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 QUARTER ENDED September 30, 1998
or
/ / Transition Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Transition Period From: To:
Commission File Number: 0-19398
FIRST COASTAL BANKSHARES, INC.
-------------------------------------------------------
(Exact name of Registrant as Specified in its Charter)
Virginia 54-1534067
- ------------------------- ---------------------
(State or other jurisdiction of (IRS Employer ID No.)
incorporation or organization
2101 Parks Avenue
Virginia Beach, Virginia 23451
- ----------------------------------------------------------
(Address of principal executive offices)
Registrant's telephone number: (757)428-9331
----------------
N/A
----------------------------------------------------------
(Former Name, Former Address and Former Fiscal Year
If Changed Since Last Report)
Indicate by check mark whether the registrant (1) has filed all documents and
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
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 4,986,541
---------
FIRST COASTAL BANKSHARES, INC.
CONTENTS
PART I - FINANCIAL INFORMATION
ITEM I
Unaudited Consolidated Statement of Financial
Condition as of September 30, 1998
and December 31,1997 1
Unaudited Consolidated Statement of Income for
the three and nine months ended
September 30, 1998 and 1997 2
Unaudited Consolidated Statement of Cash Flows
for the nine months ended
September 30, 1998 and 1997 3 - 4
Unaudited Consolidated Statement of Stockholders'
Equity for the nine months ended
September 30, 1998 5
Notes to Unaudited Consolidated
Financial Statements 6 - 7
Item II
Management's Discussion and Analysis of
Financial Condition and Results of Operations 8 - 18
PART II - OTHER INFORMATION
ITEM 1
Legal Proceedings 19
ITEM 2
Changes in Securities 19
ITEM 3
Defaults Upon Senior Securities 19
ITEM 4
Submission of Matters to a Vote of
Security Holders 19
ITEM 5
Other Information 19
ITEM 6
Exhibits and Report on Form 8-K 19
SIGNATURES 20
-i-
1
FIRST COASTAL BANKSHARES, INC.
UNAUDITED CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
(Dollars in thousands, except share data)
September 30, December 31,
1998 1997
------------ ------------
ASSETS
Cash and amounts due from banks $ 9,844 $ 7,236
Federal funds sold and interest
bearing deposits 10,467 194
Investment securities
Held-to-maturity (approximate fair
value $3,003 and $10,786,
respectively) 2,996 11,006
Available-for-sale 9,414 8,407
Mortgage-backed and related securities
Held-to-maturity (approximate fair
value $16,576 and $23,780,
respectively) 16,822 24,369
Available-for-sale 69,664 86,637
Loans receivable, net
Held-for-investment 431,103 454,477
Held-for-sale 12,188 8,356
Foreclosed real estate, net 1,504 2,382
Property and equipment, net 6,375 6,888
Accrued income receivable, net 3,839 4,414
Other assets 4,056 1,822
--------- ---------
$ 578,272 $ 616,188
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits $ 396,568 $ 407,443
Advances from the Federal Home
Loan Bank 114,234 143,084
Securities sold under agreements
to repurchase 14,495 17,033
Advance payments by borrowers
for taxes and insurance 1,478 906
Other liabilities 5,373 3,573
--------- ---------
532,148 572,039
--------- ---------
STOCKHOLDERS' EQUITY
Serial preferred stock, authorized
5,000,000 shares, no shares issued
or outstanding -- --
Common stock, $.01 par value, 10,000,000
shares authorized; 4,986,541 shares issued
and outstanding in 1998 (4,980,611 in 1997) 50 50
Capital in excess of par value 9,564 9,465
Retained earnings - substantially
restricted 36,942 34,588
Accumulated other comprehensive
income (loss) (432) 46
--------- ---------
46,124 44,149
--------- ---------
$ 578,272 $ 616,188
========= =========
Notes to Unaudited Consolidated Financial Statements
are an integral part of this statement
2
FIRST COASTAL BANKSHARES, INC.
UNAUDITED CONSOLIDATED STATEMENT OF INCOME
(Dollars in thousands, except per share data)
For the Three Months For the Nine months
Ended September 30, Ended September 30,
------------------- -------------------
1998 1997 1998 1997
------ ------ ------ -----
Interest and fees on loans $ 9,780 $ 10,262 $ 29,662 $ 30,072
Interest on mortgage-backed
and related securities 1,296 1,634 5,003 5,117
Other interest and
dividend income 314 404 983 1,277
-------- -------- -------- --------
Total interest income 11,390 12,300 35,648 36,466
-------- -------- -------- --------
Interest on deposits 4,655 4,735 14,537 14,800
Interest on advances from
Federal Home Loan Bank 1,832 2,556 6,067 6,925
Interest on repurchase
agreements 191 238 607 516
-------- -------- -------- --------
Total interest expense 6,678 7,529 21,211 22,241
-------- -------- -------- --------
Net interest income 4,712 4,771 14,437 14,225
Provision for loan losses -- 50 -- 225
-------- -------- -------- --------
Net interest income after
provision for loan losses 4,712 4,721 14,437 14,000
-------- -------- -------- --------
OTHER INCOME
Mortgage lending fees 814 386 1,995 901
Retail banking fees 571 429 1,472 1,041
Mortgage loan servicing fees 144 154 482 510
Gain on sale of securities 92 15 92 15
Gain on sales of foreclosed
real estate 29 20 57 60
Other 176 84 420 238
-------- -------- -------- --------
1,826 1,088 4,518 2,765
-------- -------- -------- --------
OTHER EXPENSES
Salaries and employee
benefits 2,339 1,987 7,074 5,764
Net occupancy expense 947 767 2,701 2,269
Federal deposit insurance
premiums 65 66 190 272
Other net expense (gain) of
foreclosed real estate (71) (22) 60 56
Provision for losses on
foreclosed real estate 9 100 46 100
Other 1,328 1,138 3,696 3,456
-------- -------- -------- --------
4,617 4,036 13,767 11,917
-------- -------- -------- --------
Income before income taxes 1,921 1,773 5,188 4,848
Provision for income taxes 709 674 1,937 1,867
-------- -------- -------- --------
Net income $ 1,212 $ 1,099 $ 3,251 $ 2,981
======== ======== ======== ========
Earnings per share, basic $ 0.24 $ 0.22 $ 0.65 $ 0.60
Earnings per share, diluted 0.24 0.22 0.63 0.59
======== ======== ======== ========
Dividend per common share $ 0.06 $ 0.05 $ 0.18 $ 0.15
======== ======== ======== ========
The Notes to Unaudited Consolidated Financial Statements
are an integral part of this statement
3
FIRST COASTAL BANKSHARES, INC.
UNAUDITED CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in thousands)
For the Nine months
Ended September 30,
1998 1997
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 3,251 $ 2,981
Adjustments to reconcile net income to net
cash provided (used) by operating activities:
Provision for loan losses -- 225
Provision for losses on foreclosed real estate, net 46 100
Recovery of losses on real estate
acquired in settlement of loans 22 --
Depreciation 985 822
Amortization of loan discounts, premiums and
fees, net (402) (569)
Amortization of other discounts and premiums, net 205 99
Gain on sales of securities available-
for-sale (92) (15)
Gain on sales of foreclosed real estate (57) (60)
Gain on sales of assets (55) --
Gain on sales of loans (1,995) (901)
Originations of loans held-for-sale (146,347) (88,424)
Proceeds from sales of loans held-for-sale 144,510 85,175
Decrease in accrued income receivable 575 249
Increase in other assets (1,987) (1,300)
Increase (decrease) in other liabilities 1,800 (201)
--------- ---------
Net cash provided (used) by operating
activities 459 (1,819)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Net decrease (increase) in loans receivable 21,780 (10,983)
Principal payments received on mortgage-backed
and related securities 32,721 22,651
Proceeds from maturities of investment securities 9,752 7,072
Proceeds from sales of investment securities
available-for-sale 2,092 2,015
Proceeds from sales of foreclosed real estate 2,875 1,598
Proceeds from sale of property and equipment 472 --
Purchases of:
Mortgage-backed securities available-for-sale (9,244) (10,723)
Investment securities available-for-sale (4,637) (2,284)
Property and equipment (889) (1,576)
Additions to foreclosed real estate (12) (142)
--------- ---------
Net cash provided by investing activities 54,910 7,628
--------- ---------
Continued
The Notes to Unaudited Consolidated Financial Statements
are an integral part of this statement
4
FIRST COASTAL BANKSHARES, INC.
UNAUDITED CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in thousands)
For the Nine Months
Ended September 30,
1998 1997
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in money market deposit accounts,
NOW accounts and savings deposits $ 32,059 $ 8,302
Net decrease in time deposits (42,934) (44,117)
Proceeds from Federal Home Loan Bank advances 189,200 175,200
Payments on Federal Home Loan Bank advances (218,050) (155,226)
Net (decrease) increase in securities
sold under agreements to repurchase (2,538) 12,121
Net increase in advance payments by borrowers 572 776
Proceeds from issuance of common stock 100 98
Cash dividends paid (897) (746)
--------- ---------
Net cash used by financing activities (42,488) (3,592)
--------- ---------
Increase in cash and cash equivalents 12,881 2,217
Cash and cash equivalents at beginning of period 7,430 7,335
--------- ---------
CASH AND CASH EQUIVALENTS INCLUDES
Cash and amounts due from banks $ 9,844 $ 9,333
Federal funds sold and interest
bearing deposits 10,467 219
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid on deposits $ 21,076 $ 22,852
Income taxes paid 2,102 1,685
SCHEDULE OF NONCASH INVESTING ACTIVITIES
Real estate acquired in settlement
of loans, net of allowances $ 1,996 $ 1,812
The Notes to Unaudited Consolidated Financial Statements
are an integral part of this statement
5
FIRST COASTAL BANKSHARES, INC.
UNAUDITED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Dollars in thousands, except share data)
Capital Accumulated
In Excess Other
Common Stock of Retained Comprehensive
Shares Amount Par Value Earnings Income (loss) Total
------------------------------------------------------------------------------------
Balance,
December 31,1997 4,980,611 $ 50 $ 9,465 $ 34,588 $ 46 $ 44,149
Net income for the
nine months ended
September 30, 1998 3,251 3,251
Sale of shares of
common stock to
employee stock
purchase plan 3,802 63 63
Issuance of common
stock under
dividend rein-
vestment plan 2,128 36 36
Net unrealized loss
on securities
available-for-
sale, net of tax (478) (478)
Cash dividends paid (897) (897)
-------- ------ ------- ------- ------- -------
Balance,
September 30, 1998 4,986,541 $ 50 $ 9,564 $ 36,942 $ (432) $ 46,124
========= ====== ======= ======= ======= =======
Balance,
December 31, 1996 4,970,307 $ 50 $ 9,336 $ 31,480 $ (39) $ 40,827
Net income for the
nine months ended
September 30, 1997 2,981 2,981
Sale of shares of
common stock to
employee stock
purchase plan 4,855 57 57
Issuance of common
stock under
dividend rein-
vestment plan 2,883 36 36
Exercise of stock
options 750 5 5
Net unrealized gain
on securities
available-for-
sale, net of tax 160 160
Cash dividends paid (746) (746)
--------- ------ ------- ------- ------- -------
Balance,
September 30, 1997 4,978,795 $ 50 $ 9,434 $ 33,715 $ 121 $ 43,320
========= ====== ======= ======= ======= =======
The Notes to Unaudited Consolidated Financial Statements are an
integral part of this statement
6
FIRST COASTAL BANKSHARES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. The accompanying unaudited consolidated financial statements are prepared
in accordance with the instructions to Form 10-Q and do not include all of
the disclosures and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of the
management of First Coastal Bankshares, Inc. (the "Company") the financial
statements reflect all adjustments, consisting of only normal recurring
accruals, necessary to present fairly the financial position of the
Company. The consolidated financial statements include the accounts of the
Company and First Coastal Bank (the "Bank") and its wholly-owned
subsidiaries.
The Notes to the Consolidated Financial Statements of the Annual Report on
Form 10-K for the fiscal year ended December 31,1997 should be read in
conjunction with this Form 10-Q.
2. Net unamortized premiums on loans and mortgage-backed securities amounted
to $2,341,000 at September 30, 1998. Deferred loan fees at September 30,
1998 amounted to $1,133,000.
3. The results of operations for the three and nine months ended September 30,
1998 are not necessarily indicative of the results to be expected for the
entire fiscal year or any other period.
4. In addition to undisbursed loan funds of $48,813,000, the Bank had
outstanding commitments to purchase or originate $31,650,000 in loans and
investment securities at September 30, 1998. The Company also had
outstanding commitments to sell $15,731,000 in loans and securities at
September 30, 1998.
7
5. The weighted average number of shares used in the computation of basic and
diluted earnings per share is as follows (in thousands):
For the three For the nine
months ended months ended
September 30 September 30
------------ ------------
1998 1997 1998 1997
------------- -------------
Weighted average shares outstanding - basic 4,985 4,976 4,983 4,974
Effect of dilutive stock options 135 124 156 90
Weighted average shares outstanding - diluted 5,120 5,100 5,139 5,064
6. Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130 (SFAS 130), "Reporting Comprehensive Income."
Comprehensive income includes net income for the period plus other items of
comprehensive income as described in SFAS 130. The only item of other
comprehensive income applicable to the Company is the change in unrealized
gains and losses on securities available-for-sale. Total comprehensive
income for the three months ended September 30, 1998 and 1997 was
$1,124,000 and $1,224,000, respectively. Total comprehensive income for the
nine months ended September 30, 1998 and 1997 was $2,773,000 and
$3,141,000, respectively.
7. On October 28, 1998, the Company entered into an Agreement and Plan of
Merger with Centura Banks, Inc. (the "Agreement"). The parties desire to
consummate the merger during the first quarter of 1999. Consummation of the
merger is subject to several conditions including, among other things,
receipt of stockholder and regulatory approval. Under the Agreement, the
Company would be merged with and into Centura Banks, Inc. Shareholders of
the Company would receive .34 shares of Centura common stock for each share
of Company common stock outstanding on the date of the merger, subject to
adjustment under certain circumstances.
8
FIRST COASTAL BANKSHARES, INC.
ITEM II. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
ASSETS
The Company's total assets at September 30, 1998 were $578 million which is a
decrease of $37.9 million or 6.2% from December 31, 1997. The net decrease is
the result of a $19.5 million decrease in total loans receivable and a $24.5
million decrease in mortgage-backed and related securities.
The mix of the Company's loans receivable has shifted from 1-4 family
residential loans and toward certain of the Company's other loan categories as
shown in the following table (dollars in thousands):
09/30/98 12/31/97 09/30/97
-------- -------- --------
Loans
Residential mortgage $224,232 $280,620 $288,704
Commercial real estate 66,867 68,910 68,310
Construction 70,935 48,321 42,538
Land acquisition 10,784 15,751 19,584
Commercial 38,171 24,750 19,966
Consumer 24,399 20,422 19,931
Held-for-sale 12,188 8,356 8,935
-------- -------- --------
Total $447,576 $467,130 $467,968
======== ======== ========
The net decreases in residential mortgage loans noted above were caused by
increased prepayments and declining originations of such loans due to a flat
yield curve and declining interest rates. This interest rate environment results
in increased prepayments of the Company's residential mortgage loans as
borrowers seek to refinance their loans at lower fixed rates, thus also shifting
the origination of new loans from the Company's portfolio loan products which
are shorter term and variable rate loans. The Company sells all of its longer
term, fixed rate loans in the secondary market.
The overall increase in the Company's other loan categories (collectively,
non-residential) is the direct result of the Company's emphasis on originating
such loans.
9
The decrease in the Bank's mortgage-backed and related securities portfolio at
September 30, 1998 as compared to December 31,1997 was due to the increased
prepayments of the underlying loans combined with management's decision not to
purchase these types of securities at this time.
LIABILITIES
Total liabilities decreased during the first nine months of 1998 by $39.9
million or 7.0% to $532 million. This net decrease is the result of a $28.9
million decrease in advances from the Federal Home Loan Bank, a $2.5 million
decrease in securities sold under agreements to repurchase, and a $10.9 million
decrease in deposits. These decreases were partially offset by a $1.8 million
increase in other liabilities.
Management's objective is to increase the Hampton Roads retail deposit base and
de-emphasize other deposits and brokered deposits. Components of total deposits
at the periods indicated are as follows (in thousands):
9/30/98 12/31/97 9/30/97
--------- -------- --------
Hampton Roads Retail Deposits
Non-interest checking $ 24,996 $ 17,310 $ 17,117
Interest checking 22,573 16,778 16,922
Savings 117,977 99,071 75,885
CD's 170,307 184,653 185,270
Other and Non-Local Deposits $ 30,715 $ 36,723 $ 39,488
Brokered CD's $ 30,000 $ 52,908 $ 52,892
NONPERFORMING ASSETS
Nonperforming assets of the Bank comprise delinquent loans on which income
accrual has ceased or is being fully reserved, and property acquired through
foreclosure or repossession. Nonperforming assets totaled $5.5 million at
September 30, 1998 and $6.9 million, at December 31, 1997.
The delinquent loan component of nonperforming assets was $3.9 million and $4.6
million at September 30, 1998 and December 31, 1997, respectively. Delinquent
loans were substantially secured by single-family residential
properties at September 30, 1998.
10
Allowances for possible losses on loans and foreclosed real estate are
maintained by the Bank. The following table sets forth the activity in the
Bank's allowance for loan losses and allowance for losses on foreclosed real
estate for the periods indicated:
1998 1997
---------- ----------
ALLOWANCE FOR LOAN LOSSES
Balance, January 1 $4,297,000 $4,390,000
Provision for loan losses -- 225,000
Less net charges-offs 12,000 152,000
---------- ----------
Balance, September 30, $4,285,000 $4,463,000
========== ==========
ALLOWANCE FOR LOSSES ON FORECLOSED
REAL ESTATE
Balance, January 1 $ 335,000 $ 235,000
Provision for losses on foreclosed
real estate 46,000 100,000
Less net charges to the allowance 56,000 --
---------- ----------
Balance, September 30, $ 325,000 $ 335,000
========== ==========
RESULTS OF OPERATIONS: Three Months Ended September 30, 1998 and 1997
NET OPERATING RESULTS
For the three months ended September 30, 1998, the Company earned $1,212,000 or
$.24 per diluted share as compared to $1,099,000 or $.22 per diluted share for
the same period in 1997.
NET INTEREST INCOME
Net interest income during the quarter ended September 30,1998 was $4.7 million
as compared to $4.8 million during the same period of 1997. The net interest
margin for the quarter ended September 30, 1998 was 3.33% as compared to 3.26%
during the third quarter of 1997. The decrease during the 1998 quarter in the
yield on mortgage- backed and related securities is the result of a decrease in
long-term interest rates which causes increased actual and projected prepayment
speeds and reduced yields on certain securities.
The following table sets forth the weighted average yields earned on the
Company's assets, the weighted average interest rates paid on the Company's
liabilities, and the net yield on average interest earning assets for the
periods indicated. Average balances are determined on a daily basis and
nonperforming loans are included in the average loan amount (dollars in
thousands).
11
For the three-months ended September 30,
----------------------------------------------------------------
1998 1997
----------------------------------------------------------------
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
-------- --------- ------ -------- -------- ------
Interest earning assets
Loans $455,108 $ 9,780 8.58% $471,057 $ 10,262 8.71%
Mortgage-backed and related
securities 94,440 1,296 5.49% 95,357 1,634 6.86%
Investment securities and other
earning assets 20,548 314 6.06% 26,561 404 6.04%
-------- -------- ---- -------- -------- ----
Total earning assets 570,096 11,390 7.98% 592,975 12,300 8.29%
Nonearning assets 24,737 20,086
------ ------
Total assets 594,833 613,061
======= =======
Interest bearing liabilities
Time deposits 230,311 3,187 5.49% 262,946 3,823 5.77
Interest bearing demand and
other deposits 146,357 1,468 3.98% 101,701 912 3.52%
FHLB advances 123,726 1,832 5.87% 163,649 2,556 6.20
Other borrowings 14,120 191 5.36% 16,545 238 5.70
-------- -------- ---- ------- ----- ----
Total interest bearing
liabilities 514,514 6,678 5.15% 544,841 7,529 5.48%
Noninterest bearing liabilities 34,387 25,779
------ ------
Total liabilities 548,901 570,620
Equity 45,932 42,441
------ ------
Liabilities and equity 594,833 613,061
======= =======
----- -----
Net interest income 4,712 4,771
===== =====
---- ----
Interest rate spread 2.83% 2.81%
==== ====
Net interest margin 3.33% 3.26%
==== ====
OTHER INCOME
Other income during the third quarter of 1998 increased by $738,000 or 67.8%
compared with the third quarter of 1997 due to large increases in retail banking
fees and mortgage lending fees. The increased retail banking fees resulted
primarily from the fees associated with an increased number of checking
accounts, additional ATM's in service during the 1998 quarter compared to 1997,
and an increase in the third quarter of 1998 of certain checking and deposit
account fees.
In addition, mortgage lending fees increased substantially to $814,000 for the
three months ended September 30, 1998 as compared to $386,000 for the same
period of 1997. The increase in these fees is directly related to the increase
in sales (fundings) of mortgage loans during the period. The table below
compares certain mortgage lending
12
information for the quarter ended September 30, 1998 to the same period in 1997
(in thousands):
For the Quarter Ended September 30,
----------------------------------------
$ %
1998 1997 Increase Increase
----------------------------------------
Applications $55,186 $38,832 $16,354 42%
Closings 48,108 29,234 18,874 65%
Fundings 47,153 29,434 17,719 60%
Ending Pipeline 61,023 25,179 35,844 142%
OTHER EXPENSES
Other expenses increased $581,000 or 14.4% during the third quarter of 1998 as
compared to the same period in 1997. This increase was primarily due to a
$531,000 combined net increase in salary, benefits and net occupancy expense
which is the result of the cost incurred to operate and staff two additional
retail banking offices opened in the second quarter of 1998, the cost of
additional ATM's, and the cost of additional loan officers and support staff
added throughout the second half of 1997 and the first nine months of 1998 in
support of the Company's objective of increasing local, non-residential loan
portfolios. In addition, the Company closed one branch during June 1998. As a
result of these initiatives, the Company operates 16 branches at September 30,
1998 versus 14 a year earlier, has 38 ATM's in service versus 23 a year earlier,
and has 285 full time equivalent employees versus 225 at September 30, 1997.
Additional other expenses are as follows (in thousands):
For the Three Months
Ended September 30
------------------
1998 1997
------ ------
Loan servicing $ 101 $ 107
Service bureau 225 205
Advertising 166 124
Legal and accounting 123 91
Office supplies 206 155
Other 507 456
------ ------
$1,328 $1,138
13
RESULTS OF OPERATION: Nine months Ended September 30, 1998 and 1997
NET OPERATING RESULTS
For the nine months ended September 30, 1998, the Company earned $3,251,000 or
$.63 per diluted share as compared to $2,981,000 or $0.59 per diluted share for
the same period in 1997.
NET INTEREST INCOME
Net interest income during the nine months ended September 30, 1998 was $14.4
million as compared to $14.2 million during the same period of 1997. The net
interest margin for the nine months ended September 30, 1998 was 3.25% as
compared to 3.20% during the first nine months of 1997. The decrease during the
quarter in the yield on mortgage-backed and related securities is the result of
a decrease in long-term interest rates which causes increased actual and
projected prepayment speeds and reduced yields on certain securities.
The following table sets forth the weighted average yields earned on the
Company's assets, the weighted average interest rates paid on the Company's
liabilities, and the net yield on average interest earning assets for the
periods indicated. Average balances are determined on a daily basis and
nonperforming loans are included in the average loan amount (dollars in
thousands).
For the Nine Months Ended September 30,
-------------------------------------------------------------------
1998 1997
-------------------------------- -------------------------------
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
-------- -------- -------- -------- -------- --------
Interest earning assets
Loans $464,570 $ 29,662 8.52% $463,992 $ 30,072 8.64%
Mortgage-backed and related
securities 104,635 5,003 6.38% 99,222 5,117 6.88%
Investment securities and other
earning assets 21,870 983 6.01% 27,381 1,277 6.24%
-------- -------- ---- -------- -------- ----
Total earning assets 591,075 35,648 8.05% 590,595 36,466 8.24%
Nonearning assets 22,205 16,957
------ ------
Total assets 613,280 607,552
======= =======
Interest bearing liabilities
Time deposits 247,435 10,340 5.59% 279,607 12,080 5.78%
Interest bearing demand and
other deposits 140,363 4,197 4.00% 101,154 2,720 3.59%
FHLB advances 135,627 6,067 5.98% 149,696 6,925 6.19%
Other borrowings 14,825 607 5.47% 12,248 516 5.64%
-------- -------- ---- -------- -------- ----
Total interest bearing
liabilities 538,250 21,211 5.27% 542,705 22,241 5.48%
Noninterest bearing liabilities 30,190 23,498
------ ------
Total liabilities 568,440 566,203
Equity 44,840 41,349
------ ------
Liabilities and equity 613,280 607,552
======= =======
------ ------
Net interest income 14,437 14,225
====== ======
---- ----
Interest rate spread 2.78% 2.76%
==== ====
Net interest margin 3.25% 3.20%
==== ====
14
OTHER INCOME
Other income during the first nine months of 1998 increased by $1,753,000 or
63.4% compared with the first nine months of 1997 due to large increases in
retail banking fees and mortgage lending fees. The increased retail banking fees
resulted primarily from the fees associated with an increased number of checking
accounts, additional ATM's in service during the first nine months of 1998
compared to 1997, an increase in the fee for non- customer ATM transactions at
Company owned ATM's, and an increase in certain checking and deposit account
fees.
In addition, mortgage lending fees increased substantially to $1,995,000 for the
first nine months of 1998 as compared to $901,000 for the same period of 1997.
The increase in these fees is directly related to the increase in sales
(fundings) of mortgage loans during the period. The table below compares certain
mortgage lending information for the nine months ended September 30, 1998 to the
same period in 1997 (in thousands):
For the Nine Months Ended September 30,
--------------------------------------------
$ %
1998 1997 Increase Increase
-------- -------- -------- --------
Applications $198,741 $118,658 $ 80,083 67%
Closings 146,348 88,348 58,000 66%
Fundings 136,518 80,384 56,134 70%
Ending Pipeline 61,023 25,179 35,844 142%
15
OTHER EXPENSES
Other expenses increased $1,850,000 or 15.5% during the first nine months of
1998 as compared to the same period in 1997. This increase was primarily due to
a $1,742,000 combined net increase in salary, benefits and net occupancy expense
which is the result of the cost incurred to operate and staff two additional
retail banking offices opened in the second quarter of 1998, the cost of
additional ATM's, and the cost of additional loan officers and support staff
added throughout the second half of 1997 and the first nine months of 1998 in
support of the Company's objective of increasing local, non-residential loan
portfolios.
Additional other expenses are as follows (in thousands):
For the Nine Months Ended
September 30
------------------
1998 1997
------------------
Loan servicing 336 338
Service bureau 701 591
Advertising 550 557
Legal and accounting 387 332
Office supplies 581 452
Other 1,141 1,186
----- -----
3,696 3,456
===== =====
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY
There has been no material adverse change during the nine months ended September
30, 1998 in the ability of the Company to fund its operations. The Office of
Thrift Supervision ("OTS") has established minimum liquidity requirements for
savings associations. Current regulations require a liquidity level of at least
4%. The Bank's liquidity ratio at September 30, 1998 was 5.24% and exceeded 4%
at each measurement date during the first nine months of 1998.
REGULATORY CAPITAL STANDARDS
The Company is in compliance with all of its regulatory capital requirements at
September 30, 1998.
16
MARKET RISK
Management of the Company believes that during the nine months ended September
30, 1998 there has not been a material adverse change in the market risk,
defined as risk of loss arising from changes in market rates and prices of the
Company's assets or liabilities.
YEAR 2000
The Company's Year 2000 effort is proceeding in accordance with a written plan
("Plan") which has been adopted by the Company's Board of Directors. Progress
reports are provided to the Board at least quarterly.
The Company's Plan is divided into four broad areas of concern: hardware,
software, service providers and customers. Year 2000 issues being addressed in
each of these areas include both information technology related and
non-information technology related.
At September 30, 1998, the Company had largely completed the Plan's assessment
phase, which is mainly the risk evaluation and identification process, and the
renovation phase, which is mainly the modification or replacement of equipment
and systems that were identified as not Year 2000 compliant.
At September 30, 1998, there are no material, incomplete tasks pursuant to the
Company's Plan.
Activities scheduled for the fourth quarter include the continuation of testing
of the Company's internal systems and the implementation of certain remediated
systems. Also scheduled is the completion of a contingency plan, the
17
execution of which, if necessary, will enable the Company to continue operations
and maintain customer confidence in the event of systems failure caused by
unanticipated Year 2000 problems.
The Company presently estimates that it will spend $350,000, approximately 30%
of which will be to replace outdated computers which have been fully
depreciated. The remainder of the estimated cost which includes salary of staff
temporarily assigned to the project will be expensed as incurred. Management of
the Company expects its Year 2000 remediation efforts to be largely complete by
June 30, 1999.
IMPACT OF FUTURE ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 133 (the "Statement")
"Accounting for Derivative Instruments and Hedging Activities" was issued during
June 1998.
This Statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, (collectively referred to as derivatives) and for hedging activities.
It requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. If certain conditions are met, a derivative may be specifically
designated as (a) a hedge of the exposure to changes in the fair value of a
recognized asset or liability or an unrecognized firm commitment, (b) a hedge of
the exposure to variable cash flows of a forecasted transaction, or (c) a hedge
of the foreign currency exposure of a net investment in a foreign operation, an
unrecognized firm commitment, an available- for-sale security, or a
foreign-currency-denominated forecasted transaction.
18
The accounting for changes in the fair value of a derivative (that is, gains and
losses) depends on the intended use of the derivative and the resulting
designation.
Under this Statement, an entity that elects to apply hedge accounting is
required to establish at the inception of the hedge the method it will use for
assessing the effectiveness of the hedging derivative and the measurement
approach for determining the ineffective aspect of the hedge. Those methods must
be consistent with the entity's approach to managing risk.
This Statement generally precludes designating a nonderivative financial
instrument as a hedge of an asset, liability, unrecognized firm commitment, or
forecasted transaction.
This Statement is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. Initial application of this Statement should be as of the
beginning of an entity's fiscal quarter; on that date, hedging relationships
must be designated anew and documented pursuant to the provisions of this
Statement. Earlier application of all of the provisions of this Statement is
encouraged, but it is permitted only as of the beginning of any fiscal quarter
that begins after issuance of this Statement. This Statement should not be
applied retroactively to financial statements of prior periods.
Management is presently unsure when the Statement will be adopted; however, it
will be no later than January 1, 2000. This Statement is not expected to have a
material effect on the Company's financial condition or results of operations.
19
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
Inapplicable
ITEM 2 - CHANGES IN SECURITIES
Inapplicable
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
Inapplicable
ITEM 4 - None
ITEM 5 - OTHER INFORMATION
None
ITEM 6 - EXHIBITS AND REPORT ON FORM 8-K
(a) Exhibits - None
(b) Report on Form 8-K -
- On November 3, 1998, the Company filed a current report on Form
8- K, Items 5 and 7, to report that the Company had entered into
an Agreement and Plan of Merger dated October 28, 1998, for the
merger of the Company with and into Centura Banks, Inc.
20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRST COASTAL BANKSHARES, INC.
November 16, 1998 /s/ John A. B. Davies, Jr.
- ----------------- -------------------------
Date John A. B. Davies, Jr.
President
Chief Executive Officer
November 16, 1998 /s/ Dennis R. Stewart
- ---------------- ---------------------------
Date Dennis R. Stewart
Executive Vice President
Chief Financial Officer