<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
<TABLE>
<S> <C>
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 COMMISSION FILE NUMBER 333-68207
</TABLE>
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______ TO ______
COMMISSION FILE NUMBER 333-68207
FIRST COASTAL BANCSHARES
CALIFORNIA 95-4693574
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
275 MAIN STREET, EL SEGUNDO, CALIFORNIA 90245
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (310) 322-2222
SECURITIES REGISTERED UNDER SECTION 12(b) OF EXCHANGE ACT: NONE
Securities registered under Section 12(g) of the Exchange Act: Common Stock, No
Par Value; 330,000 Units consisting of one share of Common Stock and one 11-7/8%
Cumulative Preferred Security, redemption value, $20.00 per Preferred Security.
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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 [ ] NO [X]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]
State issuer's revenues for its most recent fiscal year: $5.9 million
Aggregate market value of the voting Common Stock held by non-affiliates
at April 21, 1999: $3,386,786.
Number of shares of Common Stock outstanding as of April 21, 1999:
1,232,138.
DOCUMENTS INCORPORATED BY REFERENCE: None
Pursuant to Section 240.15d-2 of the Securities Act of 1934, this Form 10-KSB
contains only certified financial statements for the Registrant's fiscal year
ended December 31, 1998.
1
<PAGE> 2
CONTENTS
- --------------------------------------------------------------------------------
INDEPENDENT AUDITORS' REPORT
ON THE CONSOLIDATED FINANCIAL STATEMENTS 3
- --------------------------------------------------------------------------------
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS 4 AND 5
CONSOLIDATED STATEMENTS OF OPERATIONS 6
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY 7
CONSOLIDATED STATEMENTS OF CASH FLOWS 8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 9 THROUGH 31
- --------------------------------------------------------------------------------
2
<PAGE> 3
INDEPENDENT AUDITORS' REPORT
To the Shareholders
and Board of Directors of First Coastal Bancshares
We have audited the accompanying consolidated balance sheets of First Coastal
Bancshares and Subsidiary (the "Company") as of December 31, 1998 and 1997 and
the related consolidated statements of operations, changes in shareholders'
equity, and cash flows for the years then ended. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of First Coastal
Bancshares and Subsidiary as of December 31, 1998 and 1997, and the results of
their operations and their cash flows for the years then ended, in conformity
with generally accepted accounting principles.
VAVRINEK, TRINE, DAY & CO., LLP
February 4, 1999, except for Note T as to
which the date is March 8, 1999
Laguna Hills, California
3
<PAGE> 4
FIRST COASTAL BANCSHARES AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
ASSETS
Cash and Due from Banks $ 2,745 $ 2,629
Federal Funds Sold 700 325
-------- --------
CASH AND CASH EQUIVALENTS 3,445 2,954
Investment Securities Available for Sale - Note B: 14,679 10,183
Loans - Note C:
Commercial 4,303 4,574
Real Estate - Construction 73 67
Real Estate - Residential, 1 to 4 Units 24,790 13,778
Real Estate - Other 23,071 16,363
Consumer 2,917 5,210
-------- --------
TOTAL LOANS 55,154 39,992
Net Deferred Loan Costs (Fees) 9 (147)
Allowance for Loan Losses (549) (615)
-------- --------
NET LOANS 54,614 39,230
Premises and Equipment, Net - Note D 386 455
Other Real Estate Owned, Net 116 200
Goodwill, Net - Note M 1,770 1,956
Net Deferred Tax Asset - Note H 621 400
Accrued Interest and Other Assets 1,104 751
-------- --------
$ 76,735 $ 56,129
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE> 5
FIRST COASTAL BANCSHARES AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits - Note E:
Noninterest-Bearing Demand $ 14,474 $ 13,598
Money Market and NOW 14,169 11,034
Savings 3,722 4,120
Time Deposits Under $100,000 13,489 10,970
Time Deposits $100,000 and Over 12,737 5,543
-------- --------
TOTAL DEPOSITS 58,591 45,265
Short-Term Borrowings - Note F 10,000 4,550
Long-Term Debt - Note G 1,000 --
Accrued Interest and Other Liabilities 884 304
-------- --------
TOTAL LIABILITIES 70,475 50,119
Commitments and Contingencies - Note I
Shareholders' Equity - Notes J, R and S:
Preferred Stock - Series A, Authorized 5,000,000 Shares;
Issued and Outstanding 423,500 Shares;
Liquidation Value of $2,859
Plus Accumulated Dividends - Note K 2,658 2,658
Common Stock - Authorized 10,000,000 Shares;
Issued and Outstanding 714,551 at December 31, 1998
and 677,052 at December 31, 1997 3,673 3,360
Accumulated Deficit, Eliminated by Transfer of $2,850 from -- --
Common Stock and Surplus on June 30, 1997
Accumulated Deficit Since July 1, 1997 (40) (13)
Accumulated Other Comprehensive Income - Net Unrealized
(Loss) Gain on Investment Securities Available for Sale,
net of Taxes of $21 in 1998 (31) 5
-------- --------
TOTAL SHAREHOLDERS' EQUITY 6,260 6,010
-------- --------
$ 76,735 $ 56,129
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE> 6
FIRST COASTAL BANCSHARES AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998 AND 1997
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
INTEREST INCOME
Interest and Fees on Loans $ 4,397 $ 2,627
Interest on Investment Securities 676 428
Other Interest Income 292 117
------- -------
TOTAL INTEREST INCOME 5,365 3,172
INTEREST EXPENSE
Interest on Money Market and NOW 354 212
Interest on Savings 94 94
Interest on Time Deposits 1,628 575
Other Interest Expense 186 6
------- -------
TOTAL INTEREST EXPENSE 2,262 887
------- -------
NET INTEREST INCOME 3,103 2,285
PROVISION FOR LOAN LOSSES 10 25
------- -------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 3,093 2,260
NONINTEREST INCOME
Service Charges and Fees 373 209
Gain on Sale of Loans 91 27
Gain on Sale of Investment Securities Available for Sale 77 5
Other Income 25 4
------- -------
566 245
NONINTEREST EXPENSE
Salaries and Employee Benefits 1,322 1,144
Occupancy - Note I 301 233
Furniture and Equipment 128 77
Data Processing 255 237
Promotional 61 64
Legal and Accounting 228 91
Office 167 149
Other Real Estate Owned 50 1
Goodwill Amortization 132 70
Other Expenses 472 284
------- -------
3,116 2,350
------- -------
INCOME BEFORE INCOME TAXES 543 155
Income Taxes - Note H 284 95
------- -------
NET INCOME $ 259 $ 60
======= =======
Per Share Data - Note L:
Net Loss - Basic $ (0.04) $ (0.15)
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
6
<PAGE> 7
FIRST COASTAL BANCSHARES AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998 AND 1997
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
Common Stock Accumulated Deficit Accumulated
---------------------- ----------------------- Other
Preferred Number of Comprehensive Since Comprehensive
Stock Shares Amount Income Prior July 1, 1997 Income
--------- --------- ------ ------------- ----- ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
January 1, 1997 $ -- 585,197 $ 5,628 $ (2,762) $ -- $ (28)
Proceeds From Stock Offering 2,699 100,000 535
Cost of Stock Offering (141)
Dividends - Preferred Stock (155)
Common Stock Repurchased (8,144) (51)
Redemption of Preferred Stock (41) (6)
Recognition of Deferred Tax
Assets Generated Prior to
Quasi-Reorganization 250
Comprehensive Income
Quasi-Reorganization -
Note N (2,861) $ 11 2,850 11
Net Income (Loss) 60 (88) 148
Change in Unrecognized Gain
of Securities Available for
Sale 22 22
---------
Comprehensive Income $ 93
=========
--------- --------- ------- -------- --------- ---------
December 31, 1997 2,658 677,052 3,360 -- (13) 5
Dividends - Preferred Stock (286)
Recognition of Deferred Tax
Assets Generated Prior to
Quasi-Reorganization 141
Common Stock Repurchased (12,501) (78)
Exercise of Warrants 50,000 250
Comprehensive Income
Net Income $ 259 259
Change in Unrecognized Loss
of Securities Available for
Sale, net of Taxes of $21 (36) (36)
---------
Comprehensive Income $ 223
=========
--------- --------- ------- -------- --------- ---------
December 31, 1998 $ 2,658 714,551 $ 3,673 $ -- $ (40) $ (31)
========= ========= ======= ======== ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
7
<PAGE> 8
FIRST COASTAL BANCSHARES AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998 AND 1997
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES
Net Income $ 259 $ 60
Adjustments to Reconcile Net Income to
Net Cash Provided (Used) by Operating Activities:
Depreciation and Amortization 255 153
Provision for Loan Losses 10 25
Discount and Premium on Investment Securities 66 22
Gain on Sale of Investment Securities (77) (5)
Gain on Loan Sales (91) (27)
Loans Originated for Sale (1,178) (354)
Proceeds from Loan Sales 1,269 381
Deferred Income Taxes 236 95
Other Items - Net 79 (376)
-------- --------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES 828 (26)
INVESTING ACTIVITIES
Net Change in Interest-Bearing Deposits -- 396
Purchases of Available-for-Sale Securities (23,417) (7,180)
Proceeds from Sales of Available-for-Sale Securities 13,124 1,349
Proceeds from Maturities of Available-for-Sale Securities 5,742 3,564
Net Increase in Loans (15,559) (7,151)
Proceeds from Sale of Other Real Estate Owned 165 --
Net Cash Used in Purchase of Marina Bank -- (1,325)
Purchases of Premises and Equipment (54) (255)
-------- --------
NET CASH USED BY INVESTING ACTIVITIES (19,999) (10,602)
FINANCING ACTIVITIES
Net Change in Demand Deposits and Savings Accounts 3,613 432
Net Change in Time Deposits 9,713 3,249
Net Increase in Other Borrowings 6,450 4,550
Dividends Paid (286) (155)
Repurchase of Preferred and Common Stock (78) (98)
Exercise of Warrants 250 --
Proceeds from Stock Offering - Net -- 3,093
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 19,662 11,071
-------- --------
INCREASE IN CASH AND CASH EQUIVALENTS 491 443
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 2,954 2,511
-------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 3,445 $ 2,954
======== ========
Supplemental Disclosures of Cash Flow Information:
Cash Paid During the Year for Interest $ 1,901 $ 870
Cash Paid During the Year for Income Taxes $ 103 $ 1
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
8
<PAGE> 9
FIRST COASTAL BANCSHARES AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of First Coastal
Bancshares (the "Company") and its wholly-owned subsidiary, First Coastal Bank,
N.A. (the "Bank").
Nature of Operations
The Bank operates two branches in El Segundo and Marina del Rey, California. The
Bank's primary source of revenue is providing loans to clients, who are
predominately small and middle-market businesses and individuals.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents includes cash on
hand, amounts due from banks and federal funds sold. Cash flows from loans,
deposits and federal funds sold are reported net.
The Company maintains amounts due from banks which exceed federally insured
limits. The Company has not experienced any losses in such accounts.
Investment Securities Available for Sale
Available-for-sale securities consist of bonds, corporate notes and certain
equity securities not classified as trading securities nor as held-to-maturity
securities.
Unrealized holding gains and losses, net of tax, on available-for-sale
securities are reported as a net amount in a separate component of capital until
realized.
Gains and losses on the sale of available-for-sale securities are determined
using the specific-identification method.
Premiums and discounts are recognized in interest income using the interest
method over the period to maturity.
9
<PAGE> 10
FIRST COASTAL BANCSHARES AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICES - CONTINUED
Loans
Loans receivable that management has the intent and ability to hold for the
foreseeable future or until maturity or payoff are reported at their outstanding
unpaid principal balances reduced by any charge-offs, allowance for loan losses,
and net of any deferred fees or costs on originated loans, or unamortized
premiums or discounts on purchased loans.
Loan origination fees and certain direct origination costs are capitalized and
recognized as an adjustment of the yield of the related loan.
The accrual of interest on impaired loans is discontinued when, in management's
opinion, the borrower may be unable to meet payments as they become due. When
interest accrual is discontinued, all unpaid accrued interest is reversed.
Interest income is subsequently recognized only to the extent cash payments are
received.
For impairment recognized in accordance with Financial Accounting Standards
Board (FASB) Statement of Financial Accounting Standards (SFAS) No. 114,
"Accounting by Creditors for Impairment of a Loan", as amended by SFAS No. 118,
the entire change in the present value of expected cash flows is reported as
either provision for loan losses in the same manner in which impairment
initially was recognized, or as a reduction in the amount of provision for loan
losses that otherwise would be reported.
Allowance for Loan Losses
The allowance for possible loan losses is increased by charges to income and
decreased by charge-offs (net of recoveries). Quarterly detailed reviews are
performed to identify the risks inherent in the loan portfolio, assess the
overall quality of the loan portfolio and to determine the adequacy of the
allowance for loan losses and the related provision for loan losses to be
charged to expense. Loans identified as less than "acceptable" are reviewed
individually to estimate the amount of probable losses that need to be included
in the allowance. These reviews include analysis of financial information as
well as evaluation of collateral securing the credit. Additionally, management
considers the inherent risk present in the "acceptable" portion of the loan
portfolio taking into consideration historical losses on pools of similar loans,
adjusted for trends, conditions and other relevant factors that may affect
repayment of the loans in these pools.
Other Real Estate Owned
Real estate properties acquired through, or in lieu of, loan foreclosure are
initially recorded at fair value at the date of foreclosure establishing a new
cost basis. After foreclosure, valuations are periodically performed by
management and the real estate is carried at the lower of cost, or fair value
minus estimated costs to sell. Revenue and expenses from operations and changes
in the valuation allowance are included in other expenses.
10
<PAGE> 11
FIRST COASTAL BANCSHARES AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICES - CONTINUED
Goodwill
Goodwill represents the excess of the purchase price over the estimated fair
value of net assets associated with acquisition transactions of the Company
accounted for as purchases and is amortized over fifteen years. Goodwill is
evaluated periodically for other than temporary impairment. Should such an
assessment indicate that the undiscounted value of an intangible may be
impaired, the net book value of the intangible would be written down to net
estimated recoverable value.
Premises and Equipment
Bank premises, furniture and equipment, and leasehold improvements are carried
at cost, less accumulated depreciation and amortization. Depreciation and
amortization is computed on the straight-line method over the estimated useful
lives of the assets, or life of the lease if shorter for leasehold improvements.
Lives used for this purpose are as follows:
Leasehold Improvements 5-15 Years
Furniture, Fixtures and Equipment 3-10 Years
Income Taxes
Deferred tax assets and liabilities are reflected at currently enacted income
tax rates applicable to the period in which the deferred tax assets or
liabilities are expected to be realized or settled. As changes in tax laws or
rates are enacted, deferred tax assets and liabilities are adjusted through the
provision for income taxes.
Financial Instruments
In the ordinary course of business, the Bank has entered into off-balance sheet
financial instruments consisting of commitments to extend credit. Such financial
instruments are recorded in the financial statements when they are funded or
related fees are incurred or received.
Earnings Per Shares (EPS)
Basic EPS excludes dilution and is computed by dividing income available to
common stockholders by the weighted-average number of common shares outstanding
for the period. Diluted EPS 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 Company.
11
<PAGE> 12
FIRST COASTAL BANCSHARES AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICES - CONTINUED
Stock-Based Compensation
SFAS No. 123, "Accounting for Stock-Based Compensation," encourages, but does
not require, companies to record compensation cost for stock-based employee
compensation plans at fair value. The Company has chosen to continue to account
for stock-based compensation using the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and related Interpretations. Accordingly, compensation cost for
stock options is measured as the excess, if any, of the quoted market price of
the Company's stock at the date of the grant over the amount an employee must
pay to acquire the stock. The pro forma effects of adoption are disclosed in
Note J.
Disclosure About Fair Value of Financial Instruments
SFAS No. 107 specifies the disclosure of the estimated fair value of financial
instruments. The Bank's estimated fair value amounts have been determined by the
Bank using available market information and appropriate valuation methodologies.
However, considerable judgment is required to develop the estimates of fair
value. Accordingly, the estimates are not necessarily indicative of the amounts
the Company could have realized in a current market exchange. The use of
different market assumptions and/or estimation methodologies may have a material
effect on the estimated fair value amounts.
Although management is not aware of any factors that would significantly affect
the estimated fair value amounts, such amounts have not been comprehensively
revalued for purposes of these financial statements since the balance sheet date
and, therefore, current estimates of fair value may differ significantly from
the amounts presented in the accompanying Notes.
Reclassifications
Certain reclassifications were made to prior year's presentation to conform to
the current year. These classifications are of a normal recurring nature.
Current Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". This statement establishes accounting and
reporting standards for derivative instruments and for hedging activities. This
new standard is effective for 2000 and is not expected to have a material impact
on the Bank's financial statements.
12
<PAGE> 13
FIRST COASTAL BANCSHARES AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
(DOLLAR AMOUNTS IN THOUSANDS)
NOTE B - INVESTMENT SECURITIES
Debt and equity securities have been classified in the balance sheets according
to management's intent. The carrying amount of securities and their approximate
fair values at December 31 were as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- --------
<S> <C> <C> <C> <C>
AVAILABLE-FOR-SALE SECURITIES
DECEMBER 31, 1998:
U.S. Treasury $ 533 $ -- $ (7) $ 526
Trust Preferred Securities 1,410 32 -- 1,442
Corporate Notes 2,020 7 (23) 2,004
Mortgage-Backed Securities 10,092 9 (70) 10,031
Other 676 -- -- 676
-------- -------- -------- --------
$ 14,731 $ 48 $ (100) $ 14,679
======== ======== ======== ========
AVAILABLE-FOR-SALE SECURITIES
DECEMBER 31, 1997:
U.S. Government and
Agency Securities $ 4,139 $ 1 $ (1) $ 4,139
Mortgage-Backed Securities 5,870 7 (2) 5,875
Federal Reserve Bank Stock 169 -- -- 169
-------- -------- -------- --------
$ 10,178 $ 8 $ (3) $ 10,183
======== ======== ======== ========
</TABLE>
Investment securities carried at $10,557 and $5,270 on December 31, 1998 and
1997, respectively, were pledged to secure short-term borrowings.
13
<PAGE> 14
FIRST COASTAL BANCSHARES AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
(DOLLAR AMOUNTS IN THOUSANDS)
NOTE B - INVESTMENT SECURITIES - CONTINUED
The amortized cost and estimated fair value of all debt securities as of
December 31, 1998 by contractual maturity are shown below. Expected maturities
will differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
--------- --------
<S> <C> <C>
Due from One Year to Five Years $ 230 $ 229
Over Five Years to Ten Years 1,789 1,775
After Ten Years 1,944 1,968
Mortgage-Backed Securities 10,092 10,031
Other 676 676
-------- --------
$ 14,731 $ 14,679
======== ========
</TABLE>
NOTE C - LOANS
The Bank's loan portfolio consists primarily of loans to borrowers within Los
Angeles county. The Bank has also purchased loans outstanding of $18,234, at
December 31, 1998, secured by residential properties in Arizona, Maine and Iowa.
Although the Bank seeks to avoid concentrations of loans to a single industry or
based upon a single class of collateral, real estate and real estate associated
businesses are among the principal industries in the Bank's market area and, as
a result, the Bank's loan and collateral portfolios are, to some degree,
concentrated in those industries.
A summary of the changes in the allowance for loan losses as of December 31
follows:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Balance at Beginning of Year $ 615 $ 382
Additions to the Allowance Charged to Expense 10 25
Recoveries on Loans Charged Off 82 38
Allowance on Loans Purchased from Marina Bank - Note M -- 376
-------- --------
707 821
Less Loans Charged Off (158) (206)
-------- --------
$ 549 $ 615
======== ========
</TABLE>
14
<PAGE> 15
FIRST COASTAL BANCSHARES AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
(DOLLAR AMOUNTS IN THOUSANDS)
NOTE C - LOANS - CONTINUED
The following is a summary of the investment in impaired loans, the related
allowance for loan losses, and income recognized thereon as of December 31:
<TABLE>
<CAPTION>
1998 1997
------ ------
<S> <C> <C>
Recorded Investment in Impaired Loans $1,725 $1,443
====== ======
Related Allowance for Loan Losses $ 54 $ 207
====== ======
Average Recorded Investment in Impaired Loans $1,346 $1,318
====== ======
Interest Income Recognized for Cash Payments $ 68 $ 130
====== ======
</TABLE>
Loans having carrying values of $165 and $197 were transferred to other real
estate owned in 1998 and 1997, respectively and loans totaling $183 were made to
facilitate the sale of other real estate owned in 1997.
In the ordinary course of business, the Bank has granted loans to certain
executive officers, directors and employees with which they are associated. In
the Bank's opinion, all loans and loan commitments to such parties are made on
substantially the same terms, including interest rate and collateral, as those
prevailing at the time for comparable transactions with other persons.
The following is a summary of the activity in these loans:
<TABLE>
<CAPTION>
1998 1997
----- -----
<S> <C> <C>
Balance at Beginning of Year $ 150 $ 187
Principal Repayments (147) (187)
Advances -- 150
----- -----
Balance at End of Year $ 3 $ 150
===== =====
</TABLE>
15
<PAGE> 16
FIRST COASTAL BANCSHARES AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
(DOLLAR AMOUNTS IN THOUSANDS)
NOTE D - PREMISES AND EQUIPMENT
A summary of premises and equipment as of December 31 follows:
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Leasehold Improvements $ 775 $ 770
Furniture, Fixtures, and Equipment 1,100 1,057
------- -------
1,875 1,827
Less Accumulated Depreciation and Amortization (1,489) (1,372)
------- -------
$ 386 $ 455
======= =======
</TABLE>
NOTE E - DEPOSITS
At December 31, 1998, the scheduled maturities of time deposits are as follows:
<TABLE>
<S> <C>
Within One Year $25,340
One to Five Years 886
-------
$26,226
=======
</TABLE>
NOTE F - SHORT-TERM BORROWINGS
Short-term borrowings at December 31, 1998 are composed of the following
advances:
<TABLE>
<CAPTION>
1998 1997
- --------------------------------- --------------------------------
Maturity Interest Amount Maturity Interest Amount
Date Rate Date Rate
- ----------- --------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
2/19/99 5.21% $ 4,000 3/26/98 5.89% $ 3,586
1/19/99 5.47% 6,000 3/1/98 5.95% 964
--------- ----------
$ 10,000 $ 4,550
========= ==========
</TABLE>
These advances are secured by investment securities as discussed in Note B.
16
<PAGE> 17
FIRST COASTAL BANCSHARES AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
(DOLLAR AMOUNTS IN THOUSANDS)
NOTE G - LONG-TERM DEBTS
On June 25, 1998, the Company borrowed $1,000 from a correspondent bank, through
the issuance of a promissory note that matures on July 15, 2005. This loan
requires quarterly payments of interest at prime plus 1.5% and $100 principal
payments in 2001, 2002, 2003, and 2004 and the balance of $600 is due on July
15, 2005. This loan is secured by the common stock of the Bank, which is wholly
owned by the Company.
NOTE H - INCOME TAXES
The provisions for income taxes included in the consolidated statements of
operations consist of the following:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Current:
Federal $ 36 $ --
State 12 1
---- ----
48 1
Deferred 236 94
---- ----
$284 $ 95
==== ====
</TABLE>
Temporary differences between the financial statement carrying amounts and tax
bases of assets and liabilities that give rise to significant portions of the
potential deferred tax asset at December 31 relate to the following:
<TABLE>
<CAPTION>
1998 1997
----- -----
<S> <C> <C>
Deferred Tax Assets:
Allowance for Loan Losses Due to Tax Limitations $ 75 $ 128
Net Loss Carryforwards 363 609
Unrealized Loss on Investment Securities 21 --
Other Assets 11 33
----- -----
470 770
Valuation Allowance -- (222)
Deferred Tax Liabilities:
Cash Basis Reporting for Tax Purposes (85) (148)
Premises and Equipment Due to Depreciation Difference (8) --
----- -----
(93) (148)
----- -----
Net Deferred Taxes $ 377 $ 400
===== =====
</TABLE>
17
<PAGE> 18
FIRST COASTAL BANCSHARES AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
(DOLLAR AMOUNTS IN THOUSANDS)
NOTE H - INCOME TAXES - CONTINUED
The valuation allowance relates to unrecognized tax benefits acquired from
Marina Bank of $158 and unrecognized tax benefits present in the Company when it
completed the quasi-reorganization. Accordingly, these benefits, when, and if,
recognized will be credited to Goodwill for items related to Marina Bank and
Common Stock for items related to the Company.
The Company adjusted the valuation allowance for $56 in 1998 and $97 in 1997 for
items related to Marina Bank (credited to Goodwill) and $141 in 1998 and $250 in
1997 for items related to the Company (credited to Common Stock).
The Bank has net operating loss carryforwards of approximately $1,037 and $144
for federal income and state franchise tax purposes, respectively. Net operating
loss carryforwards, to the extent not used, will expire in varying amounts
through 2012.
Due to ownership changes that have occurred at the Bank, the net loss
carryforwards reported, and the related deferred tax assets, have been reduced
to those allowable under Internal Revenue Code Section 382.
A comparison of the federal statutory income tax rates to the Company's
effective income tax rates follow:
<TABLE>
<CAPTION>
1998 1997
---------------------- ----------------------
Amount Rate Amount Rate
-------- ---------- --------- ---------
<S> <C> <C> <C> <C>
Federal Tax Rate $185 34.0% $ 53 34.0%
California Franchise Taxes,
Net of Federal Tax Benefit 50 9.2 17 11.0
Change in Valuation Allowance -- -- 27 17.4
Nondeductible Goodwill Amortization 45 8.3 24 15.5
Other Items - Net 4 0.8 (26) (16.6)
---- ------ ---- ------
Company's Effective Rate $284 52.3% $ 95 61.3%
==== ====== ==== ======
</TABLE>
18
<PAGE> 19
FIRST COASTAL BANCSHARES AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
(DOLLAR AMOUNTS IN THOUSANDS)
NOTE I - COMMITMENTS AND CONTINGENCIES
The Bank leases its El Segundo facility from a partnership which includes a
director of the Bank. The lease calls for monthly rental payments of $8, expires
in 2003 and includes two five-year options to renew.
At December 31, 1998, approximate future minimum annual rental payments under
noncancellable operating lease agreements are as follows:
<TABLE>
<CAPTION>
El Marina
Segundo del Rey Total
------- ------- -----
<S> <C> <C> <C>
1999 $ 98 $ 70 $168
2000 98 70 168
2001 98 -- 98
2002 98 -- 98
2003 41 -- 41
---- ---- ----
Total Minimum
Payments Required $433 $140 $573
==== ==== ====
</TABLE>
Total rent expense included in the statements of operations is approximately
$183 for 1998 and $139 for 1997.
In the normal course of business, the Bank enters into financial commitments to
meet the financing needs of its customers. These financial commitments include
commitments to extend credit. Those instruments involve to varying degrees,
elements of credit and interest rate risk not recognized in the statement of
financial position.
The Bank's exposure to credit loss in the event of nonperformance on commitments
to extend credit is represented by the contractual amount of those instruments.
The Bank uses the same credit policies in making commitments as it does for
loans reflected in the financial statements.
As of December 31, 1998, the Bank had commitments to extend credit of $3,500
whose contractual amount represents credit risk.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Since many
of the commitments are expected to expire without being drawn upon, the total
amounts do not necessarily represent future cash requirements. The Bank
evaluates each customer's credit worthiness on a case-by-case basis. The amount
of collateral obtained if deemed necessary by the Bank is based on management's
credit evaluation of the customer.
The Bank is involved in various litigation which has arisen in the ordinary
course of its business. In the opinion of management, the disposition of such
pending litigation will not have a material effect on the Bank's financial
statements.
19
<PAGE> 20
FIRST COASTAL BANCSHARES AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE J - STOCK OPTION PLAN
The Company applies Accounting Principles Board Opinion No. 25 and related
Interpretations in accounting for its stock option plan. Accordingly, no
compensation cost has been recognized for its stock option plan. Had
compensation costs for this plan been determined based on the fair value at the
grant dates consistent with the method of SFAS No. 123, the impact would not
have materially affected net income.
In 1996, the Bank adopted a stock option plan under which 85,000 of the common
shares may be issued to directors, officers and key employees at not less than
100% of fair market value at the date the options are granted. Upon formation of
the Company, this plan converted to the stock option plan of the Company.
The fair value of each option granted was estimated on the date of grant using
the Black-Scholes option pricing model with the following assumptions; risk-free
rates of 4.5% in 1998 and 5.8% in 1997, disregarding any volatility and expected
lives of five years in each year. The weighted-average fair value of options
granted during 1998 was $1.23 and $1.40 for 1997.
A summary of the status of the Bank's fixed stock option plan, retroactively
adjusted for the stock split, as of December 31, 1998 and 1997 and changes
during the years ending on those dates is presented below:
<TABLE>
<CAPTION>
1998 1997
----------------------- ------------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
--------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Outstanding at Beginning of Year 5,000 $ 5.75 -- $ --
Granted 55,000 6.25 5,000 5.75
-------- ---------
Outstanding at End of Year 60,000 6.21 5,000 5.75
======== =========
</TABLE>
The following table summarizes information about fixed options outstanding at
December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------ ----------------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Number Remaining Exercise Number Exercise
Price Outstanding Contractual Life Price Exercisable Price
- ---------------- ----------- ----------------- ---------- ------------ -----------
<S> <C> <C> <C> <C> <C>
$5.75 5,000 7.5 Years $ 5.75 2,000 $ 5.75
6.25 55,000 9.0 Years 6.25 11,000 6.25
---------- ----------
60,000 8.3 Years 6.21 13,000 6.08
========== ==========
</TABLE>
20
<PAGE> 21
FIRST COASTAL BANCSHARES AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE J - STOCK OPTION PLAN - CONTINUED
Had the Bank determined compensation cost based on the fair value at the grant
date for its stock options under SFAS No. 123, the Bank's net income would have
been reduced to the following pro forma amount:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Net Income:
As Reported $ 259 $ 60
Pro Forma $ 244 $ 59
Per Share Data:
Net Income - Basic
As Reported $ (0.04) $ (0.15)
Pro Forma $ (0.06) $ (0.15)
</TABLE>
NOTE K - PREFERRED STOCK
During 1997, the Company issued 430,000 shares of Series A 10% Cumulative
Convertible Preferred Stock. The Preferred Stock is perpetual in duration and is
senior to the Common Stock with respect to dividends and upon liquidation,
dissolution or winding-up. The liquidation preference is $6.75 per share, plus
any dividends accrued and unpaid.
Holders of Preferred Stock have the right, at their option, to convert their
shares of Preferred Stock into shares of Common Stock at an exchange ratio of
one share of Common Stock per share of Preferred Stock. The Preferred Stock may
be redeemed by the Company at a per share price of $6.89 until July 14, 2000,
$6.82 until July 14, 2001 and $6.75 thereafter.
21
<PAGE> 22
FIRST COASTAL BANCSHARES AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE L - EARNINGS PER SHARE (EPS)
The following is a reconciliation of net income (loss) and shares outstanding to
the income (loss) and the weighted-average number of shares used to compute EPS:
<TABLE>
<CAPTION>
1998 1997
-------------------------- ------------------------
Income Shares Income Shares
---------- ------------ ---------- ----------
<S> <C> <C> <C> <C>
Net Income as Reported $ 259 -- $ 60 --
Shares Outstanding at Year End -- 714,551 -- 677,052
Impact of Weighting Shares
Issued and/or Retired During the Year -- (44,722) -- (38,062)
Dividends on Preferred Stock (286) (155) --
-------- -------- -------- --------
Used in Basic EPS $ (27) 669,829 $ (95) 638,990
======== ======== ======== ========
</TABLE>
The effect of outstanding warrants, options and conversion features of the
preferred stock were not included as their effect would be antidilutive due to
the loss used for basic EPS.
NOTE M - MERGER WITH MARINA BANK
On June 26, 1997, the Company acquired 100% of the outstanding common stock of
Marina Bank (MB) for approximately $4,126 in cash (including transaction costs).
MB had total assets of approximately $20,864. The acquisition was accounted for
using the purchase method of accounting in accordance with Accounting Principles
Board Opinion No. 16. "Business Combinations." Under this method of accounting,
the purchase price was allocated to the assets acquired and deposits and
liabilities assumed based on their fair values as of the acquisition date, which
were not materially different from their book values. The financial statements
include the operations of MB from the date of the acquisition. Goodwill arising
from the transaction totaled approximately $2,083 and is being amortized over
fifteen years on a straight-line basis.
The following table sets forth selected unaudited pro forma combined financial
information of the Company and MB for the year ended December 31, 1997. The pro
forma operating data reflects the effect of the acquisition of MB as if it was
consummated at the beginning of each year presented. The pro forma results are
not necessarily indicative of the results that would have occurred had the
acquisition been in effect for the full years presented, nor are they
necessarily indicative of the results of future operations.
<TABLE>
<CAPTION>
1997
-------
<S> <C>
Interest and Noninterest Income $ 4,472
Net Loss $ (523)
Net Loss Per Share - Basic $ (.26)
</TABLE>
22
<PAGE> 23
FIRST COASTAL BANCSHARES AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE M - MERGER WITH MARINA BANK - CONTINUED
These proforma disclosures include adjustment to interest income from the
payment of the purchase price in cash, goodwill amortization and adjustments to
net income per share to reflect the issuance of preferred and common stock to
fund the purchase. No adjustments have been reflected in these amounts for the
expected cost savings to be derived from this merger.
NOTE N - QUASI-REORGANIZATION AND HOLDING COMPANY FORMATION
With the consent of the Office of the Comptroller of the Currency (the "OCC")
and the Company's shareholders, the Company adjusted its capital accounts
through a quasi-reorganization. As of July 1, 1997, the Company eliminated its
accumulated deficit and unrecognized loss on available for sale securities
through a reduction of its capital account by the same amount.
The results of operations of the Company for the periods before and after the
quasi-reorganization are summarized as follows:
<TABLE>
<CAPTION>
Unaudited
--------------------------------------------------------
January 1, 1997 July 1, 1997 For The
through through Year Ended
June 30, 1997 December 31, 1997 December 31, 1997
--------------- ----------------- ------------------
<S> <C> <C> <C>
Interest Income $ 1,127 $ 2,045 $ 3,172
Interest Expense 293 594 887
------- ------- -------
Net Interest Income 834 1,451 2,285
Provision for Loan Losses 25 -- 25
------- ------- -------
Net Interest Income After
Provision for Loan Losses 809 1,451 2,260
Noninterest Income 70 175 245
Noninterest Expenses 966 1,384 2,350
------- ------- -------
Income (Loss) Before Income Taxes (87) 242 155
Income Tax Provision 1 94 95
------- ------- -------
Net Income (Loss) $ (88) $ 148 $ 60
======= ======= =======
EPS - Basic $ (0.15) $ -- $ (0.15)
</TABLE>
23
<PAGE> 24
FIRST COASTAL BANCSHARES AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
(DOLLAR AMOUNTS IN THOUSANDS)
NOTE N - QUASI-REORGANIZATION AND HOLDING COMPANY FORMATION - CONTINUED
On June 24, 1997, the shareholders of First Coastal Bank, N.A. exchanged their
outstanding common and preferred stock for 430,000 shares of preferred stock and
685,196 shares of common stock of First Coastal Bancshares, a newly formed bank
holding company. There was no change in ownership and no cash involved in this
transaction. The transaction was accounted for as a pooling of interest and the
consolidated financial statements contained herein have been restated to give
full affect to this reorganization.
NOTE O - CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY ONLY
First Coastal Bancshares operates First Coastal Bank, N.A. The earnings of the
subsidiary are recognized on the equity method of accounting. Condensed
financial statements of the parent company only are presented below:
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
------------------------
1998 1997
------ ------
<S> <C> <C>
ASSETS:
Cash $ 57 $ 163
Investment in First Coastal Bank, N.A 6,183 5,817
Loan to First Coastal Bank, N.A 1,000 --
Other Assets 91 101
------ ------
$7,331 $6,081
====== ======
LIABILITIES:
Long-Term Debt $1,000 $ --
Other Liabilities 71 71
------ ------
TOTAL LIABILITIES 1,071 71
SHAREHOLDERS' EQUITY 6,260 6,010
------ ------
$7,331 $6,081
====== ======
</TABLE>
24
<PAGE> 25
FIRST COASTAL BANCSHARES AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
(DOLLAR AMOUNTS IN THOUSANDS)
NOTE O - CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY ONLY - CONTINUED
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended Period Ended
December 31, December 31,
1998 1997
------------ -------------
<S> <C> <C>
INCOME:
Dividends from Subsidiary $274 $149
---- ----
TOTAL INCOME 274 149
EXPENSES:
Other 24 3
---- ----
TOTAL EXPENSES 24 3
---- ----
INCOME BEFORE EQUITY IN
UNDISTRIBUTED INCOME
OF SUBSIDIARY 250 146
EQUITY IN UNDISTRIBUTED
INCOME OF SUBSIDIARY 9 2
---- ----
NET INCOME $259 $148
==== ====
</TABLE>
25
<PAGE> 26
FIRST COASTAL BANCSHARES AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
(DOLLAR AMOUNTS IN THOUSANDS)
NOTE O - CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY ONLY - CONTINUED
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended Period Ended
December 31, December 31,
1998 1997
-------------- --------------
<S> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net Income $ 259 $ 148
Noncash Items Included in Net Income:
Equity in Income of Subsidiary (283) (151)
Change in Other Assets and Liabilities 8 (36)
------- -------
NET CASH USED
IN OPERATING ACTIVITIES (16) (39)
CASH FLOWS FROM
INVESTING ACTIVITY:
Long-Term Loan made to Subsidiary (1,000) --
Dividends and Capital Infusion Received from Subsidiary 274 384
------- -------
NET CASH (USED) PROVIDED
BY INVESTING ACTIVITIES (726) 384
CASH FLOWS FROM
FINANCING ACTIVITIES:
Proceeds from Issuance of Long-Term Debt 1,000 --
Repurchase of Preferred and Common Stock (78) (98)
Dividends Paid (286) (84)
------- -------
NET CASH PROVIDED (USED)
IN FINANCING ACTIVITIES 636 (182)
------- -------
NET (DECREASE) INCREASE IN
CASH AND CASH EQUIVALENTS (106) 163
CASH AND CASH EQUIVALENTS,
AT BEGINNING OF YEAR 163 --
------- -------
CASH AND CASH EQUIVALENTS
AT ENDING OF YEAR $ 57 $ 163
======= =======
</TABLE>
26
<PAGE> 27
FIRST COASTAL BANCSHARES AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
(DOLLAR AMOUNTS IN THOUSANDS)
NOTE P - FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of a financial instrument is the amount at which the asset or
obligation could be exchanged in a current transaction between willing parties,
other than in a forced or liquidation sale. Fair value estimates are made at a
specific point in time based on relevant market information and information
about the financial instrument. These estimates do not reflect any premium or
discount that could result from offering for sale at one time the entire
holdings of a particular financial instrument. Because no market value exists
for a significant portion of the financial instruments, fair value estimates are
based on judgments regarding future expected loss experience, current economic
conditions, risk characteristics of various financial instruments, and other
factors. These estimates are subjective in nature, involve uncertainties and
matters of judgment and, therefore, cannot be determined with precision. Changes
in assumptions could significantly affect the estimates.
Fair value estimates are based on financial instruments both on and off the
balance sheet without attempting to estimate the value of anticipated future
business, and the value of assets and liabilities that are not considered
financial instruments. Additionally, tax consequences related to the realization
of the unrealized gains and losses can have a potential effect on fair value
estimates and have not been considered in many of the estimates.
The following methods and assumptions were used to estimate the fair value of
significant financial instruments:
Financial Assets
The carrying amounts of cash and due from banks, federal funds sold and
interest-bearing deposits, are considered to approximate fair value due to the
short-term nature of these financial instruments. The fair values of investment
securities available for sale are generally based on quoted market prices. The
fair value of loans are estimated using a combination of techniques, including
discounting estimated future cash flows and quoted market prices of similar
instruments where available.
Financial Liabilities
The carrying amounts of deposit liabilities payable on demand and other borrowed
funds are considered to approximate fair value due to the short-term nature of
these financial instruments. For fixed maturity deposits, fair value is
estimated by discounting estimated future cash flows using rates currently
offered for deposits of similar remaining maturities. The carrying amount of
long-term debt with variable interest rates is considered to approximate fair
value due to the repricing components of the variable rate feature.
Off-Balance Sheet Financial Instruments
The fair value of commitments to extend credit is estimated using the fees
currently charged to enter into similar agreements. The fair value of these
financial instruments are not material.
27
<PAGE> 28
FIRST COASTAL BANCSHARES AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
(DOLLAR AMOUNTS IN THOUSANDS)
NOTE P - FAIR VALUE OF FINANCIAL INSTRUMENTS - CONTINUED
The estimated fair value of financial instruments at December 31 are summarized
as follows:
<TABLE>
<CAPTION>
1998 1997
-------------------------- --------------------------
Carrying Fair Carrying Fair
Value Value Value Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Financial Assets:
Cash and Due From Banks $ 2,745 $ 2,745 $ 2,629 $ 2,629
Federal Funds Sold $ 700 $ 700 $ 325 $ 325
Investment Securities $14,679 $14,679 $10,183 $10,183
Loans $54,614 $55,382 $39,230 $39,277
Financial Liabilities:
Deposits $58,591 $58,591 $45,265 $45,271
Other Borrowings $11,000 $11,000 $ 4,550 $ 4,550
</TABLE>
NOTE Q - REGULATORY MATTERS
The Company and the Bank are subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory - and possibly additional
discretionary - actions by regulators that, if undertaken, could have a direct
material effect on the Company's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the
Company and the Bank must meet specific capital guidelines that involve
quantitative measures of the Company's assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting practices. The
capital amounts and classification are also subject to qualitative judgments by
the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios (set
forth in the table below) of total and Tier 1 capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as
defined) to average assets (as defined). Management believes, as of December 31,
1998, that the Company and the Bank meet all capital adequacy requirements to
which it is subject.
28
<PAGE> 29
FIRST COASTAL BANCSHARES AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
(DOLLAR AMOUNTS IN THOUSANDS)
NOTE Q - REGULATORY MATTERS - CONTINUED
As of December 31, 1998, the most recent notification from the Office of the
Comptroller of the Currency categorized the Bank as well-capitalized under the
regulatory framework for prompt corrective action (there are no conditions or
events since that notification that management believes have changed the Bank's
category). To be categorized as well-capitalized, the Bank must maintain minimum
ratios as set forth in the table below. The following table also sets forth the
Bank's actual capital amounts and ratios:
<TABLE>
<CAPTION>
Amount of Capital Required
------------------------------------------
To Be Adequately To Be Well-
Actual Capitalized Capitalized
---------------------- ----------------- ---------------------
Amount Ratio Amount Ratio Amount Ratio
--------- -------- -------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
AS OF DECEMBER 31, 1998:
Total Capital (to Risk-Weighted Assets) $5,736 11.2% $4,106 8.0% $5,133 10.0%
Tier 1 Capital (to Risk-Weighted Assets) $4,247 8.3% $2,053 4.0% $3,080 6.0%
Tier 1 Capital (to Average Assets) $4,247 5.4% $3,131 4.0% $3,914 5.0%
AS OF DECEMBER 31, 1997:
Total Capital (to Risk-Weighted Assets) $4,372 10.8% $3,240 8.0% $4,050 10.0%
Tier 1 Capital (to Risk-Weighted Assets) $3,864 9.5% $1,620 4.0% $2,430 6.0%
Tier 1 Capital (to Average Assets) $3,864 7.8% $1,994 4.0% $2,493 5.0%
</TABLE>
The Company is subject to similar requirements administered by its primary
regulator, the Federal Reserve Board. For capital adequacy purposes, the Company
must maintain total capital to risk-weighted assets and Tier 1 capital to
risk-weighted assets of 8.0% and 4.0%, respectively. It's total capital to
risk-weighted assets and Tier 1 capital to risk-weighted assets was 9.8% and
5.9%, respectively, at December 31, 1998.
The Bank is restricted as to the amount of dividends that can be paid. Dividends
declared by national banks that exceed the net income (as defined) for the
current year plus retained net income for the preceding two years must be
approved by the OCC. The Bank may not pay dividends that would result in its
capital levels being reduced below the minimum requirements shown above.
Banking regulations require that all banks maintain a percentage of their
deposits in cash or as reserves at the Federal Reserve Bank. These reserve
requirements were approximately $860 and $770 at December 31, 1998 and 1997,
respectively.
29
<PAGE> 30
FIRST COASTAL BANCSHARES AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE R - RELATED PARTY TRANSACTIONS
The Company's largest shareholder is California Community LLC which owns
approximately 72% of the outstanding common stock at December 31, 1998. In
addition, California Community LLC has warrants to purchase 175,000 shares of
common stock at $5.00 per share. These warrants expire on May 31, 1999. The
President and Chief Executive Officer of the Company is also the Chief Executive
Officer and Manager of California Community LLC. Several of the Company's other
Directors also have ownership interests in California Community LLC.
The Bank has engaged DataTech Management, Inc. to provide loan servicing and
computer hardware and software maintenance services. During 1998 and 1997, the
Bank paid $137 and $33, respectively, for such services. Two of the Company's
executive officers and directors own DataTech Management, Inc.
One of the Company's directors owns a 25% interest in the lessor of the
headquarters and main branch of the Bank. During 1997, the monthly rental
expense for this property was $8. See Note I for additional information on the
commitment to this lease.
NOTE S - REVERSE STOCK SPLIT
The Company's shareholders approved a one-for-five reverse split of its common
stock effective November 24, 1998. All per share data in these financial
statements and notes has been adjusted for this split.
NOTE T - SUBSEQUENT EVENTS
On March 8, 1999, the Bank acquired 100% of the outstanding common stock of
American Independent Bank, N.A. (AIB) for approximately $6,500 in cash. AIB had
total assets of approximately $38,000. The acquisition was accounted for using
the purchase method of accounting in accordance with Accounting Principles Board
Opinion No. 16. "Business Combinations". Under this method of accounting, the
purchase price was allocated to the assets acquired and deposits and liabilities
assumed based on their fair values as of the acquisition date. The financial
statements will include the operations of AIB from the date of the acquisition.
Goodwill arising from the transaction is approximately $3,700 and will be
amortized over fifteen years on a straight-line basis.
On March 3, 1999, the Company completed a public secondary capital offering for
330,000 shares of its common stock and $6,600 of 11 7/8% cumulative preferred
securities issued by a wholly-owned subsidiary, First Coastal Capital Trust. Net
proceeds from this offering were approximately $8,000, net of underwriting
commissions and professional fees of $700. The Company also capitalized
approximately $1,000 in costs associated with the origination of the preferred
securities, these costs will be amortized over the estimated life of the
securities on a straight-line basis.
30
<PAGE> 31
FIRST COASTAL BANCSHARES AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE T - SUBSEQUENT EVENTS - CONTINUED
The following table sets forth selected unaudited pro forma combined financial
information of the Bank and AIB for the years ended December 31, 1998 and 1997.
The pro forma operating data reflects the effect of the acquisition of AIB as if
it was consummated at the beginning of each year presented. The pro forma
results are not necessarily indicative of the results that would have occurred
had the acquisition been in effect for the full years presented, nor are they
necessarily indicative of the results of future operations.
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Interest and Noninterest Income $ 9,573 $ 6,835
Net Income $ 133 $ 115
Loss per Share - Basic $ (0.23) $ (0.06)
</TABLE>
These pro forma disclosures include only adjustment for goodwill amortization.
No adjustments have been reflected in these amounts for the expected cost
savings to be derived from this merger and the impact of the secondary offering
completed in 1999.
31
<PAGE> 32
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
FIRST COASTAL BANCSHARES
By: /s/ Don M. Griffith
------------------------------------------
Don M. Griffith
Chief Executive Officer, Chairman and Director
In accordance with the Exchange Act, this report has been signed by the
following persons on behalf of the Registrant and in the capacities on the dates
indicated:
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Deborah A. Marsten Chief Financial Officer, May 10, 1999
- -------------------------------- Secretary and Director
Deborah A. Marsten
/s/ Charles E. Brooks Vice Chairman May 10, 1999
- -------------------------------- Director
Charles E. Brooks
/s/ Paul M. Deters Director May 10, 1999
- --------------------------------
Paul M. Deters
/s/ Clifford J. Einstein Director May 10, 1999
- ---------------------------------
Clifford J. Einstein
/s/ Charles R. Fullerton Director May 10, 1999
- --------------------------------
Charles R. Fullerton
/s/ Carole J. LaCabe Director May 10, 1999
- --------------------------------
Carole J. LaCabe
/s/ Joseph H. Wender Director May 10, 1999
- --------------------------------
Joseph H. Wender
</TABLE>
32
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 2,745
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 700
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 14,679
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 55,163
<ALLOWANCE> 549
<TOTAL-ASSETS> 76,735
<DEPOSITS> 58,591
<SHORT-TERM> 10,000
<LIABILITIES-OTHER> 884
<LONG-TERM> 1,000
0
2,658
<COMMON> 3,673
<OTHER-SE> (71)
<TOTAL-LIABILITIES-AND-EQUITY> 76,735
<INTEREST-LOAN> 4,397
<INTEREST-INVEST> 676
<INTEREST-OTHER> 292
<INTEREST-TOTAL> 5,365
<INTEREST-DEPOSIT> 2,076
<INTEREST-EXPENSE> 2,262
<INTEREST-INCOME-NET> 3,103
<LOAN-LOSSES> 10
<SECURITIES-GAINS> 77
<EXPENSE-OTHER> 3,116
<INCOME-PRETAX> 543
<INCOME-PRE-EXTRAORDINARY> 543
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 259
<EPS-PRIMARY> (0.04)
<EPS-DILUTED> (0.04)
<YIELD-ACTUAL> 4.65
<LOANS-NON> 726
<LOANS-PAST> 8
<LOANS-TROUBLED> 996
<LOANS-PROBLEM> 1,611
<ALLOWANCE-OPEN> 615
<CHARGE-OFFS> 158
<RECOVERIES> 82
<ALLOWANCE-CLOSE> 549
<ALLOWANCE-DOMESTIC> 346
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 203
</TABLE>
