UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark one): [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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)
(207) 774-5000
(Registrant's telephone number, including area code)
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 November 10, 1999: 1,343,593 shares
INDEX
FIRST COASTAL CORPORATION AND SUBSIDIARY
PART I - FINANCIAL INFORMATION
---------------------
Page
----
Item 1. Financial Statements
Condensed Consolidated Balance Sheets (Unaudited) as of September 30,
1999 and December 31, 1998 3
Condensed Consolidated Statements of Operations (Unaudited) for the
three and nine months ended September 30, 1999 and 1998 4
Condensed Consolidated Statements of Cash Flows (Unaudited) for the
nine months ended September 30, 1999 and 1998 6
Condensed Consolidated Statements of Comprehensive Income (Unaudited)
for the three and nine months ended September 30, 1999 and 1998 7
Notes to Condensed Consolidated Financial Statements (Unaudited),
September 30, 1999 8
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk 22
PART II - OTHER INFORMATION
-----------------
Item 1. Legal Proceedings 23
Item 2. Changes in Securities and Use of Proceeds 23
Item 3. Defaults Upon Senior Securities 23
Item 4. Submission of Matters to a Vote of Security Holders 23
Item 5. Other Information 23
Item 6. Exhibits and Reports on Form 8-K 23
SIGNATURES 24
2
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
- -----------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
First Coastal Corporation and Subsidiary September 30, December 31,
------------- ------------
(in thousands) 1999 1998
- ------------------------------------------------------------------------------------------------------------------
ASSETS
Noninterest earning deposits and cash $ 6,820 $ 4,509
Interest earning deposits 4,616 28,118
--------------- ------------
Cash and cash equivalents 11,436 32,627
Investment securities:
Available for sale (at market value; amortized cost: 1999 $55,244; 1998 $47,037) 54,092 47,048
Federal Home Loan Bank stock (at cost) 1,315 1,315
Loans held for sale 233 83
Loans 118,842 105,873
Less: Deferred loan fees, net (52) (97)
Allowance for loan losses (2,832) (2,735)
--------------- ------------
115,958 103,041
Premises and equipment 2,518 2,554
Accrued interest receivable 1,074 1,132
Real estate owned and repossessions - 15
Deferred tax asset 2,832 3,354
Other assets 311 244
--------------- ------------
TOTAL ASSETS $189,769 $191,413
=============== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits $139,665 $148,545
Federal Home Loan Bank borrowings 23,952 22,545
Savings Bank Notes 2,367 2,600
Secured borrowings 6,149 967
Accrued expenses and other liabilities 268 442
--------------- ------------
TOTAL LIABILITIES 172,401 175,099
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 as of September
30, 1999 and December 31, 1998 - 1,360,527 shares 1,361 1,361
Paid-in-capital 31,751 31,751
Retained earnings (deficit) (14,939) (16,805)
Accumulated other comprehensive income (loss) (749) 7
Treasury stock (At September 30, 1999 - 5,800 shares) (56) -
--------------- ------------
TOTAL STOCKHOLDERS' EQUITY 17,368 16,314
--------------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $189,769 $191,413
=============== ============
See notes to condensed consolidated financial statements.
3
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
First Coastal Corporation and Subsidiary Three Months Ended September 30,
--------------------------------
(in thousands, except share and per share amounts) 1999 1998
- -----------------------------------------------------------------------------------------------
Interest and Dividend Income
Interest and fees on loans $ 2,562 $ 2,450
Interest and dividends on investment securities 830 595
Other interest income 69 328
------------- -------------
Total Interest and Dividend Income 3,461 3,373
Interest Expense
Deposits 1,263 1,478
Borrowings:
Federal Home Loan Bank 308 190
Savings Bank Notes 59 81
Secured borrowings 27 2
------------- -------------
Total Interest Expense 1,657 1,751
------------- -------------
Net Interest Income Before Provision for Loan Losses 1,804 1,622
Provision for loan losses - -
------------- -------------
Net Interest Income After Provision for Loan Losses 1,804 1,622
Noninterest Income
Services charges on deposit accounts 129 139
Gain on investment securities transactions - 68
Gain on sales of mortgage loans 32 51
Gain on sale of assets - 539
Other 50 33
------------- -------------
211 830
------------- -------------
Operating Expenses
Salaries and employee benefits 724 797
Occupancy 139 95
Net cost of operations of real estate owned and repossessions 1 7
Other 626 594
------------- -------------
1,490 1,493
------------- -------------
INCOME BEFORE INCOME TAXES 525 959
Income Taxes 185 338
------------- -------------
NET INCOME $ 340 $ 621
============= =============
PER SHARE AMOUNTS
Basic earnings per share:
Weighted average shares outstanding 1,359,159 1,360,527
Net income per share $ 0.25 $ 0.46
============= =============
Diluted earnings per share:
Weighted average shares outstanding 1,373,093 1,378,264
Net income per share $ 0.25 $ 0.45
============= =============
See notes to condensed consolidated financial statements.
4
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
First Coastal Corporation and Subsidiary Nine Months Ended September 30,
-------------------------------------------
(in thousands, except share and per share amounts) 1999 1998
- -----------------------------------------------------------------------------------------------------------------------------
Interest and Dividend Income
Interest and fees on loans $ 7,357 $ 7,441
Interest and dividends on investment securities 2,494 1,403
Other interest income 450 656
-------------- --------------
Total Interest and Dividend Income 10,301 9,500
Interest Expense
Deposits 3,964 3,817
Borrowings:
Federal Home Loan Bank 898 593
Savings Bank Notes 208 251
Secured borrowings 59 12
-------------- --------------
Total Interest Expense 5,129 4,673
-------------- --------------
Net Interest Income Before Provision for Loan Losses 5,172 4,827
Provision for loan losses - -
-------------- --------------
Net Interest Income After Provision for Loan Losses 5,172 4,827
Noninterest Income
Services charges on deposit accounts 364 379
Gain on investment securities transactions 22 104
Gain on sales of mortgage loans 549 67
Gain on sale of assets 1,110 539
Other 95 93
-------------- --------------
2,140 1,182
-------------- --------------
Operating Expenses
Salaries and employee benefits 2,107 2,074
Occupancy 448 354
Net cost of operations of real estate owned and repossessions 5 9
Other 1,881 1,717
-------------- --------------
4,441 4,154
-------------- --------------
INCOME BEFORE INCOME TAXES 2,871 1,855
Income Taxes 1,005 657
-------------- --------------
NET INCOME $ 1,866 $ 1,198
============== ==============
PER SHARE AMOUNTS
Basic earnings per share:
Weighted average shares outstanding 1,360,066 1,359,790
Net income per share $ 1.37 $ 0.88
============== ==============
Diluted earnings per share:
Weighted average shares outstanding 1,374,146 1,380,013
Net income per share $ 1.36 $ 0.87
============== ==============
See notes to condensed consolidated financial statements.
5
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
First Coastal Corporation and Subsidiary Nine Months Ended September 30,
--------------------------------------
(in thousands) 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------
Operating Activities
Net Income $ 1,866 $ 1,198
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 331 299
Amortization of investment securities premiums 166 83
Realized investment securities gains (22) (104)
Realized gains on assets held for sale (549) (67)
Loans originated and acquired for sale (3,973) (9,599)
Sales of loans originated and acquired for sale 4,372 11,182
Decrease in interest receivable 58 20
Increase in interest payable 33 7
Net change in other assets 465 918
Net change in other liabilities (207) (90)
---------- ----------
Net cash provided by operating activities 2,545 3,842
---------- ----------
Investing Activities
Sales and maturities of securities available for sale 11,310 4,542
Maturities of securities held to maturity - 10,000
Purchases of investment securities available for sale (19,254) (30,630)
Purchases of investment securities held to maturity - (3,193)
Net change in loans (12,917) 74
Net sales (purchases) of premises and equipment (295) 665
---------- ----------
Net cash used by investing activities (21,156) (18,542)
---------- ----------
Financing Activities
Net change in deposits (8,880) 30,469
Proceeds from borrowings 3,000 4,000
Payments on borrowings (1,826) (4,758)
Net change in secured borrowings 5,182 710
Repurchase of common stock (56) -
Proceeds from issuance of common stock options - 7
---------- ----------
Net cash (used) provided by financing activities (2,580) 30,428
---------- ----------
Increase (decrease) in cash and cash equivalents (21,191) 15,728
Cash and cash equivalents at beginning of period 32,627 7,554
---------- ----------
Cash and cash equivalents (interest and noninterest bearing) at end of period $ 11,436 $ 23,282
========== ==========
Noncash Investing Activities
Change in unrealized holding gains (losses) on investment securities available
for sale, net of income taxes $ (756) $ 246
Transfer of loans to real estate owned and repossessions - 121
See notes to condensed consolidated financial statements.
6
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
First Coastal Corporation and Subsidiary Three Months Ended September 30,
-----------------------------------
(dollars in thousands) 1999 1998
- ----------------------------------------------------------------------------------------------------------------------
Net Income $ 340 $ 621
Other comprehensive income:
Unrealized holding gains (losses) arising during the period, net of income taxes
(taxes equaled: 1999 - $(118); 1998 - $160) (201) 311
Reclassification adjustment for realized gains included in net income, net of
income taxes (taxes equaled: 1999 - $0; 1998 - $(23)) - (45)
---------- ----------
(201) 266
---------- ----------
Comprehensive income $ 139 $ 887
========== ==========
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
First Coastal Corporation and Subsidiary Nine Months Ended September 30,
------------------------------
(dollars in thousands) 1999 1998
- ----------------------------------------------------------------------------------------------------------------
Net Income $1,866 $1,198
Other comprehensive income:
Unrealized holding gains (losses) arising during the period, net of income
taxes (taxes equaled: 1999 - $(396); 1998 - $162) (741) 315
Reclassification adjustment for realized gains included in net income, net of
income taxes (taxes equaled: 1999 - $(7); 1998 - $(35) ) (15) (69)
-------------- -------------
(756) 246
-------------- -------------
Comprehensive income $1,110 $1,444
============== =============
See notes to condensed consolidated financial statements.
7
FIRST COASTAL CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
SEPTEMBER 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 ("Coastal
Bank" or 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 nine months
ended September 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.
Subsequent Event
On October 29, 1999, the Company announced that the Bank had entered into a
lease agreement, subject to certain terms and conditions, with respect to the
relocation of the Company's and the Bank's headquarters (including the branch
and operations center of the Bank), to a new facility currently under
construction at 1198 Congress Street, Portland, Maine. Such lease agreement is
for 18,757 rentable square feet and consists of the first two floors of a three-
story building. The facility will include a branch and three-lane drive-through,
ATM, commercial and retail banking offices and space to support the Bank's loan,
deposit and computer operations. Occupancy is expected to take place early in
the second quarter of 2000. The new facility is expected to improve customer
accessibility, provide increased market awareness of Coastal Bank, result in
enhanced overall service for existing and prospective customers and provide
space for growth. The new facility will result in increased operating expenses
of approximately $300,000 on an annual basis as compared to the Company's
current 12,500 square foot facility. The Bank is negotiating an extension of the
lease on its current headquarters, branch and operations center to extend the
term from March 15, 2000 to July 15, 2000.
Savings Bank Notes
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
(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
8
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 made generally less restrictive 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 ratio on a parent only-basis
exceeds 30% to increase the permissible ratio threshold to 50%.
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 pursuant to which the Company could 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. At September 30, 1999, the Company had repurchased 5,800 shares of its
common stock under the program. In addition, the Company repurchased 11,134
shares of its common stock on November 9, 1999.
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.
There is no adjustment made to income used to calculate basic and diluted
earnings per share. The table below sets forth the approximate number of shares
used to calculate basic and diluted earnings per share ("EPS") for the three and
nine months ended September 30, 1999 and 1998.
9
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ -------------------------
1999 1998 1999 1998
----------- --------- --------- ----------
Weighted average shares outstanding for basic EPS 1,359,159 1,360,527 1,360,066 1,359,790
Effect of dilutive stock options /(1)/ 13,934 17,737 14,080 20,223
----------- --------- --------- ----------
Weighted average shares outstanding for diluted
EPS 1,373,093 1,378,264 1,374,146 1,380,013
=========== ========= ========= =========
/(1)/ Shares considered anti-dilutive and therefore excluded from the
calculation of the Company's weighted average shares outstanding for
diluted EPS equaled 39,500 and 36,000 for the three and nine months ended
September 30, 1999, respectively, and 22,000 and 18,000 for the three and
nine months ended September 30, 1998, respectively.
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 currently 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.
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 successful relocation and transition to a
suitable new headquarters, branch and 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; (vi) the level of
demand for new and existing products; and (vii) legislative and regulatory
changes, changes in tax policies, rates and regulations and
10
changes in accounting principles, policies or guidelines. 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 $340,000 and $1,866,000 for the three and
nine months ended September 30, 1999, compared to net income of $621,000 and
$1,198,000 for the same periods in 1998. Net income for the nine months ended
September 30, 1999 was positively impacted by after-tax gains of approximately
$733,000 and $300,000 recorded during the first six months of 1999, resulting
from the sale of the Bank's Kennebunk branch and the sale of the Bank's
residential mortgage servicing portfolio, respectively. Net income for the three
and nine months ended September 30, 1998 included an after-tax gain of
approximately $356,000 received from the sale of real estate located in
Westbrook, Maine, which currently serves as the Bank's headquarters branch and
operations center, offset in part by an after-tax pension expense accrual of
approximately $99,000.
Net Interest Income
Net interest income increased by $182,000 and $345,000 for the three and nine
months ended September 30, 1999 as compared to the same periods in 1998. The
increase in net interest income for the nine months ended September 30, 1999 is
primarily attributable to increased average securities balances of $24.8 million
as compared to the same period in 1998, resulting in an increase in interest
income attributable to securities of $1.1 million as compared to the same period
in 1998. The increase in interest income attributable to higher securities
balances was offset in part by increases in borrowing and deposit expenses
resulting from higher balances, as well as lower yields on securities and other
interest earning assets. Though average loan balances were $5.6 million higher
for the nine month period ended September 30, 1999 as compared to the same
period in 1998, interest income from loans declined $84,000 during the most
recent period as a result of a 0.57% decline in the average yield on loans. The
average yield on loans equaled 8.78% for the nine months ended September 30,
1999 as compared to 9.35% for the nine months ended September 30, 1998.
The increase in net interest income for the three months ended September 30,
1999 is primarily attributable to higher average loan balances of $11.2 million
as compared to the same period in 1998 and lower deposit expenses, which
declined primarily as a result of a reduction in the interest rates paid on High
Rise Savings accounts and due to lower deposit balances resulting from the sale
of the Bank's Kennebunk branch in May 1999. These increases in net interest
income were offset in part by a decline in the yield on average earning assets
of 0.30% for the three months ended September 30, 1999 as compared to the same
period in 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 income recognition and income reversals
related to interest earning assets which become noninterest earning assets.
11
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 Nine Months Ended September 30,
----------------------------------------------------------------------------------
1999 1998
--------------------------------------------- ----------------------------------
Average Average
Balance Interest Yield /(1)/ Balance Interest Yield /(1)/
- --------------------------------------------------------------------------------------------------------------------------------
Assets:
Interest earning cash $ 12,157 $ 450 4.88% $ 15,836 $ 656 5.46%
Investments 53,768 2,494 6.20 28,971 1,403 6.47
Loans /(2)/ /(3)/
Residential real estate mortgages 32,008 1,912 7.96 35,582 2,290 8.58
Commercial real estate mortgages 59,738 4,068 9.10 51,152 3,715 9.71
Commercial and industrial loans 7,043 476 9.03 5,274 387 9.82
Consumer loans 13,206 901 9.12 14,417 1,049 9.73
-------- ------- -------- ------
Total loans 111,995 7,357 8.78 106,425 7,441 9.35
Total interest earnings assets 177,920 10,301 7.74 151,232 9,500 8.40
Noninterest earning assets 8,813 10,203
-------- --------
Total assets $186,733 $161,435
======== ========
Liabilities:
Deposits
Savings $ 63,812 1,755 3.68 $ 48,734 1,320 3.62
NOW and money market accounts 19,340 334 2.31 18,045 313 2.32
Certificates of deposit 49,622 1,875 5.05 54,347 2,184 5.37
-------- ------- -------- ------
Total interest bearing deposits 132,774 3,964 3.99 121,126 3,817 4.21
Borrowings 24,275 1,106 6.09 16,420 844 6.87
Secured borrowings 1,910 59 4.09 377 12 4.16
-------- ------- -------- ------
Total interest bearing liabilities 158,959 5,129 4.31 137,923 4,673 4.53
Noninterest bearing deposits 11,313 7,706
Noninterest bearing liabilities 207 105
Stockholders' equity 16,254 15,701
-------- --------
Total liabilities and stockholders' equity $186,733 $161,435
======== ========
Net interest income $ 5,172 $4,827
======= ======
Net interest rate spread /(4)/ 3.43% 3.87%
Net interest rate margin /(5)/ 3.89% 4.27%
/(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.
12
The Company's net interest rate spread for the nine months ended September 30,
1999 decreased to 3.43% as compared to 3.87% for the same period in 1998, and
the net interest rate margin for the nine months ended September 30, 1999
decreased to 3.89% as compared to 4.27% for the same period in 1998. However,
for the three months ended September 30, 1999, the Company's net interest rate
spread and net interest rate margin increased to 3.59% and 4.06%, as compared to
3.48% and 3.89% for the three months ended September 30, 1998.
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
------------------------------------------------------------
9/30/99 6/30/99 3/31/99 12/31/98 9/30/98 6/30/98
------------------------------------------------------------
Net Interest Rate
Spread 3.59% 3.67% 3.06% 3.40% 3.48% 3.91%
Net Interest Rate
Margin 4.06% 4.11% 3.50% 3.86% 3.89% 4.29%
Interest Income
Interest income increased $801,000 for the nine months ended September 30, 1999
as compared to the same period in 1998. This increase is primarily attributable
to an increase in average earning assets of $26.7 million, including increases
in the average balance on investment securities ($24.8 million) and loan
balances ($5.6 million), offset by a decline in interest earning cash ($3.7
million). The increase in interest earning assets was primarily the result of an
increase in total funding 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 (including High Rise) and
borrowings average balances increased $15.1 million and $9.4 million,
respectively, for the nine months ended September 30, 1999 as compared to the
nine months ended September 30, 1998. The increase in securities balances, which
averaged 28.8% of total average assets for the nine months ended September 30,
1999 as compared to 17.9% for the nine months ended September 30, 1998, in
combination with a decline in interest rates for all of the interest bearing
asset categories, resulted in a 0.66% decline in the average yield on total
interest earning assets, to 7.74% for the nine months ended September 30, 1999
as compared to 8.40% for the nine months ended September 30, 1998. Average loan
balances equaled $112.0 million for the nine months ended September 30, 1999 and
ending loan balances equaled $118.8 million at September 30, 1999, an increase
of $13.0 million (12.3%) over ending loan balances at December 31, 1998. The
increase in loan balances is primarily attributable to approximately $26 million
in new commercial loan volume generated during 1999, largely consisting of
commercial real estate loans.
Interest income increased $88,000 for the three months ended September 30, 1999
as compared to the same period in 1998. This increase is largely attributable to
an increase in average loan balances of approximately $11.2 million, offset in
part by a 0.52% decline in loan yields, from a yield of 9.28% for the three
months ended September 30, 1998 to a yield of 8.76% for the three months ended
September 30, 1999.
Interest Expense
Interest expense increased $456,000 for the nine months ended September 30, 1999
as compared to the same period in 1998. This increase is largely attributable to
a $309,000 increase in interest expense on borrowings, which is the result of an
increase in average balances of $9.4 million, offset in part by a 0.86%
reduction in yield. Additionally, deposit expense increased $147,000,
attributable to a $11.6 million increase in average
13
balances, offset in part by a 0.22% decline in yield. The Company's cost of
funds for the nine months ended September 30, 1999 was 4.31% as compared to
4.53% for the same period in 1998.
Interest expense for the three months ended September 30, 1999 decreased $94,000
as compared to the same period in 1998. This decline is primarily attributable
to a decrease in interest expense on deposits of $215,000, offset by a $118,000
increase in interest expense on FHLB borrowings. The decline in interest expense
on deposits is the result of a 0.47% decline in overall deposit costs, from
4.35% to 3.88% for the three months ended September 30, 1999 as compared to the
three months ended September 30, 1998. The decline in deposit yields is the
result of a 0.54% decline in interest rates paid on savings accounts, primarily
High Rise Savings. Additionally, average interest bearing deposit balances
declined $4.9 million, primarily the result of the sale of the Bank's Kennebunk
branch in the second quarter of 1999, which included $12.5 million in deposits.
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 nine months ended
September 30, 1999 and 1998. The absence of a provision for loan losses in 1999
and 1998 is primarily attributable to the continued low level of nonperforming
loans and potential problem loans (as compared to historical levels), and from
the result of management's review of the portfolio and determination of the
adequacy of the allowance for loan losses at September 30, 1999.
Noninterest Income
Noninterest income increased $958,000 for the nine months ended September 30,
1999 as compared to the same period in 1998. This increase is attributable to a
$1.1 million pre-tax gain on the sale of the Bank's Kennebunk branch 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.
Income for the nine months ended September 30, 1998 included a $539,000 pre-tax
gain received on the sale of the Bank's real estate located in Westbrook, Maine.
Noninterest income declined $619,000 for the three months ended September 30,
1999 as compared to the same period in 1998. This decline is attributable to a
$539,000 pre-tax gain received on the sale of the Bank's real estate located in
Westbrook. Additionally, there were no securities gains for three months ended
September 30, 1999 as compared to $68,000 for the same period in 1998.
Operating Expenses
Operating expense increased $287,000 for the nine months ended September 30,
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, and the sale and leaseback of the Bank's headquarters branch and
operations center in the third quarter of 1998. The business 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. The
increase in operating expenses was partially offset by the elimination of
operating expenses associated with the Bank's former
14
branch in Kennebunk, which was sold in the second quarter of 1999. Management
anticipates operating expenses for the balance of 1999, 2000 and 2001 to further
increase as a result of several additional business initiatives that are
currently contemplated or underway, including (i) the Bank's lease of a new
headquarters, branch and operations center and related furniture, fixtures and
equipment expenses, which is estimated to increase the Company's occupancy
expense approximately $300,000 annually, (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, and (iv) the Bank's
continued expansion of its commercial lending activities.
FINANCIAL CONDITION
Total Assets
At September 30, 1999, total assets equaled $189.8 million, representing a
decrease of $1.6 million (or 0.9%) from total assets of $191.4 million at
December 31, 1998. This decline was the result of a $21.2 million decline in
cash and cash equivalents, partially offset by increases in loan balances ($12.9
million) and investment securities ($7.0 million). Deposits declined $8.9
million, largely as a result of the sale of the Bank's Kennebunk branch, which
consisted of $12.5 million in deposits at the time of the sale on May 14, 1999.
The decline in deposit balances was partially offset by a $5.2 million increase
in secured borrowings and a $1.4 million increase in FHLB borrowings.
Investments
The Company's investment portfolio is comprised primarily of U.S. government and
agency obligations. Total investment securities at September 30, 1999 were $54.1
million compared to $47.0 million at December 31, 1998. This increase is
primarily attributable to the purchase of $8.4 million in U.S. government
obligations (of which $4.0 million are Treasury Inflation Indexed Bonds), $3.0
million in U.S. government agency notes and $8.0 million in mortgage-backed
securities, partially offset by the sale of $2.9 million in U.S. government
obligations, $2.0 million in government agency notes and $6.2 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 September 30, 1999.
September 30, 1999
----------------------------------------------
Gross Gross Fair
Amortized Unrealized Unrealized Market
(in thousands) Cost Gain Loss Value
- -----------------------------------------------------------------------------
Available for sale:
U.S. government obligations $19,846 - $ 470 $19,376
U.S. government agency notes 1,000 - 54 946
Mortgage backed securities 33,926 $70 698 33,298
Equity securities 472 - - 472
--------- --------- -------- ---------
$55,244 $70 $1,222 $54,092
========= ========= ======== =========
The after-tax unrealized gain (loss) on investment securities classified as
available for sale was $(749,000) and $7,000, at September 30, 1999 and December
31, 1998, respectively.
15
The following table represents the contractual maturities for investments in
debt securities for each major security type at September 30, 1999.
September 30, 1999
-------------------------------------------
Maturing
-------------------------------------------
After One
Within But within After
(in thousands) One Year Five Five Years Total
- --------------------------------------------------------------------------
Available for sale:
U.S. government obligations $523 $2,067 $16,786 $19,376
U.S. government agency - - 946 946
Mortgage backed securities - - 33,298 33,298
------ ------- -------- -------
$523 $2,067 $51,030 $53,620
====== ====== ======== =======
Loans Held for Sale
Loans held for sale equaled $233,000 at September 30, 1999 as compared to
$83,000 at December 31, 1998, an increase of $150,000. 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:
September 30, December 31,
-----------------------------
(in thousands) 1999 1998
- -----------------------------------------------------------------------------
Real estate mortgage loans:
Residential $ 29,034 $ 32,555
Commercial 66,150 52,747
Real estate construction 1,472 1,384
Commercial and industrial 9,218 5,872
Consumer and other 12,968 13,315
---------- ----------
Total $118,842 $105,873
========== ==========
Loans increased $13.0 million (or 12.3%) at September 30, 1999 as compared to
December 31, 1998. The increase is attributable to a $13.4 million increase in
commercial real estate loans and $3.3 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 September 30, 1999 and $2.7 million
at December 31, 1998. The Allowance increased during the nine month period as a
result of loan recoveries of $103,000 exceeding charged-off loans of $6,000.
There was no provision for loan losses during the nine months ended September
30, 1999. The Allowance represented 2.4% and 2.6% of total loans at September
30, 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 September 30, 1999. However, future additions to the
16
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 increase
the Allowance 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:
September 30, December 31,
-----------------------------
(in thousands) 1999 1998
- ----------------------------------------------------------------------
Nonaccrual loans $ 373 $ 430
Accruing loans past due 90 days or more 244 121
Restructured loans - -
Real estate owned and repossessions - 15
------ ------
Total $ 617 $ 566
====== ======
Nonperforming assets increased $51,000 at September 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 current level of nonperforming assets is encouraging, this level is
considered by management to be so low that it is unlikely 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 September 30, 1999
and December 31, 1998, the recorded investment in loans for which impairment has
been recognized in accordance with SFAS No. 114 totaled $373,000 and $439,000,
respectively. The corresponding portion of the Allowance allocated against the
total recorded investment in loans was $25,000 and $55,000 as of September 30,
1999 and December 31, 1998, respectively. All of the impaired loans were
classified as nonaccrual at September 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 $9,000 for the nine months ended September 30, 1999 and
$22,000 for the year ended December 31, 1998. The average balance of outstanding
impaired loans was $315,000 and $414,000 at September 30, 1999 and December 31,
1998, respectively.
17
Real Estate Owned ("REO")
REO consists of properties acquired through mortgage loan foreclosure
proceedings, repossessions or in full or partial satisfaction of outstanding
loan obligations. At September 30, 1999, the Bank had no REO properties as
compared to $15,000 at December 31, 1998.
Liquidity - Bank
Deposits totaled $139.7 million at September 30, 1999, a decrease of $8.9
million (or 6.0%) from the level of $148.6 million at December 31, 1998.
Deposit balances were as follows:
September 30, December 31,
-----------------------------
(in thousands) 1999 1998
- ------------------------------------------------------------------
Noninterest bearing demand deposits $ 11,691 $ 10,447
Interest bearing demand deposits 19,727 21,680
Savings and escrow deposits 61,014 63,393
Time deposits 47,233 53,025
------------- ------------
Total $139,665 $148,545
============= ============
The decline in deposit levels is attributable to the sale of the Bank's
Kennebunk branch, with deposits totaling $12.5 million at the time of the sale
on May 14, 1999. This decrease was partially offset by increases in the Bank's
other interest and non-interest bearing demand deposits and savings deposits.
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 at September 30, 1999, the Company's
expenses consist primarily of Delaware franchise taxes associated with the
Company's authorized capital stock and various other expenses. These 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 pursuant to which the Company could repurchase up to 68,026 shares of
its common stock, representing approximately 5% of the 1,360,527 shares then
outstanding. At September 30, 1999, the Company had repurchased 5,800 shares of
its common stock under the program. In addition, the Company repurchased 11,134
shares of its common stock on November 9, 1999. 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
18
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, 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 September 30, 1999, the Company's debt-to-
equity ratio and regulatory capital ratios would have permitted the payment of a
dividend by the Company under the terms of the First Amendment to Loan
Agreement.
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
September 30, 1999, the parent's cash and cash equivalents totaled $977,000.
The Company suspended the payment of cash dividends to its stockholders in the
fourth quarter of 1989 and has not paid any cash dividends to its stockholders
since that time.
Capital - Bank
The table below sets forth the regulatory capital requirements and capital
ratios for the Bank at September 30, 1999 and December 31, 1998:
(dollars in thousands) September 30, 1999 December 31, 1998
- ---------------------------------------------------------------------------------------------------
Tier 1 capital (Leverage) to total assets /(1)/ ratio
Qualifying capital $ 16,809 $ 14,709
Actual % 9.23% 7.90%
Minimum requirements for capital adequacy % 4.00% 4.00%
Average quarterly assets $182,090 $186,077
Tier 1 capital to risk-weighted assets
Qualifying capital $ 16,809 $ 14,709
Actual % 15.91% 14.33%
Minimum requirements for capital adequacy % 4.00% 4.00%
Total capital to risk-weighted assets (Tier 1 and Tier 2)
Qualifying capital $ 18,148 $ 16,010
Actual % 17.18% 15.60%
Minimum requirement for capital adequacy % 8.00% 8.00%
Risk-weighted assets $105,643 $102,612
/(1)/ Calculated on an average quarterly basis
19
Capital - Company
The table below sets forth the regulatory capital requirements and capital
ratios for the Company at September 30, 1999 and December 31, 1998:
(dollars in thousands) September 30, 1999 December 31, 1998
- --------------------------------------------------------------------------------------------------
Tier 1 capital (Leverage) to total assets /(1)/ ratio
Qualifying capital $ 15,785 $ 13,453
Actual % 8.66% 7.20%
Minimum requirements for capital adequacy % 4.00-5.00% 4.00-5.00%
Average quarterly assets $ 182,289 $ 186,757
Tier 1 capital to risk-weighted assets
Qualifying capital $ 15,785 $ 13,453
Actual % 14.92% 13.05%
Minimum requirements for capital adequacy % 4.00% 4.00%
Total capital to risk-weighted assets (Tier 1 and Tier 2)
Qualifying capital $ 17,126 $ 14,759
Actual % 16.19% 14.32%
Minimum requirement for capital adequacy % 8.00% 8.00%
Risk-weighted assets $ 105,797 $ 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
20
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).
The Company has completed activities related to the Awareness Phase. As stated
previously, the Company formed a Year 2000 Committee which 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 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. 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 have been completed. 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 all necessary validation testing.
21
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, where necessary, have been provided and installed by the Company's
third-party vendors. As a result, the implementation phase has been completed
for all necessary software and hardware applications.
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 $23,000 in external costs for its Year 2000
program, which have been expensed as incurred. The Company does not anticipate
incurring additional expenses in excess of $5,000 related to Year 2000
compliance between now and December 31, 1999.
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 has developed 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
- --------------------------------------------------------------------
Not applicable.
22
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
- -------------------------
As of September 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
- -----------------------------------------------------------
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 are set forth below:
10.1 Lease Agreement, dated as of October 26, 1999, between
Coastal Bank and Olympia Equity Investors III, L.P.
27.1 Financial Data Schedule.
(b) No Reports on Form 8-K were filed by the Company during the third quarter
of 1999.
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: November 12, 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: November 12, 1999 By: /s/ Gregory T. Caswell
-----------------------------------------
Gregory T. Caswell
President and Chief Executive Officer
(Principal Executive Officer)
Date: November 12, 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 Lease Agreement, dated as of October 26, 1999, between Coastal
Bank and Olympia Equity Investors III, L.P. (filed herewith).
27.1 Financial Data Schedule (filed herewith).