<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 3 TO FORM 10-K ON FORM 10-K/A
(MARK ONE)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 1995
OR
( )TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from _____________ to __________
Commission file number 0-14087
FIRST COASTAL CORPORATION
--------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 06-1177661
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
36 THOMAS DRIVE, WESTBROOK, MAINE 04092
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (207) 774-5000
Securities registered pursuant to Section 12(b) of the Act: NOT APPLICABLE
Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, $1.00
PAR VALUE PER SHARE
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not 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-K or any
amendment to this Form 10-K. [ ]
On and effective as of September 11, 1991, First Coastal Corporation was
advised by the National Association of Securities Dealers that its Common Stock
had been removed from the NASDAQ National Market System due to an insufficient
number of active market makers in the stock. The Common Stock is traded in the
over-the-counter market in the "pink sheets," although such trades are
limited and sporadic and there is no established public trading market for the
Common Stock. The aggregate market value of the Common Stock held by non-
affiliates based on the book value per share of Common Stock of $6.66 at
December 31, 1995 was $3,989,779.
As of the close of business on March 29, 1996, 600,361 shares of the
registrant's Common Stock, par value $1.00 per share, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None
<PAGE>
PART I
ITEM 1. BUSINESS.
GENERAL
FIRST COASTAL CORPORATION
First Coastal Corporation, a Delaware corporation ("First Coastal" or the
"Company") is a bank holding company whose sole operating subsidiary is Coastal
Savings Bank ("Coastal" or the "Bank"). The Company was organized in January
1987 for the purpose of becoming the parent holding company of Suffield Bank
following Suffield Bank's conversion from mutual to stock form. The Company
acquired Coastal Bancorp, a Maine corporation ("Bancorp"), which was the bank
holding company of Coastal, a Maine-chartered, stock savings bank, on April 1,
1987. On September 6, 1991, Suffield Bank was placed in receivership by the
Connecticut Department of Banking, leaving the Bank as the Company's sole
operating subsidiary. On July 26, 1994, Bancorp was dissolved with the effect
that the Bank became a direct wholly-owned subsidiary of the Company. See
"Certain Regulatory Matters -- Receivership of Suffield Bank" and "-- Settlement
of Cross Guaranty Claim."
COASTAL SAVINGS BANK
The Bank was formed in 1981 as a Maine-chartered savings bank through the
consolidation of Brunswick Savings Institution and York County Savings Bank,
which were organized in 1858 and 1860, respectively. On July 11, 1984, the Bank
completed its conversion from mutual form to a Maine stock savings bank.
The Bank had total assets of approximately $145 million at December 31, 1995.
The region served by the Bank includes the communities of Brunswick, Freeport,
Kennebunk, Kezar Falls, Saco, Topsham and Westbrook. The Bank operated eight
banking offices as of December 31, 1995.
The principal business of the Bank consists of attracting deposits from the
general public and originating residential real estate, construction, consumer,
commercial and commercial real estate loans and investment securities. Deposits
at the Bank are federally insured by the Bank Insurance Fund ("BIF"), which is
administered by the Federal Deposit Insurance Corporation ("FDIC").
The principal executive offices of the Company and the Bank are located at 36
Thomas Drive, Westbrook, Maine 04092; telephone (207)774-5000.
2
<PAGE>
CERTAIN REGULATORY MATTERS
RECEIVERSHIP OF SUFFIELD BANK
On September 6, 1991, the Company announced that Suffield Bank was placed into
receivership by the Connecticut Banking Department and the FDIC was appointed as
the receiver. Financial data reported for 1991 gives effect to the closure of
Suffield Bank as if it had occurred at the beginning of 1991. Since the
receivership of Suffield Bank, management's efforts have been primarily focused
on resolving the cross guaranty claim as described below and improving
operations of the Company's subsidiary, Coastal.
SETTLEMENT OF CROSS GUARANTY CLAIM
On January 31, 1995, the Company and the Bank consummated a settlement with the
FDIC in accordance with the terms and conditions of the Amended and Restated
Settlement Agreement, dated as of November 23, 1994 (the "Amended and Restated
Settlement Agreement"), pursuant to which the FDIC waived and released its cross
guaranty claim against the Bank. The cross guaranty claim was the result of the
September 1991 failure of Suffield Bank. As part of the settlement, the Company
issued to the FDIC a non-recourse promissory note in the principal amount of
$9.0 million (the "Note" or the "FDIC Note"), secured by the Company's pledge of
the outstanding stock of the Bank. In 1994 the Company incurred an
extraordinary charge to earnings resulting from the issuance of the Note.
Principal and interest under the FDIC Note are deferred until its maturity date,
which is January 31, 1997, subject to extension under certain circumstances.
The Company announced on January 31, 1996 that it intends to pursue a
recapitalization of the Company as the means to facilitate the satisfaction of
the FDIC Note. As part of the recapitalization, the Company expects to raise
approximately $3.0 to $4.0 million through an offering of its common stock,
including a rights offering to the Company's existing stockholders. The
offering will be made only by means of a prospectus. In addition to the
proceeds from the common stock offering, the Company also expects to use funds
derived from dividends from the Bank and the proceeds from a loan to satisfy its
obligation under the FDIC Note. The recapitalization and related transactions
are subject to a number of conditions, including the receipt of appropriate
regulatory approvals, and there can be no assurance that such recapitalization
and related transactions will be consummated or that the Company will be
successful in repaying the FDIC Note. The Company anticipates that the
recapitalization would be completed in the third quarter of 1996.
MEMORANDUM OF UNDERSTANDING
Effective as of January 23, 1992, Coastal consented to an Order to Cease and
Desist (the "Order to Cease and Desist" or the "Order") issued by the FDIC and
concurred with by the Maine Bureau of Banking (the "Maine Bureau of Banking").
The Order required Coastal to cease and desist from engaging in certain
activities and practices detrimental to the Bank and also required, among other
things, the maintenance by the Bank of specified capital ratios. Effective
December 8, 1994, the Order was terminated.
3
<PAGE>
The Order was replaced with a Memorandum of Understanding ("Memorandum") among
the Bank, the FDIC and the Maine Bureau of Banking effective as of
November 22, 1994. The Memorandum provides, among other things, that (i) the
Bank continue to maintain its allowance for loan and lease losses in accordance
with applicable regulatory requirements, (ii) the Board of Directors of the Bank
continue to review the adequacy of the Bank's loan and lease loss reserves and
provide for adequate reserves, (iii) the Bank continue to have a Tier 1 capital
to total assets ratio at or in excess of 6.0%, (iv) the Bank continue to comply
with the FDIC's Statement of Policy on Risk-Based Capital, (v) the Bank provide
monthly progress reports regarding substandard or doubtful assets, (vi) the Bank
agree not to extend or renew credit to, or for the benefit of, any borrower who
or which has a loan or other extension of credit with the Bank that has been
charged-off or classified in whole or in part, loss, doubtful or substandard and
is uncollected unless certain conditions are met, (vii) the Bank not declare or
pay any dividends without the prior written consent of the FDIC and the Maine
Bureau of Banking, and (viii) the Bank continue to furnish written progress
reports detailing the form and manner of any action taken to seek to secure
compliance with the Memorandum. In addition, the Board of Directors is required
to develop a written plan of action to reduce the Bank's risk position with
respect to each borrower who had outstanding principal debt owing to the bank in
excess of $500,000 and for the formulation of a strategic plan and policies
covering investments, funds management and various lending policies. At
December 31, 1995, the Bank had a Tier 1 capital to total assets ratio of 9.19%.
In March 1988, the Company entered into a Memorandum of Understanding with the
Federal Reserve Bank of Boston which provided, among other things, for the
formulation of plans and policies covering capital adequacy, funds management,
the Company's management information system and the adoption of a written
dividend policy consistent with the policies of the Board of Governors of the
Federal Reserve System (the "Federal Reserve") regarding the payment of cash
dividends by bank holding companies. Management addressed these matters by
developing plans and policies which were submitted to the Federal Reserve in
1988, and updated such plans and policies in 1992 and 1995. Effective March
13, 1995, the Federal Reserve Bank of Boston terminated the Memorandum of
Understanding.
REGULATORY CAPITAL REQUIREMENTS
Under applicable federal regulations, the Company and Coastal are each required
to maintain minimum levels of regulatory capital. The Federal Reserve has
adopted a leverage-based capital requirement for bank holding companies with a
composite rating of 1 under the bank holding company rating system of a minimum
level of tier 1 capital to total assets of 3.0%. All other bank holding
companies or bank subsidiaries of bank holding companies are required to
maintain a minimum ratio of tier 1 capital to total assets of 4.0% to 5.0%.
Under the Federal Reserve's risk-based capital guidelines, bank holding
companies or banks also are required to maintain a minimum ratio of
qualifying total capital to risk-weighted assets of 8.0%. The guidelines apply
on a consolidated basis to bank holding companies with consolidated assets of
$150 million or more. For bank holding companies which have less than $150
million in consolidated assets, as did the Company for each of the quarters
ended March 31, 1995, June 30, 1995, September 30, 1995 and December 31, 1995,
the guidelines are applied on a bank-only basis (as opposed to a consolidated
basis) unless (i) the parent bank holding company is engaged in nonbank activity
involving significant leverage or
4
<PAGE>
(ii) the parent company has a significant amount of debt that is held by the
general public. The Federal Reserve capital adequacy guidelines provide that
"debt held by the general public" is debt held by parties other than financial
institutions, officers, directors, and controlling stockholders of the banking
organization or their related interests. The FDIC Note is not considered to be
"debt held by the general public" for purposes of such capital guidelines. As a
result, applied on a bank-only basis, the Company's ratios of tier 1 capital to
total assets, tier 1 capital to risk-weighted assets, qualifying total capital
to risk-weighted assets of 9.19%, 14.32%, and 15.59%, respectively, at December
31, 1995 were in compliance with such guidelines.
The FDIC has also adopted minimum capital requirements as regulations for state
non-member banks such as the Bank. Under the minimum leverage capital
requirement, insured state non-member banks must maintain a Tier 1 capital to
total assets ratio of at least 3% to 5% depending on the CAMEL rating of the
bank. The Memorandum requires that the Bank continue to maintain a Tier 1
capital to total assets ratio at or in excess of 6.0%. At December 31, 1995,
the Bank had a Tier 1 capital to total assets ratio of 9.19%.
In addition, under such regulations insured non-member banks must maintain a
minimum ratio of qualifying total capital to risk-weighted assets of 8.0%,
including a minimum ratio of Tier 1 capital to risk-weighted assets of 4.0%. At
December 31, 1995, the Bank had a ratio of Tier 1 capital to risk-weighted
assets of 14.32% and a ratio of qualifying total capital to risk-weighted assets
of 15.59%.
5
<PAGE>
LENDING ACTIVITIES
LOAN PORTFOLIO COMPOSITION
The following table sets forth the composition of the Company's loan portfolio
at the dates indicated:
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------
(IN THOUSANDS) 1995 1994 1993 1992 1991
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Real estate mortgage:
Residential $ 30,966 $ 33,158 $ 39,771 $ 51,898 $ 71,216
Commercial 50,797 57,997 61,953 65,567 75,073
Real estate construction - - 429 669 1,542
Commercial and industrial 2,524 2,510 3,013 3,703 6,650
Consumer and other loans 16,263 15,991 18,305 22,208 26,787
-------- -------- -------- -------- --------
Total loans $100,550 $109,656 $123,471 $144,045 $181,268
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Ratios of loans to:
Deposits 80% 84% 88% 92% 106%
Assets 69% 71% 72% 76% 85%
</TABLE>
The Bank's loan growth has been limited as a result of several factors.
Beginning in the late 1980's adverse real estate market conditions and a rising
interest rate environment in New England limited demand for new loans in the
Bank's market area. The Bank began to experience significant asset quality
problems and significant operating losses, resulting in a curtailment in loan
volume as these problems began to be addressed. The Bank's ability to grow was
further limited due to capital restraints imposed by the FDIC and the Maine
Bureau of Banking under the Order to Cease and Desist. One requirement of the
Order was that the Bank improve its Tier 1 capital to total assets ratio from
the December 31, 1991 level of 4.42% to 6.0% by December 31, 1993. This
requirement caused management to effect a strategy of selective balance sheet
shrinkage, including a reduction in loan originations. Payoffs of loans also
reduced loan balances as interest rates began to decline. Though the 6.0% Tier
1 capital to total assets level was achieved (6.24% at December 31, 1993),
management's continued focus on improving overall asset quality, in conjunction
with the pre-settlement uncertainties arising from the FDIC cross guaranty
claim, and the post-settlement efforts to develop a plan for repaying the FDIC
Note, resulted in new loan volume receiving less emphasis until mid-1995.
While the Bank's asset growth has been hampered in recent years as discussed
above, the Company's pending recapitalization is expected to allow the Bank to
focus on increasing its loan origination activities and pursuing a strategy of
managed growth, with a particular focus on residential mortgage, commercial and
industrial, and consumer loans.
See Item 7, "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Loans," which is incorporated herein by reference.
6
<PAGE>
The following table sets forth the maturities of the loan portfolio by loan type
as of December 31, 1995:
<TABLE>
<CAPTION>
After One
Within But Within After
(IN THOUSANDS) One Year Five Years Five Years Total
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Real estate mortgage:
Residential $ 205 $ 1,071 $29,690 $ 30,966
Commercial 9,795 21,619 19,383 50,797
Real estate construction - - - -
Commercial and industrial 753 1,223 548 2,524
Consumer and other 418 1,500 14,345 16,263
------- ------- ------- --------
Total loans $11,171 $25,413 $63,966 $100,550
------- ------- ------- --------
------- ------- ------- --------
Loans maturing after
one year with:
Fixed interest rate $5,462 $15,975 $ 21,437
Variable/adjustable interest rate 19,951 47,991 67,942
------- ------- ------- --------
$25,413 $63,966 $ 89,379
------- ------- ------- --------
------- ------- ------- --------
</TABLE>
LOAN ORIGINATIONS
Mortgage loans originated by the Bank are primarily secured by property located
within its existing market area in Maine. The bank is an active residential
mortgage lender. A significant percentage of loans originated are 1-4 family
residential real estate loans, a large portion of which are sold in the
secondary market on a servicing-retained basis. Most of the Bank's residential
loans are originated using the Federal National Mortgage Association ("FNMA")
underwriting guidelines.
In April 1995, the Bank hired a new senior officer responsible for branch
administration and retail lending and commenced a focused effort to originate
residential and consumer loans through its branch offices, several of which have
since been re-staffed to support such efforts. While the Bank's newly focused
origination strategy is still in its early stages, the Bank's residential and
consumer loan originations have increased since mid-1995, as set forth below.
While the Bank intends to continue its focus on residential and consumer lending
in 1996, the level of such lending will depend upon a number of factors,
including the level of interest rates and general economic conditions.
<TABLE>
<CAPTION>
For the Quarter Ended
--------------------------------------------------
(IN THOUSANDS) December 31, September 30, June 30, March 31,
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1995 originations (1) :
Residential real estate $1,658 $1,563 $776 $ 171
Consumer 930 583 625 250
------ ------ ------ ------
Total $2,588 $2,146 $1,401 $ 421
------ ------ ------ ------
------ ------ ------ ------
1994 originations (1):
Residential real estate $ 561 $ 439 $1,412 $2,309
Consumer 356 404 837 219
------ ------ ------ ------
Total $ 917 $ 843 $2,249 $2,528
------ ------ ------ ------
------ ------ ------ ------
</TABLE>
(1) Includes refinancing of existing portfolio and off balance sheet serviced
loans.
7
<PAGE>
The continued improvement in overall asset quality has also allowed the Bank to
begin focusing more resources towards the generation of new commercial loans.
The Bank expects to complete certain staffing changes early in 1996 that are
intended to facilitate the Bank's goal of growth in commercial loan generation
in 1996 and thereafter.
The commercial real estate mortgage portfolio of approximately $50.8 million at
December 31, 1995, as compared to $58.0 million at December 31, 1994, includes
loans secured by apartment buildings, mixed use commercial buildings, office
buildings and other income-producing properties. Substantially all of these
loans are secured by mortgages on properties located in Maine. The maturities
are set forth in the above table.
At December 31, 1995 and 1994, commercial and industrial loans totaled $2.5
million. The Bank makes commercial and industrial loans secured by equipment
and other corporate or personal assets, including accounts receivable,
inventory, marketable securities and real estate. The terms and maturities of
commercial loans are negotiated with the borrower, but generally the loans
mature in seven years or less and bear interest at a fixed or adjustable rate.
Consumer loans originated by the Bank primarily include automobile, mobile home
and boat loans, home improvement loans, loans secured by deposits, lines of
credit secured by residential real estate and credit card agreements, subject to
applicable provisions of Maine law and regulations, and student loans under the
Maine Guaranteed Student Loan Program. The interest on student loans is
partially subsidized, and a minimum of 98% of each loan is guaranteed by the
federal government. As of December 31, 1995, the Bank had approximately $16.3
million in consumer loans, compared to $16.0 million as of December 31, 1994.
All consumer loans originated are reviewed for creditworthiness, adequacy of
collateral and the borrowers' ability to repay.
For information on Allowance for Loan Losses and Nonperforming Assets, see Item
7, "Management's Discussion and Analysis of Financial Condition and Results of
Operations," which is incorporated herein by reference.
SECONDARY MARKET ACTIVITY
The Bank is active in secondary market transactions primarily through the sale
of long-term, fixed-rate residential mortgage loans that it originates. The
sale of these loans is intended to improve the interest rate sensitivity of the
Bank's assets (consistent with the Bank's asset/liability policy), generate
future fee income and provide additional funds for lending and liquidity. The
Bank seeks to originate longer term fixed-rate mortgages only when commitments
to sell these mortgages can readily be obtained. Due to interest rate
fluctuations, it may periodically be necessary for the Bank to fill such
commitments by selling mortgages having a higher or lower interest rate than the
rate specified in the commitment. Such sales will be made at a premium or
discount depending on the interest rate variation and will result in realized
gains or losses to the Bank on the transaction.
The Bank is an approved seller and servicer by and for FNMA and the Maine State
Housing Authority ("MSHA"). At December 31, 1995 and December 31, 1994, the
Bank was servicing loans for others of $53.7 million and $57.0 million,
respectively.
8
<PAGE>
INVESTMENT ACTIVITIES
The Bank's investment portfolio is managed in accordance with a written
investment policy adopted by the Board of Directors and reviewed on an annual
basis. Under this policy, and in accordance with applicable provisions of the
Bank Holding Company Act of 1956, as amended ("BHCA"), without the prior
approval of the Federal Reserve Bank of Boston and the Board of Directors, the
Company is prohibited from purchasing shares of any company if such purchase
would cause the Company's existing ownership to equal or exceed 5% of such
company's outstanding shares. The Company's investment policy provides that all
investment purchases of equity securities initiated by the Bank must receive the
advance approval of the Board's Investment Committee. The Company's investment
portfolio is comprised primarily of U.S. government and agency obligations and
miscellaneous other securities. For a summary of investments, see Item 8,
"Financial Statements and Supplementary Data -- Notes B and D," which are
incorporated herein by reference.
Effective January 1, 1994, with the implementation of Financial Accounting
Standards Board ("FASB") Statement No. 115, investment securities classified as
available for sale are reported at fair value, with unrealized gains and losses
excluded from earnings and reported in a separate component of stockholders'
equity. Investment securities held to maturity are stated at cost adjusted for
amortization of bond premiums and accretion of bond discounts. There was no
effect to the Company's Financial Statements on January 1, 1994 as a result of
implementing FASB Statement No. 115. During 1995, net unrealized gains (losses)
on available for sale securities increased by $323,000 as compared to December
31, 1994. The net unrealized gains (losses) on these securities was $38,000 at
December 31, 1995.
Since the adoption of FASB Statement No. 115, the Company's Investment Policy
states that all securities purchased with an original maturity of over one year,
other than mortgage backed securities originated by the Bank with current loan
production, will be classified as available for sale. Securities purchased with
an original maturity of one year or less, or callable U.S. government agency
notes, will be considered held-to-maturity. Mortgage backed securities
originated by the Bank with current loan production will be classified as
trading securities.
9
<PAGE>
SOURCES OF FUNDS
GENERAL
Deposits and advances from the Federal Home Loan Bank ("FHLB") of Boston are the
principal sources of Coastal's funds for use in lending and for other general
business purposes. Coastal's deposits are primarily derived from the areas
where its banking offices are located. Coastal does not actively solicit
deposits outside the State of Maine or use brokers to obtain deposits.
In addition to deposit accounts and advances, Coastal derives funds from loan
repayments, sales of loans and returns on investments. Unscheduled loan
repayments and scheduled amortization have been a substantial source of funds,
while deposit inflows and outflows are significantly influenced by general
interest rates, money market and general economic conditions. Subject to the
limitations described under "Borrowings", FHLB advances may be used on a short-
term basis to compensate for reductions in normal sources of funds such as
deposit inflows at less than projected levels. The Bank has also been
authorized for access to the discount window of the Federal Reserve Bank in its
District; however, to date this borrowing source has not been used. See
"Regulation -- Federal Reserve System" concerning limitations on a Federal
Reserve Bank's ability to lend to undercapitalized institutions.
DEPOSITS
The Bank has a wide variety of deposit programs designed to attract both short-
term and long-term deposits from the general public, primarily from consumers
and businesses. These programs include interest bearing and non-interest
bearing checking accounts, savings accounts, certificates of deposit, jumbo
certificates of deposit and individual retirement accounts. Deposits at the
Bank are federally insured by the BIF, which is administered by the FDIC.
The Bank's deposit growth has been limited in large part by the same factors
discussed under "Lending Activities" above, including the Bank's prior strategy
of selectively shrinking the balance sheet. The following table sets forth the
Company's deposit balances at the dates indicated:
<TABLE>
<CAPTION>
December 31,
------------------------------------------------
(IN THOUSANDS) 1995 1994 1993 1992 1991
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Noninterest bearing
demand deposits $ 5,128 $ 5,425 $ 5,871 $ 7,217 $ 7,900
Interest bearing
demand deposits 15,741 17,300 18,470 18,813 16,472
Savings and escrow deposits 42,020 48,205 53,655 55,581 52,994
Time deposits 62,776 59,107 62,591 74,707 93,017
-------- -------- -------- -------- --------
Total $125,665 $130,037 $140,587 $156,318 $170,383
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
</TABLE>
10
<PAGE>
Beginning in early 1995, while the Company evaluated various alternatives for
repaying the FDIC Note, management implemented a strategy designed to stabilize
deposit levels. As a result, total deposits were relatively unchanged at
December 31, 1995 equaling $125.7 million, as compared to the January 31, 1995
level of $126.7 million.
On February 22, 1996, the Bank entered into an agreement to sell its Kezar Falls
branch to Maine Bank & Trust Company. Included in the sale are all of the
branch's deposits (totaling approximately $9.9 million at December 31, 1995),
the real estate and certain of the furniture, fixtures and equipment of the
branch. The agreement between the Bank and Maine Bank & Trust Company is
expected to be consummated during the second quarter of 1996, subject to the
receipt of appropriate regulatory approvals.
The mix of the Bank's deposits has varied from year to year, with higher cost
time deposits increasing in 1995 as a percentage of the Bank's total deposits.
This trend is largely reflective of an industry-wide trend, reflecting the
continuing impact of deregulation on the banking industry, as well as increased
competition for funds from nonbank competitors, including money market and
stock mutual funds.
At December 31, 1995, 1994 and 1993, Coastal's deposits consisted of the
following:
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------
1995 1994 1993
-------------------------------------------------------
Average Average Average Average Average Average
(DOLLARS IN THOUSANDS) Amount Rate Amount Rate Amount Rate
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Noninterest bearing
demand deposits $ 4,973 - $ 5,798 - $ 6,132 -
Interest bearing
demand deposits 15,958 2.24% 17,749 2.27% 18,249 2.42%
Savings deposits 44,201 2.91 51,162 2.74 54,706 2.91
Time deposits 61,344 5.43 60,930 4.60 68,288 4.96
-------- -------- --------
Total $126,476 $135,639 $147,375
-------- -------- --------
-------- -------- --------
</TABLE>
At December 31, 1995, jumbo certificates of deposit maturities and weighted
average interest rates were as follows:
<TABLE>
<CAPTION>
Balance Weighted Average
Maturities (IN MONTHS) (In thousands) Interest Rate
- --------------------------------------------------------------------------
<S> <C> <C>
3 months or less $ 438 5.50%
over 3 - 6 101 5.25
over 6 - 12 432 5.89
over 12 738 6.40
------
Total $1,709 5.66%
------
------
</TABLE>
As of December 31, 1995, Coastal had no brokered deposits as these deposits all
matured in 1993.
11
<PAGE>
BORROWINGS
The Bank has used FHLB advances in the past to expand its lending and investment
activities and to enhance the Bank's mix of rate-sensitive assets and
liabilities, E.G., to extend maturities or to improve liquidity. The following
table sets forth the amount of the Company's borrowed funds at the dates
indicated:
<TABLE>
<CAPTION>
December 31,
-----------------------------------
(IN THOUSANDS) 1995 1994 1993
- ----------------------------------------------------------------------
<S> <C> <C> <C>
FHLB advances $ 6,000 $12,612 $18,108
FDIC Note (1) 9,000 9,000 -
------- ------- -------
$15,000 $21,612 $18,108
------- ------- -------
------- ------- -------
</TABLE>
(1) The FDIC Note bears interest at a rate of 5% from January 31, 1995 to
January 31, 1996 and 6.5% from February 1, 1996 to January 31, 1997,
subject to certain exceptions. See Item 8, "Financial Statements and
Supplementary Data -- Note A."
At December 31, 1995, the Bank had outstanding $6.0 million in borrowings with a
weighted average interest rate of 5.77% from the FHLB of Boston, maturing as
follows:
<TABLE>
<CAPTION>
Amount Maturing
Due Date (IN THOUSANDS) Interest Rate
--------------------------------------------------------------
<S> <C> <C>
July 1997 $2,000 6.06%
January 1998 2,000 5.92
March 1998 2,000 5.32
------
$6,000
------
------
</TABLE>
The following table sets forth information regarding the weighted average
interest expense at December 31 and the highest month end balances of the Bank's
total borrowings:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1995 1994 1993
- -------------------------------------------------------------------------
<S> <C> <C> <C>
Weighted average interest expenses of
total borrowings 5.37% 7.28% 8.08%
Highest month end balance of
total borrowings $10,412 $18,108 $24,684
</TABLE>
Under applicable FHLB regulations, member banks are required to maintain at all
times an amount of qualified collateral that is at least sufficient to satisfy
the collateral maintenance level. The collateral maintenance level for a member
bank is the aggregate amount of collateral that, based on certain percentages
of book value, market value or unpaid principal, has a value equal to the
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aggregate amount of the member bank's outstanding advances. Depending on the
ratio of tangible capital to assets as defined by the FHLB and certain other
factors, each member bank is assigned by the FHLB to one of three collateral
status groups:
(i) Blanket Lien Status - tangible capital of 4.5% or more of
assets;
(ii) Listing/Segregation Status - tangible capital below 4.5% of
assets; and
(iii) Delivery (Possession) Status - tangible capital below 3.5% of
assets.
Although its tangible capital is above 3.5% of assets, Coastal is in delivery
status. Because of the potential contingent liability of affiliated
institutions within a holding company structure, the FHLB closely reviews the
financial condition of a member bank's parent company. If a member bank's
parent holding company has a low tangible capital ratio or is experiencing
substantial financial problems, the member bank may be assigned to listing or
delivery status. In connection with the waiver and release of the FDIC cross
guaranty claim, the Bank requested the removal of the foregoing restrictions
imposed by the FHLB. On May 1, 1995, the Bank received a letter from the FHLB
stating that it would lengthen the maturity restriction on new fixed term and
fixed rate advances from six months to one year.
The Bank also has been approved by the Federal Reserve Bank of Boston to obtain
liquidity from its discount window. No funds have been, or are anticipated to
be, obtained from this source.
The Bank estimates that it has approximately $20 million ($7.2 million with the
FHLB and $12.8 million with the Federal Reserve Bank of Boston) in additional
short-term borrowing capacity as of December 31, 1995. This amount fluctuates
based on qualified collateral.
For additional information on Borrowings, see Item 8, "Financial Statements and
Supplementary Data -- Note I," incorporated herein by reference.
EMPLOYEES
As of December 31, 1995, the Company and its subsidiary had 65 full-time
equivalent employees.
COMPETITION
The Bank is a full service savings bank with eight banking offices which are
located in the communities of Brunswick, Freeport, Kennebunk, Kezar Falls, Saco,
Topsham and Westbrook. Competition among financial institutions in the Bank's
market area is intense and the Bank competes in obtaining funds and in making
loans with other state and national banks, savings and loan associations,
consumer financial companies, credit unions, money market mutual funds, and
other financial institutions which have far greater financial resources than
those available to the Bank. At June 30, 1995 a total of approximately 46% of
deposits in Maine was held by three large financial institutions, two of which
are wholly owned subsidiaries of superregional bank holding companies with
assets in excess of $50.0 billion and one of which is a Maine-based savings bank
with assets in excess of $2.0 billion. Competition among financial
institutions is based upon interest rates and
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other credit and service charges, the quality of services rendered, the
convenience of banking facilities and in the case of loans to larger commercial
borrowers, relative lending limits.
REGULATION
FEDERAL BANK HOLDING COMPANY REGULATION
The Company is subject to regulation under the BHCA and is required to file with
the Federal Reserve annual reports and such additional information as the
Federal Reserve may require pursuant to the BHCA. The Federal Reserve may
conduct examinations of the Company and its subsidiary.
Under the BHCA, Federal Reserve approval is required for any action which causes
a bank or other company to become a bank holding company and for any action
which causes a bank to become a subsidiary of a bank holding company. A bank
holding company must obtain Federal Reserve approval before it acquires direct
or indirect ownership or control of any voting shares of any bank if, after such
acquisition, it will own or control directly or indirectly more than 5% of the
voting stock of such bank unless it already owns a majority of the voting stock
of such bank. Federal Reserve approval also must be obtained before a bank
holding company acquires all or substantially all of the assets of a bank or
merges or consolidates with another bank holding company. The Riegle-Neal
Interstate Banking and Branching Efficiency Act of 1994 (the "IBBEA") authorized
the acquisition of banks in any state by bank holding companies, subject to
compliance with federal and state antitrust laws, the Community Reinvestment Act
(the "CRA") and specific deposit concentration limits. The IBBEA removes most
state law barriers to interstate acquisitions of banks and ultimately will
permit multi-state banking operations to merge into a single bank.
A bank holding company is prohibited, except in certain statutorily-prescribed
instances, from acquiring direct or indirect ownership or control of more than
5% of the voting shares of any company which is not a bank or bank holding
company, and from engaging directly or indirectly in activities other than those
of banking, managing or controlling banks, or furnishing services to its
subsidiaries. A bank holding company may, however, subject to the approval of
the Federal Reserve, engage in, or acquire shares of companies engaged in,
activities which are deemed by the Federal Reserve to be so closely related to
banking or managing or controlling banks as to be a proper incident thereto.
Under the Change in Bank Control Act, persons who intend to acquire control of a
bank holding company, acting directly or indirectly, or through or in concert
with one or more persons, generally must give 60 days prior written notice to
the Federal Reserve. "Control" exists when the acquiring party directly or
indirectly has voting control of at least 25% of the bank holding company's
voting securities or the power to direct the management or policies of such
company. Under Federal Reserve regulations, a rebuttable presumption of control
arises with respect to an acquisition where, after the transaction, the
acquiring party has ownership, control or the power to vote at least 10% (but
less than 25%) of any class of the company's voting securities if (i) the
company has securities registered under Section 12 of the Securities Exchange
Act of 1934 or (ii) immediately after the
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transaction no other person will own a greater proportion of that class of
voting securities. The Federal Reserve may disapprove the proposed acquisition
on certain specified grounds.
As a bank holding company, the Company is subject to capital adequacy guidelines
of the Federal Reserve. The guidelines apply on a consolidated basis to bank
holding companies with consolidated assets of $150 million or more. For bank
holding companies which have less than $150 million in consolidated assets, as
did the Company for each of the quarters ended March 31, 1995, June 30, 1995,
September 30, 1995 and December 31, 1995, the guidelines are applied on a bank-
only basis (as opposed to a consolidated basis) unless (i) the parent bank
holding company is engaged in nonbank activity involving significant leverage or
(ii) the parent company has a significant amount of debt that is held by the
general public. The Federal Reserve capital adequacy guidelines provide that
"debt held by the general public" is debt held by parties other than financial
institutions, officers, directors, and controlling stockholders of the banking
organization or their related interests. The FDIC Note is not considered to be
"debt held by the general public" for purposes of such capital guidelines.
A bank holding company's ability to pay dividends and expand business through
the acquisition of new banking subsidiaries can be restricted if its capital
falls below levels established by these guidelines. In addition, any bank
holding company whose capital falls below specified levels can be required to
implement a plan to increase capital.
The Federal Reserve's capital adequacy guidelines provide for three types of
capital: tier 1 capital (or core capital), tier 2 capital (or supplementary
capital) and total capital. Tier 1 capital generally includes common
stockholders' equity, qualifying noncumulative perpetual preferred stock and
related surplus, qualifying cumulative perpetual preferred stock and related
surplus (limited to a maximum of 25% of tier 1 elements) and minority interest
in the equity accounts of consolidated subsidiaries. Goodwill and most types of
intangible assets are required to be deducted from tier 1 capital. The only
types of intangible assets that may be included in a bank holding company's
capital are readily marketable purchased mortgage-servicing rights and purchased
credit-card relationships, provided that the total amount of these assets
included in capital may not exceed 50% of tier 1 capital elements. Purchased
credit-card relationships are subject to a separate sublimit of 25% of tier 1
capital elements. The amount of purchased mortgage-servicing rights and
purchased credit-card relationships that a bank holding company may include in
capital, subject to the aggregate limitations described above, is limited to the
lesser of (i) 90% of their fair market value or (ii) 100% of their book value.
Tier 2 capital generally includes allowances for loan and lease losses (limited
to 1.25% of risk-weighted assets), most perpetual preferred stock and any
related surplus, certain hybrid capital instruments, perpetual debt and
mandatory convertible securities and certain intermediate-term preferred stock
and subordinated debt instruments (subject to a maximum of 50% of tier 1 capital
excluding goodwill, but phased-out as the instrument matures). Total capital
generally includes tier 1 capital, plus qualifying tier 2 capital, minus
investments in unconsolidated subsidiaries, reciprocal holdings of bank holding
company capital securities and other deductions as may be determined by the
Federal Reserve.
Under current Federal Reserve capital adequacy guidelines, bank holding
companies generally must maintain a ratio of tier 1 capital to qualifying total
consolidated assets of 4.0% to 5.0%. The
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minimum ratio is 3.0% for the most highly rated bank holding companies or banks.
The Federal Reserve's capital adequacy guidelines also require bank holding
companies to maintain a minimum ratio of qualifying total capital to risk-
weighted assets of 8.0%, including a minimum ratio of tier 1 capital to risk-
weighted assets of 4.0%. The maximum amount of tier 2 or supplementary capital
elements that qualify as total capital is limited to 100% of tier 1 capital, net
of goodwill. A bank holding company's risk-weighted assets are determined by
multiplying the balance sheet amount by a specified risk-weight determined by
the Federal Reserve in accordance with the relative risk level of the asset.
Off-balance sheet items, such as standby letters of credit, are converted to an
on-balance sheet credit equivalent amount by multiplying the face amount of the
off-balance sheet item by a credit conversion factor determined by the Federal
Reserve.
On a bank-only basis, the Company's ratios of tier 1 capital to total assets,
tier 1 capital to total risk-weighted assets, and total capital to risk-weighted
assets of 9.19%, 14.32%, and 15.59%, respectively, at December 31, 1995 were in
compliance with such guidelines.
The Federal Reserve has proposed to modify its risk-based capital adequacy
guidelines to take into account interest-rate risk. The interest-rate risk
proposal would attempt to estimate the effect that changes in market interest
rates might have on the net economic value of an institution. An institution
with interest-rate risk exposure in excess of an as yet to be determined
threshold level would be required to allocate additional capital equal to the
dollar amount of the estimated change in its net economic value that is in
excess of that level. The FDIC has proposed similar changes to its risk-based
capital guidelines that will apply to the Bank. The foregoing proposals may
have the effect of requiring the Company and the Bank to maintain increased
capital.
The Federal Reserve also is empowered to initiate cease and desist proceedings
and other supervisory actions for any violation of the BHCA and the regulations,
orders and notices issued by the Federal Reserve thereunder. Under Federal
Reserve regulations, banks and bank holding companies which do not meet minimum
capital requirements are considered undercapitalized. Undercapitalized bank
holding companies are required to submit an acceptable plan for achieving
capital adequacy and are subject to appropriate enforcement actions by the
Federal Reserve.
In March 1988, the Company entered into a Memorandum of Understanding with the
Federal Reserve Bank of Boston which provided, among other things, for the
formulation of plans and policies concerning capital adequacy, funds management,
the Company's management information system and the adoption of a written
dividend policy consistent with Federal Reserve policies regarding the payment
of cash dividends by bank holding companies. Management addressed these matters
by developing plans and policies which were submitted to the Federal Reserve in
1988, and updated such plans and policies in 1992 and 1995. Effective March 13,
1995, the Federal Reserve Bank of Boston terminated the Memorandum of
Understanding.
MAINE BANK HOLDING COMPANY REGULATION
Maine state law regulates bank holding companies. The state law is designed to
conform with the registration, application and reporting requirements of the
BHCA to the maximum extent feasible. As a holding company, the Company must
register with the Maine Superintendent of Banking, and
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must notify the Maine Superintendent of Banking whenever any person or company
directly or indirectly acquires control of 5% or more of the Company's stock or
whenever there is a "material" change in the ownership of the Company. If 5% or
more of the stock in the Company is acquired by a financial institution or by a
financial institution holding company, the Superintendent must approve that
acquisition. Similarly, other transactions require advance approval by the
Superintendent including, among other things, the acquisition of control of the
Company or the Bank, the acquisition by the Company or the Bank of 5% or more of
the stock of another financial institution and the engagement of the Company,
Bank or a subsidiary in an activity closely related to banking.
In February 1996, the Maine legislature amended Maine's Banking Code to permit
interstate branching in accordance with the IBBEA. Among other things, the
amendments prohibit the operation of deposit production offices, establish a
limit on the amount of deposits that may be acquired through merger or
acquisition and impose reporting requirements necessary to monitor compliance.
The amendments also permit the establishment of DE NOVO branches in Maine on a
reciprocal basis.
At the state level, the Maine Bureau of Banking regulates the Bank's internal
organization and its permissible activities. Under Maine law, in addition to
taking deposits and making loans, savings banks, like the Bank, are permitted to
engage in real estate investments and investments in securities. The Bank must
maintain capital in accordance with rules adopted by the Superintendent of
Banking. By law, these capital rules may be no less stringent than the capital
requirements imposed by federal banking regulators on federally chartered
institutions. The stock held by the Company in the Bank is assessable. If the
Bank's capital becomes impaired, the Superintendent may order the Board of
Directors to restore the deficiency.
BANK REGULATION
As a BIF-insured savings bank, the Bank is subject to regulation, supervision
and examination by the FDIC. The Bank also is subject to regulation,
supervision and examination by the Maine Bureau of Banking.
The Maine Bureau of Banking administers the Maine statutes which regulate the
Bank's internal organization as well as its deposit, lending and investment
activities. The approval of the Maine Bureau of Banking is required for changes
in the Bank's articles of incorporation, bylaws, branch offices and major
transactions. The Maine Bureau of Banking conducts periodic examinations of the
Bank as part of its supervision. Many of the areas regulated by the Maine
Bureau of Banking, including location of branch offices, acquisitions of other
financial institutions and mergers, are subject to similar regulation by the
FDIC.
As a BIF-insured savings bank, the Bank is subject to certain FDIC requirements
designed to maintain the safety and soundness of individual banks and the
banking system. The FDIC has prescribed safety and soundness guidelines
relating to (i) internal controls, information systems and internal audit
systems; (ii) loan documentation; (iii) credit underwriting; (iv) interest rate
exposure; (v) asset growth; and (vi) compensation and benefit standards for
officers, directors, employees and principal stockholders. Such guidelines
impose standards based upon an institution's asset quality and
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earnings. The guidelines are intended to set out standards that the agencies
will use to identify and address problems at institutions before capital becomes
impaired. Institutions are required to establish and maintain a system to
identify problem assets and prevent deterioration of those assets in a manner
commensurate with its size and the nature and scope of its operations.
Furthermore, institutions must establish and maintain a system to evaluate and
monitor earnings and ensure that earnings are sufficient to maintain adequate
capital and reserves in a manner commensurate with their size and the nature and
scope of their operation.
Under the guidelines, an institution not meeting one or more of the safety and
soundness guidelines is required to file a compliance plan with the FDIC. In
the event that an institution, such as the Bank, were to fail to submit an
acceptable compliance plan or fail in any material respect to implement an
accepted compliance plan within the time allowed by the FDIC, the institution
would be required to correct the deficiency and the appropriate federal agency
would also be authorized to: (i) restrict asset growth; (ii) require the
institution to increase its ratio of tangible equity to assets; (iii) restrict
the rates of interest that the institution may pay; or (iv) take any other
action that would better carry out the purpose of the corrective action. The
Bank believes it was in compliance with all such guidelines as of December 31,
1995.
The FDIC periodically conducts examinations of insured institutions and, based
upon evaluations, may revalue assets of an insured institution and require
establishment of specific reserves in amounts equal to the difference between
such revaluation and the book value of the assets.
The FDIC also has adopted minimum capital adequacy regulations. Although there
are some differences between the capital adequacy guidelines adopted by the
Federal Reserve and the FDIC, the primary elements of each are generally
identical. Under the minimum leverage-based capital requirement adopted by the
FDIC, insured state nonmember banks must maintain a ratio of Tier 1 capital to
total assets of at least 3% to 5% depending on the CAMEL rating of the Bank.
Under such regulations, state nonmember banks must maintain a minimum ratio of
qualifying total capital to risk-weighted assets of 8.0%, including a minimum
ratio of Tier 1 capital to risk-weighted assets of 4.0%. At December 31, 1995,
the Bank had a ratio of qualifying total capital to risk-weighted assets of
15.59% and a ratio of Tier 1 capital to risk-weighted assets of 14.32%. The
FDIC has proposed to amend its risk-based capital standards to ensure that those
standards provide adequately for interest-rate risk in a manner similar to that
proposed by the Federal Reserve. See "Business -- Regulation -- Federal Bank
Holding Company Regulation."
Capital requirements higher than the generally applicable minimum requirements
may be established for a particular bank if the FDIC determines that the bank's
capital is, or may become, inadequate in view of its particular circumstances.
Individual minimum capital requirements may be appropriate where the bank is
receiving special supervisory attention, has a high degree of exposure to
interest rate risk or poses other safety and soundness concerns.
The FDIC adopted prompt corrective action regulations ("PCA regulations").
Under the PCA regulations, insured institutions will be considered (i) "well
capitalized" if the institution has a total risk-based capital ratio of 10% or
greater, a Tier 1 risk-based capital ratio of 6% or greater, and a
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leverage ratio of 5% or greater (provided that the institution is not subject to
an order, written agreement, capital directive or prompt corrective action
directive to meet and maintain a specified capital level for any capital
measure), (ii) "adequately capitalized" if the institution has a total risk-
based capital ratio of 8% or greater, a Tier 1 risk-based capital ratio of 4% or
greater and a leverage ratio of 4% or greater (3% or greater if the institution
is rated composite 1 in its most recent report of examination and is not
experiencing or anticipating significant growth), (iii) "undercapitalized" if
the institution has a total risk-based capital ratio that is less than 8%, or a
Tier 1 risk-based ratio of less than 4% or greater and has a leverage ratio that
is less than 4% (3% if the institution is rated composite CAMEL 1 in its most
recent report of examination and is not experiencing or anticipating significant
growth), (iv) "significantly undercapitalized" if the institution has a total
risk-based capital ratio that is less than 6%, a Tier 1 capital risk-based
capital to total adjusted assets that is less than 3% or a leverage ratio to
adjusted total assets that is less than 3% and (v) "critically undercapitalized"
if the institution has a ratio of tangible equity to total assets that is less
than or equal to 2%. At December 31, 1995, the Bank was classified as an
"adequately capitalized" institution.
Any insured depository institution that falls below the minimum capital
standards must submit a capital restoration plan. Under the PCA regulations,
undercapitalized institutions are precluded from increasing their assets,
acquiring other institutions, establishing additional branches or engaging in
new lines of business without an approved capital plan and an agency
determination that such actions are consistent with the plan. Any insured
institution is prohibited from making a capital distribution if, after making
the distribution, the institution would be undercapitalized, except in limited
circumstances approved by the FDIC. Insured depository institutions that are
significantly undercapitalized may be required to take one or more of the
following actions: (i) raise additional capital so that the institution will be
adequately capitalized, (ii) be acquired by, or combined with, another
institution if grounds exist for appointing a receiver, (iii) refrain from
affiliate transactions, (iv) limit the amount of interest paid on deposits to
the prevailing rates of interest in the region where the institution is located,
(v) further restrict asset growth, (vi) hold a new election for directors,
dismiss any director or senior executive officer who held office for more than
180 days immediately before the institution became undercapitalized or employ
qualified senior executive officers, (vii) stop accepting deposits from
correspondent depository institutions and (viii) divest or liquidate any
subsidiary which the appropriate federal banking agency determines poses a
significant risk to the institution. Any company which controls a significantly
undercapitalized depository institution may be required to: (i) divest or
liquidate any affiliate other than an insured depository institution, (ii)
divest the institution if the appropriate federal banking agency determines that
divestiture would improve the institution's financial condition and future
prospects and (iii) if such company is a bank holding company, refrain from
making any capital distributions without the prior approval of the Federal
Reserve.
Critically undercapitalized institutions are subject to additional restrictions.
No later than 90 days after an insured depository institution becomes critically
undercapitalized, the appropriate federal banking agency is required to appoint
a receiver (or, with the concurrence of the FDIC, a conservator) for the
institution, unless the appropriate federal banking agency determines, with the
concurrence of the FDIC, that other action would better achieve the purposes of
FDIA. The appropriate federal banking agency must make periodic
redeterminations that the alternative action continues to be justified no less
frequently than every 90 days. The appropriate federal banking
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agency is required to appoint a receiver if the institution remains critically
undercapitalized nine months later, unless the institution is in compliance with
an approved capital plan and the applicable federal banking agency and the FDIC
certify that the institution is viable.
The FDIA also requires any company that has control of an undercapitalized
depository institution, in connection with the submission of a capital
restoration plan by the institution, to guarantee that the institution will
comply with the plan and provide appropriate assurances of performance. The
aggregate liability of any such controlling company under such guaranty is
limited to the lesser of (i) 5% of the institution's assets at the time it
became undercapitalized or (ii) the amount necessary to bring the institution
into capital compliance at the time it fails to comply with the terms of its
capital plan. If the Bank is classified as undercapitalized, the Company may be
required to guarantee performance of any capital plan required to be submitted
under the FDIA.
An insured state bank, such as the Bank, may not engage as principal in any
activity that is not permissible for a national bank, unless the FDIC has
determined that the activity would pose no significant risk to the BIF and the
state bank is in compliance with applicable capital standards. Activities of
subsidiaries of insured state banks are similarly restricted to those activities
permissible for subsidiaries of national banks, unless the FDIC has determined
that the activity would pose no significant risk to the BIF and the state bank
is in compliance with applicable capital standards. The FDIA also provides
that, except for subsidiaries of which the insured state bank is a majority
owner and except for certain investments in qualified housing projects, an
insured state bank may not, directly or indirectly, acquire or retain any equity
investment of a type that is not permissible for a national bank. Insured state
banks are required to divest any equity investment the retention of which is not
permissible as quickly as can be prudently done, but in no event later than
December 9, 1996. Notwithstanding the foregoing, an insured state bank may, to
the extent permitted by the FDIC, acquire and retain ownership of common or
preferred stock listed on a national securities exchange, provided that the
insured state bank made or maintained an investment in such securities during
the period beginning on September 30, 1990 and ending on November 26, 1991 and
provided further that the aggregate amount of the investment does not exceed
100% of the bank's capital. This exception would cease to apply with respect to
any insured state bank upon any change in control of such bank or any conversion
of the charter of such bank. Determinations under these provisions by the FDIC
must be made by regulation or order. The Bank believes that its activities as
presently conducted conform to those permissible for national banks, except for
approximately $125,000 of certain other investments of the Bank at December 31,
1995 which the Bank intends to sell pursuant to a divestiture plan.
Transactions between the Bank and its affiliates, are subject to Sections 23A
and 23B of the Federal Reserve Act. For purposes of these sections, the term
"affiliate" with respect to the Bank refers to the Company. A transaction is
deemed to be one with an affiliate if the proceeds of the transaction are
transferred to, or used for the benefit of, an affiliate. Under sections 23A
and 23B, transactions between banks and their affiliates are generally limited
in the following ways: First, the aggregate amount of all "covered
transactions" (which include, among other things, loans or other extensions of
credit to or on behalf of an affiliate, purchases of assets from an affiliate or
investments in the securities of an affiliate) between a bank (and its
subsidiaries) and any one affiliate may not exceed 10% of the capital stock and
surplus of the bank, and the aggregate amount of covered transactions
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between a bank (and its subsidiaries) and all affiliates may not exceed 20% of
the capital stock and surplus of the bank. Second, any loan or extension of
credit to, or guarantee, acceptance or letter of credit issued on behalf of an
affiliate by a bank or any of its subsidiaries must at all times be secured by
collateral having a market value equal to from 100% to 130% of the outstanding
balance of the extension of credit, depending upon the nature of the collateral.
Third, neither low quality assets or securities issued by an affiliate may be
accepted by a bank as collateral for an extension of credit issued to or on
behalf of any affiliate. Fourth, a bank and its subsidiaries are prohibited
from purchasing a low-quality asset from an affiliate unless the bank or any
such subsidiary, pursuant to an independent credit evaluation, committed itself
to purchase the asset prior to the time the asset was acquired by the affiliate.
Transactions between a bank and its subsidiaries or affiliates generally must be
on terms and conditions, including credit standards, that are substantially the
same or at least as favorable to the bank or its subsidiary as those prevailing
at the time for comparable transactions with or involving unaffiliated parties
or, in the absence of comparable transactions, on terms or under circumstances,
including credit standards, that in good faith would be offered or would apply
to unaffiliated parties. Section 23B imposes additional restrictions on the
ability of a bank and its subsidiaries (i) when acting in a fiduciary capacity,
to purchase securities or assets from an affiliate, and (ii) whether acting as
principal or fiduciary, to purchase or acquire, during the existence of any
underwriting or selling syndicate, any security if a principal underwriter of
the security is an affiliate of the bank. Finally, neither a bank nor any of
its subsidiaries or affiliates may publish an advertisement or enter into any
agreement stating or suggesting that the bank is in any way responsible for the
obligations of its affiliates.
INSURANCE OF DEPOSITS
The Bank's deposit accounts are insured by the Bank Insurance Fund of the
Federal Deposit Insurance Corporation. The Bank is required to pay quarterly
insurance premiums on semiannual assessments for FDIC insurance.
The FDIC implemented a risk-based deposit insurance assessment system. Deposit
insurance assessment rates are currently within a range of $0.00 to $0.27 per
$100 of insured deposits, depending on the assessment risk classification
assigned to each institution. The FDIC places each institution into one of nine
assessment risk classifications based on the institution's capital and
supervisory classification. Adequately capitalized banks, such as the Bank, are
subject to BIF assessment rates within a range of $0.03 to $0.24 per $100 of
insured deposits, depending on the supervisory subgroup to which the bank is
assigned by the FDIC. The FDIC sets assessment rates at a level sufficient to
maintain the BIF's reserve ratio to 1.25% of insured deposits. The FDIC is
authorized to establish a higher reserve ratio and to impose special assessments
to pay for the costs of authorized borrowings. The FDIC considers BIF revenue
and expense levels, the BIF reserve ratio and BIF borrowings in establishing
assessment rate ranges.
In August 1995, the FDIC determined that the BIF had achieved its designated
reserve ratio and lowered BIF deposit insurance premium rates for all but the
riskiest institutions. Effective January 1, 1996, BIF deposit insurance
premiums for adequately capitalized banks were set at $0.00 to $0.27
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per $100 of insured deposits per year, depending upon an institution's
supervisory rating. The deposit insurance premiums imposed by the FDIC are
subject to change.
FDIC insurance of deposits may be terminated by the FDIC, after notice and
hearing, upon a finding by the FDIC that the insured bank has engaged or is
engaging in unsafe or unsound practices, or is in an unsafe or unsound condition
to continue operations as an insured bank, or has violated any applicable law,
regulation, rule or order of, or condition imposed on the FDIC. Additionally,
if insurance termination proceedings are initiated against a bank, the FDIC may
temporarily suspend insurance on new deposits received by the institution under
certain circumstances.
BIF insured banks, such as the Bank, and savings institutions insured through
the Savings Association Insurance Fund ("SAIF") may merge, consolidate or engage
in asset transfer and liability assumption transactions. The resulting
institution may continue to be subject to BIF and SAIF assessments in relation
to that portion of its combined deposit base which is attributable to the
deposit base of its respective predecessor BIF and SAIF institutions or may
apply to the FDIC to convert all of its deposits to either insurance fund upon
payment of the then applicable entrance and exit fees for each fund.
Under the Community Reinvestment Act (the "CRA") and the implementing FDIC
regulations, which were amended in 1995 to provide for a performance-based
evaluation system, a savings institution has a continuing and affirmative
obligation to help meet the credit needs of its local communities, including low
and moderate income neighborhoods, consistent with the safe and sound operation
of the institution. The CRA requires the board of directors of savings
institutions, such as the Bank, to adopt a CRA statement for each assessment
area that, among other things, describes its efforts to help meet the community
credit needs and the specific types of credit that the institution is willing to
extend. In connection with its examination of a savings institution, the FDIC
is required to take into account the institution's record of meeting the credit
needs of its community in determining whether to grant approval for certain
types of applications including mergers and acquisitions. The Bank's CRA rating
is satisfactory as of the last examination.
FEDERAL HOME LOAN BANK SYSTEM
The Bank is a member of the FHLB of Boston, one of the 12 regional banks of the
FHLB System. The FHLB System provides a central credit facility for member
institutions. The Bank, as a member of the FHLB of Boston, is required to own
shares of capital stock in the FHLB of Boston in an amount at least equal to the
greater of 1% of the aggregate principal amount of unpaid residential mortgage
loans, home purchase contracts and similar obligations at the beginning of each
year, or 5% of its advances (borrowings) from the FHLB of Boston, whichever is
greater. The Bank was in compliance with this requirement with an investment at
December 31, 1995 of $1.3 million.
Under applicable regulations, member banks are required to maintain at all times
an amount of qualified collateral that is at least sufficient to satisfy the
collateral maintenance level established by the FHLB. See "Business -- Sources
of Funds -- Borrowings."
22
<PAGE>
FEDERAL RESERVE SYSTEM
The Federal Reserve has adopted regulations that require insured depository
institutions to maintain nonearning reserves against their transaction accounts
(primarily NOW and regular checking accounts) and nonpersonal time deposits
(those which are transferable or held by a person other than a natural person)
with an original maturity of less than 18 months. At December 31, 1995, the
Bank was in compliance with these requirements.
The Bank also has the ability to borrow from the Federal Reserve Bank of Boston
"discount window." The FDIA places limitations upon the ability of the Federal
Reserve Bank of Boston to extend advances to undercapitalized and critically
undercapitalized depository institutions. The FDIA provides that a Federal
Reserve Bank generally may not have advances outstanding to an undercapitalized
institution for more than 60 days in any 120-day period. Under FDIA, the
Federal Reserve Bank of Boston will be liable for a portion of any excess losses
incurred by the FDIC with respect to an institution that receives Federal
Reserve Bank of Boston advances after becoming critically undercapitalized.
TAXATION
FEDERAL
The Company files a consolidated federal income tax return with the Bank using
the accrual method of accounting.
Internal Revenue Service ("IRS") guidance dealing with the tax consequences of
federal financial assistance (E.G., cash) provided by the FDIC requires all
federal financial assistance provided to an acquiring bank to be taxable to the
bank that has been seized. Accordingly, all federal financial assistance
provided to the acquiror of Suffield Bank's assets and liabilities may be
taxable income included in the consolidated federal income tax return of the
Company. This income may generally be offset by tax losses resulting from the
sale of assets sold by the FDIC. Although management has been informed by the
FDIC that there will be no net taxable income resulting from seizure of Suffield
Bank, management has not been able to obtain written confirmation from the FDIC
at this time. Accordingly, income taxes disclosed in the Consolidated Financial
Statements do not take into account adjustments, if any, which may result from
the seizure of Suffield Bank.
In 1990, Coastal Bancorp and its subsidiaries carried back their share of the
consolidated net operating losses of the Suffield Financial Corporation and
subsidiaries group to the years 1984, 1985 and 1986. Tentative tax refunds in
the amount of $926,000 were paid to the Bank as a result of this carryback. In
1989 and 1990, Suffield Financial Corporation and Suffield Bank also carried
back their share of the net operating losses of the group. A portion of the
1990 losses was carried back to the 1986 taxable year of the Suffield group as
it existed before the acquisition of Coastal Bancorp and the Bank (the "Old
Suffield Group") and resulted in a tentative refund of $1,973,000 and a portion
of the 1989 losses was carried back to the years 1979 through 1985 of the Old
Suffield Group and resulted in tentative refunds of $1,279,000.
23
<PAGE>
All refunds in excess of $1.0 million must be approved by the Joint Committee on
Taxation of the U.S. Congress. The IRS has reviewed and approved the refund
claims and has forwarded the case to the Joint Committee on Taxation in
Washington, D.C. with a recommendation that the refunds be approved as made.
The final approval of the Joint Committee on Taxation is expected as early as
the third quarter of 1996. If the Joint Committee on Taxation were to conclude
that the losses were not eligible for the ten-year carryback, the Bank would be
liable for the repayment of $926,000 of refunds plus interest and would increase
its net operating loss carryforwards by $2.4 million. The Bank also believes
that the requirements have been satisfied with respect to the carryback of 1989
and 1990 losses by Suffield Financial Corporation and Suffield Bank under the
ten-year rule. In any event, none of the Company, Coastal Bancorp or the Bank
were members of the Old Suffield Group in the above carryback years.
Consequently, the Bank believes that in accordance with the consolidated return
regulations, the Company, Coastal Bancorp or the Bank would not be liable for
the repayment of any refunds generated by carryback to the Old Suffield Group.
The federal income tax returns of the Company have been examined and audited or
closed without audit by the IRS for tax years through 1988 and such years are
not subject to further IRS audit except with respect to carrybacks to those
years.
STATE
The State of Maine imposes income and franchise taxes on financial institutions
such as the Bank equal to 1% of Maine net income and $0.08 per $1,000 of the
Bank's year-end assets, respectively. Maine net income equals the Bank's net
income or loss as reported on its federal income tax return. The Maine
franchise tax may be reduced by a credit in the event of a book net operating
loss for a particular taxable year. The credit equals the book net operating
loss multiplied by the franchise tax rate and may be carried forward for up to
five years. The Maine income and franchise taxes are deductible in determining
federal taxable income.
24
<PAGE>
ITEM 2. PROPERTIES.
The Company primarily utilizes the premises, equipment and furniture of the Bank
without direct payment of any rental or other fees to the Bank. The Bank's
executive offices and operations center is located at 36 Thomas Drive,
Westbrook, Maine. The Bank currently maintains eight branches as listed below.
Location Address Leased/Owned Lease Expiration
- -------- ------- ------------ ----------------
Brunswick 83 Main Street Owned n/a
Brunswick, ME
Brunswick 14 Gurnet Road Owned n/a
Brunswick, ME
Topsham Topsham Fair Mall Building Owned n/a
Route 196 Land Leased June 2000
Topsham, ME
Freeport 165 Main Street Owned n/a
Freeport, ME
Westbrook 36 Thomas Drive Owned n/a
Westbrook, ME
Saco 32 Saco Valley Shopping Ctr. Leased January 2001
Saco, ME
Kennebunk Shoppers Village Leased December 2000
Kennebunk, ME
Kezar Falls(1) Federal Road Owned n/a
Kezar Falls, ME
(1) The Bank entered into an agreement with Maine Bank & Trust Company dated
February 22, 1996 pursuant to which the Bank will sell substantially all of
the assets of its Kezar Falls, Maine branch office to Maine Bank & Trust
Company, and Maine Bank & Trust Company will assume certain liabilities of
the Bank with respect to the branch. Pending the receipt of appropriate
regulatory approvals, the transaction is expected to be consummated in the
second quarter of 1996.
ITEM 3. LEGAL PROCEEDINGS.
As of December 31, 1995, there were various claims and lawsuits pending against
the Company incidental to the ordinary course of business. In the opinion of
management, after consultation with
25
<PAGE>
legal counsel, resolution of these matters is not expected to have a material
effect on the consolidated financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
As of December 31, 1995, the Company had approximately 1,573 holders of
record and 600,361 outstanding shares of Common Stock. The Common Stock is
traded in the over-the-counter market in the "pink sheets," although such
trades are limited and sporadic and there is no established public trading
market for the Common Stock.
For the periods reported below, the following table sets forth the range of
high and low closing bid prices for the Common Stock on the OTC Bulletin
Board as reported by NASDAQ Trading and Market Services. Such quotations
represent prices between dealers without adjustment for retail markups,
markdowns or commissions. Information prior to May 31, 1995 has been
adjusted to reflect the one for ten reverse stock split with respect to the
Company's outstanding Common Stock effective as of such date.
<TABLE>
<CAPTION>
High Low
- ------------------------------------------------------------
<S> <C> <C>
1994
First Quarter $1.50 $1.50
Second Quarter 0.10 0.10
Third Quarter -- --
Fourth Quarter 5.00 1.20
1995
First Quarter $5.00 $1.25
Second Quarter 2.00 1.50
Third Quarter 2.50 1.50
Fourth Quarter 3.50 1.50
</TABLE>
No dividends were declared by the Company in 1991 through 1995. The Company's
only source of cash is from dividends from the Bank. The Amended and Restated
Settlement Agreement prohibits the payment of dividends by the Company to its
stockholders until the unpaid principal amount and interest under the FDIC Note
are paid in full in accordance with the terms thereof. There are certain
additional restrictions on the ability of the Company to pay dividends and on
the ability of the Bank to transfer funds to the Company in the form of cash
dividends. See Item 8, "Financial Statements and Supplementary Data -- Note A
and Note J," which are incorporated herein by reference.
26
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.
SELECTED CONSOLIDATED FINANCIAL DATA OF FIRST COASTAL CORPORATION
The following table sets forth, in summary form, certain selected financial data
as of and for each of the five years in the period ended December 31, 1995.
The 1994 financial results reflect a $9.0 million extraordinary charge to
earnings as a result of the issuance by the Company of the non-recourse
promissory note to the Federal Deposit Insurance Corporation ("FDIC") in
consideration of the waiver and release of the FDIC's cross guaranty claim
against Coastal Savings Bank ("Coastal" or the "Bank") in connection with the
consummation of the Amended and Restated Settlement Agreement on January 31,
1995. See Item 8, "Financial Statements and Supplementary Data -- Note A,"
which is incorporated herein by reference.
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA) 1995 1994 1993 1992 1991
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Interest income $11,707 $11,780 $12,748 $16,319 $21,032
Interest expense (1) 5,850 5,726 7,254 9,986 14,639
------- ------- ------- ------- -------
Net interest income 5,857 6,054 5,494 6,333 6,393
Provision for loan losses (425) 107 (30) 1,136 5,967
------- ------- ------- ------- -------
Net interest income
after provision for loan losses 6,282 5,947 5,524 5,197 426
Investment securities gains (losses) (4) 38 99 (19) 360
Other income 576 391 1,323 1,126 980
Other expenses (2) 5,194 6,278 6,158 7,049 12,853
Income tax benefit - - (4) (198) (114)
------- ------- ------- ------- -------
Income (loss) before minority
interest and extraordinary item 1,660 98 792 (547) (10,973)
Minority interest in
net income (loss) - - 44 (18) (378)
------- ------- ------- ------- -------
Income (loss) before
Extraordinary Item 1,660 98 748 (529) (10,595)
Extraordinary Item -
Charge to earnings as a result of the
settlement of the cross guaranty claim - 9,000 - - --
------- ------- ------- ------- -------
Net income (loss) $ 1,660 $(8,902) $ 748 $ (529) $(10,595)
------- ------- ------- ------- -------
------- ------- ------- ------- -------
PER SHARE DATA:
Weighted Average Shares Outstanding 600,361 600,361 600,361 600,361 600,361
Income (loss) before
extraordinary item $ 2.77 $ .16 $ 1.25 $ (.88) $ (17.65)
------- ------- ------- ------- -------
------- ------- ------- ------- -------
Net income (loss) $ 2.77 $(14.83) $ 1.25 $ (.88) $ (17.65)
------- ------- ------- ------- -------
------- ------- ------- ------- -------
</TABLE>
There were no cash dividends declared for the five years ended December 31,
1995.
(1) The 1995 interest expense includes $419,000 in interest expense associated
with the $9.0 million note to the FDIC.
(2) In 1995 and 1994, the Company incurred approximately $0.3 million and $0.8
million, respectively, consisting of legal and other professional fees in
connection with the settlement of the cross guaranty claim with the FDIC.
The 1991 other expense included a $3.2 million writedown for the
deconsolidation of Suffield Bank.
27
<PAGE>
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------------------
(DOLLARS IN THOUSANDS) 1995 1994 1993 1992 1991
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET
DATA:
Total assets $145,453 $154,212 $170,819 $188,838 $214,422
Investment securities 19,712 16,746 1,036 4,061 l,487
Assets held for sale 281 185 3,421 6,882 3,661
Loans, net 100,528 109,625 123,468 144,000 181,209
Allowance for loan losses 2,659 4,042 3,642 4,280 6,098
Nonperforming assets 7,517 9,006 11,627 24,382 27,303
Deposits 125,665 130,037 140,587 156,318 170,383
Borrowings 6,000 12,612 18,108 21,249 31,595
FDIC Note 9,000 9,000 - - -
Stockholders' equity 3,997 2,014 9,878 9,130 9,659
FINANCIAL RATIOS:
Net interest rate spread 4.13% 3.79% 3.26% 3.26% 2.47%
Return on average assets before
extraordinary item 1.14 .06 .41 (.27) (4.62)
Return on average assets 1.14 (5.48) .41 (.27) (4.62)
Return on average equity before
extraordinary item 58.20 .92 7.63 (5.44) (82.20)
Return on average equity 58.20 (83.78) 7.63 (5.44) (82.20)
Equity to assets 2.75 1.31 5.78 4.83 4.50
Dividend payout ratio -- -- -- -- --
Tier 1 leverage capital 2.74 1.41 5.63 4.81 4.50
Total risk-based capital 5.54 3.46 9.69 8.02 7.72
</TABLE>
28
<PAGE>
SELECTED FINANCIAL DATA FOR COASTAL SAVINGS BANK
The following table sets forth, in summary form, certain selected financial data
as of and for each of the five years in the period ended December 31, 1995:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------
Unaudited
---------
(IN THOUSANDS) 1995 1994 1993 1992 1991
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Interest income $11,707 $11,774 $12,731 $16,275 $20,980
Interest expense 5,435 5,727 7,255 9,989 14,639
------- ------- ------- ------- -------
Net interest income 6,272 6,047 5,476 6,286 6,341
Provision for loan losses (425) 107 (30) 1,136 5,967
------- ------- ------- ------- -------
Net interest income after provision
for loan losses 6,697 5,940 5,506 5,150 374
Investment securities gains (losses) (4) 38 99 (19) 360
Other income 576 392 1,321 1,145 1,089
Other expenses 4,811 6,063 5,940 7,104 9,539
Income tax expense (benefit) -- -- 6 (198) (114)
------- ------- ------- -------- --------
Net income (loss)(1) $ 2,458 $ 307 $ 980 $ (630) $(7,602)
------- ------- ------- -------- --------
------- ------- ------- -------- --------
</TABLE>
(1) In 1994, the Bank incurred approximately $0.6 million consisting of legal
and other professional fees in connection with the settlement of the cross
guaranty claim with the FDIC.
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------------
Unaudited
---------
(IN THOUSANDS) 1995 1994 1993 1992 1991
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets $145,446 $153,948 $170,177 $188,144 $212,611
Investment
securities 19,712 16,746 1,036 4,061 l,487
Assets held for sale 281 185 3,421 6,882 3,661
Loans, net 100,528 109,625 123,468 144,000 181,209
Allowance for loan losses 2,659 4,042 3,642 4,280 6,098
Nonperforming assets 7,517 9,006 11,627 24,382 27,303
Deposits 125,764 130,076 140,599 156,378 170,528
Borrowings 6,000 12,612 18,108 21,249 31,595
Stockholders' equity 13,335 10,754 10,906 9,926 9,406
FINANCIAL RATIOS:
Return on average assets 1.68% .19% .54% (.32)% (3.33)%
Return on average equity 20.67 2.82 9.20 (6.31) (49.01)
Equity to assets 9.17 6.99 6.41 5.28 4.42
Tier 1 leverage capital 9.19 7.05 6.24 5.25 4.42
Total risk-based capital 15.59 12.12 10.57 8.60 7.57
</TABLE>
29
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following management's discussion and analysis of First Coastal Corporation
("First Coastal" or the "Company") financial condition and results of operations
for the last three fiscal years should be read in conjunction with the
consolidated selected financial data and the consolidated financial statements
and notes appearing elsewhere herein.
SETTLEMENT OF CROSS GUARANTY CLAIM
On January 31, 1995, the Company and the Bank consummated a settlement with the
FDIC in accordance with the terms and conditions of the Amended and Restated
Settlement Agreement, dated as of November 23, 1994 (the "Amended and Restated
Settlement Agreement"), pursuant to which the FDIC waived and released its cross
guaranty claim against the Bank. The cross guaranty claim was the result of the
September 1991 failure of Suffield Bank. As part of the settlement, the Company
issued to the FDIC a non-recourse promissory note in the principal amount of
$9.0 million (the "Note" or the "FDIC Note"), secured by the Company's pledge of
the outstanding stock of the Bank. In 1994, the Company incurred an
extraordinary charge to earnings resulting from the issuance of the Note.
Principal and interest under the FDIC Note are deferred until its maturity date,
which is January 31, 1997, subject to extension under certain circumstances.
The Company announced on January 31, 1996 that it intends to pursue a
recapitalization of the Company as the means to facilitate the satisfaction of
the FDIC Note. As part of the recapitalization, the Company expects to raise
approximately $3.0 to $4.0 million through an offering of its common stock,
including a rights offering to the Company's existing stockholders. The
offering will be made only by means of a prospectus. In addition to the
proceeds from the common stock offering, the Company also expects to use funds
derived from dividends from the Bank and the proceeds from a loan to satisfy its
obligation under the FDIC Note. The recapitalization and related transactions
are subject to a number of conditions, including the receipt of appropriate
regulatory approvals, and there can be no assurance that such recapitalization
and related transactions will be consummated or that the Company will be
successful in repaying the FDIC Note. The Company anticipates that the
recapitalization would be completed in the third quarter of 1996.
REMOVAL OF GOING CONCERN MODIFICATION
The report of the independent accountants ("Report") issued in connection with
the Company's 1993 consolidated financial statements stated that, among other
things, the Company's financial statements have been prepared assuming that the
Company will continue as a going concern due to the significance of the
uncertainty regarding the FDIC cross guaranty claim at the time. As a result of
the consummation of the Amended and Restated Settlement Agreement and certain
other factors as described in Note A to the Company's Consolidated Financial
Statements, the 1994 and 1995 Report of Independent Accountants expresses an
unqualified opinion on the financial statements of the Company for the years
ended December 31, 1994 and 1995.
30
<PAGE>
FINANCIAL CONDITION
INTEREST RATE SENSITIVITY
The following table sets forth certain information at December 31, 1995
regarding the rate sensitivity of the Company's earning assets and sources of
funds. For purposes of this table, rate sensitive earning assets ("RSA") and
rate sensitive liabilities ("RSL") include all such assets and liabilities
maturing or subject to repricing within the time frames outlined in the
following table. Other investment securities and interest-bearing demand
deposits are considered non-rate sensitive.
<TABLE>
<CAPTION>
After Three
Within Months After One After Two After Three
Three within But within But within But within After Non-rate
(IN THOUSANDS) Months One Year Two Years Three Years Five Years Five Years Sensitive Total
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Interest earning deposits $4,375 $4,375
Fed Funds 10,000 10,000
Securities:
Available for sale (1) 1,999 $2,021 $994 $787 $3,440 9,241
Held-to-maturity (1) 4,993 5,794 999 11,786
Assets held for sale 281 281
Loans (2) 25,713 42,850 9,769 $4,556 $2,969 12,793 1,878 100,528
Other assets 9,242 9,242
------- ------- ------- ------ ------ ------- ------- --------
TOTAL ASSETS $47,361 $50,665 $11,762 $4,556 $2,969 $13,580 $14,560 $145,453
------- ------- ------- ------ ------ ------- ------- --------
------- ------- ------- ------ ------ ------- ------- --------
LIABILITIES AND
STOCKHOLDERS' EQUITY
Savings and MMDA's $46,056 $46,056
CD's 13,823 $26,903 $11,385 $7,533 $3,031 $101 62,776
FHLB Advances 2,000 4,000 6,000
FDIC Note 9,000 9,000
Other liabilities $17,624 17,624
Stockholders' equity 3,997 3,997
------- ------- ------- ------ ------ ------- ------- --------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $59,879 $26,903 $22,385 $11,533 $3,031 $101 $21,621 $145,453
------- ------- ------- ------ ------ ------- ------- --------
------- ------- ------- ------ ------ ------- ------- --------
Gap $(12,518) $23,762 $(10,623) $(6,977) $(62) $13,479 $(7,061)
Cumulative Gap (12,518) 11,244 621 (6,356) (6,418) 7,061
RSA/Total assets 32.56% 34.83% 8.09% 3.13% 2.04% 9.34% 10.01%
RSL/Total assets 41.17 18.50 15.39 7.93 2.08 0.07 14.86
Cumulative RSA/RSL 79.09 112.96 100.57 94.73 94.81 105.70
Cumulative Gap/Total assets (8.61) 7.73 .43 (4.37) (4.41) 4.85
</TABLE>
(1) Non-rate sensitive securities include certain equity investments such as
FHLB stock and limited partnership interests. Callable securities are
placed according to earliest call date.
(2) Nonaccrual loans are considered non-rate sensitive and the allowance for
loan losses is included in the non-rate sensitive category.
31
<PAGE>
At December 31, 1995, Coastal is asset-sensitive (positive Gap) within a one
year time frame in the amount of $11.2 million or 7.73% of total assets. This
compares to a positive Gap of $1.9 million or 1.2% of total assets at December
31, 1994. When a bank's ability to reprice interest-earning assets exceeds its
ability to reprice interest-bearing liabilities within shorter time periods, as
in the case with the Company, decreases in interest rates generally would
adversely affect net interest income, while increases in interest rates
generally would have the opposite effect. However, because earning assets and
sources of funds do not reprice in exactly the same manner as interest levels
change, the preceding table should not be viewed as a sole indicator of how the
Company will be affected by changes in interest rates. It is the Company's
policy to seek to reduce its exposure to the adverse effects of volatile
interest rates. Evaulating and managing this potential exposure is a continual
challenge in a changing environment and a primary objective of the Company's
asset/liability management policy. Managing the rate sensitivity within the
balance sheet can be accomplished in several ways. By managing the origination
of new assets and liabilities, or the rollover of the existing balance sheet
assets, incremental change towards the desired sensitivity position can be
achieved. However, as interest levels decrease the volume of new adjustable
rate loans decrease and conversely the demand for fixed rate loans increase.
The Company has an asset/liability committee which meets weekly to discuss the
management of interest rate risk, liquidity and funds management.
INVESTMENT SECURITIES
The Company's investment portfolio is comprised primarily of U.S. government and
agency obligations and also contains miscellaneous equity securities. Total
investment securities at December 31, 1995 were $19.7 million compared to $16.7
million at December 31, 1994. This increase is attributable to the purchase of
$11.8 million in U.S. government agency callable notes and $1.0 million in U.S.
treasury securities, partially offset by sales totaling $2.0 million of the
Bank's holdings in an adjustable rate mutual fund for financial institutions,
$1.0 million in mortgage backed securities and maturities of $7.0 million in
U.S. treasury securities.
At December 31, 1995 securities classified as held to maturity consisted of $0.9
million in U.S. government treasury bills and $10.8 million in callable notes
issued by Fannie Mae, FHLB, Sallie Mae and Freddie Mac.
32
<PAGE>
The following tables set forth the book value and maturities of investment
securities and weighted average yields at December 31, 1995, 1994 and 1993:
<TABLE>
<CAPTION>
December 31, 1995 December 31, 1994
----------------- -----------------
(DOLLARS IN THOUSANDS) Book Value Yield Book Value Yield
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available for sale:
U.S. government obligations maturing
in 1-5 years $ 5,014 5.6% $ 4,852 5.8%
Mortgage backed securities maturing
in over 10 years 787 7.5 858 7.5
Equity/mutual fund 2,000 6.2 3,894 5.6
Other 125 - 320 2.9
------- -------
$ 7,926 5.9% $ 9,924 5.9%
------- -------
------- -------
Held to maturity:
U.S. government obligations maturing
in one year or less $ 993 6.5% $ 6,822 5.2%
U.S. government agency callable notes
maturing after 1-5 years (final maturity) 8,991 6.6 -
5-10 years (final maturity) 1,802 7.3 - -
------- -------
10,793 6.7 - -
------- -------
$11,786 6.7% $ 6,822 5.2%
------- -------
------- -------
</TABLE>
<TABLE>
<CAPTION>
December 31, 1993
--------------------
(DOLLARS IN THOUSANDS) Book Value Yield
- -----------------------------------------------------------------------------------------
<S> <C> <C>
U.S. government and
agency obligations:
maturing 1 year or less $ 628 3.5%
maturing after 1-5 years - -
------
628 3.5
Other bonds and notes:
maturing after 1-5 years - -
maturing after 10 years - -
Other securities 408 2.3
------
Total investments $1,036 3.0%
------
------
</TABLE>
33
<PAGE>
LOANS
Loans, net of unearned income, decreased $9.1 million (or 8.3%) from $109.6
million at December 31, 1994 to $100.5 million at December 31, 1995. The
reasons for the decrease are (i) $14.4 million in early loan payoffs,
(ii) reclassification during 1995 of approximately $1.0 million of loans to real
estate owned, (iii) amortization of $3.6 million, and (iv) charge-off of loans
totaling approximately $1.3 million, partially offset by new loan volume of
$11.2 million.
The decline in loan balances in 1995 represents the continuation of a five year
trend that is largely the result of a combination of two factors: Coastal's
financial difficulties during this period and the FDIC's cross guaranty claim
against Coastal, which resulted from the 1991 failure of Suffield Bank.
Coastal's financial difficulties had two primary adverse effects on the Bank's
ability to generate new loan volume and retain existing loan customers. First,
as a result of the Order to Cease and Desist among the Bank, the FDIC and the
Maine Bureau of Banking effective January 30, 1992, Coastal was required to
improve its ratio of Tier 1 capital to total assets to 6.0% by December 31,
1993, from the December 31, 1991 level of 4.42%, with incremental improvement
required at six month intervals. As a result of this requirement, management
effected a strategy of selective balance sheet shrinkage. The reduction in
asset size, from $212.6 million at December 31, 1991 to $170.2 million at
December 31, 1993, along with the Bank's return to profitability in 1993
resulted in the Bank's Tier 1 capital to total assets ratio improving to 6.24%
at December 31, 1993. At December 31, 1995, this ratio had further improved to
9.19%.
Secondly, the Bank's financial difficulties resulted in the need for management
to expend significant resources addressing the asset quality problems which were
the primary source of the Company's operating losses. The focus on asset
quality improvement resulted in a reduction in nonperforming assets from a peak
level of $29.2 million at July 31, 1992 to $7.5 million at December 31, 1995.
In combination with the need to reduce the size of Coastal's deposit and loan
balances, this focus on asset quality improvement resulted in significantly
reduced efforts at loan originations, except for residential mortgage loans
which were primarily originated with an intent to sell these loans in the
secondary mortgage market.
The uncertainties surrounding the resolution of the FDIC's cross guaranty claim
contributed further to the decline in the Bank's loan balances. Management was
required to devote significant resources towards negotiating a satisfactory
settlement of the cross guaranty claim and subsequently, towards determining the
best alternative for repaying the FDIC Note. Also, for an extended period of
time the cross guaranty claim created uncertainties with respect to the future
of the Bank. These uncertainties adversely affected Coastal's ability to
develop new commercial and retail loan business. Further, until the Company
chose among the alternatives for repaying the FDIC Note, certain management
initiatives were deferred, including those relating to the development of new
loan and deposit business. Until late 1995, the Bank's commercial real estate
lending has been primarily limited to the restructuring of existing commercial
real estate loans and the financing of real estate owned.
34
<PAGE>
The Bank began expanding in mid-1995 its residential and consumer lending
capabilities, and subsequently has experienced a significant increase in new
loan originations. In early 1996, the combination of the continued improvement
in overall asset quality and the announcement relating to the Company's plans
to recapitalize, has recently allowed the Bank to begin focusing more resources
on the generation of new commercial loans.
Coastal is an approved seller and servicer by and for the Federal National
Mortgage Association. At December 31, 1995, Coastal was servicing $53.7 million
of loans which were owned by others, as compared to $57.0 million at December
31, 1994. Servicing fee income related to these loans is reported as other
income in the consolidated statements of operations and for the years ended
December 31, 1995 and 1994, was $179,000 and $58,000, respectively. Servicing
fee income for 1994 reflects a $132,000 charge, resulting from higher than
anticipated prepayments of serviced loans.
Coastal continues to be active in secondary market transactions primarily
through the sale of residential mortgage loans and mortgage-backed securities
that it originates, although lower interest rates led to an increase in
prepayments of off balance sheet serviced loans in 1995. The sale of long-term
fixed rate mortgage loans is intended to improve the interest rate sensitivity
of the Bank's assets (consistent with the Bank's asset/liability policy),
generate future fee income and provide additional funds for lending and
liquidity.
35
<PAGE>
ALLOWANCE FOR LOAN LOSSES
The following table represents the allocation of the allowance for loan losses
("Allowance") at December 31, 1995, 1994 and 1993. The percentages represent
the percent of loans in each category to total loans.
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------------------------
1995 1994 1993
-------------------- -------------------- --------------------
Percent Percent Percent
of Loans of Loans of Loans
to Total to Total to Total
(DOLLARS IN THOUSANDS) Amount Loans Amount Loans Amount Loans
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Real estate mortgage loans:
Residential $ 82 30.8% $ 66 30.2% $ 80 32.2%
Commercial 2,216 50.5 3,322 54.6 3,000 50.2
Real estate construction loans -- -- -- -- 4 .3
Commercial and industrial loans 13 2.5 46 .6 38 2.4
Consumer and other loans 120 16.2 141 14.6 177 14.9
Unallocated 228 -- 467 -- 343 --
------ ----- ------ ----- ------ -----
Total $2,659 100.0% $4,042 100.0% $3,642 100.0%
------ ----- ------ ----- ------ -----
------ ----- ------ ----- ------ -----
Allowance as a percentage of loans 2.65% 3.67% 2.95%
Allowance as a percentage of
nonperforming loans 47.96% 66.47% 64.11%
Allowance as a percentage of
nonperforming loans
(excluding restructured loans) 125.60% 87.90% 247.92%
</TABLE>
The Allowance at December 31, 1995 equaled $2,659,000 as compared to $4,042,000
at December 31, 1994. The reduction in the Allowance is the result of
substantial loan charge-offs in the amount of $1,333,000 and negative provision
expense totaling $425,000, partially offset by loan loss recoveries of $375,000.
The loan charge-offs were largely associated with previously identified loan
loss exposure taken into consideration as part of management's review of the
adequacy of the Allowance at December 31, 1994. The negative provision for loan
loss expense for the year of $425,000 was largely the result of management's
determination as part of its December 31, 1995 review of the Allowance that a
surplus existed in the Allowance, leading to the decision to effect a reversal
of provision for loan loss expense in the amount of $675,000 in the fourth
quarter of 1995.
The following table sets forth the changes in the Allowance, including charge-
offs and recoveries, by loan category for the past five years:
36
<PAGE>
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------------------
(dollars in thousands) 1995 1994 1993 1992 1991
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at beginning
of period $ 4,042 $ 3,642 $ 4,280 $ 6,098 $ 9,185
Deconsolidation of Suffield Bank (4,400)
Charge-offs:
Real estate mortgage loans (1,113) (178) (1,197) (2,726) (3,665)
Real estate construction loans -- -- (28) ( 121) ( 201)
Commercial and industrial loans ( 142) -- ( 55) ( 178) ( 712)
Consumer and other loans ( 78) ( 112) ( 89) ( 143) ( 218)
----- ----- ----- ----- -----
Total charge-offs (1,333) ( 290) (1,369) (3,168) (4,796)
Recoveries:
Real estate mortgage loans 172 127 179 165 34
Commercial and industrial
loans 170 410 543 21 2
Consumer and other loans 33 46 39 28 106
------ ----- ----- ----- -----
Total recoveries 375 583 761 214 142
----- ----- ----- ------ -----
Net (charge-offs) recoveries ( 958) 293 ( 608) (2,954) (4,654)
----- ----- ----- ----- -----
Provision for loan losses ( 425) 107 ( 30) 1,136 5,967
----- ----- ----- ----- -----
Balance at end of period $2,659 $4,042 $3,642 $4,280 $6,098
------ ------ ------ ------ ------
------ ------ ------ ------ ------
Net charge-offs as a percentage
of average loans .91% (.25)% .46% 1.76% 2.39%
</TABLE>
The provision for loan losses for the years ended December 31, 1995, 1994 and
1993 have declined significantly in comparison to prior years. This is due to a
combination of factors, including (i) a reduction in the amount of new, emerging
loss exposure being identified during this period as compared to prior years,
(ii) a reduction or elimination of loss exposure previously allocated against
certain loans generally coming about as a result of improvement in the overall
credit quality of these loans or loan payoffs, and (iii) significant loan loss
recoveries.
The balance of the Allowance declined $1,383,000 during the year ended December
31, 1995. For some time prior to the beginning of the year ended December 31,
1995, management believed that a significant reduction in the level of the
Allowance as compared to the December 31, 1992, 1993 and 1994 balances of
$4,280,000, $3,642,000 and $4,042,000, respectively, was likely at some future
point, possibly as early as December 31, 1995. This expectation was based both
upon management's analysis of the loan portfolio and the fact that banks
recovering from a period of loan quality problems typically experience a decline
in the level of the allowance for loan loss reserves. This is because banks
experiencing loan quality problems typically increase their allowance for loan
loss through increases in provision expense in order to reserve against
anticipated higher future levels of loan losses. Typically over time,
individual loan losses within such loan portfolios are quantified and charged-
off against the allowance for loss. As loan quality improves, and the amount of
new exposure requiring additional loan loss declines, the amount of charge-offs
against the Allowance often signficantly exceeds the amount of offsetting new
provision expense and loan loss recoveries. For example, Coastal's large
decline in the balance of the Allowance for the year ended December 31, 1992, to
$4,280,000 from the December 31, 1991 level of $6,098,000, was attributable to
this factor. During 1995, as a result of loan restructures, loan payoffs and
paydowns, management was able to quantify the loss exposure associated with a
number of large loans against which significant
37
<PAGE>
loan loss reserves were allocated. In total, the resulting charge-offs were
significantly less than the level of reserves allocated against the individual
loans. The reduced level of charge-offs in combination with significant loan
loss recoveries in the amount of $375,000 in 1995, resulted in the determination
at year end, in accordance with the Bank's allowance for loan loss policy, that
the balance of the Allowance would be significantly in excess of that required
to cover the loan loss exposure estimated to exist in the loan portfolio unless
the bank effected a provision expense reversal. As a result, a provision
expense reversal in the amount of $675,000 was recorded in the fourth quarter of
1995, reducing the Allowance to $2,659,000. This resulted in total negative
provision expense for the year ended December 31, 1995 of $425,000.
Though the amount of charge-offs for the year ended December 31, 1995 of
$1,333,000 was high as compared to the prior year level of $290,000, this is
largely the result of the timing of the quantification of the losses and related
charge-offs associated with several of the large loans mentioned above. As
mentioned above, to a significant degree by December 31, 1994, the prospective
loss exposure associated with these loans had already been recognized and was
reflected in the balance of the Allowance.
While the current level of the Allowance is believed to be adequate, the Company
continues to hold a large concentration of commercial real estate loans that
remain vulnerable to loan default. Deterioration in the local economy or real
estate market, or upward movements in interest rates, could have an adverse
effect on the performance of the loan portfolio that could result in the need
for an increase in the Allowance. Conversely, further improvement in overall
asset quality, favorable economic conditions or a favorable local real estate
market could positively affect the Allowance.
NONPERFORMING ASSETS
Information with respect to nonperforming assets is set forth below:
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------
(IN THOUSANDS) 1995 1994 1993 1992 1991
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nonaccrual loans $1,948 $4,340 $1,220 $4,103 $10,638
Accruing loans past due
90 days or more 169 258 249 194 565
Restructured loans 3,427 1,483 4,212 7,455 7,678
Real estate owned 1,973 2,222 5,299 3,833 1,828
Financed real estate owned -- -- 450 1,535 --
In-substance repossessions n/a 703 197 7,262 6,594
------ ------ ------- ------- -------
$7,517 $9,006 $11,627 $24,382 $27,303
------ ------ ------- ------- -------
------ ------ ------- ------- -------
</TABLE>
38
<PAGE>
Nonperforming loans (consisting of nonaccrual loans, accruing loans past due 90
days or more and restructured loans) are comprised of the following:
<TABLE>
<CAPTION>
December 31,
(IN THOUSANDS) 1995 1994 1993
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Real estate mortgage loans:
Residential $ 386 $ 115 $ 126
Commercial 5,007 5,667 5,420
Real estate construction loans -- -- --
Commercial and industrial loans -- 156 12
Consumer and other loans 151 143 123
------- ------- -------
Total loans $ 5,544 $ 6,081 $ 5,681
------- ------- -------
------- ------- -------
</TABLE>
The following table sets forth certain information regarding nonperforming
commercial loans:
<TABLE>
<CAPTION>
December 31, 1995 December 31, 1994 December 31, 1993
---------------------- ---------------------- ----------------------
(DOLLARS IN THOUSANDS) Number of Outstanding Number of Outstanding Number of Outstanding
Type of Property Security Loans Balance Loans Balance Loans Balance
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1-4 Family Residential 2 $ 128 3 $ 308 2 $ 238
5 or more Family Residential 5 977 5 1,073 5 970
Non-Residential Real Estate 6 3,902 3 4,286 5 4,212
Commercial and Industrial -- -- 2 156 2 12
-- ------ -- ------ -- ------
13 $5,007 13 $5,823 14 $5,432
-- ------ -- ------ -- ------
-- ------ -- ------ -- ------
</TABLE>
Although the level of nonperforming assets declined in 1995, the level of
nonperforming assets had a significant adverse effect on interest income.
Interest income that would have been recorded in the year ended December 31,
1995 on nonaccrual and restructured loans under their original terms was
$487,000. Interest income actually recorded on these loans in 1995 was
$406,000. Management believes that the level of nonperforming assets will
continue to decline in 1996. However, this expectation is predicated on
continued stabilization of the real estate market and local economy, along with
a continuation of the trend in lower default rates for commercial real estate
loans. This favorable trend could be adversely affected by an increase in
interest rates.
Nonperforming loans were $5.5 million, or 5.5%, of total loans at December 31,
1995, as compared to $6.1 million, or 5.5%, of total loans at December 31, 1994.
Included in nonperforming loans at December 31, 1995 and 1994 are $3.4 million
and $1.5 million, respectively, of restructured loans which are performing in
accordance with the material terms of the restructuring.
IMPAIRED LOANS
Management reviews loans on a case by case basis to determine which loans should
be classified as impaired. If management believes there is a high probability
of a loss of principal or interest, then such loans are determined to be
impaired. At December 31, 1995, the recorded investment in loans
39
<PAGE>
for which impairment has been recognized in accordance with FASB Statement No.
114 totaled $3.7 million, of which $230,000 related to loans with no allocated
reserve because the loans have been partially written down through charge-offs
and $3.5 million related to loans with corresponding allocated reserves of
$398,000 for the year ended December 31, 1995. Included in the impaired loans
amount is $301,000 in nonaccrual loans and $3.4 million in restructured loans.
All impaired loans were secured by real estate at December 31, 1995 and
accounted for by the lower of the fair value of the collateral or amortized loan
value.
POTENTIAL PROBLEM LOANS
Though the real estate market has improved to some degree as compared to the
depressed conditions of several years ago, management recognizes that the
overall soft Maine real estate market creates an increased risk that currently
performing loans could become nonperforming. In particular, management believes
that the greatest exposure is in the area of currently performing potential
problem commercial real estate loans.
These loans, not otherwise identified as nonperforming, nonaccrual or as a
troubled debt restructuring, are largely secured by income-producing properties
located in Maine. In many cases, the borrowers on these loans have experienced
inadequate rental revenues, increased vacancies and cash flow problems. Most of
these potential problem loans were originated in the late 1980's.
At December 31, 1995, the Bank had identified approximately $6.9 million of
currently performing but potential problem loans. Such loans represented 4.7%
of total assets, ranging in size from $4,000 to $1.8 million. This compares to
$9.0 million of potential problem real estate loans at December 31, 1994, a
23.5% decrease. Of the 1995 total, three loan relationships (property type
other) involving seven loans represent $5.5 million, or 79.2%. During the first
quarter of 1996, a $500,000 payment was applied against one of the three larger
loan relationships.
The following table sets forth certain information regarding potential problem
loans at December 31, 1995:
<TABLE>
<CAPTION>
Number of Balance
Type of Security Property Outstanding Loans (IN THOUSANDS)
- ------------------------------------------------------------------------------
<S> <C> <C>
Apartments 6 $ 2,647
Industrial 1 1,362
Single family 4 119
Other 13 2,757
-- ------
24 $6,885
-- ------
-- ------
</TABLE>
Management is unable to predict the extent, if any, to which these loans may
become nonperforming in the future. An increase in the level of nonperforming
loans could result in the need for increased provisions for loan losses. As of
December 31, 1995, the Company believes the Bank's aggregate allocated loan loss
reserves against these potential problem loans, determined in accordance with
the
40
<PAGE>
Bank's allowance for loan loss policy, is adequate to cover the loss exposure
estimated to be contained within these potential problem loans.
REAL ESTATE OWNED
Real estate owned ("REO") consists of properties acquired through mortgage loan
foreclosure proceedings or in full or partial satisfaction of outstanding loan
obligations, and sales of REO properties financed by Coastal which do not meet
the requirements of Financial Accounting Standards Board ("FASB") Statement
No. 66. At December 31, 1995, REO totaled approximately $2.0 million and
consisted of $1.4 million of office buildings and mixed use commercial
buildings, $0.5 million of apartment buildings and $0.1 million of land.
LIQUIDITY - COASTAL
Deposits totaled $125.7 million at December 31, 1995, a decrease of $4.3 million
(or 3.4%) from the level of $130.0 million at December 31, 1994.
On February 22, 1996, the Bank entered into an agreement to sell its Kezar Falls
branch to Maine Bank & Trust Company. Included in the sale are all of the
branch's deposits (totaling approximately $9.9 million at December 31, 1995),
the real estate and certain of the furniture, fixtures and equipment of the
branch. The agreement between the Bank and Maine Bank & Trust Company is
expected to be consummated during the second quarter of 1996, subject to the
receipt of appropriate regulatory approvals.
Coastal has the capability of borrowing additional funds from the Federal Home
Loan Bank ("FHLB") of Boston with three-day advance notice when adequately
secured by qualified collateral. In addition, effective as of June 8, 1993, the
FHLB of Boston restricted new advances to maturities of six months or less as a
result of the cross guaranty claim. On May 1, 1995, the Bank received a letter
from the FHLB of Boston stating that it would lengthen the maturity restriction
on new fixed term and fixed rate advances from six months to one year. See Note
I to the Consolidated Financial Statements for information relating to advances
from the FHLB of Boston. Coastal is also approved by the Federal Reserve Bank
of Boston to obtain liquidity from its "Discount Window" provided that assets
are pledged to the Federal Reserve Bank's satisfaction.
Unfunded loan commitments for December 31, 1995 and 1994 were approximately $8.0
million and $7.8 million, respectively, consisting primarily of home equity
lines of credit secured by real estate. There were no standby letters of credit
for the years ended December 31, 1995 and 1994.
41
<PAGE>
The breakdown of such commitments is as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1995 1994
- ------------------------------------------------------------------------------
<S> <C> <C>
Real estate mortgage:
Residential $ 174 $ 85
Commercial -- --
Construction -- --
Commercial lines of credit 191 615
Consumer lines of credit 7,649 7,137
------ ------
Total $8,014 $7,837
------ ------
------ ------
</TABLE>
Coastal expects to fund these commitments through its traditional sources
previously described and believes that liquidity is adequate.
LIQUIDITY - PARENT
On a parent company only basis, the Company conducts no separate operations.
Its business consists of the business of its banking subsidiary. In addition to
the FDIC Note in the principal amount of $9.0 million issued by the Company to
the FDIC on January 31, 1995 in connection with the settlement of the cross
guaranty claim, the Company's expenses primarily include Delaware franchise
taxes associated with the Company's authorized capital stock, certain legal and
various other expenses. Expenses, including certain audit and professional
fees, insurance and other expenses, are allocated between Coastal and the
Company based upon the relative benefits derived. At December 31, 1995, the
Company's assets (other than its investment in its subsidiary) consisted of
$99,000 in cash and fixed assets of $8,000.
The principal source of cash for the Company is dividend payments from Coastal;
however, as described in Note J to the Consolidated Financial Statements, there
exist certain restrictions regarding the ability of Coastal to transfer funds.
Following the receipt of appropriate regulatory approvals, on November 30, 1994
and November 13, 1995 Coastal paid the Company cash dividends of $175,000 and
$200,000, respectively, for certain current and anticipated operating expenses
of the Company.
42
<PAGE>
CAPITAL - COASTAL
The table below sets forth the regulatory capital requirements and capital
ratios for Coastal at December 31, 1995:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
- -------------------------------------------------------------------------
<S> <C>
Tier 1 capital (Leverage) to total assets (1)ratio
- --------------------------------------------------
Qualifying capital $13,296
Actual % 9.19%
Minimum requirement % 6.00%
Average assets for fourth quarter $144,658
Tier 1 capital to risk-weighted assets
- --------------------------------------
Qualifying capital $13,296
Actual % 14.32%
Minimum requirement % 4.00%
Total capital to risk-weighted assets
(Tier 1 and Tier 2)
- -------------------------------------
Qualifying capital $14,475
Actual % 15.59%
Minimum requirement % 8.00%
Gross risk-weighted assets $92,821
</TABLE>
Note: As described in Note A to the Consolidated Financial Statements, the
Memorandum of Understanding among Coastal, the FDIC and the Maine Bureau of
Banking requires Coastal to maintain a Tier 1 capital to total assets ratio of
6.0% or greater. Coastal's Tier 1 capital to total assets ratio at December 31,
1995 was 9.19%.
(1) Calculated on an average quarterly basis
CAPITAL - COMPANY
The Federal Reserve capital adequacy guidelines apply on a consolidated basis to
bank holding companies with consolidated assets of $150 million or more. For
bank holding companies which have less than $150 million in consolidated assets,
as did the Company for each of the quarters ended March 31, 1995, June 30, 1995,
September 30, 1995 and December 31, 1995, the guidelines are applied on a bank-
only basis (as opposed to a consolidated basis) unless (i) the parent bank
holding company is engaged in nonbank activity involving significant leverage or
(ii) the parent company has a significant amount of debt that is held by the
general public. The Federal Reserve capital adequacy guidelines provide that
"debt held by the general public" is debt held by parties other than financial
institutions, officers, directors, and controlling stockholders of the banking
organization or their related interests. The FDIC Note is not considered to be
"debt held by the general public" for purposes of such capital guidelines. As a
result, applied on a bank-only basis, the Company's ratios
43
<PAGE>
of tier 1 capital to total assets, tier 1 capital to risk-weighted assets, and
qualifying total capital to risk-weighted assets of 9.19%, 14.32%, and 15.59%,
respectively, at December 31, 1995 were in complaince with such guidelines. If
the Company were required to calculate its ratios of tier 1 capital to total
assets, tier 1 capital to risk-weighted assets, and qualifying total capital to
risk-weighted assets on a consolidated basis, such ratios would be 2.74%, 4.27%
and 5.54%, respectively.
The Company suspended the payment of cash dividends to its stockholders in the
fourth quarter of 1989 and has not paid any cash dividends to its stockholders
since that time. See Item 8, "Financial Statements and Supplementary Data --
Note J," for dividend restrictions.
RESULTS OF OPERATIONS
COMPARISON OF YEAR ENDED DECEMBER 31, 1995 TO YEAR ENDED DECEMBER 31, 1994.
NET INCOME
For the year ended December 31, 1995, the Company had net income of $1.7 million
compared to a net loss of $8.9 million at December 31, 1994. The improvement in
earnings for 1995 is primarily attributable to three items: (i) the 1994 net
loss included a $9.0 million extraordinary charge to earnings upon the issuance
of a Note to the FDIC for the waiver and release of the cross guaranty claim
against the Bank, (ii) a negative provision for loan losses in 1995 of $425,000,
and (iii) a reduction in other expenses of $1.1 million. Each of these
principal components of the Company's operating results is discussed below.
NET INTEREST INCOME
Net interest income for the year ended December 31, 1995 was $5.9 million,
compared to $6.0 million for the year ended December 31, 1994. Included in the
1995 net interest income total is interest expense of $0.4 million for the
Company's $9.0 million Note to the FDIC.
Changes in net interest income are caused by changes in interest rates, changes
in the mix of earning assets and sources of funds, changes in the level of
earning assets and sources of funds and changes in the amount of non-earning
assets and non-interest sources of funds. Overall, the Company's interest
income for 1995 decreased $73,000 as a result of a $973,000 reduction in
interest income due to the decline in total interest earning assets, which was
offset in part by an increase in interest income of $900,000 from higher rates
received on interest earning assets. Interest expense increased by $124,000.
This was the result of increased interest expense of $921,000 due to an increase
in the rates paid on interest bearing liabilities partially offset by reduced
interest expense of $797,000 associated with lower balances of interest bearing
liabilities. For further detail, see the rate/volume analysis that follows.
PROVISION FOR LOAN LOSSES
The provision for loan losses for the year ended December 31, 1995 was
$(425,000) as compared to $107,000 for the year ended December 31, 1994. In the
fourth quarter of 1995, the Company
44
<PAGE>
posted a $675,000 provision expense reversal resulting from the determination by
management that the level of the Allowance was at a level estimated to be in
excess of that required to adequately cover the loss exposure estimated by
management to be inherent within the loan portfolio. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Allowance for Loan Losses."
The Company's policy is to fund the Allowance by charging operations in the form
of provision for loan loss expense which represents estimated loss exposure
based on periodic evaluations of the loan portfolio and current economic trends.
The Company continues to hold a large concentration of commercial real estate
loans. The ultimate collectibility of the Company's commercial real estate loan
portfolio is particularly susceptible to changes in local real estate market
conditions. Deterioration in the local economy or real estate market, or upward
movement in interest rates, could have an adverse impact on the loan portfolio
that could result in the need for increased provision for loan losses.
Management believes that the Allowance is adequate at December 31, 1995 and that
foreclosed real estate is recorded at the lower of cost or estimated fair value
(minus estimated costs to sell). While management uses available information to
recognize losses on loans and real estate owned, future additions to the
Allowance and write-downs may be necessary based on changes in the financial
condition of various borrowers, new information that becomes available relative
to various borrowers, loan real estate collateral or real estate owned, as well
as changes in local, regional or national economic conditions. In addition,
various regulatory authorities, as an integral part of their examination
process, periodically review the Company's Allowance and the carrying value of
real estate owned. Such authorities may require the Company to recognize
additions to the Allowance and/or write down the carrying value of real estate
owned, based on their judgments on information available to them at the time of
their examination.
OTHER INCOME
Other income in 1995, including investment securities gains and losses, was
$572,000 as compared to $429,000 in 1994. This increase is primarily the result
of a $132,000 charge to earnings in 1994 establishing a valuation reserve
against the deferred mortgage servicing assets as a result of higher than
anticipated prepayments of serviced loans.
OTHER EXPENSES
The following table summarizes 1995 and 1994 other expenses:
<TABLE>
<CAPTION>
Increase
(DOLLARS IN THOUSANDS) 1995 1994 (Decrease)
- -------------------------------------------------------------------------
<S> <C> <C> <C>
Salaries and employee benefits $2,092 $2,020 $ 72
Occupancy 440 568 (128)
Net cost of operation of REO and ISR 56 527 (471)
Other operating expenses 2,606 3,163 (557)
------ ------ -------
$5,194 $6,278 $(1,084)
------ ------ -------
------ ------ -------
</TABLE>
45
<PAGE>
The decrease in total expenses from 1994 to 1995 is mainly attributable to four
items: (i) in 1994 the Company incurred $812,000 in expenses associated with
the settlement of the cross guaranty claim versus approximately $300,000 in
1995, (ii) the net cost of REO declined by $471,000 ($258,000 from reduced
expenses (net of revenues) resulting from fewer REO properties and decreased
vacancies, and $213,000 resulting from a reduction in write downs from REO
properties), (iii) the cost of FDIC insurance expense on deposits declined
$216,000 resulting from a decrease in the Bank's assessment rate, and (iv) a
reduction in occupancy expenses resulting from the closure of two banking
offices in the second and third quarters of 1994.
COMPARISON OF YEAR ENDED DECEMBER 31, 1994 TO YEAR ENDED DECEMBER 31, 1993.
NET INCOME
For the year ended December 31, 1994, the Company had a net loss of $8.9
million, compared to net income of $0.7 million for the year ended December 31,
1993. This decrease was primarily attributable to two items. First, as a
result of the consummation of the Amended and Restated Settlement Agreement on
January 31, 1995, First Coastal issued to the FDIC a Note in the amount of $9.0
million in consideration of the waiver and release of the cross guaranty claim
against the Bank. First Coastal recorded the Note and recognized an
extraordinary charge to earnings in the amount of $9.0 million at December 31,
1994. Second, expenses related to the settlement of the cross guaranty claim
totaled $812,000 for the year ended December 31, 1994.
NET INTEREST INCOME
Net interest income for the year ended December 31, 1994 was $6.1 million, an
increase of $0.6 million as compared to $5.5 million for the year ended December
31, 1993. This increase is mainly attributable to a rising interest rate
environment for the year ended December 31, 1994 and which resulted in an
increase in rates on existing adjustable rate loans and investments.
Notwithstanding the increased rate environment that was experienced throughout
1994, the Company's rates paid on deposit transaction accounts remained
relatively unchanged, thereby increasing the spread on Earning Assets versus
Sources of Funds, positively impacting net interest income. However, earning
assets and sources of funds do not reprice in exactly the same manner as
interest levels change. Another factor contributing to the increase in net
interest income was the investment of interest earning deposits in higher
earning securities of approximately $15.7 million throughout 1994.
PROVISION FOR LOAN LOSSES
The provision for loan losses for the year ended December 31, 1994 was $107,000
as compared to negative provision expense of $30,000 for the year ended
December 31, 1993. In 1992 and 1991, significant provisions were made to
recognize the perceived deteriorating real estate market. In 1993, there was
present a more stable environment. Also, many of the previously recognized loan
problems were worked out or reclassified to a foreclosed status. In addition,
loan balance levels declined in 1993 and 1994 compared to prior years.
46
<PAGE>
OTHER INCOME
Other income in 1994, including investment securities gains and losses, was
$429,000 as compared to $1,422,000 in 1993. This decrease was primarily the
result of a decrease in gain on sales of mortgage loans as a result of a steady
reduction in loan origination volume caused by rising interest rates experienced
during 1994; consequently, fewer mortgage backed securities were sold.
Additionally, the Company posted an unrealized loss on loans held for sale of
$134,000 in the second quarter of 1994. The 1994 servicing fee income for loans
serviced for others reflects a $132,000 charge to earnings in establishing a
valuation reserve against the deferred mortgage servicing asset as a result of
higher than anticipated prepayments of serviced loans.
OTHER EXPENSES
The following table summarizes 1994 and 1993 other expenses:
<TABLE>
<CAPTION>
Increase
(DOLLARS IN THOUSANDS) 1994 1993 (Decrease)
- -------------------------------------------------------------------------
<S> <C> <C> <C>
Salaries and employee benefits $2,020 $2,218 $(198)
Occupancy 568 595 (27)
Net cost of operation of REO and ISR 527 593 (66)
Other operating expenses 3,163 2,752 411
------ ------ ----
$6,278 $6,158 $120
------ ------ ----
------ ------ ----
</TABLE>
The most significant increases in other operating expenses for the year ended
December 31, 1994 were the expenses related to the settlement of the cross
guaranty claim which amounted to $812,000 of which $677,000 was for legal
expenses and $135,000 was for accounting and professional services. All other
operating expense categories, exclusive of expenses related to the settlement of
the cross guaranty claim, decreased by a net of $692,000, primarily resulting
from staff reductions, two branch closures and normal cost cutting measures
throughout most operating expense categories.
RATE/VOLUME ANALYSIS
The table below sets forth certain information regarding changes in interest
income and expense of the Company for the periods indicated. For each category
of interest earning assets and interest bearing liabilities, information is
provided on changes attributable to: (i) changes in rates (change in rate
multiplied by old volume); (ii) changes in volume (change in volume multiplied
by old rate); and (iii) changes in rate/volume (change in rate multiplied by the
changes in volume which is proportionately distributed to the volume and rate
changes).
47
<PAGE>
The table illustrates the relative effect of changes in interest rates and the
Company's net earning assets on its net interest income.
<TABLE>
<CAPTION>
Year Ended December 31, 1995
Compared to
Year Ended December 31, 1994
---------------------------------------
Increase (Decrease)
Due to
-----------------------
(IN THOUSANDS) Rate Volume Total
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income:
Loans(1) $450 $(887) $(437)
Investments held to maturity 123 160 283
Investment available for sale 37 65 102
Interest earning deposits 294 (242) 52
Assets held for sale (4) (69) (73)
----- ------ ------
Total interest income 900 (973) (73)
----- ------ ------
Interest expense:
Savings 67 (229) (162)
Other time deposits 510 19 529
FHLB advances (75) (587) (662)
FDIC Note 419 - 419
----- ------ ------
Total interest expense 921 (797) 124
----- ------ ------
Net change in net interest income
before provision for loan losses $(21) $(176) $(197)
----- ------ ------
----- ------ ------
</TABLE>
(1) For purposes of these computations, nonaccrual loans are included in the
average balance volumes.
<TABLE>
<CAPTION>
Year Ended December 31, 1994
Compared to
Year Ended December 31, 1993
---------------------------------------
Increase (Decrease)
Due to
-----------------------
(IN THOUSANDS) Rate Volume Total
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income:
Loans(1) $(32) $(1,384) $(1,416)
Investments 23 498 521
Interest earning deposits 252 (145) 107
Assets held for sale (19) (161) (180)
----- ------ ----
Total interest income 224 (1,192) (968)
----- ------ ----
Interest expense:
Savings (116) (113) (229)
Other time deposits (218) (365) (583)
FHLB advances (120) (596) (716)
----- ------- ----
Total interest expense (454) (1,074) (1,528)
----- ------ ------
Net change in net interest
income before provision
for loan losses $678 $(118) $ 560
----- ------ ------
----- ------ ------
</TABLE>
(1) For purposes of these computations, nonaccrual loans are included in the
average balance volumes.
48
<PAGE>
AVERAGE BALANCE SHEETS
The table below shows the major items that affected net interest income for each
of the three years in the period ended December 31, 1995.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------------------------------
1995 1994 1993
------------------------- ------------------------- -------------------------
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
------------------------- ------------------------- -------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Loans (1)(2) $105,742 $ 9,642 9.12% $115,940 $10,079 8.69% $131,795 $11,494 8.72%
Investments
Investments 1993 3,692 194 5.25
Available for sale(3) 9,782 606 6.20 8,658 504 5.82 -- -- --
Held to maturity 7,917 494 6.24 4,504 210 4.68 -- -- --
Interest earning deposits 15,889 945 5.95 21,808 894 4.10 26,747 787 2.94
Assets held for sale 372 20 5.38 1,471 93 6.32 3,591 273 7.60
-------- ------- -------- ------- -------- -------
Total interest earning assets 139,702 11,707 8.38 152,381 11,780 7.73 165,825 12,748 7.69
Noninterest earning assets 6,444 10,206 15,880
-------- -------- --------
Total assets $146,146 $162,587 $181,705
-------- -------- --------
-------- -------- --------
LIABILITIES:
Savings $ 60,159 $ 1,644 2.73% $ 68,911 $ 1,806 2.62% $ 72,955 $ 2,035 2.79%
Other time deposits 61,344 3,333 5.43 60,930 2,804 4.60 68,288 3,387 4.96
FHLB advances 7,253 454 6.26 15,296 1,116 7.30 22,679 1,832 8.08
FDIC Note(4) 9,000 419 4.66 25 -- -- -- -- --
-------- ------- -------- ------- -------- -------
Total interest bearing liabilities 137,756 5,850 4.25 145,162 5,726 3.94 163,922 7,254 4.43
Noninterest bearing deposits 4,973 5,798 6,132
Noninterest bearing liabilities 565 1,002 1,844
Stockholders' equity 2,852 10,625 9,807
-------- -------- --------
Total liabilities and stockholders'equity $146,146 $162,587 $181,705
-------- -------- --------
-------- -------- --------
Net interest income $ 5,857 $ 6,054 $ 5,494
------- ------- -------
------- ------- -------
Net interest rate spread (5) 4.13% 3.79% 3.26%
Net interest margin (6) 4.19% 3.97% 3.31%
</TABLE>
(1) For purposes of these computations, nonaccrual loans are included in the
average loan amounts outstanding.
(2) Included in interest income on loans are loan fees of $95,000, $277,000 and
$251,000 for the years ended December 31, 1995, 1994 and 1993,
respectively.
(3) Yields on available for sale securities are calculated based upon
historical cost.
(4) The FDIC Note bears interest commencing upon issuance on January 31, 1995
at a rate of 5.0% for the first year and 6.5% for the second year.
(5) Return on interest earning assets less cost of interest bearing
liabilities.
(6) Net interest income divided by average earning assets.
49
<PAGE>
IMPACT OF INFLATION AND CHANGING PRICES
The Company's financial statements have been prepared in terms of historical
dollars, without considering changes in the relative purchasing power of money
over time due to inflation. Unlike most industrial companies, virtually all of
the assets and liabilities of a financial institution are monetary in nature.
As a result, interest rates have a more significant impact on a financial
institution's performance than the effect of general levels of inflation.
Interest rates do not necessarily move in the same direction or in the same
magnitude as the prices of goods and services. Notwithstanding this, inflation
can directly affect the value of loan collateral, in particular real estate.
Sharp decreases in real estate prices, as discussed previously, have resulted in
significant loan losses and losses on real estate acquired. Inflation, or
disinflation, could continue to significantly affect the Company's earnings in
future periods.
50
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
REPORT OF INDEPENDENT ACCOUNTANTS
BOARD OF DIRECTORS AND STOCKHOLDERS
FIRST COASTAL CORPORATION:
We have audited the accompanying consolidated balance sheets of First Coastal
Corporation (the "Company") and subsidiary as of December 31, 1995 and 1994, and
the related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these 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 consolidated financial position of First
Coastal Corporation and subsidiary as of December 31, 1995 and 1994, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1995 in conformity with generally
accepted accounting principles.
As discussed in Note B to the consolidated financial statements, on January 1,
1995, the Company changed its method of accounting for impaired loans to adopt
the provisions of Financial Accounting Standards Board Statement No. 114 and as
of January 1, 1994, changed its method of accounting for investments to adopt
the provisions of Financial Accounting Standards Board Statement No. 115.
Coopers & Lybrand, L.L.P.
Portland, Maine
February 5, 1996
51
<PAGE>
CONSOLIDATED BALANCE SHEETS
First Coastal Corporation and Subsidiary
<TABLE>
<CAPTION>
December 31,
-------------------------------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) 1995 1994
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Noninterest earning deposits and cash - Note C $4,466 $4,701
Interest earning deposits 4,375 6,636
------ ------
Cash and Cash Equivalents 8,841 11,337
Federal funds sold 10,000 10,000
Trading securities - 915
Investment securities - Note D:
Held-to-maturity 11,786 6,822
Available-for-sale (at market value) 7,926 9,924
------ ------
19,712 16,746
Federal Home Loan Bank stock-at cost 1,315 1,315
Assets held for sale - Note B 281 185
Loans - Note E 100,550 109,656
Less:Deferred loan fees, net (22) (31)
Allowance for loan losses - Note F (2,659) (4,042)
------- -------
97,869 105,583
Premises and equipment - Note G 3,073 2,941
Accrued income receivable 1,004 783
Real estate owned and repossessions 1,973 2,925
Other assets 1,385 1,482
-------- --------
TOTAL ASSETS $145,453 $154,212
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits - Note H $125,665 $130,037
Advances from Federal Home Loan Bank - Note I 6,000 12,612
FDIC Note - Note A 9,000 9,000
Accrued expenses and other liabilities 791 549
------- -------
TOTAL LIABILITIES 141,456 152,198
STOCKHOLDERS' EQUITY - NOTES J AND K
Preferred stock, $1 par value; Authorized
1,000,000 shares; none outstanding
Common Stock, $1 par value: Authorized
6,700,000 shares; issued and outstanding
1995 and 1994 - 600,361 shares - Note K 600 600
Paid-in capital 29,375 29,375
Retained earnings (deficit) (26,016) (27,676)
Unrealized gain (loss) on available for sale securities 38 (285)
-------- --------
TOTAL STOCKHOLDERS' EQUITY 3,997 2,014
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $145,453 $154,212
-------- --------
-------- --------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
52
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
First Coastal Corporation and Subsidiary
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1995 1994 1993
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST AND DIVIDEND INCOME
Interest and fees on loans $9,662 $10,172 $11,767
Interest and dividends on investment securities:
Taxable interest income 832 425 69
Dividends 268 290 125
Other interest income 945 893 787
-------- -------- --------
Total Interest and Dividend Income 11,707 11,780 12,748
INTEREST EXPENSE
Deposits - Note H 4,977 4,610 5,422
Borrowings:
Advances from Federal Home Loan Bank 454 1,116 1,832
FDIC Note 419 - -
-------- -------- --------
Total Interest Expense 5,850 5,726 7,254
-------- -------- --------
Net Interest Income Before Provision for Loan Losses 5,857 6,054 5,494
Provision for loan losses - Note F (425) 107 (30)
-------- -------- --------
Net Interest Income After Provision for Loan Losses 6,282 5,947 5,524
OTHER INCOME
Service charges on deposit accounts 257 284 300
Other service charges and fees 78 81 67
Gain (loss) on investment securities transactions (4) 38 99
Gain (loss) on sales of mortgage loans 17 (8) 606
Other 224 34 350
-------- -------- --------
572 429 1,422
-------- -------- --------
OTHER EXPENSES
Salaries and employee benefits - Note L 2,092 2,020 2,218
Occupancy - Note G 440 568 595
Net cost of operation of real estate owned 56 527 593
Other - Note P 2,606 3,163 2,752
-------- -------- --------
5,194 6,278 6,158
-------- -------- --------
Income Before Income Taxes,
Minority Interest and Extraordinary Item 1,660 98 788
Income tax benefit - Note M - - (4)
Minority interest - - 44
-------- -------- --------
INCOME BEFORE EXTRAORDINARY ITEM 1,660 98 748
EXTRAORDINARY ITEM -
Charge to earnings as a result of the settlement
of the cross guaranty claim - Note A - 9,000 -
-------- -------- --------
NET INCOME (LOSS) $ 1,660 $(8,902) $ 748
-------- -------- --------
-------- -------- --------
PER SHARE AMOUNTS
Weighted Average Shares Outstanding - Note K 600,361 600,361 600,361
Income Per Share before Extraordinary item $ 2.77 $ .16 $ 1.25
-------- -------- --------
-------- -------- --------
Net Income (Loss) per share $ 2.77 $(14.83) $ 1.25
-------- -------- --------
-------- -------- --------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
53
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
First Coastal Corporation and Subsidiary
<TABLE>
<CAPTION>
Net
Unrealized
Gain (Loss)
Retained on Available
Common Paid-In Earnings for Sale
(IN THOUSANDS) Stock Capital (Deficit) Securities Total
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balances at December 31, 1992 $6,007 $22,645 $(19,522) - $9,130
Reverse stock split;
One-for-ten - Note K (5,407) 5,407 - - -
--------- --------- --------- --------- ---------
Balances at December 31, 1992,
as restated 600 28,052 (19,522) - 9,130
1993 net income 748 - 748
--------- --------- --------- --------- ---------
Balances at December 31, 1993 600 28,052 (18,774) 9,878
1994 net loss (8,902) (8,902)
Increase in net unrealized loss on
available for sale securities - - - $ (285) (285)
Repurchase of minority interest - 1,323 - - 1,323
--------- --------- --------- --------- ---------
Balances at December 31, 1994 600 29,375 (27,676) (285) 2,014
1995 net income 1,660 1,660
Increase in net unrealized gain on
available for sale securities - - - 323 323
--------- --------- --------- --------- ---------
Balances at December 31, 1995 $ 600 $29,375 $(26,016) $ 38 $ 3,997
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
54
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
First Coastal Corporation and Subsidiary -------------------------------------
(IN THOUSANDS) 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net Income (loss) $1,660 $(8,902) $748
Adjustments to reconcile net income to net cash provided by operating activities:
Charge to earnings as a result of the settlement of the cross guaranty claim - 9,000 -
Provision for loan losses (425) 107 (30)
Writedowns of REO and ISR 13 226 467
Depreciation and amortization 292 300 323
Amortization of investment security (discounts) (248) (183) (2)
Realized investment securities (gains) losses 4 (38) (99)
(Gains) losses from assets held in trading accounts (33) 93 -
Realized (gains) on assets held for sale (17) (8) (606)
(Increase) decrease in trading account securities 948 (1,008) -
Loans originated and acquired for resale (3,376) (3,497) (14,542)
- ----------------------------------------------------------------------------------------------------------------------------------
Sales of loans originated and acquired for resale 3,297 6,741 18,609
- ----------------------------------------------------------------------------------------------------------------------------------
Decrease (increase) in interest receivable (221) (78) 252
Increase (decrease) in interest payable 392 (45) (77)
Net change in other assets 1,988 4,016 5,991
Net change in other liabilities (150) (129) 182
------- ------- -------
Net cash provided by operating activities 4,124 6,595 11,216
INVESTING ACTIVITIES
(Increase) in federal funds sold - (10,000) -
Maturities of securities - - 1,233
Maturities of securities held to maturity 8,000 634 -
Sales of securities - - 7,069
Sales of securities available for sale 2,324 233 -
Purchases of investment securities - - (5,176)
Purchases of investment securities available for sale (2) (8,990) -
Purchases of investment securities held to maturity (12,721) (6,648) -
Net change in loans 7,187 12,306 19,924
Net (purchases) of premises and equipment (424) (86) (2)
Decrease in Federal Home Loan Bank Stock - - 344
------- ------- -------
Net cash provided (used) by investing activities 4,364 (12,551) 23,392
FINANCING ACTIVITIES
Net change in deposits (4,372) (10,550) (15,731)
Proceeds from borrowings - - 5,000
Payments on borrowings (6,612) (5,496) (8,141)
Purchase of Coastal Bancorp's minority interest - (200) -
------- ------- -------
Net cash used by financing activities (10,984) (16,246) (18,872)
------- ------- -------
Increase (decrease) in cash and cash equivalents (2,496) (22,202) 15,736
Cash and cash equivalents at beginning of period 11,337 33,539 17,803
------- ------- -------
Cash and cash equivalents (interest and non- interest bearing) at end of period $ 8,841 $11,337 $33,539
------- ------- -------
------- ------- -------
NONCASH INVESTING AND FINANCING ACTIVITIES
FDIC Note - $9,000 -
Change in unrealized holding losses on investment securities available for sale $323 285 -
Securities available for sale collateralized by portfolio mortgage loans - 1,003 -
Transfer of loans to real estate owned and in-substance repossessions 952 827 $2,847
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
55
<PAGE>
Notes to Consolidated Financial Statements
First Coastal Corporation and Subsidiary
December 31, 1995
NOTE A. REGULATORY MATTERS
SETTLEMENT OF FDIC CROSS GUARANTY CLAIM
On September 6, 1991, First Coastal Corporation (the "Company") announced that
its Connecticut subsidiary, Suffield Bank, was placed into receivership by the
Connecticut Banking Department and the Federal Deposit Insurance Corporation
("FDIC") was appointed as the receiver. Under the Federal Deposit Insurance Act
("FDIA"), as amended by the Financial Institutions Reform, Recovery, and
Enforcement Act of 1989 ("FIRREA"), commonly-controlled depository institutions
such as Suffield Bank and Coastal Savings Bank ("Coastal" or the "Bank") are
liable for any loss incurred by the FDIC, or any loss which the FDIC reasonably
anticipates incurring, in connection with the default of one or more of the
commonly-controlled institutions. The FDIC had up to two years from September
6, 1991 to assert a cross guaranty claim against the Bank.
On September 3, 1991, the Company announced that Coastal had filed an
application with the FDIC for a waiver of any cross guaranty liability arising
from Suffield Bank. On September 9, 1992, the FDIC notified Coastal that it had
denied this request. The FDIC also indicated that it had authorized the
issuance of an assessment of liability under the cross guaranty provision and
claimed an anticipated loss to the Bank Insurance Fund resulting from the
failure of Suffield Bank in an amount which, if successfully asserted, would
likely result in the appointment of a receiver for Coastal. The FDIC delegated
to the Director of Supervision the authority to negotiate a settlement of the
cross guaranty liability prior to issuing a notice of assessment. On September
1, 1993, the FDIC notified Coastal that it had until February 14, 1994 or such
later date as may be extended by the FDIC, to reach a settlement with the FDIC
over the FDIC's cross guaranty claim against Coastal resulting from the
September 1991 failure of Suffield Bank. In establishing a February 14, 1994
deadline for payment of the cross guaranty liability, the FDIC indicated that
its intention was to negotiate a reasonable settlement of the cross guaranty
claim, which would enable the FDIC to maximize its recovery of losses incurred
as a result of the failure of the affiliated Suffield Bank.
On April 26, 1994, the Company, Coastal Bancorp ("Bancorp") and the Bank entered
into a definitive Settlement Agreement with the FDIC (the "Original Settlement
Agreement"). The Original Settlement Agreement provided that in consideration
for the waiver of the FDIC's cross guaranty claim against the Bank, the FDIC
would receive shares of a new class of convertible preferred stock of Coastal,
representing on conversion a 95% ownership position in the Bank. The waiver of
the cross guaranty claim was conditional and would become final and
unconditional upon the earlier of the date on which no shares of the convertible
preferred stock were outstanding or three years after the closing date of the
settlement, provided there had been no judicial determinations (or pending
actions asserting) that the stock was not validly issued, fully paid or non-
assessable.
Pursuant to the Original Settlement Agreement, the preferred stock would
automatically convert to common stock upon its sale by the FDIC to any third
party. The outstanding common stock of
56
<PAGE>
Coastal, representing a 5% ownership interest in the Bank on a post conversion
basis, would continue to be held by the Company. While the preferred stock was
to be voting stock, the FDIC agreed to grant a revocable proxy to Coastal so
that such shares would be voted in proportion to the votes cast by the other
holders of the Bank's common stock, subject to certain exceptions and
limitations.
In connection with the execution of the Original Settlement Agreement, Bancorp
paid the FDIC $200,000 and the FDIC delivered to Bancorp the shares of preferred
and common stock it held in Bancorp as receiver of Suffield Bank and a waiver
and release with respect to any rights related to the stock. As a result of
Bancorp's purchase of the stock, First Coastal became the owner of 100% of the
outstanding capital stock of Bancorp.
On July 20, 1994, prior to the Company submitting the Original Settlement
Agreement to its stockholders for approval, the United States Court of Federal
Claims issued an opinion in a case captioned BRANCH V. UNITED STATES, No. 93-
133C ("Branch"), which raised significant taking issues under the U.S.
Constitution adverse to the FDIC in connection with its assertion of cross
guaranty claims. After considering the BRANCH decision, the Boards of Directors
of the Company and the Bank concluded that it was in the best interests of the
Company, the Bank and the Company's stockholders to seek to modify the terms of
the Original Settlement Agreement.
Following extensive negotiations by the parties, the FDIC, the Company and the
Bank entered into the Amended and Restated Settlement Agreement dated as of
November 23, 1994 (the "Amended and Restated Settlement Agreement"), providing
for the settlement of the FDIC's cross guaranty claim against the Bank.
On January 31, 1995, following the receipt of stockholder approval, the Company,
Coastal and the FDIC consummated the Amended and Restated Settlement Agreement,
pursuant to which the Company issued to the FDIC a non-recourse promissory note
(the "Note" or the "FDIC Note") in the principal amount of $9.0 million in
consideration of the unconditional and irrevocable waiver and release of the
cross guaranty claim. As a result of the consummation of the Amended and
Restated Settlement Agreement, the Company recognized an extraordinary charge to
earnings of $9.0 million in the financial statements for the year ended December
31, 1994. The Company's obligations under the Note are secured by a pledge by
the Company of 100,000 shares of common stock, par value $1.00 per share, of the
Bank ("CSB Common Stock"), representing 100% of the outstanding CSB Common
Stock, pursuant to a Stock Pledge Agreement between the Company and the FDIC
dated January 31, 1995 (the "Stock Pledge Agreement"). The Stock Pledge
Agreement provides that the Company retains the right to receive all cash
dividends declared and paid on the pledged shares of CSB Common Stock and to
exercise all voting rights with respect to such shares for so long as no event
of default exists thereunder. Payment of principal and interest under the Note
is deferred until the "Maturity Date," which is January 31, 1997. If prior to
such Maturity Date the Company and the Bank have entered into a definitive
agreement regarding either an acquisition or recapitalization of the Company and
the Bank that, in either case, provides the Company with proceeds sufficient to
pay the FDIC the unpaid principal amount and interest under the Note, the
Maturity Date will be extended until the earlier of (i) July 31, 1997, (ii) the
first business day following January 31, 1997 on which such definitive agreement
is terminated or (iii) the date of closing of the acquisition or
recapitalization of the Company and the Bank.
57
<PAGE>
The Note bears interest (i) at a rate per annum equal to 5% from January 31,
1995 through February 1, 1996 and at a rate per annum equal to 6.5% thereafter
(compounded quarterly) to and including the earlier of (x) the date on which the
FDIC receives payment of the unpaid principal amount and accrued interest in
full or (y) the day prior to the Maturity Date; or alternatively, in the event
that there is an acquisition of the Bank by a third party, (ii) in an aggregate
amount equal to one half of any proceeds over $11.5 million received by the
Company from the sale of the Bank. The Amended and Restated Settlement
Agreement provides that if the Bank is sold prior to the Maturity Date, the
aggregate consideration paid by the acquiror in connection with such transaction
will be distributed in satisfaction of the Company's obligations under the Note
as follows: the first $9.0 million will be paid to the FDIC, the next $2.5
million of such consideration will be paid to the Company, and any consideration
over $11.5 million will be divided equally between the FDIC and the Company.
On January 31, 1996, the Company announced that it intends to pursue a
recapitalization of the Company as the means to facilitate the satisfaction of
the Company's $9.0 million FDIC Note. As part of the recapitalization, the
Company expects to raise approximately $3.0 to $4.0 million through an offering
of its common stock, including a rights offering to the Company's existing
stockholders. The offering will be made only by means of a prospectus. In
addition to the proceeds from the common stock offering, the Company also
expects to use funds derived from dividends from the Bank and the proceeds from
a loan to satisfy its obligation under the FDIC Note. The recapitalization and
related transactions are subject to a number of conditions, including the
receipt of appropriate regulatory approvals, and there can be no assurance that
such recapitalization and related transactions will be consummated or that the
Company will be successful in repaying the FDIC Note. The Company anticipates
that the recapitalization would be completed in the third quarter of 1996.
FDIC ORDER TO CEASE AND DESIST AND MEMORANDUM OF UNDERSTANDING
Effective as of January 23, 1992, Coastal consented to an Order to Cease and
Desist (the "Order") issued by the FDIC and concurred with by the Maine Bureau
of Banking (the "Maine Bureau of Banking"). The Order required Coastal to cease
and desist from operating with an excessive volume of adversely classified
assets, engaging in any lending or management practices which are detrimental to
the Bank, engaging in violations of applicable laws and regulations, operating
with inadequate loan documentation, engaging in practices which produce
inadequate operating income and excessive loan losses, operating with inadequate
allowance for loan losses for the kind and quality of loans held, failing to
submit Reports of Condition and Income to the FDIC in accordance with
instructions, operating with inadequate liquidity and operating with excessive
interest rate risk exposure. The Order also required that certain affirmative
actions be taken relating to the preparation of certain plans and analyses and
the maintenance of specified capital ratios.
Effective December 8, 1994, the FDIC terminated the Order. The Order was
replaced with a Memorandum of Understanding ("Memorandum") among the Bank, the
FDIC and the Maine Bureau of Banking effective as of November 22, 1994. The
Memorandum provides, among other things, that (i) the Bank continue to maintain
its allowance for loan and lease losses in accordance with applicable regulatory
requirements, (ii) the Board of Directors of the Bank continue to review the
adequacy of the Bank's loan and lease loss reserves and provide for adequate
reserves, (iii) the Bank continue to have a Tier 1 capital to total assets ratio
at or in excess of 6.0%, (iv) the Bank continue to comply
58
<PAGE>
with the FDIC's Statement of Policy on Risk-Based Capital, (v) the Bank provide
monthly progress reports regarding substandard or doubtful assets, (vi) the Bank
agree not to extend or renew credit to, or for the benefit of, any borrower who
or which has a loan or other extension of credit with the Bank that has been
charged-off or classified in whole or in part, loss, doubtful or substandard and
is uncollected unless certain conditions are met, (vii) the Bank not declare or
pay any dividends without the prior written consent of the FDIC and the Maine
Bureau of Banking, and (viii) the Bank continue to furnish written progress
reports detailing the form and manner of any action taken to seek to secure
compliance with the Memorandum. In addition, the Board of Directors is required
to develop a written plan of action to reduce the Bank's risk position with
respect to each borrower who had outstanding principal debt owing to the Bank in
excess of $500,000 and for the formulation of a strategic plan and policies
covering investments, funds management and various lending policies.
FEDERAL RESERVE MEMORANDUM OF UNDERSTANDING
In March 1988, the Company entered into a Memorandum of Understanding with the
Federal Reserve Bank of Boston which provided, among other things, for the
formulation of plans and policies covering capital adequacy, funds management,
the Company's management information system and the adoption of a written
dividend policy consistent with the policies of the Board of Governors of the
Federal Reserve System (the "Federal Reserve") regarding the payment of cash
dividends by bank holding companies. Management originally addressed these
matters by developing plans and policies which were submitted to the Federal
Reserve in 1988, and updated such plans and policies in 1992 and 1995.
Effective March 13, 1995, the Federal Reserve Bank of Boston terminated the
Memorandum of Understanding.
NOTE B. ACCOUNTING POLICIES
BUSINESS
First Coastal Corporation (formerly Suffield Financial Corporation), a Delaware
Corporation, was organized in January 1987 for the purpose of becoming the
parent holding company of Suffield Bank following Suffield Bank's conversion
from mutual to stock form. The Company acquired Coastal Bancorp, a Maine
corporation, which was the bank holding company of Coastal Savings Bank, a Maine
chartered, stock savings bank, on April 1, 1987. On September 6, 1991, Suffield
Bank was placed in receivership by the Connecticut Department of Banking,
leaving the Bank as the Company's principal operating subsidiary. On July 26,
1994, Coastal Bancorp was dissolved with the effect that the Bank became a
direct wholly-owned subsidiary of the Company. The principal business of the
Bank consists of retail and commercial banking, including attracting deposits
from the general public and originating residential mortgage, consumer,
commercial and small business loans. Deposits are federally insured by the Bank
Insurance Fund ("BIF"), which is administered by the FDIC.
Coastal Savings Bank was formed in 1981 as a Maine-chartered savings bank
through the consolidation of Brunswick Savings Institution and York County
Savings Bank, which were organized in 1858 and 1860, respectively. On July 11,
1984, the Bank completed its conversion to a Maine stock savings bank.
59
<PAGE>
BASIS OF PRESENTATION
The consolidated financial statements of the Company and subsidiary have been
prepared in conformity with generally accepted accounting principles and
reporting practices applied in the banking industry. 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. Prior period amounts are reclassified when necessary to
conform with the current year's presentation. Set forth below is a summary of
the significant accounting policies.
Most of the Company's commercial real estate loans as of December 31, 1995 are
collateralized by real estate in Maine which has experienced a significant
decline in value since the market peak in the late 1980's. In addition, all of
the real estate owned ("REO") are located in this same market. Accordingly, the
ultimate collectibility of a substantial portion of the Company's loan portfolio
and the recovery of a substantial portion of the carrying amount of REO have
been impacted by this real estate market decline and are particularly
susceptible to changes in market conditions in Maine.
While management uses available information to recognize losses on loans and
REO, future additions to the allowance for loan losses ("Allowance") or
writedowns may be necessary based on changes in economic conditions. In
addition, various regulatory authorities, as an integral part of their
examination process, periodically review the Company's Allowance and the
carrying value of REO. Such authorities may require the Company to recognize
additions to the Allowance and/or write down the carrying value of REO based on
their judgments of information available to them at the time of their
examination.
NEW ACCOUNTING STANDARDS
In May 1995, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standard (SFAS) No. 122, MORTGAGE SERVICING RIGHTS,
which amends FASB Statement No. 65, ACCOUNTING FOR CERTAIN MORTGAGE BANKING
ACTIVITIES. This standard eliminates the distinction between purchased and
originated mortgage servicing rights and establishes the use of a valuation
allowance to recognize any impairment in the fair value of mortgage servicing
rights. The Company believes that there will be no material impact to its
financial position and results of operations upon adopting FASB Statement No.
122 when required in 1996.
In addition, during October 1995, FASB issued SFAS No. 123, ACCOUNTING FOR
STOCK-BASED COMPENSATION, which establishes fair-value based accounting to
recognize compensation expense related to stock-based transactions. For
employers, the fair-value based recognition provisions are not mandatory;
however certain disclosure requirements are provided. The Company intends to
comply with the disclosure requirements when required in 1996 and expects no
material impact to its financial statements or results of operations upon
adoption.
60
<PAGE>
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with a maturity of
three months or less to be cash equivalents.
INVESTMENT SECURITIES
Effective January 1, 1994, with the implementation of FASB Statement No. 115,
investment securities classified as available for sale are reported at fair
value, with unrealized gains and losses excluded from earnings and reported as a
separate component of stockholders' equity. Investment securities held to
maturity are stated at cost adjusted for amortization of bond premiums and
accretion of bond discounts. There was no effect to the Company's financial
statements or results of operations on January 1, 1994 as a result of
implementing FASB Statement No. 115. For the year ended December 31, 1995,
investment securities classified as available for sale increased in fair value
by $323,000 as a result of declining interest rates.
As of December 31, 1995, the Company's investment accounting policy states that
all securities purchased with an original maturity of over one year, other than
mortgage backed securities originated by the Bank with current loan production,
will be classified as available for sale. Securities purchased with an original
maturity of one year or less, or callable U.S. government agency notes, will be
considered held-to-maturity. Mortgage backed securities originated by the Bank
with current loan productions, will be classified as trading securities.
ASSETS HELD FOR SALE STATED AT MARKET VALUE
Assets held for sale, consisting primarily of residential mortgages originated
for the purpose of potential sale, are valued at the lower of cost or market.
LOANS
Interest on loans is accrued and credited to operations based on the principal
amount outstanding. The accrual of interest income is discontinued when a loan
becomes delinquent and, in management's opinion, borrowers may be unable to meet
contractual obligations. Such accrual is discontinued where interest or
principal is 90 days or more past due, unless the loans are deemed to be
adequately secured and in the process of collection. In these instances,
interest is recognized only when received. When interest accruals are
discontinued, unpaid interest credited to income in the current year is reversed
and interest accrued in prior years is charged to the Allowance.
Loan origination fees and certain direct loan origination costs are deferred and
the new amount amortized as an adjustment to the related loan yield over the
estimated contractual life of the loan.
ALLOWANCE FOR LOAN LOSSES
The Allowance is maintained at a level believed adequate by management to absorb
potential losses inherent in the current loan portfolio. Management's
determination of the adequacy of the Allowance
61
<PAGE>
is based on an evaluation of the portfolio, past and expected loan loss
experience, current economic conditions, growth and diversification of the loan
portfolio, the results of the most recent regulatory examinations, the nature
and level of nonperforming assets, impaired loans and loans that have been
identified as potential problems, the adequacy of collateral and other relevant
factors. The Allowance is increased by provisions for loan losses charged
against income and recoveries on loans previously charged off.
The Company adopted FASB Statement No. 114, ACCOUNTING BY CREDITORS FOR
IMPAIRMENT OF A LOAN, on January 1, 1995. Under the new standard, a loan is
considered impaired, based on current information and events, IF THERE IS A HIGH
PROBABILITY that the Company will be unable to collect the scheduled payments of
principal or interest when due according to the contractual terms of the loan
agreement. Management identifies impaired loans on a loan-by-loan basis. The
measurement of impaired loans is generally based on the present value of
expected future cash flows discounted at the historical effective interest rate,
with the exception of all collateral-dependent loans, which are measured for
impairment based on the fair value of the collateral. The adoption of FASB
Statement No. 114 resulted in no additional provision for loan losses as
determined at January 1, 1995 and December 31, 1995.
REAL ESTATE OWNED ("REO")
REO, other than bank premises, consists of properties acquired through mortgage
loan foreclosure proceedings or in satisfaction of loans. REO is initially
recorded at the lower of cost or fair value (minus estimated costs to sell) at
the date of foreclosure and any difference is charged to the Allowance at the
time of reclassification. Subsequently, the values of such properties are
reviewed by management and writedowns, if any, are charged to expense.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated provisions for
depreciation and amortization, computed using the straight-line method over
estimated useful lives.
INCOME TAXES
The Company adopted FASB Statement No. 109, ACCOUNTING FOR INCOME TAXES, in 1993
which requires a change from the deferred method of accounting for income taxes
of APB Opinion 11 to the asset and liability method of accounting for income
taxes. Under the asset and liability method of Statement No. 109, deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. At December 31,
1995, the Company estimated that net operating loss ("NOL") carryforwards for
federal income tax return purposes of $6.8 million were available to offset
future taxable income. Due to the uncertainty that the benefit of net deferred
tax assets will be realized, a full valuation allowance has been recorded at
December 31, 1995 and December 31, 1994.
62
<PAGE>
RETIREMENT BENEFITS
Coastal has a non-contributory defined benefit pension plan covering
substantially all of their officers and employees. The benefit formula is based
on a covered employee's final average compensation and credited service. The
funding policy for this plan is to contribute amounts to the plan sufficient to
meet the minimum funding requirements set forth in the Employee Retirement
Income Security Act of 1974, plus such additional amounts as the Bank may
periodically determine to be appropriate.
NOTE C. NONINTEREST EARNING DEPOSITS AND CASH
Noninterest bearing deposits and cash balances at December 31, 1995 are subject
to withdrawal and usage restrictions of $100,000 to be maintained at the Federal
Reserve Bank of Boston to meet Coastal's reserve requirements.
NOTE D. INVESTMENT SECURITIES
The following table sets forth the amortized cost, fair market value and gross
unrealized gains and losses of investment securities for each major security
type at December 31, 1995:
<TABLE>
<CAPTION>
December 31, 1995
--------------------------------------------------------
Fair Gross Gross
Amortized Market Unrealized Unrealized
(IN THOUSANDS) Cost Value Gains Losses
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available for Sale:
U.S. government obligations $ 4,998 $ 5,014 $ 23 $ (7)
Mortgage backed securities 765 787 22 -
Equity/mutual fund 2,000 2,000 - -
Other 125 125 - -
------- ------- ------- -------
$ 7,888 $ 7,926 $ 45 $ (7)
------- ------- ------- -------
------- ------- ------- -------
Held to Maturity:
U.S. government obligations $ 993 $ 995 $ 2 -
U.S. government agency
callable notes 10,793 10,914 121 -
------- ------- ------- -------
$11,786 $11,909 $ 123 -
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
63
<PAGE>
The following table sets forth the amortized cost, fair market value and gross
unrealized gains and losses of investment securities for each major security
type at December 31, 1994:
<TABLE>
<CAPTION>
December 31, 1994
--------------------------------------------------------
Fair Gross Gross
Amortized Market Unrealized Unrealized
(IN THOUSANDS) Cost Value Gains Losses
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available for sale:
U.S. government obligations $ 4,993 $4,852 - $ (141)
Mortgage backed securities 896 858 - (38)
Equity/mutual fund 4,000 3,894 - (106)
Other 320 320 - -
------- ------- ------- -------
$10,209 $9,924 - $ (285)
Held to maturity:
------- ------- ------- -------
------- ------- ------- -------
U.S. government obligations $6,822 $6,792 - $ (30)
------- ------- ------- -------
$6,822 $6,792 - $ (30)
------- ------- ------- -------
------- ------- ------- -------
Trading securities:
Mortgage backed securities $1,008 $ 915 - $ (93)
------- ------- ------- -------
$1,008 $ 915 - $ (93)
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
The following is a summary of gross realized gains and losses on investment
securities sold for 1995, 1994 and 1993. The 1995 and 1994 security gains and
losses were all related to securities classified as available for sale. For
computation of gross realized gains and losses, cost was determined by the
specific identification method.
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------------------------------
1995 1994 1993
Gross Realized Gross Realized Gross Realized
(IN THOUSANDS) Gains Losses Gains Losses Gains Losses
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Sales of:
U.S. government obligations - - - - $ 62 -
U.S. government agency $ 1 - - - 59 -
Mortgage-backed securities - - - - - -
Equity securities 7 $ (12) $ 38 - - $ (22)
------ ------ ------ ------ ------ ------
$ 8 $ (12) $ 38 - $121 $ (22)
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
</TABLE>
64
<PAGE>
The following table represents the contractual maturities for investments in
debt securities for each major security type at December 31, 1995:
<TABLE>
<CAPTION>
December 31, 1995
-----------------------------------------------------
Maturing
-----------------------------------------------------
After One After Five
Within But Within But Within After
(IN THOUSANDS) One Year Five Years Ten Years Ten Years
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available for sale:
U.S. government obligations $4,020 $ 994 -
Mortgage backed securities - - - $ 787
---------- ---------- ---------- ----------
$4,020 $ 994 - $ 787
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Held to maturity:
U.S. government obligations $ 993 - - -
U.S. government agency callable
notes (final maturity) - $8,991 $1,802 -
---------- ---------- ---------- ----------
$ 993 $8,991 $1,802 -
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
Investment securities gains and losses as reported in the consolidated statement
of operations include for the years ended 1995, 1994 and 1993, a loss of $4,000,
a gain of $38,000 and a loss of $99,000, respectively.
At December 31, 1995, the Company had $200,000 of securities pledged as
collateral to secure public and private deposits.
NOTE E. LOANS
Loans consisted of the following:
December 31,
-----------------------
(IN THOUSANDS) 1995 1994
- ----------------------------------------------------------------------
Real estate mortgage loans:
Residential $ 30,966 $ 33,158
Commercial 50,797 57,997
Commercial and industrial loans 2,524 2,510
Consumer and other loans 16,263 15,991
-------- --------
$100,550 $109,656
-------- --------
-------- --------
Included in interest and fees on loans as reported in the consolidated
statements of operations are origination, commitment, late charges and
application fees for the years ended December 31, 1995, 1994 and 1993 of
$95,000, $277,000, and $251,000, respectively.
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<PAGE>
As of December 31, 1995 and 1994, the Company was servicing loans for others of
$53.7 million and $57.0 million, respectively. As of December 31, 1995 and
1994, Coastal had approximately $1,504,000 and $1,468,000 in excess residential
mortgage servicing fees reflected in other assets. This amount is being
amortized over the expected average life of the loans. Accumulated amortization
was approximately $663,000 and $464,000 at December 31, 1995 and 1994,
respectively. As of December 31, 1995 and 1994, the Bank reflects a valuation
reserve of $132,000 against the deferred mortgage servicing asset as a result of
higher than anticipated prepayments on serviced loans.
At December 31, 1995, Coastal had no binding commitments for the sale of
mortgage loans held for sale.
At December 31, 1995, Coastal had $12,136,281 of loans pledged to the Federal
Home Loan Bank ("FHLB") of Boston as collateral for outstanding advances of
$6,000,000.
Information with respect to nonperforming loans was as follows:
December 31,
------------------------------------
(IN THOUSANDS) 1995 1994 1993
- ----------------------------------------------------------------------
Nonaccrual loans $1,948 $4,340 $1,220
Accruing loans past due
90 days or more 169 258 249
Restructured loans 3,427 1,483 4,212
------ ------ ------
$5,544 $6,081 $5,681
------ ------ ------
------ ------ ------
Interest income recognized on nonaccrual and restructured loans totaled
$406,000, $154,000 and $280,000 in 1995, 1994 and 1993, respectively. Had
interest income on these year-end loans been paid at the contracted rates and
due dates, the Company would have recorded additional interest income in 1995,
1994 and 1993 of $81,000, $130,000 and $28,000, respectively.
Management reviews impaired loans on a case by case basis. If management
believes there is a high probability of a loss of principal or interest, then
such loans are determined to be impaired. At December 31, 1995, the recorded
investment in loans for which impairment has been recognized in accordance with
FASB Statement No. 114 totaled $3.7 million, of which $230,000 related to loans
with no allocated reserve because the loans have been partially written down
through charge-offs and $3.5 million related to loans with corresponding
allocated reserves of $398,000 (representing 15% of the Allowance of $2.7
million) for the year ended December 31, 1995. Included in the impaired loans
total is $301,000 in nonaccrual loans and $3.4 million in restructured loans.
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<PAGE>
Impaired loans consisted of the following:
(IN THOUSANDS) December 31, 1995
- -------------------------------------------------------------------------
Real estate mortgage loans:
Residential $ 301
Commercial 3,427
Real estate construction loans -
Commercial and industrial loans -
Consumer and other loans -
-------
$ 3,728
-------
-------
All impaired loans were secured by real estate at December 31, 1995 and
accounted for by the lower of the fair value of the collateral or amortized book
value.
Unfunded loan commitments for December 31, 1995 and 1994 were approximately $8.0
million and $7.8 million, respectively, consisting primarily of home equity
lines of credit secured by real estate. There were no standby letters of credit
for the years ended December 31, 1995 and 1994.
Loan commitments include unfunded portions of real estate, construction and
other loans and unused lines of credit. Loan commitments are subject to the
same credit policies as loans and generally have expiration dates and
termination clauses. Coastal obtains collateral to secure loans based upon
management's credit assessment of the borrower. Collateral held varies but may
include receivables, inventory, equipment and real estate.
NOTE F. ALLOWANCE FOR LOAN LOSSES
Changes in the Allowance were as follows:
Year Ended December 31,
-------------------------------------
(IN THOUSANDS) 1995 1994 1993
- -----------------------------------------------------------------------
Balance at beginning of year $4,042 $3,642 $4,280
Charge-offs (1,333) (290) (1,369)
Recoveries 375 583 761
------ ------ ------
Net charge-offs (958) 293 (608)
Provision for loan losses (425) 107 (30)
------ ------ ------
Balance at end of year $2,659 $4,042 $3,642
------ ------ ------
------ ------ ------
The Allowance is maintained at a level believed adequate by management to absorb
potential losses inherent in the current loan portfolio. Management's
determination of the adequacy of the Allowance is based on an evaluation of the
portfolio, past and expected loan loss experience, current economic
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<PAGE>
conditions, growth and diversification of the loan portfolio, the results of the
most recent regulatory examinations, the nature and level of nonperforming
assets, impaired loans and loans that have been identified as potential
problems, the adequacy of collateral and other relevant factors. The Allowance
is increased by provisions for loan losses charged against income and recoveries
on loans previously charged-off.
While the current level of the Allowance is believed to be adequate, the Company
continues to hold a large concentration of commercial real estate loans that
remain vulnerable to loan default. Deterioration in the local economy or real
estate market, or upward movements in interest rates, could have an adverse
effect on the performance of the loan portfolio that could result in the need
for an increase in the Allowance. Conversely, further improvement in the
overall asset quality, favorable economic conditions or a favorable local real
estate market could positively affect the Allowance.
The Allowance at December 31, 1995 equaled $2,659,000 as compared to $4,042,000
at December 31, 1994. The reduction in the Allowance is the result of
substantial loan charge-offs in the amount of $1,333,000 and negative provision
expense totaling $425,000, partially offset by loan loss recoveries of $375,000.
The loan charge-offs were largely associated with previously identified loan
loss exposure taken into consideration as a part of management's review of the
Allowance at December 31, 1994. The negative provision for loan loss expense
for the year of $425,000 was largely the result of management's determination as
part of its December 31, 1995 review of the Allowance that a surplus existed in
the Allowance, leading to the decision to effect a reversal of provision for
loan loss expense in the amount of $675,000 in the fourth quarter of 1995.
NOTE G. PREMISES AND EQUIPMENT
Premises and equipment consisted of the following:
December 31,
---------------------
(IN THOUSANDS) 1995 1994
- ----------------------------------------------------------------------
Land $ 423 $ 423
Buildings and building improvements 2,774 2,670
Leasehold improvements 371 374
Equipment 2,715 3,001
------ ------
6,283 6,468
Less: Accumulated depreciation
and amortization 3,210 3,527
------ ------
$3,073 $2,941
------ ------
------ ------
Total rental expense for all leases was $75,000, $163,000 and $196,000 for the
years ended December 31, 1995, 1994 and 1993, respectively.
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<PAGE>
Future minimum payments, by year and in the aggregate, for all noncancelable
operating leases with initial or remaining terms of one year or more consisted
of the following at December 31, 1995:
(IN THOUSANDS) December 31,
- ----------------------------------------------------------------------
1996 $ 67
1997 68
1998 71
1999 75
2000 78
-----
$359
-----
-----
All leases are for premises and include options to renew for periods ranging
from 1 to 5 years.
NOTE H. DEPOSITS
Deposits consisted of the following:
December 31,
----------------------
(IN THOUSANDS) 1995 1994
- ----------------------------------------------------------------------
Noninterest bearing demand deposits $ 5,128 $ 5,425
Interest bearing demand deposits 15,741 17,300
Savings and escrow deposits 42,020 48,205
Time deposits 62,776 59,107
-------- --------
$125,665 $130,037
-------- --------
-------- --------
Included in 1995 time deposits is $1,709,000 of deposits of $100,000 or more.
Detail of interest expense on deposits:
December 31,
------------------------------------
(IN THOUSANDS) 1995 1994 1993
- ---------------------------------------------------------------------------
Interest bearing demand deposits $ 357 $ 403 $ 443
Savings deposits 1,286 1,402 1,593
Other time deposits 3,237 2,693 3,319
Time deposits of $100,000 or more 97 112 67
------ ------ ------
$4,977 $4,610 $5,422
------ ------ ------
------ ------ ------
Total interest paid on deposits was $4,961,000, $4,420,000 and $5,470,000 for
the years ended December 31, 1995, 1994 and 1993, respectively.
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<PAGE>
NOTE I. BORROWINGS
ADVANCES FROM FEDERAL HOME LOAN BANK OF BOSTON
Maturities of advances from the FHLB of Boston outstanding at December 31, 1995
are as follows:
Weighted Average
(IN THOUSANDS) Rates Interest Rate
- ---------------------------------------------------------------------------
1997 $2,000 6.06% 6.06%
1998 4,000 5.32%-5.92% 5.62%
-------
$6,000 5.77%
-------
-------
Under applicable FHLB regulations, member banks are required to maintain at all
times an amount of qualified collateral that is at least sufficient to satisfy
the established collateral maintenance level. Depending on the ratio of
tangible capital to assets as defined by the FHLB and certain other factors,
each member bank is assigned by the FHLB to one of three collateral status
groups:
1. Blanket Lien Status - tangible capital of 4.5% or more of assets;
2. Listing/Segregation Status - tangible capital below 4.5% of assets;
and
3. Delivery (Possession) Status - tangible capital below 3.5% of assets.
Although its tangible capital is above 3.5% of assets, Coastal is in delivery
status. Because of the potential contingent liability of affiliated
institutions within a holding company structure, the FHLB closely reviews the
financial condition of a member bank's parent company. If a member Bank's
parent holding company has a low tangible capital ratio or is experiencing
substantial financial problems, the member Bank may be assigned to listing or
delivery status. In connection with the waiver and release of the FDIC cross
guaranty claim, the Bank requested the removal of the foregoing restrictions
imposed by the FHLB. On May 1, 1995, the Bank received a letter from the FHLB
stating that it will lengthen the maturity restriction on new fixed term and
fixed rate advances from six months to one year.
Total interest paid on FHLB advances amounted to $498,000, $1,159,000 and
$1,872,000 for the years ended December 31, 1995, 1994 and 1993, respectively.
FDIC NOTE
No interest was paid on the FDIC Note for the year ended December 31, 1995.
Under the terms of the Note, interest and principal are deferred until the
Note's maturity date, which is January 31, 1997, subject to extension under
certain limited circumstances. Interest accrued on the Note amounted to
approximately $419,000 through December 31, 1995. (See Note A).
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<PAGE>
FEDERAL RESERVE BANK OF BOSTON
Coastal also has been approved by the Federal Reserve Bank of Boston to obtain
liquidity from its discount window. No funds have been, or are anticipated to
be, obtained from this source.
NOTE J. RESTRICTIONS ON SUBSIDIARY DIVIDENDS, LOANS OR ADVANCES
Payment of dividends by the Company on its stock is subject to various
restrictions. Among these restrictions is a requirement under Delaware
corporate law that dividends may be paid by the Company out of its surplus or,
in the event there is no surplus, out of its net profits for the fiscal year in
which the dividend is declared and/or the preceding fiscal year.
The Amended and Restated Settlement Agreement, which was consummated on January
31, 1995, prohibits the payment of dividends by the Company to its stockholders
on any class of stock (except for a dividend paid in shares of the Company's
common stock, or in any other stock of the Company) until the unpaid principal
amount and interest under the Note are paid in full in accordance with the terms
thereof.
The principal source of cash for the parent company would normally be a dividend
from Coastal; however, certain restrictions also exist regarding the ability of
Coastal to transfer funds to the Company in the form of cash dividends, loans or
advances. The most significant of these are described below.
Maine corporate law generally provides that dividends may only be paid out of
unreserved and unrestricted earned surplus or unreserved and unrestricted net
earnings of the current fiscal year and the next preceding fiscal year taken as
a single period. Maine banking law also imposes certain restrictions, including
the requirement that the Bank establish and maintain adequate levels of capital
as set forth in rules adopted by the Maine Bureau of Banking.
The Amended and Restated Settlement Agreement provides that the Bank may not
declare any dividends, except as necessary to pay the operating expenses of the
Company as approved from time to time by both the FDIC and the Maine Bureau of
Banking. The Amended and Restated Settlement Agreement further provides that
such operating expenses may not include any amounts for accrued interest on the
Note.
The Memorandum (effective November 22, 1994) provides that the Bank may not pay
or declare any dividends without the prior written consent of the FDIC and the
Maine Bureau of Banking.
On November 13, 1995 and November 30, 1994, following the receipt of appropriate
regulatory approvals, Coastal paid the Company cash dividends of $200,000 and
$175,000, respectively, for certain current and anticipated operating expenses
of the Company.
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<PAGE>
NOTE K. REVERSE STOCK SPLIT
On May 31, 1995, the Company effected a one-for-ten reverse stock split with
respect to the issued and outstanding shares of the Company's common stock,
which was approved by the Company's stockholders on January 31, 1995. As a
result of the reverse stock split, the number of outstanding shares of common
stock of the Company was reduced from 6,006,745 shares (determined at the close
of business on May 31, 1995) to 600,361 shares. As a result, approximately
$5,407,000 was transferred from the Company's common stock account to paid-in
capital. All applicable share and per share data appearing in the consolidated
financial statements and notes thereto have been retroactively adjusted for the
reverse stock split.
NOTE L. BENEFIT PLANS
PENSION PLAN
The pension plan (the "Pension Plan") is a noncontributory defined benefit plan,
which provides retirement benefits to substantially all Bank employees.
Requirements for participation in the Pension Plan are that an employee work
more than 1,000 hours per year, have completed at least one year of service and
have attained twenty-one years of age. Employees become 100% vested after five
years of eligible service subsequent to their eighteenth birthday.
The Bank contributes such amounts as are necessary to provide assets sufficient
to meet the benefits to be paid under the terms of the Pension Plan. The Bank
has made contributions in amounts sufficient to fund the Pension Plan's current
service cost and the initial past service cost plus interest over a period of 30
years. The Pension Plan has met the ERISA minimum funding requirements.
The Bank has the right to discontinue its contributions at any time and to
terminate the Pension Plan subject to the provisions of ERISA.
Pension expense for the Pension Plan was $14,000 for each of the years ended
December 31, 1995 and December 31, 1994, as compared to a credit of $23,000 for
the year ended December 31, 1993.
72
<PAGE>
The following table sets forth the Pension Plan's funded status and amounts
recognized in the consolidated financial statements:
Year Ended December 31,
-----------------------
(IN THOUSANDS) 1995 1994
- ---------------------------------------------------------------------------
Actuarial Present Value of Benefit Obligations:
Accumulated benefit obligation
(including vested benefits
obligation of $1,327 in 1995 and
$1,241 in 1994) $1,414 $1,300
Effects of future salary increases 185 138
------ ------
Projected benefit obligation 1,599 1,438
Fair value of plan assets (primarily
listed stocks, U.S. bonds and
insurance contracts) 1,921 1,623
------ ------
Plan assets in excess of projected
benefit obligation 322 185
Unrecognized prior service cost (5) (6)
Unrecognized transition amount (120) (146)
Unrecognized loss 107 217
------ ------
Prepaid pension expense $ 304 $ 250
------ ------
------ ------
The components of net pension expense (credit) are as follows:
Year Ended December 31,
----------------------------------
(IN THOUSANDS) 1995 1994 1993
- ---------------------------------------------------------------------------
Service cost - benefits $62 $ 67 $ 36
Interest cost of projected
benefits 110 102 90
Actual return on plan assets (300) 18 (216)
Net amortization and deferral 142 (173) 67
----- ----- -----
Net pension expense (credit) $ 14 $ 14 $ (23)
----- ----- -----
----- ----- -----
The weighted average discount rate used was 7.5%, 8.25% and 7.0% in 1995, 1994
and 1993, respectively, and the increase in future compensation levels used was
5.5%, 6.0% and 5.5% in 1995, 1994 and 1993, respectively, in determining the
actuarial present value of the projected benefit obligation. The expected long-
term rate of return on assets was 8.0% for 1995, 1994 and 1993.
The Bank provides no post retirement benefits other than pensions.
73
<PAGE>
STOCK OPTION PLAN
The Company has a Stock Option Plan ("Stock Option Plan") to purchase shares of
common stock of the Company. Unless terminated by the Board of Directors, the
Stock Option Plan will automatically terminate on September 18, 1996. The total
number of shares of common stock for which options may be issued under the Stock
Option Plan, adjusted as a result of the reverse stock split, is 55,189. A
summary of transactions under the Stock Option Plan follows:
Shares Option
Under Price Range
Option Per Share
- ---------------------------------------------------------------------------
Outstanding at January 1, 1993 4,726 $35.90 - $157.40
Cancelled (934) 117.90 - 141.00
----- ----------------
Outstanding at December 31, 1993 3,792 35.90 - 157.40
Cancelled (658) 35.90
----- ----------------
Outstanding at December 31, 1994 3,134 92.50 - 157.40
Cancelled (2,667) 92.50 - 141.00
----- ----------------
Outstanding at December 31, 1995 467 $141.00 - $157.40
----- ----------------
----- ----------------
NOTE M. INCOME TAXES
Due to the uncertainty that the benefit of the net deferred tax assets will be
realized, a full valuation allowance has been recorded at December 31, 1995 and
1994.
A summary of income tax benefits is as follows:
Year Ended December 31,
----------------------------------
(IN THOUSANDS) 1995 1994 1993
- ---------------------------------------------------------------------------
Current - - $(4)
Deferred
------ ------ ------
- - $ (4)
------ ------ ------
------ ------ ------
A reconciliation of the difference between income tax benefit and the amount
computed by applying the statutory federal income tax rate to income before
income taxes, minority interest and extraordinary item is as follows:
74
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
(IN THOUSANDS) 1995 1994 1993
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal income tax at statutory rate $564 $33 $268
Increase (decrease)
resulting from:
Expiration of capital loss carryforwards 2,060 - -
Increase in net operating loss
carryforwards (253) - -
Net operating loss utilized - - (268)
Change in valuation
allowance (2,454) (35) -
Other items, net 83 2 (4)
------- -------- ------
Income tax benefit $ 0 $ 0 $ (4)
------- -------- ------
------- -------- ------
</TABLE>
Significant components of deferred income tax assets and liabilities at December
31, 1995 and 1994 are presented below:
<TABLE>
<CAPTION>
December 31,
----------------------
(IN THOUSANDS) 1995 1994
- -------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Loans, principally due to
allowance for losses $904 $1,374
REO, principally due to writedowns 304 453
Mark to market adjustments 13 129
Deferred loan fees 8 10
Reserve for mortgage servicing rights 45 45
Investment writedowns 18 14
Federal NOL credit and tax credit carryforward 2,392 2,139
Capital loss carryforward 11 2,071
State NOL credit carryforward 143 81
FDIC Note 3,060 3,060
Other 90 69
------- -------
Total gross deferred tax assets before
valuation reserve 6,988 9,445
Valuation reserve (6,850) (9,304)
------- -------
Total gross deferred tax asset 138 141
------- -------
Deferred tax liabilities:
Difference between tax and
book basis of fixed assets 138 141
------- -------
Net deferred taxes $ 0 $ 0
------- -------
------- -------
</TABLE>
75
<PAGE>
The net deferred tax asset at December 31, 1995 and December 31, 1994 is fully
offset by a valuation allowance. The change in the balance of the valuation
allowance in 1995 that is not allocated to continuing operations consists
principally of the tax impact of the mark to market adjustment on available for
sale securities. The amount of the valuation allowance will be reviewed
annually or on an as needed basis.
At December 31, 1995, the Company had a NOL carryforward for federal income tax
return purposes of approximately $6.8 million available to offset future taxable
income. The NOL for federal income tax return purposes will expire in the years
1996 to 2010. If there is a subsequent "change of ownership" of the Company as
defined by Section 382 of the Internal Revenue Code of 1986, as amended (the
"Code"), the Companys's NOLs are subject to limitation as provided by the Code.
See Note A regarding the determination of the Company to pursue a
recapitalization as the means to facilitate the satisfaction of the FDIC Note.
In addition, as of December 31, 1995, the Company had a capital loss
carryforward, which will expire in the years 1996 to 2000, of approximately
$31,600 available to offset future capital gains, if any, from the sale of the
Company's capital assets.
As of December 31, 1995, the Company had an Investment Tax Credit carryforward
which will expire in the years 1997 to 2000, of approximately $77,000 available
to offset future federal income taxes.
In 1990, Coastal Bancorp and its subsidiaries carried back their share of the
consolidated net operating losses of the Suffield Financial Corporation and
subsidiaries group to the years 1984, 1985 and 1986. Tentative tax refunds in
the amount of $926,000 were paid to the Bank as a result of this carryback. In
1989 and 1990, Suffield Financial Corporation and Suffield Bank also carried
back their share of the net operating losses of the group. A portion of the
1990 losses was carried back to the 1986 taxable year of the Suffield group as
it existed before the acquisition of Coastal Bancorp and the Bank (the "Old
Suffield Group") and resulted in a tentative refund of $1,973,000 and a portion
of the 1989 losses was carried back to the years 1979 through 1985 of the Old
Suffield Group and resulted in tentative refunds of $1,279,000.
All refunds in excess of $1.0 million must be approved by the Joint Committee on
Taxation of the U.S. Congress. The Internal Revenue Service has reviewed and
approved the refund claims and has forwarded the case to the Joint Committee on
Taxation in Washington, D.C. with a recommendation that the refunds be approved
as made. The final approval of the Joint Committee on Taxation is expected as
early as the third quarter of 1996. If the Joint Committee on Taxation were to
conclude that the losses were not eligible for the ten-year carryback, the Bank
would be liable for the repayment of $926,000 of refunds plus interest and would
increase its net operating loss carryforwards by $2.4 million. The Bank also
believes that the requirements have been satisfied with respect to the carryback
of 1989 and 1990 losses by Suffield Financial Corporation and Suffield Bank
under the ten-year rule. In any event, none of the Company, Coastal Bancorp or
the Bank were members of the Old Suffield Group in the above carryback years.
Consequently, the Bank believes that in accordance with the consolidated return
regulations, the Company, Coastal Bancorp or the Bank would not be liable for
the repayment of any refunds generated by carryback to the Old Suffield Group.
76
<PAGE>
The federal income tax returns of the Company have been examined and audited or
closed without audit by the IRS for tax years through 1988 and such years are
not subject to further IRS audit except with respect to carrybacks to those
years.
NOTE N. LITIGATION
As of December 31, 1995, there were various claims and lawsuits pending against
the Company incidental to the ordinary course of business. In the opinion of
management, after consultation with legal counsel, resolution of these matters
is not expected to have a material effect on the consolidated financial position
or results of operations.
77
<PAGE>
NOTE O. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments as determined
under FASB Statement No. 107 are as follows:
December 31, 1995
----------------------------
Book Fair
(IN THOUSANDS) Value Value
- ---------------------------------------------------------------------------
Financial Assets:
Cash and cash equivalents (1) $ 8,841 $ 8,841
Federal Funds sold 10,000 10,000
Trading Securities - -
Investment securities (2)
Held-to-Maturity 11,786 11,909
Available for sale 7,926 7,926
Federal Home Loan Bank stock 1,315 1,315
Assets held for sale 281 281
Loans, net of allowance (3) 97,869 99,837
Financial Liabilities:
Deposits (4) $125,665 $128,273
Borrowings (5) 15,000 14,759
____________________
(1) The carrying amount of cash and cash equivalents approximates fair value
due to their short maturity.
(2) The fair value of investment securities is based on quoted market prices,
if available. If prices are not available, quotes for similar instruments
and/or information supplied to management is used.
(3) The fair market value for fixed and adjustable rate loans was estimated
using the discounted cash flow analysis. Variable rate loans are
considered to be at fair value, since such loans change directly with the
market rates. The estimated fair value of nonperforming loans are
calculated by using book value less the specific amount of allocated
reserve from the allowance for loan losses.
(4) For deposit liabilities with no defined maturities, the fair value is the
amount payable on demand. Term deposits were estimated using the
discounted cash flow analysis.
(5) The fair value for FHLB borrowings and FDIC Note was estimated using the
discounted cash flow analysis.
NOTE P. OTHER EXPENSES
Included in other expenses are:
Year Ended December 31,
---------------------------------------
(IN THOUSANDS) 1995 1994 1993
- -------------------------------------------------------------------------------
Data processing $530 $534 $527
Equipment 340 338 384
FDIC insurance 190 406 451
Insurance-general 168 268 330
Office 273 258 294
Legal 282 676 182
Advertising 112 30 32
Other 711 653 552
------- -------- ---------
$2,606 $3,163 $2,752
------- -------- ---------
------- -------- ---------
78
<PAGE>
NOTE Q. FIRST COASTAL CORPORATION
(PARENT COMPANY ONLY)
FINANCIAL INFORMATION
BALANCE SHEETS
December 31,
------------------------
(IN THOUSANDS) 1995 1994
- --------------------------------------------------------------------------------
Assets
Cash $ 99 $ 290
Investment in subsidiaries 13,334 10,754
Fixed assets 8 13
------- -------
Total assets $13,441 $11,057
------- -------
------- -------
Liabilities
Other liabilities $ 444 $ 43
FDIC Note 9,000 9,000
Stockholders' equity 3,997 2,014
------- -------
Total liabilities and
stockholders' equity $13,441 $11,057
------- -------
------- -------
STATEMENTS OF OPERATIONS
Year Ended December 31,
(IN THOUSANDS) 1995 1994 1993
- --------------------------------------------------------------------------------
Dividends $ 200 $175 -
Interest Income 4 6 $ 1
------- ------- -------
204 181 1
Interest Expense:
Interest on FDIC Note 419 - -
------- ------- -------
419 - -
------- ------- -------
Net Interest Income (loss) (215) - -
Operating Expenses:
Stockholder relations 76 59
Professional fees 293 156
Other 14 - 100
------- ------- -------
383 215 100
Loss before income
tax, equity in undistributed
net income of subsidiaries and
extraordinary item (598) (34) (99)
Income tax benefit - - (10)
Equity in undistributed net
income of subsidiaries 2,258 132 837
------- ------- -------
Income before
Extraordinary Item 1,660 98 748
Extraordinary Item -
Charge to earnings as a result of
the settlement of the cross guaranty
claim - 9,000 -
------- ------- -------
Net Income (loss) $ 1,660 $(8,902) $ 748
------- ------- -------
------- ------- -------
79
<PAGE>
STATEMENTS OF CASH FLOWS
Year Ended December 31,
--------------------------------------
(IN THOUSANDS) 1995 1994 1993
- --------------------------------------------------------------------------------
Operating Activities
Net income (loss) $1,660 $ (8,902) $748
Charge to earnings as a result of
the settlement of the
cross guaranty claim - 9,000 -
Increase (decrease) in investment
in subsidiary, due from subsidiary,
other assets and other liabilities (1,851) 199 (794)
------- ------- -------
Net cash used
by operating activities (191) (101) (46)
Cash flows from Investing
Activities, other Net - 379 -
------- ------- -------
Increase in cash and cash
equivalents (191) 278 -
Cash, beginning of year 290 12 58
------- ------- -------
Cash, end of year $ 99 $ 290 $ 12
------- ------- -------
------- ------- -------
Non-Cash Financing Activities
FDIC Note $ 9,000
SEE NOTE J FOR RESTRICTIONS ON THE PAYMENT OF DIVIDENDS BY SUBSIDIARY TO THE
COMPANY.
80
<PAGE>
NOTE R. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Quarter Ended,
------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION) 3/31 6/30 9/30 12/31
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1995
- ----
Interest income $2,917 $2,935 $2,942 $2,913
Interest expense 1,399 1,458 1,492 1,501
----- ----- ----- -----
Net interest income 1,518 1,477 1,450 1,412
Provision for loan losses 100 75 75 (675)
Other income 168 137 125 129
Securities and loan sales gains - 2 3 8
Other expense 1,361 1,327 1,210 1,296
----- ----- ----- -----
Income before income taxes 225 214 293 928
Income tax - - - -
------- ------- ----- ------
Net income $ 225 $ 214 $ 293 $ 928
----- ----- ---- -----
----- ----- ---- -----
Shares outstanding 600,361 600,361 600,361 600,361
Earnings per share $ .37 $ .36 $ .49 $ 1.55
----- ----- ----- ------
----- ----- ----- ------
1994
- -----
Interest income $2,828 $3,036 $2,911 $3,005
Interest expense 1,489 1,452 1,433 1,352
------ ------ ------ ------
Net interest income 1,339 1,584 1,478 1,653
Provision for loan losses 67 - 40 -
Other income 159 157 69 14
Securities gains (losses) 72 (112) 64 6
Other expense 1,757 1,493 1,594 1,434
------ ----- ------ ------
Income (loss) before income
taxes, minority interest and
extraordinary item (254) 136 (23) 239
Income tax - - - -
Minority interest (11) 11 - -
------- ------ ------ -------
Income (loss) before
extraordinary item (243) 125 (23) 239
------- ------ ------- ------
Extraordinary Item -
Charge to earnings as a result of
the settlement of the cross
guaranty claim - - - 9,000
-------- --------- -------- ------
Net income (loss) $ (243) $ 125 $ (23) $(8,761)
-------- ------- -------- --------
-------- ------- -------- --------
Average shares outstanding 600,361 600,361 600,361 600,361
Earnings (loss) per share
Income (loss) per share before
Extraordinary item $ (.41) $ .21 $ (.04) $ .40
-------- ------- ------- ---------
-------- ------- ------- ----------
Net income (loss) per share $ (.41) $ .21 $ (.04) $(14.59)
-------- ------- ------- -------
-------- ------- -------- -------
</TABLE>
81
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
DIRECTORS
Pursuant to the Company's Restated Certificate of Incorporation, the directors
are divided into three classes, as nearly equal in number as possible, with the
number of directors as specified in the Company's Amended and Restated Bylaws.
The term of office of only one class of directors expires in each year, and
their successors are elected for terms of three years and until their successors
are elected and qualified. Under the Amended and Restated Bylaws, the directors
are divided into three classes, two of which are composed of one director and
one of which is composed of two directors. In connection with the consummation
of the Offering (as described under Item 11, "Executive Compensation --
Compensation of Directors"), the Company may seek to increase the size of its
Board of Directors pursuant to an amendment to the Company's Amended and
Restated Bylaws increasing the authorized number of directors. Under the
Company's Amended and Restated Bylaws, newly created directorships resulting
from any increase in the authorized number of directors may be filled, for the
unexpired term, by the concurring vote of a majority of the directors then in
office, whether or not a quorum, and any director so chosen shall hold office
for the remainder of the full term of the class of directors in which the new
directorship was created and until such director's successor shall have been
elected and qualified. As of June 11, 1996, the Company has made no
determination as to whether it will seek to increase the size of its Board of
Directors in connection with the Offering or who the directors designated to
fill any newly created directorships would be. In addition, there can be no
assurance that the Offering will be consummated.
The following table sets forth the names of the directors of the Company. Each
director of the Company also serves as a director of the Bank. Also set forth
is certain other information with respect to each such person's principal
occupation or employment during the past five years, the person's age at
December 31, 1995 and the periods during which such person has served as a
director of the Company.
AGE AT MEMBER OF TERM
DIRECTORS: DECEMBER 31, 1995 BOARD SINCE EXPIRES
- ---------- ----------------- ----------- -------
Normand E. Simard (1) 54 1987 1997
Edward K. Simensky 54 1994 1997
Charles A. Stewart III 61 1995 1998
Roger E. Klein 53 1990 1999
___________________
(1) Mr. Simard serves as Chairman of the Board of Directors of the Company and
the Bank.
82
<PAGE>
DIRECTORS:
ROGER E. KLEIN is President and owner of the Interest Rate Futures Research
Corporation of Princeton, New Jersey, a firm established in 1980 to manage money
in the financial futures markets. In 1982, Mr. Klein established two affiliated
companies, Futures Strategies Corp. and Timing Strategies Corp., through
which Mr. Klein manages funds and provides investment advice to institutions,
individuals and corporations. In September 1989, Mr. Klein became the Chief
Investment Officer, Executive Vice President and part owner of Quantum
American, Inc., a minority owned investment management company located in New
Orleans.
NORMAND E. SIMARD has been President of York County Biscuit Company, a food
distributor in Biddeford, Maine, since July 1993, and prior thereto, served as
Vice President since 1967. Mr. Simard was originally nominated as a director of
the Company in 1987 in accordance with the provisions of the Merger Agreement by
and among the Company, Suffield Bank, Coastal Bancorp and the Bank.
EDWARD K. SIMENSKY has been President of Simensky & Thomson, certified public
accountants, in Saco, Maine, since 1978 and a member of the advisory board of
EastGuard Insurance Company, Saco, Maine ("EastGuard"), since 1995. Mr.
Simensky was a director of Mutual Fire Insurance Company, Saco, Maine ("Mutual
Fire"), from 1987 until the acquisition of Mutual Fire by EastGuard in 1995.
Mr. Simensky was a director of Suffield Bank, a subsidiary of the Company, from
1989 until September 1991 when the Banking Commissioner for the State of
Connecticut deemed Suffield Bank insolvent and appointed the FDIC as receiver.
CHARLES A. STEWART III was the President of A.L. Stewart & Sons, a food
processing company located in Cherryfield, Maine, from 1958 until 1982 when the
company was sold. Mr. Stewart also was the owner of Tennis of Maine, Inc., an
indoor tennis club located in Falmouth, Maine, from 1982 until 1985 when the
company was sold. Mr. Stewart is currently the Treasurer of M.C.S. Enterprises,
Inc., a real estate investment company based in Freeport, Maine. Mr. Stewart
has been a director of the Boys & Girls Club of Greater Portland since 1987
and became chairman of the organization's planned giving committee in 1994.
In addition, in 1994, Mr. Stewart became a director of the Maine Tennis
Foundation.
EXECUTIVE OFFICERS
The following table sets forth the names of the executive officers of the
Company and the Bank, each of whom is elected to serve for a one-year period.
Also set forth is certain other information with respect to each such person's
principal occupation or employment during the past five years, the person's age
at December 31, 1995 and the positions currently held with the Company and the
Bank.
83
<PAGE>
AGE AT
NAME DECEMBER 31, 1995 POSITIONS HELD
------ ------------------- ----------------
Gregory T. Caswell 40 President and Chief Executive
Officer of the Company and the
Bank and a director of the Bank
Dennis D. Byrd 33 Treasurer of the Company and
Executive Vice President, Chief
Financial Officer and Treasurer
and a director of the Bank
GREGORY T. CASWELL joined the Bank in December 1991 as Senior Vice President and
Senior Loan Officer responsible for managing the lending, loan workout and
credit administration functions of the Bank. From 1982 to 1991, he was with
First NH Banks initially as Vice President -- Commercial Lending, then as Vice
President in the bank's special assets group. In December 1994, Mr. Caswell
was promoted to Executive Vice President -- Lending Division of the Bank.
Effective March 31, 1995 upon the resignation of James H. Whittaker,
Mr. Caswell was elected President and Chief Executive Officer of the Company
and the Bank and a director of the Bank.
DENNIS D. BYRD joined the Bank in October 1985 as Deposit Operations Technician.
From 1987 to 1992, Mr. Byrd was responsible for financial operations of the
Bank, promoted to Assistant Treasurer/Controller in 1989 and Assistant Vice
President in 1990. In 1993, Mr. Byrd was promoted to Vice President/Controller
and Treasurer of the Bank, and Treasurer of the Company and Coastal Bancorp. In
1994, Mr. Byrd was promoted to Executive Vice President, Chief Financial Officer
and Treasurer of the Bank and on March 31, 1995, Mr. Byrd was elected to the
Board of Directors of the Bank.
Each executive officer has entered into an employment protection agreement with
the Bank. In addition, the Boards of Directors of the Company and the Bank have
proposed new employment agreements with each of Messrs. Caswell and Byrd, which
agreements are currently under discussion and which agreements would
supersede the existing employment protection agreements with such executive
officers. See Item 11, "Executive Compensation -- Employment Agreements,"
which information is incorporated herein by reference.
SECTION 16(a) COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors and executive officers, and persons who own more than 10% of its
Common Stock, to file with the SEC initial reports of ownership of the Company's
equity securities and to file subsequent reports when there are changes in such
ownership. Based on a review of reports submitted to the Company, the Company
believes that, during the fiscal year ended December 31, 1995, all Section 16(a)
filing requirements applicable to the Company's officers, directors and more
than 10% owners were complied with on a timely basis, except that initial
reports on behalf of Edward K. Simensky and Charles A. Stewart III in connection
with their election as a directors of the Company were not filed until after the
required filing date.
84
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION.
CASH COMPENSATION
Upon the resignation of James H. Whittaker and effective March 31, 1995, Gregory
T. Caswell was elected President and Chief Executive Officer of the Company and
the Bank. The following table sets forth the compensation paid by the Company
and its subsidiary during 1995, 1994 and 1993 to each of Messrs. Caswell and
Whittaker and to Dennis D. Byrd, who was the only other executive officer whose
compensation exceeded $100,000 for services rendered in all capacities to the
Company and its subsidiary during the year ended December 31, 1995 (the "named
executive officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation
----------------------------------------------
Other Annual
Principal Positions Year Salary Bonus Compensation
- ------------------- ---- ------- ----- -------------
<S> <C> <C> <C> <C>
Gregory T. Caswell 1995 $111,827 $34,000 -
President and Chief 1994 76,416 3,000 -
Executive Officer 1993 70,000 5,000 -
James H. Whittaker 1995 56,250 10,000 $2,454(1)
President and 1994 180,000 52,500 7,133
Chief Executive 1993 143,520 30,000 2,129
Officer (former) (2)
Dennis D. Byrd 1995 81,154 21,500 -
Treasurer 1994 53,510 3,000 -
1993 41,554 5,000 -
</TABLE>
_______________________
(1) Reimbursement for federal and state taxes on compensation for living
expenses paid by the Company in 1995.
(2) Mr. Whittaker resigned as President and Chief Executive Officer of the
Company and the Bank effective March 31, 1995.
OPTION GRANTS
No options were granted during the fiscal year ended December 31, 1995.
OPTION HOLDINGS
The following table sets forth information with respect to the number of
securities underlying unexercised options held by each of the named executive
officers at December 31, 1995.
85
<PAGE>
FISCAL YEAR-END OPTIONS
Number of Securities
Underlying Unexercised
Options at FY-End (1)(2)
Name Exercisable/Unexercisable
----- -------------------------
Gregory T. Caswell 0/0
James H. Whittaker (3) 0/0
Dennis D. Byrd 10(4)/0
-------
(1) The fair market value of the underlying shares of Common Stock at December
31, 1995 was less than the exercise price of all such options previously
granted.
(2) Adjusted to reflect the one for ten reverse stock split effective May 31,
1995.
(3) Mr. Whittaker resigned as President and Chief Executive Officer of the
Company and the Bank effective March 31, 1995.
(4) Such options expire March 18, 1996.
- ----------------------------------------
PENSION PLAN
The Bank maintains a qualified noncontributory pension plan (the "Pension Plan")
for its officers and other employees through RSI Retirement Trust, created to
provide retirement benefits for the employees of savings banks and their allied
organizations. The Pension Plan is jointly administered by the plan
administrator and a pension committee appointed by the Bank and RSI Retirement
Trust. All employees are eligible to participate in the Pension Plan if they
have reached age 21 and have completed one year's service of 1,000 or more
hours. Vesting occurs after a participant completes five years of service of
1,000 or more hours per plan year. The Pension Plan is subject to the
requirements of the Employee Retirement Income Security Act of 1974, as amended
("ERISA").
The Pension Plan provides for monthly benefits to or on behalf of each covered
employee at age 65 and has provisions for death benefits, early retirement after
attainment of age 55 and 10 years of service, and disability benefits. The
annual retirement benefit is 2% of the average annual earnings during the
highest paid consecutive three years of the five years immediately preceding
retirement multiplied by years of service (maximum 30 years), reduced by 1-2/3%
of the primary social security benefits multiplied by years of service (maximum
30 years). In addition, a participant will receive an annuity based upon the
actuarial value of any accumulated voluntary contributions. Annual earnings for
purposes of determining benefits under the Pension Plan consist of the annual
base compensation excluding overtime, bonus payments or any other special
payments.
The following table illustrates annual pension benefits for retirement as of
December 31, 1995 at age 65 for various levels of compensation and years of
service under the Pension Plan.
86
<PAGE>
PENSION PLAN TABLE
YEARS OF SERVICE (1)
--------------------
<TABLE>
<CAPTION>
Annual
Compensation 15 20 25 30 35
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 75,000 $ 22,500 $ 30,000 $ 37,500 $ 45,000 $ 45,000
100,000 30,000 40,000 50,000 60,000 60,000
125,000 37,500 50,000 62,500 75,000 75,000
150,000 45,000 60,000 75,000 90,000 90,000
175,000 45,000 60,000 75,000 90,000 90,000
200,000 45,000 60,000 75,000 90,000 90,000
225,000 45,000 60,000 75,000 90,000 90,000
250,000 45,000 60,000 75,000 90,000 90,000
</TABLE>
______________________
(1) Benefits represent annual amounts under a five year and life benefit
payment option. A portion of the participant's primary social security
benefit will reduce the amount shown in this table. Pension benefits are
currently subject to a statutory maximum of $120,000, subject to cost-of-
living adjustments. The maximum annual compensation on which retirement
benefits may be calculated is limited to $150,000.
Mr. Whittaker had 3.5 years of credited service under the Pension Plan as of
March 31, 1995. Mr. Whittaker's termination of employment on March 31, 1995 was
prior to his completion of five years of service required for the vesting of
benefits. Messrs. Caswell and Byrd have 4.25 and 10.25 years, respectively, of
credited service under the Pension Plan as of December 31, 1995. Messrs.
Caswell's and Byrd's annual accrued benefit payable at age 65 under the Pension
Plan is $5,937 and $8,492, respectively, determined as of December 31, 1995.
The compensation of Messrs. Caswell and Byrd covered by the Pension Plan for
1995 consists of their respective base salary as set forth in the Summary
Compensation Table. See "Executive Compensation -- Cash Compensation."
COMPENSATION OF DIRECTORS
During 1995, there were no fees or other forms of compensation earned by or paid
to directors of the Company for any service provided as a director of the
Company. The Company has not made and does not anticipate making any payments
to directors for 1996. During 1995, each non-employee director of the Bank
received a quarterly retainer of $1,250 and a monthly aggregate meeting fee of
$250 provided that at least one meeting of the Board of Directors of the Bank
was held during the month. No amounts were paid to non-employee directors of
the Bank for meetings of committees on which such directors served. Employee
directors of the Bank receive no additional compensation for serving as
directors or committee members of the Bank.
A deferred compensation plan (the "Deferred Compensation Plan") was established
in 1987 for members of the Board of Directors of the Company and non-employee
directors of the boards of subsidiaries of the Company. Under the Deferred
Compensation Plan, each participant has the right to elect to defer a portion of
his or her annual directors' fees, with amounts deferred credited monthly with
interest at an annual rate which is determined prior to the beginning of each
calendar year. For
87
<PAGE>
1995, the interest rate was 5.60% and for 1996, is 7.23%. Payment of amounts
credited is available to participants by a lump sum or a designated number of
monthly installments, which number may not be less than 12 nor more than 120.
For 1995, no director of the Bank elected to defer any portion of his director
fees.
On May 2, 1996, the Board of Directors of the Company adopted the First Coastal
Corporation 1996 Stock Option and Equity Incentive Plan (the "Plan") for the
benefit of directors and employees of the Company and employees of any
subsidiary of the Company. On June 11, 1996, the Plan was approved by the
Company's stockholders. Under the terms of the Plan, each of the four current
non-employee directors of the Company will be granted a non-qualifying option
with a 10-year term for 1,500 shares of Common Stock (representing an
aggregate of options exercisable for 6,000 shares of Common Stock) on the
date of the first public offering of shares of Common Stock that occurs after
the date of adoption of the Plan, but such grants will not be made if no such
offering occurs before December 31, 1996. The exercise price of such options
will be equal to the offering price of the Company's Common Stock in
connection with such public offering. The Company has filed a registration
statement on Form S-2 with the SEC with respect to a proposed public offering
of 750,000 shares of Common Stock (the "Offering") and expects to consummate
the Offering in the third quarter of 1996. The Offering will be made only by
means of a prospectus. The Plan further provides that, subject to the
availability of shares, as of each annual meeting of stockholders of the
Company after December 31, 1996, each non-employee director of the Company
who is elected by the stockholders at, or whose term of office continues
after, such meeting will be granted a non-qualifying option with a 10-year
term for 500 shares upon the date of such election at a per share exercise
price equal to the market value of a share of Common Stock on the date of
grant.
EMPLOYMENT AGREEMENTS
In December 1994, the Bank entered into employment protection agreements (each
an "Employment Protection Agreement" and together, the "Employment Protection
Agreements") with each of Messrs. Caswell and Byrd, which superseded the
employment protection agreements entered into with each of such executive
officers in December 1993. The Employment Protection Agreements were amended in
April 1995 to reflect the new titles of Messrs. Caswell and Byrd. The initial
term of the Employment Protection Agreements expires December 31, 1996 and may
be renewed by the written agreement of the Bank and the executive officer. In
the event of a termination of the executive officer's employment during the term
of the Employment Protection Agreement by the Bank without "cause" or by the
executive officer for "good reason" (in each case as defined therein), the
executive officer is entitled to receive a lump sum cash payment equal to one
year's "current compensation." "Current compensation" is equal to (i) the
executive officer's salary at the annual rate in effect at the time of his
termination, (ii) any bonuses (other than performance bonuses) paid to the
officer during the 12-month period prior to his termination and (iii) any
deferred compensation credited to his account as of December 31 of the year
preceding his termination. "Performance bonuses" of $3,000 each were payable to
Messrs. Caswell and Byrd on December 31, 1994, and April 30, August 31, and
December 31, 1995, respectively. The Employment Protection Agreements provide
that the executive officer is required to give the Bank at least 90 days written
notice before he voluntarily terminates his employment with the Bank (other than
for "good reason").
88
<PAGE>
The Boards of Directors of the Company and the Bank have proposed new
employment agreements (each a "Proposed Employment Agreement" and together,
the "Proposed Employment Agreements") with each of Messrs. Caswell and Byrd,
which agreements are currently under discussion. The Proposed Employment
Agreements would supersede the Employment Protection Agreements.
Under their respective Proposed Employment Agreement, each executive officer
would be eligible to receive annual salary increases based on increases in
the cost of living and based upon performance or merit, as determined by the
Boards of Directors of the Company and the Bank. Each executive officer
would also be eligible to receive discretionary bonuses as may be authorized
by the Boards of Directors of the Company or the Bank and would be eligible
to participate in any plan of the Company or the Bank relating to stock
options, stock purchases, pension, thrift, profit sharing, employee stock
ownership, group life insurance, medical coverage, disability insurance,
education or other retirement or employee benefits that the Company or the
Bank has adopted or may adopt for the benefit of its executive employees. In
addition, each executive officer would be authorized to incur reasonable
business expenses in the performance of his duties. The Proposed Employment
Agreements provide for initial terms ending December 31, 1997 with renewals
for one additional consecutive 12-month period as of December 31, 1996 and
each subsequent anniversary of December 31, unless the Company and the Bank,
or the executive officer, gives written notice to the contrary at least two
months prior to any such renewal date. Under the Proposed Employment
Agreements, the base salaries through December 31, 1996 for Messrs. Caswell
and Byrd would be $124,800 and $88,400, respectively, which salaries may not
be reduced without the consent of the executive officer.
The Boards of Directors of the Company and the Bank may terminate the
executive officer's employment at any time. Each proposed agreement provides
that if the executive officer's employment is terminated other than for cause
(as defined), disability or incapacitation or the executive officer
terminates employment with good reason (as defined), the officer would be
entitled (subject to certain limitations) (a) to continue to participate in
and accrue benefits under certain benefit plans for the remaining term of the
agreement, but not in excess of 24 months, (b) to receive certain insurance
and indemnification benefits with respect to all of such officer's acts or
omissions while an officer or director until the final expiration or running
of all periods of limitation against action which may be applicable to such
acts or omissions, and (c) to be paid a lump sum cash payment as liquidated
damages in an amount equal to the amount that would be payable over a period
equal to the remaining term of the agreement, but not in excess of 24 months.
The Proposed Employment Agreements provide that no payment is required to be
made that would constitute a "golden parachute payment" (as defined) pursuant
to certain rules and regulations of the FDIC.
In December 1994, the Bank entered into an employment agreement with Mr.
Whittaker (the "Whittaker Employment Agreement"), which superseded the
employment agreement entered into with Mr. Whittaker in December 1993. The
Whittaker Employment Agreement terminated effective upon the resignation of
Mr. Whittaker on March 31, 1995. Pursuant to the Whittaker Employment Agreement
and during the term thereof, Mr. Whittaker's annual salary was $225,000, and he
was entitled to receive certain "performance bonuses" totaling up to $60,000.
Such performance bonuses were paid or were payable as follows: (i) $12,500 upon
the execution of the Whittaker Employment Agreement, (ii) $10,000 on January 31,
1995, (iii) $12,500 on April 30, 1995, (iv) $12,500 on August 31, 1995 and (v)
$12,500 on December 31, 1995, provided that Mr. Whittaker continued to be
employed by the Bank on the applicable date. The Bank agreed to pay or
reimburse Mr. Whittaker
89
<PAGE>
for rental of a furnished apartment within 50 miles of the Bank's operations
center in Westbrook and for travel expenses from his residence in Connecticut to
Maine, as well as reimbursement of certain taxes.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
STOCK OWNED BY MANAGEMENT
The following table sets forth information as of June 11, 1996 with respect to
the amount of Common Stock beneficially owned by each director of the Company,
by each of the named executives officers, and by all directors and executive
officers of the Company as a group. This information is based on information
furnished to the Company by such persons.
<TABLE>
<CAPTION>
Amount and Nature of Percent of Common
Name Beneficial Ownership (1)(2) Stock Outstanding
<S> <C> <C>
Gregory T. Caswell
President and Chief Executive Officer 5,000 (3) *
Dennis D. Byrd
Treasurer 2,500 (3) *
Roger E. Klein
Director 102 *
Normand E. Simard
Chairman of the Board 1,438 (4) *
Edward K. Simensky
Director 205 *
Charles A. Stewart III
Director -- --
James H. Whittaker
President and Chief Executive Officer (former) (5) 3,376 (6) *
All directors and executive officers
as a group (6 persons) 9,245 (7) 1.5%
</TABLE>
___________________
* Less than 1% of shares outstanding.
(1) In accordance with Rule 13d-3 under the Securities Exchange Act of 1934, a
person is considered to "beneficially own" shares (i) over which he has or
shares voting or investment power or (ii) of which he has the right to
acquire beneficial ownership at any time within 60 days of June 11, 1996.
As used herein, "voting power" is the power to vote or direct the voting of
shares and "investment power" is the power to dispose or direct the
disposition of shares.
(2) Adjusted to reflect the one for ten reverse stock split effective May 31,
1995.
(3) Consists of restricted stock award made under the Plan (which vests over a
three-year period (from May 2, 1996)), subject to completion of the
Offering.
(4) Includes 616 shares held in a trust of which Mr. Simard is the sole
trustee.
(5) Mr. Whittaker resigned as President and Chief Executive Officer of the
Company and the Bank effective March 31, 1995.
(6) Includes 2,900 shares held jointly by Mr. Whittaker and his wife and a
total of 49 shares held by Mr. Whittaker on behalf of certain of his
children. Does not include a total of 49 shares held by Mr. Whittaker's
father on behalf of certain of his grandchildren.
(7) Includes 7,500 shares of restricted stock awarded under the Plan (which
vest over a three-year period (from May 2, 1996)), subject to completion
of the Offering.
90
<PAGE>
PRINCIPAL HOLDERS OF COMMON STOCK
The following table sets forth information as of June 11, 1996 with respect to
the ownership of Common Stock by each person believed by management to be the
beneficial owner of more than 5% of the outstanding Common Stock. The
historical information set forth below is based on the most recent Schedule 13D
filed on behalf of each such person with the SEC.
<TABLE>
<CAPTION>
AMOUNT AND PERCENT OF
NAME AND ADDRESS OF NATURE OF BENEFICIAL COMMON STOCK
BENEFICIAL OWNER OWNERSHIP (1)(2) OUTSTANDING
-------------------- ---------------------- --------------
<S> <C> <C>
Everest Partners, L.P. . . . . . . . . . . . 53,000 (3) 8.8%
100 Hudson Street, Suite 3D
New York, New York 10013
Jonathan Googel. . . . . . . . . . . . . . . 31,050 (4) 5.2
Ben Sisti
65 Kane Street
West Hartford, Connecticut 06119
</TABLE>
________________________
(1) In accordance with Rule 13d-3 under the Securities Exchange Act of 1934, a
person is considered to "beneficially own" shares (i) over which he or she
has or shares voting or investment power or (ii) of which he or she has
the right to acquire beneficial ownership at any time within 60 days of
June 11, 1996. As used herein, "voting power" is the power to vote or
direct the voting of shares and "investment power" is the power to dispose
or direct the disposition of shares.
(2) Adjusted to reflect the one for ten reverse stock split effective May 31,
1995.
(3) A Schedule 13D dated May 28, 1996 ("Schedule 13D") states that Everest
Partners, L.P. has sole voting power and sole dispositive power over
such shares. The Schedule 13D also states that Everest Advisors, Inc.
("Advisors"), the sole general partner of Everest Partners, L.P., and
David M.W. Harvey, the sole stockholder, sole director, president and
secretary of Advisors, have sole voting power and sole dispositive power
over such shares, although Advisors and Mr. Harvey disclaim direct and
indirect beneficial ownership of the shares reported pursuant to the
Schedule 13D.
(4) An Amendment No.5 to Schedule 13D filed on February 5, 1988 ("Amendment No.
5") states that Messrs. Googel and Sisti have shared voting power and
shared dispositive power over 31,050 shares. Amendment No. 5 further
states that Mr. Googel has sole voting and sole dispositive power over an
additional 3,000 shares. Amendment No. 5 also states that Mr. Sisti has
sole voting and sole dispositive power over an additional 1,300 shares.
The Company has been advised that Messrs. Googel and Sisti are the subject
of bankruptcy proceedings pending in the United States Bankruptcy Court
for the District of Connecticut and that their individual bankruptcy
proceedings have been substantively consolidated with the bankruptcy
proceedings of Colonial Realty Company, a Connecticut general partnership.
Hal M. Hirsch of Purchase, New York, serves as bankruptcy trustee of the
consolidated Chapter 7 estates.
91
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
From time to time the Bank makes residential mortgage loans to directors,
officers, principal stockholders and employees of the Company. Management
believes that these residential mortgage loans are made in the ordinary course
of business, are made on substantially the same terms, including interest rates
and collateral, as those prevailing at the time for comparable transactions with
other persons, and neither involve more than normal risk of collectibility nor
present other unfavorable features. Other than residential mortgage loans, the
Bank does not make loans to directors, officers, principal stockholders or
employees of the Company, except for a personal credit card issued to an
employee of the Bank prior to its adoption of this loan policy.
All future residential mortgage loans made by the Bank to directors, officers,
principal stockholders and employees of the Company will be made on terms no
less favorable than those available from unaffiliated third parties, will be
made in accordance with the requirements of Regulation O under the Federal
Reserve Act and will be approved by a majority of the Board of Directors of the
Bank, including a majority of disinterested directors.
During the 1995 fiscal year, the Bank paid Futures Strategies Corp. ("FSC"),
which is owned by Mr. Klein and of which he is President, $1,500 per month
for general investment services. There is no written contract between the
Bank and FSC with respect to the payment of such fees to, and the provision
of such services by, FSC.
92
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a)(1) The following consolidated financial statements of First Coastal
Corporation and Subsidiary, included at Item 8:
Consolidated Balance Sheets as of December 31, 1995 and 1994
Consolidated Statements of Operations for each of the three years in the period
ended December 31, 1995
Consolidated Statements of Stockholders' Equity for each of the three years in
the period ended December 31, 1995
Consolidated Statements of Cash Flows for each of the three years in the period
ended December 31, 1995
Notes to Consolidated Financial Statements--December 31, 1995
Report of Independent Accountants
(a)(2) All schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are not required
under the related instructions or are inapplicable and therefore have been
omitted.
(a)(3) Exhibits. The following exhibits are either filed as part of
this Report or are incorporated herein by reference:
EXHIBIT NO. 3 ARTICLES OF INCORPORATION AND BYLAWS
3.1(i)(a) Restated Certificate of Incorporation (filed as Exhibit
3.1(i) to Annual Report on Form 10-K for the year ended December 31, 1995,
File No. 0-14087 ("1995 Form 10-K"), and incorporated herein by reference).
3.1(i)(b) Certificate of Amendment of Restated Certificate of
Incorporation.
3.1(ii) Amended and Restated Bylaws (filed as Exhibit No. 3.1(ii)
to 1995 Form 10-K and incorporated herein by reference).
EXHIBIT NO. 10 MATERIAL CONTRACTS
10.1 Suffield Financial Corporation Stock Option Plan and Suffield Bank
Stock Option Plan (filed as Exhibits 4.5 and 4.6, respectively, to the
Company's Registration Statement on Form S-8, File No. 33-11400, and
incorporated herein by reference).
93
<PAGE>
10.2 Coastal Savings Bank Stock Option Plan (filed as Exhibit 4.7 to Post-
Effective Amendment No. 1 on Form S-8 to Form S-4, File No. 33-10189, and
incorporated herein by reference).
10.3 First Coastal Corporation Director's Deferred Compensation Plan
(filed as Exhibit 10.13 to Annual Report on Form 10-K for the year ended
December 31, 1993, File No. 0-14087, and incorporated herein by reference).
10.4 Amended and Restated Settlement Agreement, dated as of November 23,
1994, among First Coastal Corporation, Coastal Savings Bank and the Federal
Deposit Insurance Corporation (filed as Exhibit 99a to Current Report on Form 8-
K, filed December 5, 1994, and incorporated herein by reference).
10.5 Promissory Note, dated January 31, 1995, by First Coastal Corporation
for the benefit of the Federal Deposit Insurance Corporation (filed as Exhibit
99b to Current Report on Form 8-K, filed February 13, 1995 ("1995 Form 8-K"),
and incorporated herein by reference).
10.6 Stock Pledge Agreement, dated as of January 31, 1995, between First
Coastal Corporation and the Federal Deposit Insurance Corporation (filed as
Exhibit 99c to 1995 Form 8-K, and incorporated herein by reference).
10.7 Memorandum of Understanding, among Coastal Savings Bank, the Federal
Deposit Insurance Corporation and the Maine Bureau of Banking, effective as of
November 22, 1994 (filed as Exhibit 10.16 to Annual Report on Form 10-K for the
year ended December 31, 1994, File No. 0-14087 ("1994 Form 10-K"), and
incorporated herein by reference).
10.8 Employment Agreement, dated December 21, 1994, between Coastal
Savings Bank and James H. Whittaker (filed as Exhibit 10.17 to 1994 Form 10-K,
and incorporated herein by reference).
10.9 Employment Protection Agreement, dated December 21, 1994, between
Coastal Savings Bank and Dennis D. Byrd (filed as Exhibit 10.18 to 1994 Form 10-
K, and incorporated herein by reference).
10.10 Employment Protection Agreement, dated December 21, 1994, between
Coastal Savings Bank and Gregory T. Caswell (filed as Exhibit 10.19 to 1994 Form
10-K, and incorporated herein by reference).
10.11 Purchase and Assumption Agreement, dated February 22, 1996,
between Coastal Savings Bank and Maine Bank & Trust Company (filed as Exhibit
10.11 to 1995 Form 10-K, and incorporated herein by reference).
10.12 Agreement for Data Processing Services, dated February 28, 1996,
between Coastal Savings Bank and Data Dimensions Inc. (filed as Exhibit 10.12
to 1995 Form 10-K, and incorporated herein by reference).
10.13 First Coastal Corporation 1996 Stock Option and Equity
Incentive Plan.
94
<PAGE>
EXHIBIT NO. 21 SUBSIDIARY OF THE REGISTRANT
Subsidiary of the Company (filed as Exhibit 21 to 1995 Form 10-K, and
incorporated herein by reference).
EXHIBIT NO. 27 FINANCIAL DATA SCHEDULE
14(b) Not applicable.
14(c) Exhibits to this Amendment No. 3 to Form 10-K on Form 10-K/A are attached
or incorporated herein by reference as stated above.
14(d) Not applicable.
95
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 CORPORATION
June 13, 1996 By: /s/ Gregory T. Caswell
---------------------------
Gregory T. Caswell
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
June 13, 1996 By:/s/ Gregory T. Caswell
---------------------------
Gregory T. Caswell
President and Chief Executive
Officer
(Principal Executive Officer)
June 13, 1996 By:/s/ Dennis D. Byrd
---------------------------
Dennis D. Byrd
Treasurer
(Principal Financial and
Accounting Officer)
And by a majority of the Board of Directors of the Registrant.
June 13, 1996 By:/s/ Normand E. Simard
---------------------------
Normand E. Simard
Chairman of the Board and Director
June 13, 1996 By:/s/ Roger E. Klein
---------------------------
Roger E. Klein
Director
June 13, 1996 By:/s/ Edward K. Simensky
---------------------------
Edward K. Simensky
Director
June 13, 1996 By:/s/ Charles A. Stewart III
---------------------------
Charles A. Stewart III
Director
96
<PAGE>
EXHIBIT INDEX
Exhibit
No. Description of Exhibit
- ---------- ---------------------
3.1(i)(b) Certificate of Amendment of Restated Certificate of
Incorporation
10.13 First Coastal Corporation 1996 Stock Option and
Equity Incentive Plan
27 Financial Data Schedule
<PAGE>
Exhibit 3.1 (i)(b)
CERTIFICATE OF AMENDMENT
of
RESTATED CERTIFICATE OF INCORPORATION
of
FIRST COASTAL CORPORATION
First Coastal Corporation, a corporation organized and existing under and
by virtue of the General Corporation Law of the State of Delaware (the
"Corporation"), DOES HEREBY CERTIFY:
FIRST: This Certificate of Amendment was duly adopted in accordance with the
provisions of Section 242 of the General Corporation Law of the State of
Delaware, and was approved by the affirmative vote of the holders of at least
two-thirds of the shares entitled to vote thereon.
SECOND: The Restated Certificate of Incorporation of the Corporation hereby is
amended (a) to delete the caption of Article 10 in its entirety and to replace
it with a new caption of Article 10 to read in its entirety as follows:
"APPROVAL FOR CERTAIN STOCK ACQUISITIONS AND OFFERS TO ACQUIRE STOCK AND
ACQUISITIONS OF CONTROL AND OFFERS TO ACQUIRE CONTROL"; and (b) to delete
Subsection 1 of Article 10 in its entirety and to replace it with a new
Subsection 1 of Article 10 to read in its entirety as follows:
"SUBSECTION 1. Three-Year Restriction on Certain
Acquisitions and Offers to Acquire Voting Stock
In addition to and not in limitation of the provisions of
Subsections 2 through 6 of this Article 10 and except as
otherwise provided by this Subsection 1, for a period of three
years from the Effective Date, no Person shall become, or make
any Offer to become, a Beneficial Owner of 5% or more of the
Voting Stock of the Corporation (a "Prohibited 5% Owner") without
the prior approval of the Board of Directors of the Corporation.
A Person who is a Beneficial Owner of 5% or more of the Voting
Stock of the Corporation on the Effective Date (an "Existing 5%
Owner") shall not be deemed to be a Prohibited 5% Owner in
violation of this Subsection 1 solely as a result of such status;
PROVIDED, HOWEVER, that if after the Effective Date, any Existing
5% Owner shall
<PAGE>
become, or make any Offer to become, at any time the Beneficial
Owner of any additional shares of Voting Stock of the
Corporation, then such Person shall be deemed to be a Prohibited
5% Owner if, following the acquisition of such additional shares,
such Existing 5% Owner is or will be the Beneficial Owner of 5%
or more of the Voting Stock of the Corporation.
No Person shall become a Prohibited 5% Owner as the result
of an acquisition of shares of Voting Stock by the Corporation
which, by reducing the number of shares of Voting Stock of the
Corporation outstanding, increases the proportionate number of
shares of Voting Stock beneficially owned by such Person to 5% or
more of the shares of Voting Stock of the Corporation then
outstanding; PROVIDED, HOWEVER, that if a Person shall become a
Beneficial Owner of 5% or more of the Voting Stock of the
Corporation then outstanding by reason of share purchases by the
Corporation and shall, after such share purchases by the
Corporation, become the Beneficial Owner of any additional shares
of Voting Stock of the Corporation, then such Person shall be
deemed to be a Prohibited 5% Owner if such Person is then the
Beneficial Owner of 5% or more of the Voting Stock then
outstanding.
In the event that any Person becomes a Prohibited 5% Owner
in violation of this Article 10, such number of the shares of
Voting Stock of which such Person is the Beneficial Owner, in
excess of the number of shares of Voting Stock of which such
Person might be the Beneficial Owner without becoming a
Prohibited 5% Owner, shall be considered from and after the date
such Person becomes a Prohibited 5% Owner to be "excess shares"
for purposes of this Subsection 1. Such excess shares shall
thereafter no longer (i) be entitled to vote on any matter, (ii)
be entitled to take other shareholder action, (iii) be entitled
to be counted in determining the total number of outstanding
shares for purposes of any matter involving shareholder action,
or (iv) be transferable, except with the approval of the Board of
Directors or by an independent trustee appointed by the Board of
Directors for the purpose of having such excess shares sold on
the open market or otherwise. The proceeds from the sale by the
trustee of such excess shares shall be paid (i) first, to the
trustee in
-2-
<PAGE>
an amount equal to the trustee's reasonable fees and expenses,
(ii) second, to the Beneficial Owner of such excess shares in an
amount up to such owner's federal income tax basis in such excess
shares, and (iii) third, to the Corporation as to any remaining
balance.
If the Board of Directors of the Corporation determines in
good faith that a Person who would otherwise be a Prohibited 5%
Owner, as defined pursuant to the foregoing provisions, has
inadvertently become a Prohibited 5% Owner and such Person ceases
to be the Beneficial Owner and disposes of a sufficient number of
shares of Voting Stock within the time fixed by the Board of
Directors incident to the foregoing determination, so that such
Person would no longer be a Prohibited 5% Owner, pending and upon
such disposition of shares of Voting Stock, such Person shall not
be deemed a Prohibited 5% Owner for purposes of this Subsection 1
unless and until such Person shall subsequently become a
Prohibited 5% Owner.
For purposes of this Subsection 1, the term "Effective Date"
shall mean June 11, 1996, and the term "Beneficial Owner" shall
have the meaning ascribed to such term in Article 12, Subsection
3.C. hereof. For purposes of this Article 10, the terms
"Control," "Offer," "Person" and "Voting Stock" shall have the
meanings ascribed to such terms in Subsection 5 of this Article
10."
-3-
<PAGE>
IN WITNESS WHEREOF, the Corporation has caused this Certificate of
Amendment of Restated Certificate of Incorporation to be signed by Gregory T.
Caswell, its President and Chief Executive Officer, and attested to by Dennis D.
Byrd, its Treasurer, on this 11th day of June, 1996.
FIRST COASTAL CORPORATION
By:/s/ Gregory T. Caswell
-------------------------------------
Gregory T. Caswell
President and Chief Executive Officer
ATTEST:
By:/s/ Dennis D. Byrd
------------------
Dennis D. Byrd
Treasurer
-4-
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EXHIBIT 10.13
FIRST COASTAL CORPORATION
1996 STOCK OPTION AND EQUITY INCENTIVE PLAN
FIRST COASTAL CORPORATION (the "Corporation") sets forth herein the
terms of this 1996 Stock Option and Equity Incentive Plan (the "Plan") as
follows:
1. PURPOSE
The Plan is intended to advance the interests of the Corporation by
providing eligible individuals (as designated pursuant to Section 4 below) with
an opportunity to acquire or increase a proprietary interest in the Corporation,
which thereby will create a stronger incentive to expend maximum effort for the
growth and success of the Corporation and its subsidiaries, and will encourage
such eligible individuals to remain in the employ or service of the Corporation
or that of one or more of its subsidiaries. To this end, the Plan provides for
the grant of stock options and the issuance of shares of stock as a bonus,
including restricted stock, all as set out herein.
Each stock option granted under the Plan (an "Option") is intended to
be an "incentive stock option" within the meaning of section 422 of the Internal
Revenue Code of 1986, as amended from time to time, or the corresponding
provision of any subsequently enacted tax statute (the "Code"), except (i) to
the extent that any such Option would exceed the limitations set forth in
Section 7 below; (ii) for Options specifically designated at the time of grant
as not being "incentive stock options" and (iii) for Options granted to
directors of the Corporation who are not officers or other salaried employees of
the Corporation or any of its subsidiaries ("Non-Employee Directors"). Shares
of stock may also be issued to employees pursuant to the Plan as a bonus or in
lieu of a cash bonus and such shares may be subject to vesting and transfer
restrictions, in accordance with the provisions of Section 6 below. Such grants
and awards are referred to collectively as "Incentive Awards." Each Incentive
Award shall be evidenced by a written agreement between the Corporation and the
recipient employee setting out the terms and conditions of the grant (an
"Agreement").
2. ADMINISTRATION
(a) BOARD. The Plan shall be administered by the Board of Directors
of the Corporation (the "Board"), which shall have the full power and authority
to take all actions, and to make all determinations required or provided for
under the Plan or any Incentive Award granted or Agreement entered into
hereunder and all such other actions and determinations not inconsistent with
the specific terms and provisions of the Plan deemed by the Board to be
necessary or appropriate to the administration of the Plan or any Incentive
Award granted or Agreement entered into hereunder. All such actions and
determinations shall be by the affirmative vote of a majority of the members of
the Board present at a meeting at which any issue relating to the Plan is
properly raised for consideration or by unanimous consent of the Board executed
in writing in accordance with the Corporation's Certificate of Incorporation and
By-Laws, and with applicable law. The interpretation and construction by the
Board of any provision of the Plan or of any Incentive Award granted or
Agreement entered into hereunder shall be final and conclusive.
(b) COMMITTEE. The Board may from time to time appoint an Incentive
Compensation Committee (the "Committee") consisting of not less than three
members of the Board, none of whom shall be an officer or other salaried
employee of the Corporation or any of its subsidiaries, and each of whom shall
qualify in all respects as an "outside director" for purposes of Treasury
Regulations Section 1.162-27(e)(3) and, to the extent required to satisfy the
requirements of Rule
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16b-3 of the Securities and Exchange Commission under the Securities Exchange
Act of 1934 (the "Exchange Act"), as a "disinterested person". The Board, in
its sole discretion, may provide that the role of the Committee shall be limited
to making recommendations to the Board concerning any determinations to be made
and actions to be taken by the Board pursuant to or with respect to the Plan, or
the Board may delegate to the Committee such powers and authorities related to
the administration of the Plan, as set forth in Section 2(a) above, as the Board
shall determine, consistent with the Certificate of Incorporation and By-Laws of
the Corporation and applicable law. The Board may remove members, add members,
and fill vacancies on the Committee from time to time, all in accordance with
the Corporation's Certificate of Incorporation and By-Laws, and with applicable
law. The majority vote of the Committee, or acts reduced to or approved in
writing by a majority of the members of the Committee, shall be the valid acts
of the Committee.
(c) NO LIABILITY. No member of the Board or of the Committee shall
be liable for any action or determination made in good faith with respect to the
Plan or any Incentive Award granted or Agreement entered into hereunder.
(d) DELEGATION TO THE COMMITTEE. In the event that the Plan or any
Incentive Award granted or Agreement entered into hereunder provides for any
action to be taken by or determination to be made by the Board, such action may
be taken by or such determination may be made by the Committee if the power and
authority to do so has been delegated to the Committee by the Board as provided
for in Section 2(b) above. Unless otherwise expressly determined by the Board,
any such action or determination by the Committee shall be final and conclusive.
(e) ACTION BY THE BOARD. Except as indicated below, the Board may
act under the Plan other than by, or in accordance with the recommendations of,
the Committee, constituted as set forth in Section 2(b) above with respect to
Incentive Awards granted to individuals who are subject to Section 16 of the
Exchange Act, only if a majority of the members of the Board are "disinterested
persons" as defined in Rule 16b-3 of the Securities and Exchange Commission
under the Exchange Act. This restriction on the Board's actions under the Plan,
however, shall not apply in the event the restriction ceases to be a requirement
for reliance upon the exemption provided by Rule 16b-3.
3. STOCK
The stock that may be issued pursuant to Incentive Awards granted
under the Plan shall be shares of Common Stock, par value $1.00 per share, of
the Corporation (the "Stock"), which shares may be treasury shares or authorized
but unissued shares. The number of shares of Stock that may be issued pursuant
to Incentive Awards granted under the Plan shall not exceed in the aggregate
130,000 shares, which number of shares is subject to adjustment as hereinafter
provided in Section 17 below. If any Incentive Award expires, terminates, or is
terminated or forfeited for any reason prior to exercise or vesting in full, the
shares of Stock that were subject to the unexercised or forfeited portion of
such Incentive Award shall be available for future Incentive Awards granted
under the Plan.
4. ELIGIBILITY
(a) EMPLOYEES. Incentive Awards may be granted under the Plan to any
full-time employee of the Corporation or any "subsidiary corporation" thereof
within the meaning of Section 424(f) of the Code (a "Subsidiary") (including any
such employee who is an officer or director of the Corporation or any
Subsidiary) as the Board shall determine and designate from time to time prior
to expiration or termination of the Plan. The maximum number of shares of Stock
subject to Options that may be granted under the Plan to any officer or other
employee of the Corporation or any Subsidiary in any calendar year is 30,000
shares (subject to adjustment as provided in Section 17 hereof).
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(b) NON-EMPLOYEE DIRECTORS. Subject to the availability of shares
issued under Section 3 of the Plan, (i) on the date of the first public offering
of the Corporation's Stock occurring after the effective date (as defined in
Section 5(a) below) an Option to purchase up to 1,500 shares of Stock, at the
price at which the Stock is offered to the public in such offering and upon the
other terms and conditions specified in the Plan, shall be granted under the
Plan to each individual who is serving as a Non-Employee Director on that date,
except that such Options shall not be granted if no such offering occurs before
December 31, 1996 and (ii) as of each annual meeting of stockholders of the
Company occurring after December 31, 1996, an Option to purchase up to 500
shares of Stock, at the price and upon the other terms and conditions specified
in the Plan, shall be granted under the Plan to each Non-Employee Director who
is elected to the Board of Directors of the Corporation by the stockholders at
such meeting or whose term of office continues after such meeting.
5. EFFECTIVE DATE AND TERM OF THE PLAN
(a) EFFECTIVE DATE. The Plan shall be effective as of the date of
adoption by the Board, subject to approval of the Plan within one year of such
effective date by a majority of the votes present, either in person or by proxy,
and entitled to vote at a duly held meeting of the stockholders at which a
quorum representing at least one-third of all the outstanding voting stock is
present, either in person or by proxy; PROVIDED, HOWEVER, that upon approval of
the Plan by the stockholders of the Corporation as set forth above, all
Incentive Awards granted under the Plan on or after the effective date shall be
fully effective as if the stockholders of the Corporation had approved the Plan
on the effective date. If the stockholders fail to approve the Plan within one
year of such effective date, any Incentive Awards granted hereunder shall be
null and void and of no effect.
(b) TERM. The Plan shall terminate on the date ten years from the
effective date.
6. GRANT OF INCENTIVE AWARDS
(a) OPTIONS. Subject to the terms and conditions of the Plan, the
Board may, at any time and from time to time, prior to the date of termination
of the Plan, grant to such eligible individuals as the Board may determine
("Optionees"), Options to purchase such number of shares of the Stock on such
terms and conditions as the Board may determine, including any terms or
conditions which may be necessary to qualify such Options as "incentive stock
options" under Section 422 of the Code.
(b) BONUS AND RESTRICTED STOCK AWARDS. Subject to the terms of the
Plan, the Board may, at any time and from time to time, prior to the date of
termination of the Plan, grant to such eligible individuals as the Board may
determine ("Holders"), shares of Stock, subject to the attainment of such
performance objectives, the completion of such service requirements (if any) and
the payment of such amount (if any) as the Board shall determine and specify as
a condition to making such grant. Each such grant shall be effected by the
execution of an Agreement setting out the terms and conditions applicable
thereto and by the issuance of shares of Stock or restricted Stock. Agreements
covering bonus or restricted Stock awards need not contain the same or similar
provisions, PROVIDED, that all such Agreements shall comply with the terms of
the Plan. Upon attainment of the specified objectives and requirements (or, to
the extent specified by the Board, partial attainment of such objectives and
requirements), the Holder shall be entitled to shares of Stock specified in the
grant (or the portion of such shares earned by partial attainment of the
objectives and requirements, as applicable) free of restrictions, except that
such shares of Stock shall continue to be subject to the restrictions set out in
Sections 10(d) and 15. Except as shall otherwise have been specified in the
Agreement at the time of grant or in any duly executed amendment thereto, the
shares of restricted Stock (or appropriate portion thereof) shall be forfeited
and shall again be available for regrant under the terms of the Plan upon
(i) the failure of the Holder to pay the price (if any) specified for the shares
within the time set by the Board at the time of the grant, (ii) upon the
expiration of the specified period for attaining performance objectives without
such
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objectives having been achieved or (iii) upon termination of the Holder's
employment without the Holder having satisfied the service requirement specified
at the time of grant. The Board may require that the certificates evidencing
the grant of shares of restricted Stock hereunder be held in escrow until such
restrictions have expired. The Board may also cause a legend to be placed on
such certificates making appropriate reference to the restrictions to which the
shares are subject.
(c) DATE OF GRANT. The date on which the Board approves the grant of
an Incentive Award shall be considered the date on which such Incentive Award is
granted.
7. LIMITATION ON INCENTIVE STOCK OPTIONS
An Option (other than an Option described in exception (ii) or (iii)
of Section 1) shall constitute an Incentive Stock Option to the extent that the
aggregate fair market value (determined at the time the option is granted) of
the Stock with respect to which Incentive Stock Options are exercisable for the
first time by any Optionee during any calendar year (under the Plan and all
other plans of the Optionee's employer corporation and its parent and subsidiary
corporations within the meaning of Section 422(d)(1) of the Code) does not
exceed $100,000.
8. OPTION AGREEMENTS
All Options granted pursuant to the Plan shall be evidenced by written
agreements ("Option Agreements"), to be executed by the Corporation and by the
Optionee, in such form or forms as the Board shall from time to time determine.
Option Agreements covering Options granted from time to time or at the same time
need not contain similar provisions; PROVIDED, HOWEVER, that all such Option
Agreements shall comply with all terms of the Plan.
9. OPTION PRICE
The purchase price of each share of the Stock subject to an Option
(the "Option Price") shall be fixed by the Board and stated in each Option
Agreement, and shall be not less than the greater of par value or one hundred
percent of the fair market value of a share of the Stock on the date the Option
is granted (as determined in good faith by the Board); PROVIDED, HOWEVER, that
in the event the Optionee would otherwise be ineligible to receive an "incentive
stock option" by reason of the provisions of Sections 422(b)(6) and 424(d) of
the Code (relating to stock ownership of more than ten percent), the Option
Price of an Option which is intended to be an "incentive stock option" (within
the meaning of Section 422 of the Code) shall be not less than the greater of
par value or one hundred and ten percent of the fair market value of a share of
Stock at the time such Option is granted. In the event that the Stock is listed
on an established national or regional stock exchange, is admitted to quotation
on the National Association of Securities Dealers Automated Quotation System, or
is publicly traded in an established securities market, in determining the fair
market value of the Stock, the Board shall use the closing price of the Stock on
such exchange or System or in such market (the highest such closing price if
there is more than one such exchange or market) on the trading date immediately
before the Option is granted (or, if there is no such closing price, then the
Board shall use the mean between the highest bid and lowest asked prices or
between the high and low prices on such date), or, if no sale of the Stock has
been made on such day, on the next preceding day on which any such sale shall
have been made.
10. TERM AND EXERCISE OF OPTIONS
(a) TERM. Each Option granted under the Plan shall terminate and all
rights to purchase shares thereunder shall cease upon the expiration of ten
years from the date such Option is granted, or, with respect to Options granted
to persons other than Non-Employee Directors, on such
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date prior thereto as may be fixed by the Board and stated in the Option
Agreement relating to such Option; PROVIDED, HOWEVER, that in the event the
Optionee would otherwise be ineligible to receive an "incentive stock option" by
reason of the provisions of Sections 422(b)(6) and 424(d) of the Code (relating
to stock ownership of more than ten percent), an Option granted to such Optionee
which is intended to be an "incentive stock option" (within the meaning of
Section 422 of the Code) shall in no event be exercisable after the expiration
of five years from the date it is granted.
(b) OPTION PERIOD AND LIMITATIONS ON EXERCISE. Each Option granted
under the Plan to persons other than Non-Employee Directors shall be
exercisable, in whole or in part, at any time and from time to time, over a
period commencing on or after the date of grant and ending upon the expiration
or termination of the Option, as the Board shall determine and set forth in the
Option Agreement relating to such Option. Without limiting the foregoing, the
Board, subject to the terms and conditions of the Plan, may in its sole
discretion provide that an Option may not be exercised in whole or in part for
any period or periods of time during which such Option is outstanding; PROVIDED,
HOWEVER, that any such limitation on the exercise of an Option contained in any
Option Agreement may be rescinded, modified or waived by the Board, in its sole
discretion, at any time and from time to time after the date of grant of such
Option, so as to accelerate the time at which the Option may be exercised. Each
Option granted to a Non-Employee Director shall be exercisable, in whole or in
part, at any time and from time to time, over a period commencing on the date of
grant and ending upon the expiration of the Option. Notwithstanding any other
provisions of the Plan, no Option granted to an Optionee under the Plan shall be
exercisable in whole or in part prior to the date the Plan is approved by the
stockholders of the Corporation as provided in Section 5 above.
(c) METHOD OF EXERCISE. An Option that is exercisable hereunder may
be exercised by delivery to the Corporation on any business day, at its
principal office, addressed to the attention of the Committee, of written notice
of exercise, which notice shall specify the number of shares with respect to
which the Option is being exercised, and shall be accompanied by payment in full
of the Option Price of the shares for which the Option is being exercised. The
minimum number of shares of Stock with respect to which an Option may be
exercised, in whole or in part, at any time shall be the lesser of 100 shares or
the maximum number of shares available for purchase under the Option at the time
of exercise. Payment of the Option Price for the shares of Stock purchased
pursuant to the exercise of an Option shall be made (i) in cash or in cash
equivalents; (ii) through the tender to the Corporation of shares of Stock,
which shares shall be valued, for purposes of determining the extent to which
the Option Price has been paid thereby, at their fair market value (determined
in the manner described in Section 9 above) on the date of exercise; or (iii) by
a combination of the methods described in (i) and (ii). Notwithstanding the
preceding sentence, payment in full of the Option Price need not accompany the
written notice of exercise provided the notice of exercise directs that the
Stock certificate or certificates for the shares for which the Option is
exercised be delivered to a licensed broker acceptable to the Corporation as the
agent for the individual exercising the Option and, at the time such Stock
certificate or certificates are delivered, the broker tenders to the Corporation
cash (or cash equivalents acceptable to the Corporation) equal to the Option
Price for the shares of Stock purchased pursuant to the exercise of the Option
plus the amount (if any) of federal and/or other taxes which the Corporation,
may, in its judgment, be required to withhold with respect to the exercise of
the Option. An attempt to exercise any Option granted hereunder other than as
set forth above shall be invalid and of no force and effect. Promptly after the
exercise of an Option and the payment in full of the Option Price of the shares
of Stock covered thereby, the individual exercising the Option shall be entitled
to the issuance of a Stock certificate or certificates evidencing his ownership
of such shares. A separate Stock certificate or certificates shall be issued
for any shares purchased pursuant to the exercise of an Option which is an
"incentive stock option" (within the meaning of Section 422 of the Code)
("Incentive Stock Option"), which certificate or certificates shall not include
any shares which were purchased pursuant to the exercise of an Option which is
not an Incentive Stock Option. An individual holding or exercising an Option
shall have none of the rights of a stockholder until the shares of Stock covered
thereby are fully paid and issued to him and, except as provided in Section 17
below, no adjustment shall be made for dividends or other rights for which the
record date is prior to the date of such issuance.
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(d) RESTRICTIONS ON TRANSFER OF STOCK AND RIGHTS OF CORPORATION TO
REPURCHASE SHARES. If an Option is exercised before the date that is six months
from the later of (i) the date of grant of the Option or (ii) the date of
stockholder approval of the Plan and the individual exercising the Option is a
reporting person under Section 16(a) of the Exchange Act, then such certificate
or certificates shall bear a legend, if necessary to qualify for an exemption
under Rule 16b-3 under the Exchange Act, restricting the transfer of the Stock
covered thereby until the expiration of six months from the later of the date
specified in clause (i) above or the date specified in clause (ii) above. The
Board may provide in the Agreement relating to an Incentive Award granted to an
employee or in a separate instrument for (a) restrictions and limitations on the
transferability of the shares of Stock issued or to be acquired upon exercise of
an Option granted as a part of such Incentive Award, (b) an agreement between
the Optionee and the Corporation for the sale of such shares by the Optionee and
their purchase by the Corporation upon the happening of such events, and at such
price and under such other terms and conditions as the Board shall determine and
(c) such other restrictions or limitations on such shares as it may deem
advisable, including restrictions pursuant to Section 15 hereof. All share
certificates issued to evidence shares of Stock issued hereunder (including
shares issued as a result of the exercise of an Option) shall bear such legends
and statements as the Board shall deem appropriate or advisable to reflect any
such restrictions, limitations or agreements.
11. TRANSFERABILITY OF OPTIONS
During the lifetime of an Optionee to whom an Option is granted, only
such Optionee (or, in the event of legal incapacity or incompetency, the
Optionee's guardian or conservator, committee or other legal representative) may
exercise the Option, except that such restriction shall apply in the case of an
Option that is not an Incentive Stock Option only if such restriction is
required to satisfy the requirements of Rule 16b-3 under the Exchange Act. No
Incentive Stock Option shall be assignable or transferable by the Optionee to
whom it is granted, other than by will or the laws of descent and distribution.
12. TERMINATION OF EMPLOYMENT OR SERVICE
(a) EMPLOYEES. Upon the termination of the employment of an Optionee
with the Corporation or a Subsidiary, other than by reason of the death or
"permanent and total disability" (within the meaning of Section 22(e)(3) of the
Code) of such Optionee, any Option granted to an Optionee pursuant to the Plan
shall terminate three months after the date of such termination of employment,
unless earlier terminated pursuant to Section 10(a) above, and such Optionee
shall have no further right to purchase shares of Stock pursuant to such Option;
PROVIDED, HOWEVER, that the Board may provide, by inclusion of appropriate
language in any Option Agreement, that an Optionee may (subject to the general
limitations on exercise set forth in Section 10(b)), in the event of termination
of employment of the Optionee with the Corporation or a Subsidiary, exercise an
Option, in whole or in part, at any time after such termination of employment
and before termination of the Option as provided in Section 10(a) above, either
subject to or without regard to any installment limitation on exercise imposed
pursuant to Section 10(b) above. Upon the termination of the employment of a
Holder with the Corporation or a Subsidiary, other than by reason of the death
or "permanent and total disability" (within the meaning of Section 22(e)(3) of
the Code) of such Holder, any shares of restricted Stock that have not become
vested shall be forfeited. Whether a leave of absence or leave on military or
government service shall constitute a termination of employment for purposes of
the Plan shall be determined by the Board, which determination shall be final
and conclusive. For purposes of the Plan, a termination of employment with the
Corporation or a Subsidiary shall not be deemed to occur if the Optionee or
Holder is immediately thereafter employed with the Corporation or any
Subsidiary.
(b) NON-EMPLOYEE DIRECTORS. Any Option granted to a Non-Employee
Director shall not terminate until the expiration of the ten-year term of the
Option regardless of whether the
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Non-Employee Director continues to serve as a director of the Corporation or any
subsidiary of the Corporation, as applicable.
13. RIGHTS IN THE EVENT OF DEATH OR DISABILITY
(a) DEATH OF AN EMPLOYEE. If the Optionee dies while employed by the
Corporation or a Subsidiary or after termination of employment and during the
period in which an Option may be exercised hereunder, except as otherwise is
provided in the Option Agreement relating to such Option, the executors or
administrators or legatees or distributees of such Optionee's estate shall have
the right (subject to the general limitations on exercise set forth in Section
10(b) above), at any time within one year after the date of the Optionee's death
and prior to termination of the Option as provided in Section 10(a) above, to
exercise any Option held by such Optionee at the date of such Optionee's death,
whether or not such Option was exercisable immediately prior to such Optionee's
death; PROVIDED, HOWEVER, that the Board may provide, by inclusion of
appropriate language in any Option Agreement, that in the event of the death of
the Optionee, the holder of an Option may (subject to the general limitations on
exercise set forth in Section 10(b)), exercise an Option, in whole or in part,
at any time after the Optionee's death and before termination of the Option as
provided in Section 10(a) above, either subject to or without regard to any
installment limitation on exercise imposed pursuant to Section 10(b) above. The
extent to which shares of restricted Stock shall become vested as a result of
the Holder's death while employed by the Corporation or a Subsidiary shall be
specified in the Agreement with respect to such Incentive Award.
(b) DISABILITY OF AN EMPLOYEE. If the Optionee terminates employment
with the Corporation or a Subsidiary by reason of the "permanent and total
disability" (within the meaning of Section 22(e)(3) of the Code) of such
Optionee, then such Optionee shall have the right (subject to the general
limitations on exercise set forth in Section 10(b) above), at any time within
one year after such termination of employment and prior to termination of the
Option as provided in Section 10(a) above, to exercise, in whole or in part, any
Option held by such Optionee at the date of such termination of employment,
whether or not such Option was exercisable immediately prior to such termination
of employment; PROVIDED, HOWEVER, that the Board may provide, by inclusion of
appropriate language in the Option Agreement, that the Optionee may (subject to
the general limitations on exercise set forth in Section 10(b) above), in the
event of the termination of employment of the Optionee with the Corporation or a
Subsidiary by reason of the "permanent and total disability" (within the meaning
of Section 22(e)(3) of the Code) of such Optionee, exercise an Option, in whole
or in part, at any time after such termination of employment and before
termination of the Option as provided in Section 10(a) above, either subject to
or without regard to any installment limitation on exercise imposed pursuant to
Section 10(b) above. Whether a termination of employment is to be considered by
reason of "permanent and total disability" for purposes of this Plan shall be
determined by the Board, which determination shall be final and conclusive. The
extent to which shares of restricted Stock shall become vested as a result of
the Holder's disability while employed by the Corporation or a Subsidiary shall
be specified in the Agreement with respect to such Incentive Award.
(c) DEATH OR DISABILITY OF A NON-EMPLOYEE DIRECTOR. Any Option
granted to a Non-Employee Director shall continue to be exercisable following
the death or disability of the Non-Employee Director until the expiration of the
Option under Section 10(a) above.
14. USE OF PROCEEDS
The proceeds received by the Corporation from the sale of Stock
pursuant to Incentive Awards granted under the Plan shall constitute general
funds of the Corporation.
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15. REQUIREMENTS OF LAW
(a) VIOLATIONS OF LAW. The Corporation shall not be required to sell
or issue any shares of Stock under any Incentive Award if the sale or issuance
of such shares would constitute a violation by the individual receiving such
shares or exercising an Option or by the Corporation of any provisions of any
law or regulation of any governmental authority, including without limitation
any federal or state securities laws or regulations. Specifically in connection
with the Securities Act of 1933 (as now in effect or as hereafter amended), upon
exercise of any Option, unless a registration statement under such Act is in
effect with respect to the shares of Stock covered by such Option, the
Corporation shall not be required to sell or issue such shares unless the Board
has received evidence satisfactory to it that the holder of such Option may
acquire such shares pursuant to an exemption from registration under such Act.
Any determination in this connection by the Board shall be final, binding, and
conclusive. The Corporation may, but shall in no event be obligated to,
register any securities covered hereby pursuant to the Securities Act of 1933
(as now in effect or as hereafter amended). The Corporation shall not be
obligated to take any affirmative action in order to cause the exercise of an
Option or the issuance of shares pursuant thereto to comply with any law or
regulation of any governmental authority. As to any jurisdiction that expressly
imposes the requirement that an Option shall not be exercisable unless and until
the shares of Stock covered by such Option are registered or are subject to an
available exemption from registration, the exercise of such Option (under
circumstances in which the laws of such jurisdiction apply) shall be deemed
conditioned upon the effectiveness of such registration or the availability of
such an exemption.
(b) COMPLIANCE WITH RULE 16B-3. The Plan is intended to comply with
Rule 16b-3 or its successor under the Exchange Act. With respect to persons
subject to Section 16 of the Exchange Act, any provision of the Plan or action
of the Plan administrators that is inconsistent with such Rule shall be deemed
null and void to the extent permitted by law and deemed advisable by the Plan
administrators.
16. AMENDMENT AND TERMINATION OF THE PLAN
The Board may, at any time and from time to time, amend, suspend or
terminate the Plan as to any shares of Stock as to which Incentive Awards have
not been granted; PROVIDED, HOWEVER, that no amendment by the Board shall,
without approval by a majority of the votes present, either in person or by
proxy, and entitled to vote at a duly held meeting of stockholders at which a
quorum representing at least one-third of all the outstanding voting stock of
the Corporation is present, either in person or by proxy, (a) change the
requirements as to eligibility to receive Incentive Awards; (b) increase the
maximum number of shares of Stock in the aggregate that may be issued pursuant
to Incentive Awards granted under the Plan (except as permitted under Section 17
hereof); or (c) materially increase the benefits accruing to eligible
individuals under the Plan. Except as permitted under Section 17 hereof, no
amendment, suspension or termination of the Plan shall, without the consent of
the holder of the Incentive Award, alter or impair rights or obligations under
any Incentive Award theretofore granted under the Plan.
17. EFFECT OF CHANGES IN CAPITALIZATION
(a) CHANGES IN STOCK. If the outstanding shares of Stock are
increased or decreased or changed into or exchanged for a different number or
kind of shares or other securities of the Corporation by reason of any
recapitalization, reclassification, stock split-up, combination of shares,
exchange of shares, stock dividend or other distribution payable in capital
stock, or other increase or decrease in such shares effected without receipt of
consideration by the Corporation, occurring after the effective date of the
Plan, the number and kinds of shares for the issuance of which Incentive Awards
may be granted under the Plan shall be adjusted proportionately and
appropriately by the Corporation. In addition, the number and kind of shares
for which Options are outstanding shall be adjusted proportionately and
appropriately so that the proportionate interest of
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the holder of the Option immediately following such event shall, to the extent
practicable, be the same as immediately prior to such event. Any such
adjustment in outstanding Options shall not change the aggregate Option Price
payable with respect to shares subject to the unexercised portion of the Option
outstanding but shall include a corresponding proportionate adjustment in the
Option Price per share.
(b) REORGANIZATION IN WHICH THE CORPORATION IS THE SURVIVING
CORPORATION. Subject to Subsection (c) hereof, if the Corporation shall be the
surviving corporation in any reorganization, merger, or consolidation of the
Corporation with one or more other corporations, any Option theretofore granted
pursuant to the Plan shall pertain to and apply to the securities to which a
holder of the number of shares of Stock subject to such Option would have been
entitled immediately following such reorganization, merger, or consolidation,
with a corresponding proportionate adjustment of the Option Price per share so
that the aggregate Option Price thereafter shall be the same as the aggregate
Option Price of the shares remaining subject to the Option immediately prior to
such reorganization, merger, or consolidation.
(c) REORGANIZATION IN WHICH THE CORPORATION IS NOT THE SURVIVING
CORPORATION OR SALE OF ASSETS OR STOCK. Upon the dissolution or liquidation of
the Corporation, or upon a merger, consolidation or reorganization of the
Corporation with one or more other corporations in which the Corporation is not
the surviving corporation, or upon a sale of all or substantially all of the
assets of the Corporation to another corporation, or upon any transaction
(including, without limitation, a merger or reorganization in which the
Corporation is the surviving corporation) approved by the Board which results in
any person or entity owning eighty percent or more of the combined voting power
of all classes of stock of the Corporation, the Plan and all Options outstanding
hereunder shall terminate, except to the extent provision is made in writing in
connection with such transaction for the continuation of the Plan and/or the
assumption of the Options theretofore granted, or for the substitution for such
Options of new options covering the stock of a successor corporation, or a
parent or subsidiary thereof, with appropriate adjustments as to the number and
kinds of shares and exercise prices, in which event the Plan and Options
theretofore granted shall continue in the manner and under the terms so
provided. Except as otherwise provided in the Option Agreement with respect to
an Option granted other than to a Non-Employee Director, in the event of any
such termination of the Plan, each individual holding an Option shall have the
right (subject to the general limitations on exercise set forth in Section 10(b)
above), immediately prior to the occurrence of such termination and during such
period occurring prior to such termination as the Board in its sole discretion
shall determine and designate, to exercise such Option in whole or in part,
whether or not such Option was otherwise exercisable at the time such
termination occurs and without regard to any installment limitation on exercise
imposed pursuant to Section 10(b) above. The Board shall send written notice of
an event that will result in such a termination to all individuals who hold
Options not later than the time at which the Corporation gives notice thereof to
its stockholders.
(d) ADJUSTMENTS. Adjustments under this Section 17 related to Stock
or securities of the Corporation shall be made by the Board, whose determination
in that respect shall be final, binding, and conclusive. No fractional shares
of Stock or units of other securities shall be issued pursuant to any such
adjustment, and any fractions resulting from any such adjustment shall be
eliminated in each case by rounding downward to the nearest whole share or unit.
(e) NO LIMITATIONS ON CORPORATION. The grant of an Incentive Award
pursuant to the Plan shall not affect or limit in any way the right or power of
the Corporation to make adjustments, reclassifications, reorganizations or
changes of its capital or business structure or to merge, consolidate, dissolve
or liquidate, or to sell or transfer all or any part of its business or assets.
18. DISCLAIMER OF RIGHTS
No provision in the Plan or in any Incentive Award granted or
Agreement entered into pursuant to the Plan shall be construed to confer upon
any individual the right to remain in the
9
<PAGE>
employ or service of the Corporation or any Subsidiary, or to interfere in any
way with the right and authority of the Corporation or any Subsidiary either to
increase or decrease the compensation of any individual at any time, or to
terminate any employment or other relationship between any individual and the
Corporation or any Subsidiary.
19. NONEXCLUSIVITY OF THE PLAN
Neither the adoption of the Plan nor the submission of the Plan to the
stockholders of the Corporation for approval shall be construed as creating any
limitations upon the right and authority of the Board to adopt such other
incentive compensation arrangements (which arrangements may be applicable either
generally to a class or classes of individuals or specifically to a particular
individual or individuals) as the Board in its discretion determines desirable,
including, without limitation, the granting of stock options otherwise than
under the Plan.
* * *
This Plan was duly adopted and approved by the Board of Directors of
the Corporation by resolution at a meeting held on the 2nd day of May, 1996.
/s/ Patricia Briand
----------------------------------------
Secretary of the Corporation
This Plan was duly approved by the stockholders of the Corporation at
a meeting held on the 11th day of June, 1996.
/s/ Patricia Briand
----------------------------------------
Secretary of the Corporation
10
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