<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to __________
Commission file number 0-14087
FIRST COASTAL CORPORATION
-----------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 06-1177661
(State or other jurisdiction of (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. [ ]
Based upon the closing price of the registrant's common stock as of March
25, 1997, the aggregate market value of the common stock held by nonaffiliates
was $12,963,707.
As of the close of business on March 25, 1997, 1,357,861, shares of the
registrant's common stock, par value $1.00 per share, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Stockholders for the fiscal year ended
December 31, 1996 are incorporated by reference in Part II.
Portions of the definitive proxy statement for the annual meeting of
stockholders to be held May 21, 1997, which the registrant intends to file no
later than 120 days after December 31, 1996 are incorporated by reference in
Part III.
<PAGE>
PART I
ITEM 1. BUSINESS.
GENERAL
FIRST COASTAL CORPORATION
First Coastal Corporation, a Delaware corporation (the "Company"), is a bank
holding company whose sole operating subsidiary is Coastal Savings Bank, a
Maine-chartered stock 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, 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, and the Bank became a direct wholly-owned
subsidiary of the Company.
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 $148 million at December 31, 1996.
The region served by the Bank includes the communities of Brunswick, Freeport,
Kennebunk, Saco, Topsham and Westbrook, Maine. The Bank operated seven banking
offices as of December 31, 1996.
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 up to the limits provided by law 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.
CERTAIN REGULATORY MATTERS
SATISFACTION OF THE CROSS GUARANTY SETTLEMENT OBLIGATION TO FDIC
On July 24, 1996, the Company completed its recapitalization plan pursuant to
which the Company satisfied in full its obligation to the FDIC arising from the
January 1995 settlement of the FDIC 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 "FDIC Note"),
secured by the Company's pledge of 100% of the outstanding common stock of the
Bank. In 1994, the Company incurred a $9.0 million extraordinary charge to
earnings resulting from the issuance of the FDIC Note. Principal and interest
under the FDIC Note were deferred until its maturity date, January 31, 1997.
The funds used to repay the FDIC Note were derived from (i) the sale of 750,000
shares of the Company's common stock at $5.00 per share pursuant to a registered
public offering; (ii) a dividend of $3.2 million from the
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Bank to the Company; and (iii) the borrowing of $4.0 million from a group of
four Maine savings banks (the "Savings Banks"), secured by the pledge by the
Company of 100% of the outstanding common stock of the Bank. For further
information see "Note I --Borrowings" in the Company's 1996 Annual Report to
Stockholders.
TERMINATION OF THE MEMORANDUM OF UNDERSTANDING
On September 9, 1996 and September 16, 1996, the Company was notified by the
Superintendent of the Maine Bureau of Banking and the Regional Director of the
Boston Regional Office of the FDIC, respectively, that the Memorandum of
Understanding previously entered into among the FDIC, the Maine Bureau of
Banking and the Bank on November 22, 1994 (the "Memorandum of Understanding")
was terminated.
REGULATORY CAPITAL REQUIREMENTS
Under applicable federal regulations, the Company and Coastal are each required
to maintain minimum levels of regulatory capital. The Board of Governors of the
Federal Reserve System (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 tier 1 capital to risk-weighted assets of 4.0%
and 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, such as the Company, 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.
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, and qualifying
total capital to risk-weighted assets of 9.28%, 14.31%, and 15.60%,
respectively, at December 31, 1996 were in compliance 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 6.62%, 10.21%
and 11.54%, respectively.
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 CAMELS rating of the
bank. At December 31, 1996, the Bank had a Tier 1 capital to total assets ratio
of 9.28%. 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, 1996, the Bank had a ratio of Tier 1 capital to risk-
weighted assets of 14.31% and a ratio of qualifying total capital to risk-
weighted assets of 15.60%.
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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) 1996 1995 1994 1993 1992
- --------------- -------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Real estate mortgage loans:
Residential $30,981 $ 30,966 $ 33,158 $ 39,771 $ 51,898
Commercial 48,456 50,797 57,997 61,953 65,567
Real estate construction loans 769 - - 429 669
Commercial and industrial loans 3,059 2,524 2,510 3,013 3,703
Consumer and other loans 15,281 16,263 15,991 18,305 22,208
------- -------- -------- -------- --------
Total loans $98,546 $100,550 $109,656 $123,471 $144,045
======= ======== ======== ======== ========
Ratios of loans to:
Deposits 86% 80% 84% 88% 92%
Assets 67% 69% 71% 72% 76%
</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. At approximately this same time the Bank began to
experience significant asset quality problems and significant operating losses,
resulting in a curtailment in loan volume as management sought to address these
problems. 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 entered into on January 23, 1992 (the "Order") (the Order
was terminated on December 8, 1994 and replaced by the Memorandum of
Understanding, which was terminated in September 1996). 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 (Tier 1
capital to total assets ratio equaled 6.24% at December 31, 1993). This
requirement caused management to effect a strategy of selective balance sheet
shrinkage, including a reduction in loan originations. The uncertainties with
regard to the Bank's prospects and the likelihood it could successfully address
its core operating problems, including its asset quality problems, the pre-
settlement uncertainties arising from the FDIC cross guaranty claim and the
post-settlement uncertainty as to finding a means for repaying the FDIC Note
further contributed to the decrease in the size of the Bank's loan portfolio due
to borrower concern as to the Bank's future. The Bank's ability to originate
commercial and industrial and commercial real estate loans was particularly
impacted by borrower uncertainties with regard to the Bank's future until the
Company's recapitalization. In addition, management's focus on the Bank's asset
quality problems, the cross guaranty claim and post-settlement recapitalization
plan took away from its ability to devote all efforts and resources to loan
growth until the recapitalization was completed.
The Bank began expanding its residential and consumer lending capabilities
during late 1995 and throughout 1996. In addition, the combination of continued
improvement in overall asset quality and the completion of the Company's
recapitalization plan have been beneficial to the Bank's loan origination
activities. The completion of the recapitalization also has allowed the Bank to
focus additional efforts 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.
4
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During the first quarter of 1996, the Company experienced a significant
reduction ($4.5 million) in loan outstandings resulting primarily from the
prepayment of loans in advance of their scheduled maturity dates. However, from
March 31, 1996 to December 31, 1996 the Company's loan outstandings increased
$2.5 million.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Loans" in the Company's 1996 Annual Report to Stockholders.
The following table sets forth the maturities of the loan portfolio by loan type
as of December 31, 1996:
<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 loans:
Residential loans $ 81 $ 831 $30,069 $30,981
Commercial loans 7,188 25,096 16,172 48,456
Real estate construction loans 769 - - 769
Commercial and industrial loans 1,303 1,232 524 3,059
Consumer and other loans 158 1,453 13,670 15,281
------- ------- ------- -------
Total loans $ 9,499 $28,612 $60,435 $98,546
======= ======= ======= =======
Loans maturing after
one year with:
Fixed interest rate $ 9,200 $17,437 $26,637
Variable/adjustable interest rate 19,412 42,998 62,410
------- ------- -------
$28,612 $60,435 $89,047
======= ======= =======
</TABLE>
LOAN ORIGINATIONS
Residential 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, the majority 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 1995, the Bank commenced an effort to substantially improve the overall
effectiveness of its branch system, including its ability to originate
residential and consumer loans. Five branches have been re-staffed to support
these efforts. The Bank's residential and consumer loan originations have
increased since mid-1995, as set forth below, and most of these loans were
originated through the branch system as opposed to the prior origination
strategy which relied heavily upon commission based mortgage origination. While
the Bank intends to continue its focus on growth in residential and consumer
lending in 1997, the level of such lending will depend upon a number of factors,
including the level of interest rates, general economic conditions and overall
profitability of these loans.
<TABLE>
<CAPTION>
For the Year Ended December 31,
-------------------------------
(in thousands) 1996 1995 1994
- -------------- -------------------------------
<S> <C> <C> <C>
Originations/(1)/:
Residential real estate $15,581 $4,168 $4,721
Consumer 4,249 2,388 1,816
------- ------ ------
Total $19,830 $6,556 $6,537
======= ====== ======
</TABLE>
/(1)/ Includes refinancing of existing portfolio and off balance sheet serviced
loans.
5
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The continued improvement in overall asset quality, along with the completion of
the July 1996 recapitalization have resulted in the Bank being able to devote
more resources towards the generation of new commercial loans. As a result,
management anticipates an increase in 1997 in the level of commercial loan
originations, which includes commercial and industrial loans and commercial real
estate loans.
The commercial real estate mortgage portfolio of approximately $48.5 million at
December 31, 1996, as compared to $50.8 million at December 31, 1995, 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, 1996 and 1995, commercial and industrial loans totaled $3.1
million and $2.5 million, respectively. 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, 1996, the Bank had approximately $15.3
million in consumer loans, compared to $16.3 million as of December 31, 1995.
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
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in the Company's 1996 Annual Report to Stockholders.
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 and the timing between the commitment to the borrower and the
closing and subsequent sale of the loan in the secondary market, such sales will
be made at a premium or discount (depending on the current interest rate
environment) 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. At December 31, 1996 and December 31, 1995, the Bank was
servicing loans which were owned by others of $50.5 million and $53.7 million,
respectively.
INVESTMENT ACTIVITIES
The Company'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 (the "BHCA"), without the prior
approval of the Federal Reserve Bank of Boston and the Board of Directors, the
Company is prohibited from directly or indirectly purchasing shares of any
company if such purchase would cause the Company's direct or indirect 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 Bank generally is prohibited by the Federal Deposit
Insurance Act from acquiring or retaining, directly or indirectly,
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any equity investment of a type or in an amount that is not permissable for a
national bank. The Company's investment portfolio is comprised primarily of U.S.
government and agency obligations and equity securities. For a summary of
investments, see Item 8, "Financial Statements and Supplementary Data -- Notes A
and D."
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. 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.
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 up to the limits provided by law 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) 1996 1995 1994 1993 1992
- -------------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Noninterest bearing demand deposits $ 5,790 $ 5,128 $ 5,425 $ 5,871 $ 7,217
Interest bearing demand deposits 15,090 15,741 17,300 18,470 18,813
Savings and escrow deposits 36,445 42,020 48,205 53,655 55,581
Time deposits 57,760 62,776 59,107 62,591 74,707
-------- -------- -------- -------- --------
Total $115,085 $125,665 $130,037 $140,587 $156,318
======== ======== ======== ======== ========
</TABLE>
In April 1996, the Bank sold its Kezar Falls branch to Maine Bank & Trust
Company. Included in the sale were all of the branch deposits totaling $9.9
million.
The mix of the Bank's deposits has varied from year to year, with higher cost
time deposits increasing in 1995 and 1996 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.
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At December 31, 1996, 1995 and 1994, Coastal's deposits consisted of the
following:
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------------
1996 1995 1994
---------------------------------------------------------------
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 $ 5,323 - $ 4,973 - $ 5,798 -
Interest bearing demand deposits 14,302 2.22% 15,958 2.24% 17,749 2.27%
Savings deposits 39,128 2.76 44,201 2.91 51,162 2.74
Time deposits 60,428 5.51 61,344 5.43 60,930 4.60
-------- ------- --------
Total $119,181 $126,476 $135,639
======== ======== ========
</TABLE>
At December 31, 1996, 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 $ 1,262 5.61%
over 3 - 6 300 5.81
over 6 - 12 318 5.64
over 12 306 5.41
--------
Total $ 2,186 5.61%
========
</TABLE>
As of December 31, 1996, Coastal had no brokered deposits.
BORROWINGS
The following table sets forth the amount of the Company's borrowed funds for
the years ended December 31, 1996, 1995 and 1994:
<TABLE>
<CAPTION>
December 31,
-------------------------
(in thousands) 1996 1995 1994
- -------------- ------- ------- -------
<S> <C> <C> <C>
FHLB advances $15,000 $ 6,000 $12,612
Savings Bank Notes 4,000 - -
FDIC Note - 9,000 9,000
------- ------- -------
$19,000 $15,000 $21,612
======= ======= =======
</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) 1996 1995 1994
- -------------- -------- -------- --------
<S> <C> <C> <C>
Weighted average interest expenses of
total borrowings 6.64% 5.37% 7.28%
Highest month end balance of
total borrowings $19,000 $10,412 $18,108
</TABLE>
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<PAGE>
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 currently
anticipated to be, obtained from this source.
The Bank estimates that it has approximately $38.2 million ($26.0 million with
the FHLB and $12.2 million with the Federal Reserve Bank of Boston) in
additional short-term borrowing capacity as of December 31, 1996. This amount
fluctuates based on qualified collateral.
FEDERAL HOME LOAN BANK
The Bank uses FHLB advances 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.
At December 31, 1996, the Bank had outstanding $15.0 million in borrowings with
a weighted average interest rate of 6.0% 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
November 2001 5,000 6.25
November 2001 4,000 6.05
-------
$15,000
=======
</TABLE>
SAVINGS BANK NOTES
On July 24, 1996, the Company borrowed $4.0 million and issued promissory notes
in the aggregate principal amount of $4.0 million (the "Savings Bank Notes") to
the Savings Banks as part of the Company's recapitalization plan, pursuant to
which the Company repaid in full the FDIC Note. The Savings Bank Notes bear
interest at 10.85% annually, payable quarterly. Beginning June 30, 1998, and
semi-annually thereafter, principal payments of $200,000 are required. At the
time the Savings Bank Notes mature on December 31, 2001, the unpaid balance of
the Savings Bank Notes, based on the scheduled amortization, will be $2,400,000.
The Savings Bank Notes are secured by a pledge by the Company of 100% of the
common stock of the Bank pursuant to a stock pledge agreement between the
Company and the Savings Banks.
For additional information on Borrowings, see "Note I -- Borrowings" in the
Company's 1996 Annual Report to Stockholders.
EMPLOYEES
As of December 31, 1996, the Company and its subsidiary had 67 full-time
equivalent employees.
COMPETITION
The Bank is a full service savings bank with seven banking offices in the
southern Maine communities of Brunswick, Freeport, Kennebunk, 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 and other financial institutions which have
far greater financial resources than those available to the Bank. The Bank also
faces competition for deposits from money market funds and other securities
funds offered by brokerage firms and other
9
<PAGE>
similar financial institutions. Competition among financial institutions is
based upon interest rates and 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 a bank holding company within the meaning of the BHCA. The
Company is required to file periodic reports and other information with the
Federal Reserve. The Federal Reserve may also conduct examinations of the
Company and the Bank.
Federal Reserve approval is required for any action that causes a bank or other
company to become a bank holding company and for any action that causes a bank
to become a subsidiary of a bank holding company. Federal Reserve approval must
be obtained prior to a bank holding company acquiring direct or indirect
ownership or control of any voting shares of any bank if, after such
acquisition, the bank holding company 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.
A bank holding company generally is prohibited from acquiring direct or indirect
ownership or control of more than 5% of the voting shares of any company that 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 that 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. Legislation enacted in 1996 streamlined certain applications
to the Federal Reserve for approval to engage in nonbanking activities that are
set forth in the rules and regulations of the Federal Reserve, provided that the
holding company is well-capitalized, well-managed, and meets certain other
criteria specified in the legislation, as implemented by regulations recently
promulgated by the Federal Reserve. In order to qualify as a well-capitalized
bank holding company, its lead depository institution must be well-capitalized
under the standards set forth under the Prompt Corrective Action Act and well-
capitalized institutions also must control at least 80% of the total risk-
weighted assets held by the bank holding company. In order to qualify as well-
managed, no institution controlled by the bank holding company can receive the
two lowest composite examination ratings as of their most recent examination.
Currently, the Company qualifies as well-capitalized and well-managed. At this
time, however, the Company has no plans to engage in any new nonbanking
activities.
Under the Change in Bank Control Act, natural 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 an 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
the 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 a 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 transaction no other person will own a
greater proportion of that class of voting securities. The Federal Reserve may
disapprove a proposed acquisition of control by a natural person 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, such
as the Company,
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<PAGE>
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.
Under current Federal Reserve capital adequacy guidelines, bank holding
companies generally must maintain a ratio of tier 1 capital to total assets of
4.0% to 5.0%. The 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%. On a bank-only basis, the Company's
ratios of tier 1 capital to total assets, tier 1 capital to risk-weighted
assets, and qualifying total capital to risk-weighted assets of 9.28%, 14.31%,
and 15.60%, respectively, at December 31, 1996 were in compliance with such
guidelines.
A bank holding company's ability to pay dividends to its stockholders and expand
its line of business through the acquisition of new banking subsidiaries can be
restricted if its capital falls below levels established by the Federal
Reserve's guidelines. In addition, any bank holding company whose capital falls
below levels specified in the guidelines can be required to implement a plan to
increase capital.
The Federal Reserve is empowered to initiate cease and desist proceedings and
other supervisory actions for violations of the BHCA, or its regulations, orders
or notices issued thereunder. Under Federal Reserve regulations, banks and bank
holding companies which do not meet minimum capital adequacy guidelines are
considered to be undercapitalized and are required to submit an acceptable plan
for achieving capital adequacy.
MAINE BANK HOLDING COMPANY REGULATION
Maine state law also regulates bank holding companies. The state law is
designed to conform with the registration, application and reporting
requirements of the Federal Reserve to the maximum extent feasible. As a
holding company, the Company must register with the Maine Superintendent of
Banking (the "Superintendent"), and must notify the Superintendent 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 or the Bank is to be
acquired by a financial institution or by a financial institution holding
company, the Superintendent must approve such an 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
thereof in an activity closely related to banking.
Maine law permits interstate branching in accordance with the provisions of
federal law. Maine law also permits the establishment of de novo branches in
Maine by out-of-state financial institutions on a reciprocal basis. Such
provisions create enhanced competition for the Bank.
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, under the Superintendent, administers the Maine
statutes which regulate the Bank's internal organization as well as its deposit,
lending and investment activities. The Maine Bureau of Banking must approve any
changes in the Bank's articles of incorporation, bylaws, branch offices and
major transactions. Maine law also governs the Bank's ability to engage in real
estate investments and investments in securities, subject to compliance with
applicable provisions of federal law. The Maine Bureau of Banking conducts
periodic examinations of the Bank as part of its supervision. Maine law
requires the Bank to maintain capital levels in
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<PAGE>
accordance with rules adopted by the Superintendent. Such capital requirements
can be no less stringent than the capital requirements imposed by federal
banking regulators on federally chartered institutions. If the Bank's capital
becomes impaired, the Superintendent may order the Bank's Board of Directors to
take the necessary steps to restore the deficiency.
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 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 safety and soundness guidelines
as of December 31, 1996.
The FDIC, in conjunction with the Superintendent, periodically conducts
examinations of insured institutions and, based upon evaluations, may require a
revaluation of assets of an insured institution and may require the
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 regulations for insured state
nonmember banks. Although there are some differences between the capital
adequacy guidelines adopted by the Federal Reserve with respect to the Company
and the FDIC with respect to the Bank, 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 Bank's CAMELS
rating. 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, 1996, the Bank had a ratio of qualifying total capital to risk-weighted
assets of 15.60% and a ratio of Tier 1 capital to risk-weighted assets of
14.31%.
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 if a bank is
receiving special supervisory attention, has a high degree of exposure to
interest rate risk or poses other safety and soundness concerns. The Bank
currently is not subject to any imposed minimum capital requirements.
Under FDIC regulations adopted under the Prompt Corrective Action Act, 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 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
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<PAGE>
ratio of 4% or greater and a leverage ratio of 4% or greater (3% or greater if
the institution is rated composite CAMELS 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% and has a leverage
ratio that is less than 4% (3% if the institution is rated composite CAMELS 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, 1996, the Bank was
classified as a "well capitalized" institution. The FDIC and the Federal Reserve
can impose severe restrictions upon undercapitalized insitutions and their
holding companies.
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 determines
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 determines that the activity
would pose no significant risk to the BIF and the state bank is in compliance
with applicable capital standards. 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 except for a majority-owned subsidiary and
certain investments in qualified housing projects.
Transactions between the Bank and its affiliates are subject to certain
quantitative and qualitative limitations as set forth in Sections 23A and 23B of
the Federal Reserve Act, which is administered by the FDIC. 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
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 the Bank and its subsidiaries or affiliates, including the
Company, generally must be on terms and conditions, including credit standards,
that are substantially the same or at least as favorable to the Bank 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.
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<PAGE>
INSURANCE OF DEPOSITS
The Bank's deposit accounts are insured up to the limits provided by law by the
BIF. The Bank is required to make quarterly payments on semiannual insurance
premium assessments for its FDIC deposit insurance.
The FDIC implements a risk-based deposit insurance assessment system. Deposit
insurance assessment rates currently are 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 an institution's capital and
supervisory classification. Assessment rates are periodically reviewed by the
FDIC and set at a level sufficient to maintain the BIF's reserve ratio of 1.25%
of insured deposits. The FDIC considers BIF revenue and expense levels, the BIF
reserve ratio and BIF borrowings in establishing assessment rate ranges.
Accordingly, 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 by 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.
Legislation enacted in 1996 contemplates the merger of the BIF, which generally
insures deposits in national and state-chartered banks, such as the Bank, with
the Savings Association Insurance Fund (the "SAIF"), which insures deposits at
savings associations. The combined deposit insurance fund, which will be formed
no earlier than January 1, 1999, will insure deposits at all FDIC insured
depository institutions. As a condition to the combined insurance fund,
however, no insured depository institution can be chartered as a savings
association. The Secretary of the Treasury is required to report to the
Congress no later than March 31, 1997 with respect to the development of a
common charter for all insured depository insitutions. The Company and the Bank
can give no assurances as to whether legislation to merge the insurance funds
will be enacted, when the deposit insurance funds will be merged or the type of
common federal charter that may be enacted.
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 has the ability to borrow funds from the FHLB of Boston
in order to maintain its liquidity. As a member of the FHLB of Boston, the Bank
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, 1996 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."
FEDERAL RESERVE SYSTEM
The Federal Reserve has adopted regulations that require, among other things,
that insured depository institutions 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, 1996, the Bank was in compliance with these requirements.
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The Bank has the ability to borrow funds from the "discount window" of the
Federal Reserve Bank of Boston in order to maintain liquidity. However, the
Federal Reserve Bank of Boston is prohibited from extending advances to
undercapitalized or critically undercapitalized depository institutions, and
generally cannot have advances outstanding to an undercapitalized institution
for more than 60 days in any 120-day period. The Bank does not currently
anticipate obtaining funds from the Federal Reserve Bank of Boston.
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 the 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.
The Company recognized an income tax benefit in 1996 of $4,859,000. Of this
amount, $4,811,000 was attributable to a reduction in the amount of the
valuation allowance previously established against the Company's deferred tax
asset (having an effective tax rate of 34%). In addition, the Company received
$48,000 in interest applicable to a 1992 carryback refund.
The deferred tax asset and offsetting valuation allowance as of September 30,
1996 and prior periods were principally the result of the Company's accumulation
of net operating loss carryforwards. The deferred tax asset represents the
estimated amount of future deductions for tax reporting purposes previously
expensed for financial reporting purposes, and the benefit from future income
taxes the Company will not have to pay as a result of the net operating loss
carryforwards. Previously, a 100% valuation allowance was maintained against
the deferred tax asset as there were significant uncertainties regarding the
Company's future and its ability to utilize its net operating loss carry
forwards through sustained, profitable operations. Management believes that the
completion of the July 1996 recapitalization, the payoff of the FDIC Note and
the improved financial condition of the Company have reduced the uncertainties
relating to the Company's ability to realize the benefits of the deferred tax
asset. As a result, the valuation allowance against the deferred tax asset (in
accordance with Financial Accounting Standards Board Statement of Financial
Accounting Standard No. 109) was reduced by $4,811,000. On a going forward
basis for financial reporting purposes only, earnings will now be subject to
federal and state income tax expense.
In order to help maintain the benefit of the deferred tax asset, at the
Company's June 1996 annual meeting of stockholders, the Company's stockholders
approved an amendment to the Restated Certificate of Incorporation of the
Company which generally provides that no person shall become or make an offer to
become a beneficial owner of five percent or more of the Company's voting stock
for a three year period, which expires June 11, 1999. For additional
information relating to income taxes, refer to Note M to the Company's
Consolidated Financial Statements.
The federal income tax returns of the Company have been examined and audited or
closed without audit by the IRS for tax years through 1991 and such years are
not subject to further IRS audit except with respect to carrybacks to those
years.
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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.
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 seven branches as listed below.
<TABLE>
<CAPTION>
Location Address Leased/Owned Lease Expiration
- -------- ------- ------------ ----------------
<S> <C> <C> <C>
Brunswick 83 Maine Street Owned n/a
Brunswick, ME
Brunswick 14 Gurnet Road Owned n/a
Brunswick, ME
Topsham 47 Topsham Fair Mall Rd. Building Owned n/a
Topsham, ME Land Leased June 2000
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
</TABLE>
ITEM 3. LEGAL PROCEEDINGS.
As of December 31, 1996, 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of the Company's stockholders during the
fourth quarter of the fiscal year ended December 31, 1996.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Information required by this Item is set forth under the caption "Market for
Registrant's Common Equity and Related Stockholder Matters" on page 21 of the
Annual Report to Stockholders for the year ended December 31, 1996, which
information is hereby incorporated herein by reference and specifically made a
part hereof.
ITEM 6. SELECTED FINANCIAL DATA.
Information required by this Item is set forth under the caption "Selected
Financial Data" on pages 4 to 6 of the Annual Report to Stockholders for the
year ended December 31, 1996, which information is hereby incorporated herein by
reference and specifically made a part hereof.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Information required by this Item is set forth under the caption "Management's
Discussion and Analysis of Financial Condition and Results of Operations" on
pages 7 to 21 of the Annual Report to Stockholders for the year ended December
31, 1996, which information is hereby incorporated herein by reference and
specifically made a part hereof.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Information required by this Item and the auditor's report thereon are set forth
on pages 22 to 45 of the Annual Report to Stockholders for the year ended
December 31, 1996, which information is hereby incorporated herein by reference
and specifically made a part hereof.
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.
Information required by this Item will be set forth under the captions "Election
of Directors," "Executive Officers" and "Executive Compensation -- Section 16(a)
Beneficial Ownership Reporting Compliance" in the Company's definitive proxy
statement for the Company's 1997 annual meeting of stockholders. Such
information is hereby incorporated herein by reference and specifically made a
part hereof.
ITEM 11. EXECUTIVE COMPENSATION.
Information required by this Item will be set forth under the caption "Executive
Compensation" in the Company's definitive proxy statement for the Company's 1997
annual meeting of stockholders. Such information is hereby incorporated herein
by reference and specifically made a part hereof.
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information required by this Item will be set forth under the caption "Stock
Owned by Management" in the Company's definitive proxy statement for the
Company's 1997 annual meeting of stockholders. Such information is hereby
incorporated herein by reference and specifically made a part hereof.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information required by this Item will be set forth under the caption "Executive
Compensation -- Certain Transactions" in the Company's definitive proxy
statement for the Company's 1997 annual meeting of stockholders. Such
information is hereby incorporated herein by reference and specifically made a
part hereof.
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 in the Annual Report of the Registrant for
the year ended December 31, 1996, are incorporated herein by reference in Item
8. The remaining information appearing in the Annual Report to Stockholders is
not deemed to be filed as part of this Report, except as expressly provided
herein.
Consolidated Balance Sheets as of December 31, 1996 and 1995
Consolidated Statements of Operations for each of the three years in the period
ended December 31, 1996
Consolidated Statements of Stockholders' Equity for each of the three years in
the period ended December 31, 1996
Consolidated Statements of Cash Flows for each of the three years in the period
ended December 31, 1996
Notes to Consolidated Financial Statements--December 31, 1996
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 herewith 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).
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<PAGE>
3.1(i)(b) Certificate of Amendment of Restated Certificate of Incorporation
(filed as Exhibit 3.1(i)(b) to Amendment No. 3 to Annual Report on Form 10-K on
Form 10-K/A for the year ended December 31, 1995, File No. 0-14087 ("1995 Form
10-K/A"), and incorporated herein by reference).
3.1(ii) Amended and Restated Bylaws (filed herewith).
EXHIBIT NO. 10 MATERIAL CONTRACTS
10.1 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).
10.2 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).
10.3 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).
10.4 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).
10.5 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, and incorporated herein by
reference).
10.6 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).
10.7 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).
10.8 First Coastal Corporation 1996 Stock Option and Equity Incentive Plan
(filed as Exhibit 10.13 to 1995 Form 10-K/A, and incorporated herein by
reference).
10.9 Loan Agreement, dated as of July 24, 1996, among First Coastal
Corporation and Androscoggin Savings Bank, Bangor Savings Bank, Machias Savings
Bank and Norway Savings Bank (collectively, the "Lenders") and Machias Savings
Bank, as agent (filed as Exhibit 10.9 to Quarterly Report on Form 10-Q for the
quarter ended June 30, 1996, File No. 0-14087 ("June 1996 Form 10-Q"), and
incorporated herein by reference).
10.10 Stock Pledge Agreement, dated as of July 24, 1996, between First
Coastal Corporation and Machias Savings Bank, for itself and as agent for the
Lenders (filed as Exhibit 10.10 to June 1996 Form 10-Q, and incorporated herein
by reference).
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10.11 Promissory Note, dated July 24, 1996, by First Coastal Corporation for
the benefit of Androscoggin Savings Bank (filed as Exhibit 10.11 to June 1996
Form 10-Q, and incorporated herein by reference).
10.12 Promissory Note, dated July 24, 1996, by First Coastal Corporation for
the benefit of Bangor Savings Bank (filed as Exhibit 10.12 to June 1996 Form 10-
Q, and incorporated herein by reference).
10.13 Promissory Note, dated July 24, 1996, by First Coastal Corporation for
the benefit of Machias Savings Bank (filed as Exhibit 10.13 to June 1996 Form
10-Q, and incorporated herein by reference).
10.14 Promissory Note, dated July 24, 1996, by First Coastal Corporation for
the benefit of Norway Savings Bank (filed as Exhibit 10.14 to June 1996 Form 10-
Q, and incorporated herein by reference).
10.15 Employment Agreement, dated as of July 31, 1996, among Coastal Savings
Bank, First Coastal Corporation and Dennis D. Byrd (filed as Exhibit 10.15 to
June 1996 Form 10-Q, and incorporated herein by reference).
10.16 Employment Agreement, dated as of July 31, 1996, among Coastal Savings
Bank, First Coastal Corporation and Gregory T. Caswell (filed as Exhibit 10.16
to June 1996 Form 10-Q, and incorporated herein by reference).
EXHIBIT NO. 13 ANNUAL REPORT TO SECURITY HOLDERS
First Coastal Corporation 1996 Annual Report (filed herewith). Portions of the
First Coastal Corporation 1996 Annual Report have been incorporated by reference
into this Annual Report on Form 10-K.
EXHIBIT NO. 21 SUBSIDIARY OF THE REGISTRANT
Subsidiary of the Company (filed herewith).
EXHIBIT NO. 23 CONSENTS OF EXPERTS AND COUNSEL
Consent of Coopers & Lybrand to incorporation by reference of its report dated
February 10, 1997 into the Company's Registration Statement on Form S-8 (No.
333-08631) filed with the Securities and Exchange Commission on July 23, 1996.
EXHIBIT NO. 27 FINANCIAL DATA SCHEDULE
Financial Data Schedule (filed herewith).
14(b) Not applicable.
14(c) Exhibits to this Annual Report on Form 10-K are attached or
incorporated herein by reference as stated above.
14(d) Not applicable.
20
<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
March 31, 1997 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.
March 31, 1997 By: /s/ Gregory T. Caswell
----------------------------------
Gregory T. Caswell
President and Chief Executive Officer
(Principal Executive Officer)
March 31, 1997 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.
March 31, 1997 By: /s/ Normand E. Simard
----------------------------------
Normand E. Simard
Chairman of the Board and Director
March 31, 1997 By: /s/ Gregory T. Caswell
----------------------------------
Gregory T. Caswell
Director
March 31, 1997 By: /s/ Dennis D. Byrd
---------------------------------
Dennis D. Byrd
Director
March 31, 1997 By: /s/ David B. Hawkes
----------------------------------
David B. Hawkes
Director
March 31, 1997 By: /s/ Roger E. Klein
----------------------------------
Roger E. Klein
Director
March 31, 1997 By: /s/ Edward K. Simensky
---------------------------------
Edward K. Simensky
Director
March 31, 1997 By: /s/ Charles A. Stewart III
---------------------------------
Charles A. Stewart III
Director
21
<PAGE>
EXHIBIT INDEX
Exhibit
No. Description of Exhibit
------- ---------------------------
3.1(ii) Amended and Restated Bylaws
13 First Coastal Corporation 1996 Annual Report
21 Subsidiary of the Registrant
23 Consent of Coopers & Lybrand
27 Financial Data Schedule
<PAGE>
AMENDED AND RESTATED BYLAWS
OF
FIRST COASTAL CORPORATION
(hereinafter called the "Corporation")
ARTICLE I
OFFICES
Section 1. Registered Office. The registered office of the Corporation
-----------------
shall be in the city of Wilmington, County of New Castle, State of Delaware.
Section 2. Other Offices. The Corporation may also have offices at such
-------------
other places both within and without the State of Delaware as the board of
directors may from time to time determine.
ARTICLE II
MEETINGS OF SHAREHOLDERS
Section 1. Place of Meetings. Meetings of shareholders for the election
-----------------
of directors or for any other purpose shall be held at such time and place,
either within or without the State of Delaware, as shall be designated from time
to time by the board of directors and stated in the notice of the meeting or in
a duly executed waiver of notice thereof.
Section 2. Annual Meetings. The annual meetings of shareholders shall be
---------------
held at such date and hour as shall be designated from time to time by the board
of directors within thirteen months subsequent to the later of the date of
incorporation or the last annual meeting of shareholders and as shall be stated
in the notice of the meeting, at which meetings the shareholders shall elect by
a plurality vote a board of directors and transact such other business as may
properly be brought before the meeting. Written notice of the annual meeting
stating the place, date and hour of the meeting shall be given to each
shareholder entitled to vote at such meeting not less than 20 nor more than 50
days before the date of the meeting. The notice shall also set forth the
purpose or purposes for which the meeting is called.
Section 3. Business at Annual Meeting. At an annual meeting of the
--------------------------
shareholders, only such business shall be conducted as shall have been properly
brought before the meeting. To be properly brought before an annual meeting,
business must be (a) specified in the notice of meeting (or any supplement
thereto) given by or at the direction of the board of directors, (b) otherwise
properly brought before the meeting by or at the direction of the board of
directors, or (c) otherwise properly brought before the meeting by a
shareholder.
For business to be properly brought before an annual meeting by a
shareholder, the shareholder must have given timely notice thereof in writing to
the secretary of the Corporation. To be timely, a shareholder's notice must be
delivered to or mailed and received at the principal executive offices of the
Corporation not less than 30 days nor more than 90 days prior to the meeting;
provided, however, that in the event that less than 45 days' notice or prior
public disclosure of the date of the meeting is given or made to shareholders,
notice by the shareholder to be timely must be so received not later than the
close of business on the 15th day following the day on which such notice of the
date of the annual meeting was mailed or such public disclosure was
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made. A shareholder's notice to the secretary shall set forth as to each matter
the shareholder proposes to bring before the annual meeting (a) a brief
description of the business desired to be brought before the annual meeting and
the reasons for conducting such business at the annual meeting, (b) the name and
address, as they appear on the Corporation's books, of the shareholder proposing
such business, (c) the class and number of shares of the Corporation which are
beneficially owned by the shareholder, and (d) any material interest of the
shareholder in such business. No later than the tenth day following the date of
receipt of a shareholder notice pursuant to this Section 3, the chairman of the
board of directors of the Corporation shall, if the facts warrant, determine and
notify in writing the shareholder submitting such notice that such notice was
not made in accordance with the time limits and/or other procedures prescribed
by the bylaws. If no such notification is mailed to such shareholder within such
ten-day period, such shareholder notice containing a matter of business shall be
deemed to have been made in accordance with the provisions of this Section 3.
Notwithstanding anything in these bylaws to the contrary, no business shall be
conducted at an annual meeting except in accordance with the procedures set
forth in this Section 3.
Section 4. Special Meetings. Special meetings of shareholders for any
----------------
purpose may be called only as provided in the Certificate of Incorporation.
Written notice of a special meeting stating the place, date and hour of the
meeting and the purpose or purposes for which the meeting is called shall be
given not less than 20 nor more than 50 days before the date of the meeting to
each shareholder entitled to vote at such meeting.
Section 5 Quorum. The holders of one-third of the capital stock issued
------
and outstanding and entitled to vote thereat, present in person or represented
by proxy, shall constitute a quorum at all meetings of the shareholders for the
transaction of business. If, however, such quorum shall not be present or
represented at any meeting of the shareholders, the shareholders entitled to
vote thereat, present in person or represented by proxy, shall have power to
adjourn the meeting from time to time, without notice other than announcement at
the meeting, until a quorum shall be present or represented. At such adjourned
meeting at which a quorum shall be present or represented, any business may be
transacted which might have been transacted at the meeting as originally
noticed. If the adjournment is for more than 30 days, or if after the
adjournment a new record date is fixed for the adjourned meeting, a notice of
the adjourned meeting shall be given to each shareholder entitled to vote at the
meeting.
Section 6. Voting. Except as otherwise required by law, the Certificate
------
of Incorporation or these bylaws, any matter brought before any meeting of
shareholders shall be decided by the affirmative vote of the majority of the
votes cast on the matter. Each shareholder represented at a meeting of
shareholders shall be entitled to cast one vote for each share of the capital
stock entitled to vote thereat held by such shareholder.
Section 7. List of Shareholders Entitled to Vote. The officer of the
-------------------------------------
Corporation who has charge of the stock ledger of the Corporation shall prepare
and make, at least ten days before every meeting of shareholders, a complete
list of the shareholders entitled to vote at the meeting, arranged in
alphabetical order, and showing the address of each shareholder and the number
of shares registered in the name of each shareholder. Such list shall be open
to the examination of any shareholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least ten days prior to the
meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not so
specified, at the place where the meeting is to be held. The list shall also be
produced and kept at the time and place of the meeting during the whole time
thereof, and may be inspected by any shareholder of the Corporation who is
present.
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Section 8. Stock Ledger. The stock ledger of the Corporation shall be the
------------
only evidence as to who are the shareholders entitled to examine the list
required by Section 7 of this Article II or to vote in person or by proxy at any
meeting of shareholders.
Section 9. Proxies. At all meetings of shareholders, a shareholder may
-------
vote by proxy executed in writing by the shareholder or his duly authorized
attorney-in-fact. Proxies solicited on behalf of the board of directors shall
be voted as directed by the shareholder or, in the absence of such direction, as
determined by a majority of the board of directors. No proxy shall be valid
after three years from its date, unless the proxy provides for a longer period.
A duly executed proxy shall be irrevocable if it states that it is irrevocable
and if, and only as long as, it is coupled with an interest sufficient in law to
support an irrevocable power.
Section 10. Voting of Shares in the Name of Two or More Persons. If
---------------------------------------------------
shares or other securities having voting power stand of record in the names of
two or more persons, whether fiduciaries, members of a partnership, joint
tenants, tenants in common, tenants by the entirety or otherwise, or if two or
more persons have the same fiduciary relationship respecting the same shares,
unless the secretary of the Corporation is given written notice to the contrary
and is furnished with a copy of the instrument or order appointing them or
creating the relationship wherein it is so provided, their acts with respect to
voting shall have the following effect: (1) if only one votes, his act binds
all; (2) if more than one vote, the act of the majority so voting binds all; (3)
if more than one vote, but the vote is evenly split on any particular matter,
each faction may vote the securities in question proportionally, or any person
voting the shares, or a beneficiary, if any, may apply to the Court of Chancery
of the State of Delaware or such other court as may have jurisdiction to appoint
an additional person to act with the persons so voting the shares, which shall
then be voted as determined by a majority of such persons and the person
appointed by the Court. If the instrument so filed shows that any such tenancy
is held in unequal interests, a majority or even-split for the purposes of this
subsection shall be a majority or even-split in interest.
Section 11. Voting of Shares by Certain Holders. Shares standing in the
-----------------------------------
name of another corporation may be voted by any officer, agent or proxy as the
bylaws of such corporation may prescribe, or, in the absence of such provision,
as the board of directors of such corporation may determine. Shares held by an
administrator, executor, guardian or conservator may be voted by him, but no
trustee shall be entitled to vote shares held by him without a transfer of such
shares into his name. Shares standing in the name of a receiver may be voted by
such receiver, and shares held by or under the control of a receiver may be
voted by such receiver without the transfer into his name if authority so to do
is contained in an appropriate order of the court or other public authority by
which such receiver was appointed.
A shareholder whose shares are pledged shall be entitled to vote such
shares unless in the transfer by the pledgor on the books of the Corporation he
has expressly empowered the pledgee to vote thereon, in which case only the
pledgee, or his proxy, may represent such stock and vote thereon.
Neither treasury shares of its own stock held by the Corporation, nor
shares held by another corporation, if a majority of the shares entitled to vote
for the election of directors of such other corporation are held by the
Corporation, shall be voted at any meeting or counted in determining the total
number of outstanding shares at any given time for purposes of any meeting.
Section 12. Inspectors of Election. In advance of any meeting of
----------------------
shareholders, the board of directors may appoint any persons other than nominees
for office as inspectors of election to act at such meeting or any adjournment
thereof. If the board of directors so appoints such inspectors, that
appointment shall not be altered at the meeting. If inspectors of election are
not so appointed, the chairman of the board or the president may, and on the
request of not less than ten percent of the votes represented at the meeting
shall, make such appointments at the meeting. In case any person
-3-
<PAGE>
appointed as inspector fails to appear or fails or refuses to act, the vacancy
may be filled by appointment by the board of directors in advance of the meeting
or by the chairman of the board or the president.
Unless otherwise prescribed by law, the duties of such inspectors shall
include: determining the number of shares of stock entitled to vote, the voting
power of each share, the shares of stock represented at the meeting, the
existence of a quorum, the authenticity, validity and effect of proxies;
receiving votes, ballots or consents; hearing and determining all challenges and
questions in any way arising in connection with the right to vote; counting and
tabulating all votes or consents; determining the result; and such acts as may
be proper to conduct the election or the vote with fairness to all shareholders.
Section 13. Conduct of Meetings. Annual and special meetings shall be
-------------------
conducted in accordance with rules prescribed by the presiding officer of the
meeting, unless otherwise prescribed by law or these bylaws. The board of
directors shall designate, when present, either the chairman of the board or the
president to preside at such meetings.
ARTICLE III
DIRECTORS
Section 1. The number of directors shall be seven. Directors need not be
residents of the State of Delaware.
Directors shall be elected only by shareholders at annual meetings of
shareholders, other than the initial board of directors and except as provided
in Section 2 of this Article III in the case of vacancies and newly created
directorships. Each director elected shall hold office for the term for which
he is elected and until his successor is elected and qualified or until his
earlier resignation or removal; provided, however, that no person of an age 70
years or older shall be eligible for election, reelection, appointment or
reappointment to the board of directors and no director becoming 70 years of age
shall continue to serve as such beyond the earlier of the annual meeting of
shareholders immediately following his attainment of such age or the election of
his successor by the board of directors prior to such annual meeting of
shareholders.
Section 2. Classes; Terms of Office; Vacancies. The board of directors
-----------------------------------
shall divide the directors into three classes; and, when the number of directors
is changed, shall determine the class or classes to which the increased or
decreased number of directors shall be apportioned; provided, further, that no
decrease in the number of directors shall affect the term of any director then
in office. At each annual meeting of shareholders, directors elected to succeed
those whose terms are expiring shall be elected for a term of office to expire
at the third succeeding annual meeting of shareholders and when their respective
successors are elected and qualified; provided, however, that a director elected
by the board of directors pursuant to Section 1 of this Article III to succeed a
director who has attained 70 years of age shall serve until the annual meeting
of shareholders immediately following such election.
Vacancies and 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 or
the vacancy occurred and until such director's successor shall have been elected
and qualified.
Section 3. Duties and Powers. The business of the Corporation shall be
-----------------
managed by or under the direction of the board of directors which may exercise
all such powers of the Corporation and do all such lawful acts and things as are
not by statute or by the Certificate of Incorporation or
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<PAGE>
by these bylaws directed or required to be exercised or done by the
shareholders. The board of directors shall annually elect, from its members, a
chairman of the board who shall preside at its meetings and shall annually
elect, from its members or otherwise, a president.
Section 4. Meetings. The board of directors of the Corporation may hold
--------
meetings, both regular and special, either within or without the State of
Delaware. The annual regular meeting of the board of directors shall be held
without other notice than this bylaw immediately after, and at the same place
as, the annual meeting of the shareholders. Additional regular meetings of the
board of directors may be held with or without notice at such time and at such
place as may from time to time be determined by the board of directors. Special
meetings of the board of directors may be called by the chairman of the board,
the president or a majority of directors then in office. Notice thereof stating
the place, date and hour of the meeting shall be given to each director either
by mail or by courier at the address at which the director is most likely to be
reached not less than 48 hours before the date of the meeting, or by telephone
or telegram on 24 hours notice.
Section 5. Quorum. Except as may be otherwise specifically provided by
------
law, the Certificate of Incorporation or these bylaws, at all meetings of the
board of directors, a majority of the directors then in office shall constitute
a quorum for the transaction of business and the act of a majority of the
directors present at any meeting at which there is a quorum shall be the act of
the board of directors. If a quorum shall not be present at any meeting of the
board of directors, the directors present thereat may adjourn the meeting from
time to time, without notice other than announcement at the meeting, until a
quorum shall be present.
Section 6. Actions Without Meeting. Any action required or permitted to
-----------------------
be taken at any meeting of the board of directors or of any committee thereof
may be taken without a meeting, if all the members of the board of directors or
committee, as the case may be, consent thereto in writing, and the writing or
writings are filed with the minutes of proceedings of the board of directors or
committee.
Section 7. Meetings by Means of Conference Telephone. Members of the
-----------------------------------------
board of directors of the Corporation, or any committee designated by the board
of directors, may participate in a meeting of the board of directors or such
committee by means of a conference telephone or similar communications equipment
by means of which all persons participating in the meeting can hear each other,
and participation in a meeting pursuant to this Section 7 shall constitute
presence in person at such meeting but shall not constitute attendance for the
purpose of compensation pursuant to Section 8 of this Article III.
Section 8. Compensation. The board of directors shall have the authority
------------
to fix the compensation of directors. The directors may be paid their
reasonable expenses, if any, of attendance at each meeting of the board of
directors and may be paid a reasonable fixed sum for actual attendance at each
meeting of the board of directors. Directors, as such, may receive a stated
salary for their services. No such payment shall preclude any director from
serving the Corporation in any other capacity and receiving compensation
therefor. Members of special or standing committees may be allowed like
compensation for attending committee meetings.
Section 9. Interested Directors. No contract or transaction between the
--------------------
Corporation and one or more of its directors or officers, or between the
Corporation and any other corporation, partnership, association, or other
organization in which one or more of its directors or officers are directors or
officers, or have a financial interest, shall be void or voidable solely for
this reason, or solely because the director or officer is present at or
participates in the meeting of the board of directors or committee thereof which
authorizes the contract or transaction, or solely because his or their votes are
counted for such purpose if (i) the material facts as to his or their
relationship or interest and as to the contract or
-5-
<PAGE>
transaction are disclosed or are known to the board of directors or the
committee, and the board of directors or committee in good faith authorizes the
contract or transaction by the affirmative votes of a majority of the
disinterested directors, even though the disinterested directors be less than a
quorum; or (ii) the material facts as to his or their relationship or interest
and as to the contract or transaction are disclosed or are known to the
shareholders entitled to vote thereon, and the contract or transaction is
specifically approved in good faith by vote of the shareholders; or (iii) the
contract or transaction is fair as to the Corporation as of the time it is
authorized, approved or ratified by the board of directors, a committee thereof
or the shareholders. Common or interested directors may be counted in
determining the presence of a quorum at a meeting of the board of directors or
of a committee which authorizes the contract or transaction.
Section 10. Corporate Books. The directors may keep the books of the
---------------
Corporation outside of the State of Delaware at such place or places as they may
from time to time determine.
Section 11. Presumption of Assent. A director of the Corporation who is
---------------------
present at a meeting of the board of directors at which action on any matter is
taken shall be presumed to have assented to the action taken unless his dissent
or abstention shall be entered in the minutes of the meeting or unless he shall
file his written dissent to such action with the person acting as the secretary
of the meeting before the adjournment thereof or shall forward such dissent by
registered mail to the secretary of the Corporation within five days after the
date he receives a copy of the minutes of the meeting. Such right to dissent
shall not apply to a director who voted in favor of such action.
Section 12. Resignation. Any director may resign at any time by sending a
-----------
written notice of such resignation to the chairman of the board or the president
of the Corporation. Unless otherwise specified therein such resignation shall
take effect upon receipt thereof by the chairman of the board or the president.
More than three consecutive absences from regular meetings of the board of'
directors, unless excused by resolution of the board of directors, shall
automatically constitute a resignation, effective when such resignation is
accepted by the board of directors.
Section 13. Nominees. Only persons who are nominated in accordance with
--------
the procedures set forth in this Section 13 shall be eligible for election as
directors. Nominations of persons for election to the board of directors of the
Corporation may be made at a meeting of shareholders by or at the direction of
the board of directors or by any shareholder of the Corporation entitled to vote
for the election of directors at the meeting who complies with the notice
procedures set forth in this Section 13. Such nominations, other than those
made by or at the direction of the board of directors, shall be made pursuant to
timely notice in writing to the secretary of the Corporation. To be timely, a
shareholder's notice shall be delivered to or mailed and received at the
principal executive offices of the Corporation not less than 30 days nor more
than 90 days prior to the meeting; provided, however, that in the event that
less than 45 days' notice or prior public disclosure of the date of the meeting
is given or made to shareholders, notice by the shareholder to be timely must be
so received not later than the close of business on the 15th day following the
day on which such notice of the date of the meeting was mailed or such public
disclosure was made. Such shareholder's notice shall set forth (a) as to each
person whom the shareholder proposes to nominate for election or re-election as
a director, (i) the name, age, business address and residence address of such
person, (ii) the principal occupation or employment of such person, (iii) the
class and number of shares of the Corporation which are beneficially owned by
such person, and (iv) any other information relating to such person that is
required to be disclosed in solicitations of proxies for election of directors,
or is otherwise required, in each case pursuant to Regulation 14A, or any
successor regulation, under the Securities Exchange Act of 1934, as amended
(including without limitation such person's written consent to being named in
the proxy statement as a nominee and to serving as a director if elected) and
(b) as to the shareholder giving notice (i) the name and address, as they appear
on the Corporation's books, of such shareholder and (ii) the class and number of
shares of the Corporation which are beneficially owned by such shareholder. At
the request of the board of directors, any person nominated by the board of
directors for election as a director shall
-6-
<PAGE>
furnish to the secretary of the Corporation that information required to be set
forth in a shareholder's notice of nomination which pertains to the nominee. No
later than the tenth day following the date of receipt of a shareholder
nomination submitted pursuant to this Section 13, the chairman of the board of
directors of the Corporation shall, if the facts warrant, determine and notify
in writing the shareholder making such nomination that such nomination was not
made in accordance with the time limits and/or other procedures prescribed by
the bylaws. If no such notification is mailed to such shareholder within such
ten-day period, such nomination shall be deemed to have been made in accordance
with the provisions of this Section 13. No person shall be eligible for election
as a director of the Corporation unless nominated in accordance with the
procedures set forth in this Section 13.
ARTICLE IV
EXECUTIVE AND OTHER COMMITTEES
Section 1. Appointment. The board of directors, by resolution adopted by
-----------
a majority of the full board, may designate the chief executive officer and two
or more other directors to constitute an executive committee. The chairman of
the board shall serve as the chairman of the executive committee, unless a
different director is designated as chairman by the board of directors. The
designation of any committee pursuant to this Article IV and the delegation of
authority thereto shall not operate to relieve the board of directors, or any
director, of any responsibility imposed by law or regulation.
Section 2. Authority. The executive committee, when the board of
---------
directors is not in session, shall have and may exercise all the powers and
authority of the board of directors in the management of the business and
affairs of the Corporation, and may authorize the seal of the Corporation to be
affixed to all papers which may require it, except to the extent, if any, that
such powers and authority shall be limited by the resolution appointing the
executive committee; and except also that the executive committee shall not have
the power or authority of the board of directors with reference to amending the
Certificate of Incorporation; adopting an agreement of merger or consolidation;
recommending to the shareholders the sale, lease or exchange of all or
substantially all of the Corporation's property and assets; recommending to the
shareholders a dissolution of the Corporation or a revocation of a dissolution;
amending the bylaws of the Corporation; filling a vacancy or creating a new
directorship; or approving a transaction in which any member of the executive
committee, directly or indirectly, has any material beneficial interest; and
unless the resolution or bylaws expressly so provide, the executive committee
shall not have the power or authority to declare a dividend or to authorize the
issuance of stock or securities convertible into or exercisable for stock.
Section 3. Tenure. Subject to the provisions of Section 8 of this Article
------
IV, each member of the executive committee shall hold office until the next
annual regular meeting of the board of directors following his designation and
until his successor is designated as a member of the executive committee.
Section 4. Meetings. Regular meetings of the executive committee may be
--------
held without notice at such times and places as the executive committee may fix
from time to time by resolution. Special meetings of the executive committee
may be called by the chairman of the executive committee, any two members
thereof or the chief executive officer upon not less than 24 hours' notice
stating the place, date and hour of the meeting, which notice may be written or
oral. Any member of the executive committee may waive notice of any meeting and
no notice of any meeting need be given to any member thereof who attends in
person. The notice of a meeting of the executive committee need not state the
business proposed to be transacted at the meeting.
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<PAGE>
Section 5. Quorum. A majority of the members of the executive committee
------
shall constitute a quorum for the transaction of business at any meeting
thereof, and action of the executive committee must be authorized by the
affirmative vote of a majority of the members present at a meeting at which a
quorum is present.
Section 6. Action Without a Meeting. Any action required or permitted to
------------------------
be taken by the executive committee at a meeting may be taken without a meeting
if a consent in writing, setting forth the action so taken, shall be signed by
all of the members of the executive committee and the writing or writings are
filed with the minutes of the proceedings of the committee.
Section 7. Vacancies. Any vacancy in the executive committee may be
----------
filled by a resolution adopted by a majority of the full board of directors.
Section 8. Resignations and Removal. Any member of the executive
------------------------
committee may be removed at any time with or without cause by resolution adopted
by a majority of the full board of directors. Any member of the executive
committee may resign from the executive committee at any time by giving written
notice to the chairman of the board or the president of the Corporation. Unless
otherwise specified therein, such resignation shall take effect upon receipt.
The acceptance of such resignation shall not be necessary to make it effective.
Section 9. Procedure. The executive committee may fix its own rules of
---------
procedure which shall not be inconsistent with these bylaws. It shall keep
regular minutes of its proceedings and report the same to the full board of
directors for its information at the meeting thereof held next after the
proceedings shall have been taken.
Section 10. Other Committees. The board of directors by resolution shall
----------------
establish an audit committee and a stock option committee, composed in each case
only of directors who are not employees of the Corporation or any subsidiary
thereof. The board of directors by resolution may also establish such other
committees composed of directors as they may determine to be necessary or
appropriate for the conduct of the business of the Corporation and may prescribe
the duties and powers thereof.
ARTICLE V
OFFICERS
Section 1. Positions. The officers of the Corporation shall include a
---------
president, one or more vice presidents, a secretary and a treasurer, each of
whom shall be elected by the board of directors. The board of directors may
also designate the chairman of the board as an officer. The president shall be
the chief executive officer unless the board of directors designates the
chairman of the board as the chief executive officer. The offices of the
secretary and treasurer may be held by the same person and a vice president may
also be either the secretary or the treasurer. The board of directors may
designate one or more vice presidents as executive vice president or senior vice
president. The board of directors may also elect or authorize the appointment
of such other officers as the business of the Corporation may require. The
officers shall have such authority and perform such duties as the board of
directors may from time to time authorize or determine. In the absence of
action by the board of directors, the officers shall have such powers and duties
as generally pertain to their respective offices.
Section 2. President. Except to the extent that the board of directors
---------
shall have delegated all or a portion of such authority to the chairman of the
board or one or more other officers, the president, or in his absence a director
or other officer of the Corporation appointed by the board of directors, shall
preside at all meetings of the shareholders, and the president shall have
general
-8-
<PAGE>
charge and direction of the business of the Corporation and shall perform such
other duties as are properly required of him by the board of directors, the
certificate of incorporation or these bylaws.
Section 3. Vice Presidents. In the absence of the president or in the
---------------
event of his inability or refusal to act, the vice president (or in the event
there may be more than one vice president, the vice presidents in the order
designated, or in the absence of any designations, then in the order of their
election) shall perform the duties of the president, and, when so acting, shall
have all the powers of and be subject to all the restrictions upon the
president.
Section 4. Secretary. The secretary shall keep the minutes of the
---------
meetings of shareholders and the board of directors and shall give notice of all
such meetings as required by these bylaws. The secretary shall have custody of
such minutes, the corporate seal and the stock certificate records of the
Corporation, except to the extent some other person is authorized to have
custody and possession thereof by resolution of the board of directors.
Section 5. Treasurer. The treasurer shall keep the fiscal accounts of the
---------
Corporation, including an account of all moneys received or disbursed.
Section 6. Election. The board of directors at its first meeting held
--------
after the annual meeting of shareholders shall elect annually the officers of
the Corporation who shall exercise such powers and perform such duties as shall
be set forth in these bylaws and as determined from time to time by the board of
directors; and all officers of the Corporation shall hold office until their
successors are chosen and qualified, or until their earlier resignation or
removal. Any vacancy occurring in any office of the Corporation shall be filled
by the board of directors. The salaries of all officers of the Corporation
shall be fixed by the board of directors.
Section 7. Removal. Any officer may be removed by the board of directors
-------
whenever in its judgment the best interests of the Corporation will be served
thereby, but such removal, other than for cause, shall be without prejudice to
the contract rights, if any, of the person so removed.
Section 8. Voting Securities Owned by the Corporation. Powers of
------------------------------------------
attorney, proxies, waivers of notice of meeting, consents and other instruments
relating to securities owned by the Corporation may be executed in the name of
and on behalf of the Corporation by the president or any vice president and any
such officer may, in the name of and on behalf of the Corporation, take all such
action as any such officer may deem advisable to vote in person or by proxy at
any meeting of security holders of any corporation in which the Corporation may
own securities and at any such meeting shall possess and may exercise any and
all rights and powers incident to the ownership of such securities and which, as
the owner thereof, the Corporation might have exercised and possessed if
present. The board of directors may, by resolution, from time to time confer
like powers upon any other person or persons.
ARTICLE VI
STOCK
Section 1. Form of Certificates. Every holder of stock in the Corporation
--------------------
shall be entitled to have a certificate signed by or in the name of the
Corporation by (i) the chairman of the board or the president and (ii) by the
secretary or an assistant secretary of the Corporation, representing the number
of shares registered in certificate form.
Section 2. Signatures. Any or all of the signatures on a certificate may
----------
be facsimile. In case any officer, transfer agent or registrar who has signed
or whose facsimile signature has been placed upon a certificate shall have
ceased to be such officer before such certificate is issued, it may be issued by
the Corporation with the same effect as if he were such officer at the date of
issue.
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<PAGE>
Section 3. Lost Certificates. The president or any vice president may
-----------------
direct a new certificate to be issued in place of any certificate theretofore
issued by the Corporation alleged to have been lost, stolen or destroyed, upon
the making of an affidavit of that fact by the person claiming the certificate
of stock to be lost, stolen or destroyed. When authorizing such issue of a new
certificate, the president or any vice president may, in his discretion and as a
condition precedent to the issuance thereof, require the owner of such lost,
stolen or destroyed certificate, or his legal representative, to advertise the
same in such manner as such officer may require and/or to give the Corporation a
bond in such sum as he may direct as indemnity against any claim that may be
made against the Corporation with respect to the certificate alleged to have
been lost, stolen or destroyed.
Section 4. Transfers. Stock of the Corporation shall be transferable in
---------
the manner prescribed by law and in these bylaws. Transfers of stock shall be
made on the books of the Corporation only by the person named in the certificate
or by his attorney lawfully constituted in writing and upon the surrender of the
certificate therefor, which shall be cancelled before a new certificate shall be
issued.
Section 5. Record Date. In order that the Corporation may determine the
-----------
shareholders entitled to notice of or to vote at any meeting of shareholders or
any adjournment thereof, or to express consent to corporate action in writing
without a meeting, or entitled to receive payment of any dividend or other
distribution or allotment of any rights, or entitled to exercise any rights in
respect of any change, conversion or exchange of stock, or for the purpose of
any other lawful action, the board of directors may fix, in advance, a record
date, which shall not be more than 50 days nor less than 20 days before the date
of such meeting, nor more than 50 days prior to any other action. A
determination of shareholders of record entitled to notice of or to vote at a
meeting of shareholders shall apply to any adjournment of the meeting; provided,
however, that the board of directors may fix a new record date for the adjourned
meeting.
Section 6. Beneficial Owners. The Corporation shall be entitled to
-----------------
recognize the exclusive right of a person registered on its books as the owner
of shares to receive dividends, and to vote as such owner, and shall not be
bound to recognize any equitable or other claim to or interest in such share or
shares on the part of any other person, whether or not the Corporation shall
have express or other notice thereof, except as otherwise required by law.
ARTICLE VII
NOTICES
Section 1. Notices. Whenever written notice is required by law, the
--------
Certificate of Incorporation or these bylaws to be given to any director, member
of a committee or shareholder, such notice may be given by mail, addressed to
such director, member of a committee or shareholder, at his address as it
appears on the records of the Corporation, with postage thereon prepaid, and
such notice shall be deemed to be given at the time when, the same shall be
deposited in the United States mail. Written notice may also be given
personally or by telegram, telex or cable.
Section 2. Waivers of Notice. Whenever any notice is required by law, the
-----------------
Certificate of Incorporation or these bylaws to be given to any director, member
of a committee or shareholder, a waiver thereof in writing, signed by the person
or persons entitled to said notice, whether before or after the time stated
therein, shall be deemed equivalent thereto.
Attendance of a person at a meeting shall constitute a waiver of notice of
such meeting, except when the person attends a meeting with the express purpose
of objecting, at the beginning of
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<PAGE>
the meeting, to the transaction of any business because the meeting is not
lawfully called or convened. Neither the business to be transacted at nor the
purpose of any regular or special meeting of the shareholders, directors, or
members of a committee of directors need be specified in any other waiver of
notice unless so required by the Certificate of Incorporation or these bylaws.
ARTICLE VIII
GENERAL PROVISIONS
Section 1. Dividends. Dividends upon the capital stock of the
---------
Corporation, subject to the provisions of the Certificate of Incorporation and
the laws of the State of Delaware, may be declared by the board of directors at
any regular or special meeting, and may be paid in cash, in property or in
shares of capital stock of the Corporation.
Subject to the provisions of the General Corporation Law of the State of
Delaware, such dividends may be paid either out of surplus, out of the net
profits for the fiscal year in which the dividend is declared and/or the
preceding fiscal year.
Section 2. Disbursements. All checks or demands for money and notes of
-------------
the Corporation shall be signed by such officer or officers or such other person
or persons as the board of directors may from time to time designate.
Section 3. Fiscal Year; Annual Audit. The fiscal year of the Corporation
-------------------------
shall end on December 31 of each year. The Corporation shall be subject to an
annual audit as of the end of its fiscal year by independent public accountants
appointed by and responsible to the board of directors. The appointment of such
accountants shall be subject to annual ratification by the shareholders.
Section 4. Corporate Seal. The corporate seal shall have inscribed
--------------
thereon the name of the Corporation, the year of its organization and the words
"Corporate Seal, Delaware". The Seal may be used by causing it or a facsimile
thereof to be impressed or affixed or otherwise reproduced.
ARTICLE IX
INDEMNIFICATION
Section 1. Power to Indemnify in Actions, Suits or Proceedings Other Than
--------------------------------------------------------------
Those by or in the Right of the Corporation. Subject to Section 3 of this
- -------------------------------------------
Article IX, the Corporation shall indemnify, to the fullest extent permitted by
applicable law as it presently exists or may hereafter be amended, any person
who was or is a party or is threatened to be made a party to any threatened,
pending or completed action, suit or proceeding, and any appeal therein, whether
civil, criminal, administrative, arbitrative or investigative (other than an
action by or in the right of the Corporation) by reason of the fact that he is
or was a director, officer, trustee, employee or agent of the Corporation, or is
or was serving at the request of the Corporation as a director, officer,
trustee, employee or agent of another corporation, association, partnership,
joint venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines, penalties and amounts paid in settlement actually and
reasonably incurred by him in connection with such action, suit or proceeding,
and any appeal therein, if he acted in good faith and in a manner he reasonably
believed to be in or not opposed to the best interests of the Corporation, and,
with respect to any criminal action or proceeding, had no reasonable cause to
believe his conduct was unlawful. The termination of any action, suit or
proceeding, and any appeal therein, by judgment, order, settlement, conviction,
or upon a plea of nolo contendere or its equivalent, shall not, of itself,
---------------
create a presumption that the person did not act in good faith and in a manner
which he reasonably
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<PAGE>
believed to be in or not opposed to the best interests of the Corporation, and,
with respect to any criminal action or proceeding, had reasonable cause to
believe that his conduct was unlawful.
Section 2. Power to Indemnify in Actions, Suits or Proceedings by or in
------------------------------------------------------------
the Right of the Corporation. Subject to Section 3 of this Article IX, the
- ----------------------------
Corporation shall indemnify any person who was or is a party or is threatened to
be made a party to any threatened, pending, or completed action or suit by or in
the right of the Corporation to procure a judgment in its favor by reason of the
fact that he is or was a director, officer, trustee, employee or agent of the
Corporation, or is or was serving at the request of the Corporation as a
director, officer, trustee, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, against amounts paid in
settlement and expenses (including attorneys' fees) actually and reasonably
incurred by him in connection with the defense or settlement of such action or
suit, if he acted in good faith and in a manner he reasonably believed to be in
or not opposed to the best interests of the Corporation; provided, however, that
no indemnification shall be made against expenses in respect of any claim, issue
or matter as to which such person shall have been adjudged to be liable to the
Corporation or against amounts paid in settlement unless and only to the extent
that there is a determination (as set forth in Section 3 of this Article IX)
that despite the adjudication of liability or the settlement, but in view of all
the circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses or amounts paid in settlement.
Section 3. Authorization of Indemnification. Any indemnification under
---------------------------------
this Article IX (unless ordered by a court) shall be made by the Corporation
only as authorized in the specific case upon a determination that
indemnification of the director, officer, trustee, employee or agent is proper
in the circumstances because such director, officer, trustee, employee or agent
has met the applicable standard of conduct set forth in Section 1 or Section 2
of this Article IX and, if applicable, is fairly and reasonably entitled to
indemnity as set forth in the proviso in Section 2 of this Article IX, as the
case may be. Such determination shall be made (i) by the directors who were not
parties to such action, suit or proceeding, even though less than a quorum, (ii)
if there are no such directors, or, if such directors so direct, by independent
legal counsel in a written opinion, or (iii) by the shareholders. To the
extent, however, that a director, officer, trustee, employee or agent of the
Corporation has been successful on the merits or otherwise in defense of any
action, suit or proceeding described above, or in defense of any claim, issue or
matter therein, he shall be indemnified against expenses (including attorneys'
fees) actually and reasonably incurred by him in connection therewith, without
the necessity of authorization in the specific cases. No director, officer,
trustee, employee or agent of the Corporation shall be entitled to
indemnification in connection with any action, suit or proceeding voluntarily
initiated by such person unless the action, suit or proceeding was authorized by
a majority of the entire board of directors.
Section 4. Good Faith Defined. For purposes of any determination under
------------------
Section 3 of this Article IX, a person shall be deemed to have acted in good
faith and in a manner he reasonably believed to be in or not opposed to the best
interests of the Corporation, or, with respect to any criminal action or
proceeding, to have had no reasonable cause to believe his conduct was unlawful,
if his action is based on the records or books of account of the Corporation or
another enterprise, or on information supplied to him by the officers of the
Corporation or another enterprise in the course of their duties, or on the
advice of legal counsel for the Corporation or another enterprise or on
information or records given or reports made to the Corporation or another
enterprise by an independent certified public accountant or by an appraiser or
other expert selected with reasonable care by the Corporation or another
enterprise. The term "another enterprise" as used in this Section 4 shall mean
any other corporation or any association, partnership, joint venture, trust or
other enterprise of which such person is or was serving at the request of the
Corporation as a director, officer, trustee, employee or agent. The provisions
of this Section 4 shall not be deemed to be exclusive or to limit in any way the
circumstances in which a person may be deemed to have met the applicable
standards of conduct set forth in Sections 1 or 2 of this Article IX, as the
case may be.
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<PAGE>
Section 5. Indemnification by a Court. Notwithstanding any contrary
--------------------------
determination in the specific case under Section 3 of this Article IX, and
notwithstanding the absence of any determination thereunder, any director,
officer, trustee, employee or agent may apply to any court of competent
jurisdiction in the State of Delaware for indemnification to the extent
otherwise permissible under Sections 1 and 2 of this Article IX. The basis of
such indemnification by a court shall be a determination by such court that
indemnification of the director, officer, trustee, employee or agent is proper
in the circumstances because he has met the applicable standards of conduct set
forth in Sections 1 and 2 of this Article IX, as the case may be. Notice of any
application for indemnification pursuant to this Section 5 shall be given to the
Corporation promptly upon the filing of such application. Notwithstanding any
of the foregoing, unless otherwise required by law, no director, officer,
trustee, employee or agent of the Corporation shall be entitled to
indemnification in connection with any action, suit or proceeding voluntarily
initiated by such person unless the action, suit or proceeding was authorized by
a majority of the entire board of directors.
Section 6. Expenses Payable in Advance. Expenses incurred in connection
---------------------------
with a threatened or pending action, suit or proceeding may be paid by the
Corporation in advance of the final disposition of such action, suit or
proceeding upon receipt of an undertaking by or on behalf of the director,
officer, trustee, employee or agent to repay such amount if it shall be
determined that he is not entitled to be indemnified by the Corporation as
authorized in this Article IX.
Section 7. Contract, Non-exclusivity and Survival of Indemnification. The
---------------------------------------------------------
indemnification provided by this Article IX shall be deemed to be a contract
between the Corporation and each director, officer, employee and agent who
serves in such capacity at any time while this Article IX is in effect, and any
repeal or modification thereof shall not affect any rights or obligations then
existing with respect to any state of facts then or theretofore existing or any
action, suit or proceeding theretofore or thereafter brought based in whole or
in part upon any such state of facts. Further, the indemnification and
advancement of expenses provided by this Article IX shall not be deemed
exclusive of any other rights to which those seeking indemnification and
advancement of expenses may be entitled under any certificate of incorporation,
bylaw, agreement, contract, vote of shareholders or disinterested directors or
pursuant to the direction (howsoever embodied) of any court of competent
jurisdiction or otherwise, both as to action in his official capacity and as to
action in another capacity while holding such office, it being the policy of the
Corporation that, subject to the limitation in Section 3 of this Article IX
concerning voluntary initiation of actions, suits or proceedings,
indemnification of the persons specified in Sections 1 and 2 of this Article IX
shall be made to the fullest extent permitted by law. The provisions of this
Article IX shall not be deemed to preclude the indemnification of any person who
is not specified in Sections 1 or 2 of this Article IX but whom the Corporation
has the power or obligation to indemnify under the provisions of the law of the
State of Delaware. The indemnification and advancement of expenses provided by,
or granted pursuant to, this Article IX shall, unless otherwise provided when
authorized or ratified, continue as to a person who has ceased to be a director,
officer, trustee, employee or agent and shall inure to the benefit of the heirs,
executors and administrators of such person.
Section 8. Insurance. The Corporation may purchase and maintain insurance
---------
on behalf of any person who is or was a director, officer, trustee, employee or
agent of the Corporation, or is or was serving at the request of the Corporation
as a director, officer, trustee, employee or agent of another corporation,
association, partnership, joint venture, trust or other enterprise against any
liability asserted against him and incurred by him in any such capacity, or
arising out of his status as such, whether or not the Corporation would have the
power or the obligation to indemnify him against such liability under the
provisions of this Article IX.
Section 9. Meaning of Corporation for Purposes of Article IX. For
-------------------------------------------------
purposes of this Article IX, references to "the Corporation" shall include, in
addition to the resulting corporation, any constituent corporation (including
any constituent of a constituent) absorbed in a consolidation or
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<PAGE>
merger which, if its separate existence had continued, would have had power and
authority to indemnify its directors, officers and employees or agents, so that
any person who is or was a director, officer, employee or agent of such
constituent corporation, or is or was serving at the request of such constituent
corporation as a director, officer, employee or agent of another corporation,
association, partnership, joint venture, trust or other enterprise, shall stand
in the same position under the provisions of this Article IX with respect to the
resulting or surviving corporation as he would have with respect to such
constituent corporation if its separate existence had continued.
ARTICLE X
AMENDMENTS
The board of directors or the shareholders may from time to time amend the
bylaws of the Corporation. Such action by the board of directors shall require
the affirmative vote of at least two thirds of the directors then in office at a
duly constituted meeting of the board of directors called for such purpose.
Such action by the shareholders shall require the affirmative vote of at least
two thirds of the total votes eligible to be voted at a duly constituted meeting
of shareholders called for such purpose.
* * * * * *
The Amended and Restated Bylaws of the Corporation were originally approved
and adopted by the board of directors of the Corporation on July 28, 1994.
Sections 1 and 3 of ARTICLE IX were amended on December 21, 1994.
Sections 1 and 3 of ARTICLE III and Section 1 of ARTICLE V were amended
effective as of March 31, 1995.
Section 1 of ARTICLE III was amended on April 26, 1995.
Section 1 of ARTICLE III was amended on September 18, 1996.
Section 1 of ARTICLE III was amended on March 26, 1997.
(Revised 03/26/97)
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<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Letter to Stockholders 1
Selected Consolidated Financial Data 4
Managements Discussion and
Analysis of Financial Condition
and Results of Operation 7
Market for Registrants
Common Equity and Related
Stockholder Matters 21
Report of Independent Accountants 22
Consolidated Financial Statements 23
Corporate and Stockholder Information 46
</TABLE>
<PAGE>
PRESIDENT'S LETTER
[PHOTO]
TO OUR STOCKHOLDERS:
AN ERA BROUGHT TO A CLOSE...
1996 introduced the dawn of a new era of opportunity and promise for First
Coastal. The Companys recapitalization, completed July 24, 1996, brought to a
conclusion an era of omnipresent financial risk that had threatened the
financial solvency and future of First Coastal since the late 1980s. The
recapitalization allowed the Company to repay in full its $9.0 million
obligation to the FDIC stemming from the 1991 failure of Suffield Bank. Further
good news relating to this troubled period was received in September when we
were notified that our last remaining regulatory agreement, the 1994 Memorandum
of Understanding between the FDIC, the Maine Bureau of Banking and its remaining
subsidiary, Coastal Savings Bank ("Coastal" or the "Bank"), had been terminated.
In many ways this notification represented the final milestone in the Company's
long journey to a full financial recovery.
The Companys recent history is notable as it provides perspective for the
future. The fact that we are here today and that First Coastal is in a position
to grow and prosper is truly remarkable. Few banking companies have faced the
type of adversity borne by the Company and survived. First Coastal faced three
large problems in recent years, all of which severely threatened the Company's
financial future: (i) the late 1980s/early 1990s financial difficulties of
Coastal, (ii) the cross guaranty claim asserted against Coastal by the FDIC as a
result of the Suffield Bank failure, and (iii) the repayment of the $9.0 million
obligation which resulted from the settlement of the FDIC cross guaranty claim.
Coastal's financial difficulties were largely the result of the Banks heavy
investment in commercial real estate in the mid-to-late 1980s and the subsequent
real estate downturn. In 1992, following three years of large operating losses
and the FDIC and Maine Superintendent of Bankings subsequent placement of the
Bank under an Order to Cease and Desist, the financial prospects for the Bank
were bleak. During this period the preponderance of New England banks with
commercial real estate and nonperforming asset levels similar to Coastal failed.
Coastal managed to survive, and in fact became profitable beginning with the
quarter ended September 30, 1992 even though the level of nonperforming assets
was still extraordinarily high, 12.9% of total assets. An example of the Bank's
perceived value and prospects during this period was the Company's late 1992
attempt to sell the Bank, at the insistence of the FDIC, in an effort to
generate a recovery for the FDIC as a means of satisfying the cross guaranty
claim. The only offers
1
<PAGE>
received required that the FDIC provide financial assistance as part of the
transaction. This type of sale would have resulted in the FDIC experiencing a
significant loss and shareholders receiving very little, if anything, as a
result of the sale. We have come a long way. Just three and one-half years later
the Banks finances had improved to the point whereby the recapitalization plan,
including the $3.2 million dividend from the Bank to the Company, was feasible.
The second major problem faced by the Company was the cross guaranty claim
asserted against Coastal by the FDIC for the estimated $89.8 million loss
incurred by the Bank Insurance Fund and resulting from the 1991 failure of
Suffield Bank. In 1994 a settlement was negotiated with the FDIC, with the
resulting agreement closed on January 31, 1995. Under the terms of the
agreement, the Company had two years to pay the FDIC $9.0 million plus accrued
interest. The negotiated settlement of this claim was both necessary for the
Company's survival and unprecedented. This arrangement represents the only time
a settlement of a cross guaranty claim has been negotiated with the FDIC. In
most instances the institution against which the claim was asserted has been
seized by the FDIC, with dire consequences for the stockholders.
ACCOMPLISHMENTS IN 1996...
Which brings us to the third large problem faced by the Company, the
repayment of the $9.0 million FDIC obligation. In addressing this problem the
Company had two basic alternatives: recapitalize First Coastal or sell the
Company (or the Bank). At the time the settlement agreement was closed, on
January 31, 1995, we could not be certain sufficient funds could be generated
from either alternative to repay the FDIC obligation and, if so, whether any
meaningful return could be provided to our stockholders. For perspective, in
December 1993, only eighteen months prior to our initiating our review of these
alternatives, our (second) pre-FDIC settlement attempt to sell the Bank and
satisfy the cross guaranty claim resulted in a high bid of only $6.2 million,
which was unacceptable to the Company and the FDIC.
The recapitalization alternative chosen was challenging. It incorporated the
use of leverage as a means of limiting the amount of new equity capital raised,
$3.1 million through a registered public offering, and therefore a reduction in
the dilution in ownership to our stockholders. The leverage components consisted
of $4.0 million in bank financing and a $3.2 million dividend from the Bank to
the Company. Due to the number of complex issues involved, including regulatory
approvals of the dividend, procurement of the required financing on satisfactory
terms and the successful completion of the registered public offering, it was
far from certain the plan would prove to be successful. However, the
recapitalization closed as planned, with our historical stockholders retaining
approximately 44% interest in the recapitalized Company. This was an ownership
position that was far in excess of what had seemed possible prior to the
commencement of the planning process, and certainly far superior to what might
have been reasonably expected in years past.
The Company made substantial progress in 1996 in its efforts to re-engineer
Coastal as a thriving community bank. Following years of stagnation brought
about by the Company's tremendous difficulties discussed above, 1996 saw a
continuation of the effort to rebuild the business infrastructure of the Bank,
including the overall strength of staff and management, products and services
offered, technology, and strategic focus. A number of changes occurred that
have significantly improved the Bank's ability to generate new residential and
commercial loans. Residential loan volume increased by 273.8% to $15.6 million
in 1996, while commercial loan volume is expected to increase significantly in
1997. The mid-year introduction of a new consumer checking account program
resulted in a significant number of new customers for the Bank. In August we
completed a conversion of our computer system from an outsourced service bureau
relationship to an in-house system, substantially reducing our overall computer
related expenses.
2
<PAGE>
We were pleased with the Company's financial results for 1996. Net income
equaled $6.4 million for the year, which included an income tax benefit of $4.9
million and a $366,000 premium received from the sale of the Kezar Falls branch.
Net of these two non-recurring items, net income equaled $1.2 million in 1996.
Asset quality showed further significant improvement in 1996. Nonperforming
assets declined by 65% to $2.6 million as compared to December 31, 1995, a far
cry from the peak level of $29.2 million reached on July 31, 1992. The Company
incurred no provision expense in 1996. The allowance for loan losses totaled
$2.7 million at December 31, 1996, equaling 2.7% of total loans and 124% of
nonperforming loans.
1997 AND BEYOND...
1997 is an exciting time for the Company. For the first time in years we are
free of issues that threaten First Coastal's near term financial viability. We
have made progress towards developing an organization that can compete and
thrive in banking's rapidly evolving business environment and this will continue
in 1997. As this letter is being written we are in the midst of developing a new
strategic plan for the Company. For the first time in my five and one-half years
with First Coastal we are able to look well into the future and discuss and plan
what type of organization the Company will become. This compares with our prior
existence as full time crisis managers, striving to find a way to bring the
Company over one more seemingly insurmountable hurdle, with a strategic planning
perspective measured in months instead of years. We are now in a position to
work toward clearing the ultimate hurdle, to make worthwhile the hard work that
has brought us to this point. This hurdle is the task of developing First
Coastal into a high performance financial services company.
Our success will be built upon our strengths, which rest with our tremendous
people. The reason the Company has survived under the most difficult of
circumstances is the result of the efforts of an exceptionally dedicated group
of employees and board of directors, who have consistently displayed unusual
resiliency and ability in bringing First Coastal to this point. The core
employee group that has stayed with the Company through the very tough years,
augmented by key additions over the past two years, embody the essence of hard
work and teamwork. We understand our strengths, we know our weaknesses, and we
are committed to continually improving our ability to perform, both as a company
and as individuals. We view our small size as a strength, enabling us to work
more effectively together through better communication and teamwork. This will
allow us to provide better service and react more quickly and efficiently to
opportunities than our less focused competitors. We expect this combination of
commitment, teamwork, focus and nimbleness will result in our becoming a
superior company in the years ahead. As we move forward into 1997 and beyond, I
wish to thank our board of directors, our employees, our loyal customers, and
our shareholders for your continued support.
Gregory T. Caswell
President and Chief Executive Officer
3
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
SELECTED CONSOLIDATED FINANCIAL DATA OF FIRST COASTAL CORPORATION
The following table sets forth, in summary form, certain selected financial
data of First Coastal Corporation (the "Company") as of and for each of the five
years in the period ended December 31, 1996.
The 1996 financial results reflect the completion of the Companys
recapitalization plan, whereby the Company repaid in full its obligation to the
Federal Deposit Insurance Corporation ("FDIC") in the amount of $9.7 million
($9.0 million principal amount plus accrued interest) arising from the
settlement of the FDIC's cross guaranty claim against its subsidiary, Coastal
Savings Bank (the "Bank"). The recapitalization plan included (i) the sale of
750,000 shares of the Companys common stock at $5.00 per share, bringing the
total shares issued and outstanding to 1,357,861; (ii) a dividend in the amount
of $3.2 million from the Bank to the Company; and (iii) the borrowing of $4.0
million from a group of four Maine savings banks (the "Savings Banks"). For
further information, see Note B to the Company's Consolidated Financial
Statements.
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------
(dollars in thousands, except per share data) 1996 1995 1994 1993 1992
- -------------------------------------------- -----------------------------------------------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Interest income $ 11,331 $ 11,707 $ 11,780 $ 12,748 $ 16,319
Interest expense (1) 5,653 5,850 5,726 7,254 9,986
-------- -------- -------- -------- --------
Net interest income 5,678 5,857 6,054 5,494 6,333
Provision for loan losses - (425) 107 (30) 1,136
-------- -------- -------- -------- --------
Net interest income
after provision for loan losses 5,678 6,282 5,947 5,524 5,197
Investment securities gains (losses) 38 (4) 38 99 (19)
Noninterest income (2) 952 576 391 1,323 1,126
Operating expenses (3) 5,142 5,194 6,278 6,158 7,049
Income tax benefit (4) (4,859) - - (4) (198)
-------- -------- -------- -------- --------
Income (loss) before minority
interest and extraordinary item 6,385 1,660 98 792 (547)
Minority interest in net income (loss) - - - 44 (18)
-------- -------- -------- -------- --------
Income (loss) before Extraordinary Item 6,385 1,660 98 748 (529)
Extraordinary Item -
Charge to earnings as a result of the
settlement of the cross guaranty claim (5) - - 9,000 - -
-------- -------- -------- -------- --------
Net income (loss) $ 6,385 $ 1,660 $ (8,902) $ 748 $ (529)
======== ======== ======== ======== ========
PER SHARE DATA:
Weighted Average Shares Outstanding 931,509 600,361 600,361 600,361 600,361
Income (loss) before extraordinary item $ 6.85 $ 2.77 $ .16 $ 1.25 $ (.88)
Net income (loss) $ 6.85 $ 2.77 $ (14.83) $ 1.25 $ (.88)
</TABLE>
There were no cash dividends declared for the five years ended
December 31, 1996.
(1) The 1996 and 1995 interest expense includes $525,000 and $419,000,
respectively, in interest expense associated with the notes payable,
representing interest due on the promissary note in the principal amount of
$9.0 million issued to the FDIC (the "FDIC Note") and the promissary notes
in the aggregate principal amount of $4.0 million issued to the Savings
Banks (the "Savings Bank Notes").
(2) In 1996, the Bank sold its Kezar Falls branch and recognized a net gain of
$366,000.
(3) In 1995 and 1994, the Company incurred approximately $0.3 million and $0.8
million, respectively, of legal and other professional fees associated with
the settlement of the FDIC's cross guaranty claim against the Bank.
(4) The 1996 results include a $4.8 million tax benefit resulting from a
reduction in the Company's valuation allowance against its deferred tax
asset. See Note M to the Company's Consolidated Financial Statements.
(5) The 1994 financial results reflect a $9.0 million extraordinary charge to
earnings as a result of the issuance by the Company of the FDIC Note
resulting from the settlement of the FDIC's cross guaranty claim against
the Bank.
4
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------
(dollars in thousands) 1996 1995 1994 1993 1992
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets $147,734 $145,453 $154,212 $170,819 $188,838
Investment securities 26,692 19,712 16,746 1,036 4,061
Assets held for sale 1,490 281 185 3,421 6,882
Loans, net of fees 98,515 100,528 109,625 123,468 144,000
Allowance for loan losses 2,666 2,659 4,042 3,642 4,280
Nonperforming assets 2,623 7,517 9,006 11,627 24,382
Deposits (1) 115,085 125,665 130,037 140,587 156,318
Borrowings 15,000 6,000 12,612 18,108 21,249
Notes payable (2) 4,000 9,000 9,000 - -
Stockholders' equity 13,388 3,997 2,014 9,878 9,130
FINANCIAL RATIOS:
Net interest rate spread 4.12 % 4.13 % 3.79 % 3.26 % 3.26 %
Return on average assets before
extraordinary item 4.57 1.14 .06 .41 (.27)
Return on average assets 4.57 1.14 (5.48) .41 (.27)
Return on average equity before
extraordinary item 102.60 58.20 .92 7.63 (5.44)
Return on average equity 102.60 58.20 (83.78) 7.63 (5.44)
Equity to assets 9.06 2.75 1.31 5.78 4.83
Dividend payout ratio - - - - -
Tier 1 leverage capital 6.62 2.74 1.41 5.63 4.81
Total risk-based capital 11.54 5.54 3.46 9.69 8.02
</TABLE>
(1) The sale of the Bank's Kezar Falls branch in 1996 included deposits
totaling $9.9 million.
(2) Notes Payable consists of the FDIC Note and the Savings Bank Notes.
SELECTED FINANCIAL DATA FOR COASTAL SAVINGS BANK
The following table sets forth, in summary form, certain selected
financial data of the Bank as of and for each of the five years in the period
ended December 31, 1996:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------
(dollars in thousands) 1996 1995 1994 1993 1992
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Interest income $11,331 $11,707 $11,774 $12,731 $16,275
Interest expense 5,135 5,435 5,727 7,255 9,989
------- ------- ------- ------- -------
Net interest income 6,196 6,272 6,047 5,476 6,286
Provision for loan losses - (425) 107 (30) 1,136
------- ------- ------- ------- -------
Net interest income after provision
for loan losses 6,196 6,697 5,940 5,506 5,150
Investment securities gains (losses) 38 (4) 38 99 (19)
Noninterest income (1) 952 576 392 1,321 1,145
Operating expenses (2) 4,840 4,811 6,063 5,940 7,104
Income tax expense (benefit) (3) (2,009) - - 6 (198)
------- ------- ------- ------- -------
Net income (loss) $ 4,355 $ 2,458 $ 307 $ 980 $ ( 630)
======= ======= ======= ======= =======
</TABLE>
(1) In 1996, the Bank sold its Kezar Falls branch and recognized a gain of
$366,000.
(2) In 1994, the Bank incurred approximately $0.6 million of legal and other
professional fees associated with the settlement of the FDIC's cross
guaranty claim against the Bank.
(3) The 1996 results include a $2.0 million tax benefit resulting from a
reduction in the Bank's valuation allowance against its deferred tax asset.
See Note M to the Company's Consolidated Financial Statements.
5
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------
(in thousands) 1996 1995 1994 1993 1992
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets $144,720 $145,446 $153,948 $170,177 $188,144
Investment securities 26,692 19,712 16,746 1,036 4,061
Assets held for sale 1,490 281 185 3,421 6,882
Loans, net of fees 98,515 100,528 109,625 123,468 144,000
Allowance for loan losses 2,666 2,659 4,042 3,642 4,280
Nonperforming assets 2,623 7,517 9,006 11,627 24,382
Deposits (1) 115,347 125,764 130,076 140,599 156,378
Borrowings 15,000 6,000 12,612 18,108 21,249
Stockholders' equity 14,173 13,335 10,754 10,906 9,926
Financial Ratios:
Return on average assets 3.12% 1.68% .19% .54% (.32)%
Return on average equity 33.57 20.67 2.82 9.20 (6.31)
Equity to assets 9.79 9.17 6.99 6.41 5.28
Tier 1 leverage capital 9.28 9.19 7.05 6.24 5.25
Total risk-based capital 15.60 15.59 12.12 10.57 8.60
</TABLE>
(1) The sale of the Bank's Kezar Falls branch in 1996 included deposits
totaling $9.9 million
6
<PAGE>
MANAGEMENT'S FINANCIAL REVIEW
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
BUSINESS
First Coastal Corporation (the "Company"), a Delaware corporation, is a
bank holding company whose sole operating subsidiary is Coastal Savings Bank
(the "Bank"), a Maine chartered savings bank headquartered in Westbrook, Maine.
The Bank was formed in 1981 through the consolidation of Brunswick Savings
Institution and York County Savings Bank, which were organized in 1858 and 1860,
respectively. The Company has no separate operations and its business consists
of the business of the Bank. The Bank is engaged in customary banking
activities, including attracting deposits and various lending activities, and
conducts its business from seven offices in the counties of Cumberland,
Sagadahoc and York. The Bank's deposits are insured by the Federal Deposit
Insurance Corporation ("FDIC") up to the limits provided by law.
SIGNIFICANT EVENTS IN 1996
SATISFACTION OF THE CROSS GUARANTY SETTLEMENT OBLIGATION TO FDIC
On July 24, 1996, the Company completed its recapitalization plan pursuant
to which the Company satisfied in full its obligation to the FDIC arising from
the January 1995 settlement of the FDIC 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 "FDIC
Note"), secured by the Company's pledge of 100% of the outstanding common stock
of the Bank. In 1994, the Company incurred a $9.0 million extraordinary charge
to earnings resulting from the issuance of the FDIC Note. Principal and interest
under the FDIC Note were deferred until its maturity date, January 31, 1997. The
funds utilized to repay the obligation were derived from (i) the sale of 750,000
shares of the Company's common stock at $5.00 per share by means of a registered
public offering; (ii) a dividend of $3.2 million from the Bank to the Company;
and (iii) the borrowing of $4.0 million from a group of four Maine savings banks
(the "Savings Bank Notes"), secured by the pledge by the Company of 100% of the
outstanding common stock of the Bank.
TERMINATION OF THE MEMORANDUM OF UNDERSTANDING
On September 9, 1996 and September 16, 1996, the Company was notified by the
Superintendent of the Maine Bureau of Banking and the Regional Director of the
Boston Regional Office of the FDIC, respectively, that the Memorandum of
Understanding previously entered into among the FDIC, the Maine Bureau of
Banking and the Bank on November 22, 1994 (the "Memorandum of Understanding"),
was terminated.
RESULTS OF OPERATIONS
COMPARISON OF YEAR ENDED DECEMBER 31, 1996 TO YEAR ENDED DECEMBER 31, 1995
OVERVIEW
The Company reported net income of $6.4 million (or $6.85 per share) for the
year ended December 31, 1996, compared to net income of $1.7 million (or $2.77
per share) for the year ended December 31, 1995. The results for 1996 reflect an
income tax benefit of $4.8 million recorded in the fourth quarter of 1996 which
resulted from a reduction in the Company's valuation allowance on its deferred
tax asset due to the improved financial condition of the Company, including the
completion of the recapitalization. Additionally, the earnings for 1996 included
a $366,000 gain in the second quarter as a result of the sale of the Bank's
Kezar Falls branch. For 1996, the Company incurred no provision for loan loss
expense as compared to a negative provision for loan loss expense of $425,000
for 1995.
NET INTEREST INCOME
Net interest income equaled $5.7 million and $5.9 million for the years
ended December 31, 1996 and 1995, respectively. Net interest income changes are
caused by interest rate movements, changes in the amount and the mix of
interest-earning assets and interest-bearing liabilities, and changes in the
level of noninterest-earning assets and noninterest-bearing liabilities.
7
<PAGE>
MANAGEMENT'S FINACIAL REVIEW
The following table sets forth, for the periods indicated, information
regarding (i) the total dollar amount of interest income of the Company from
interest-earning assets and the resultant average yields; (ii) the total dollar
amount of interest expense on interest-bearing liabilities and the resultant
average cost; (iii) net interest income; (iv) interest rate spread; and (v) net
interest margin.
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------------------------------------------
1996 1995 1994
---------------------------- --------------------------- ------------------------------
Average Yield/ Average Yield/ Average Yield/
(in thousands) Balance Interest Rate Balance Interest Rate Balance Interest Rate
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Loans (1)(2) $ 98,223 $ 9,226 9.39% $106,114 $ 9,662 9.11% $117,411 $ 10,172 8.66%
Investments
Available for sale (3) 13,350 834 6.25 9,782 606 6.20 8,658 505 5.82
Held to maturity 11,470 759 6.62 7,917 494 6.24 4,504 210 4.68
Interest earning deposits 9,559 512 5.36 15,889 945 5.95 21,808 893 4.10
-------- -------- -------- -------- -------- ------
Total interest earning assets 132,602 11,331 8.55 139,702 11,707 8.38 152,381 11,780 7.73
Noninterest earning assets 7,077 6,444 10,206
-------- -------- --------
Total assets $139,679 $146,146 $162,587
======== ======== ========
LIABILITIES:
Savings $ 53,430 $ 1,396 2.61% $ 60,159 $ 1,644 2.73% $ 68,911 $ 1,806 2.62%
Other time deposits 60,428 3,328 5.51 61,344 3,333 5.43 60,930 2,804 4.60
FHLB advances 7,226 404 5.59 7,253 454 6.26 15,296 1,116 7.30
Notes payable (4) 6,757 525 7.77 9,000 419 4.66 25 - -
-------- -------- -------- -------- -------- --------
Total interest bearing
liabilities 127,841 5,653 4.42 137,756 5,850 4.25 145,162 5,726 3.94
Noninterest bearing deposits 5,323 4,973 5,798
Noninterest bearing liabilities 292 565 1,002
Stockholders' equity 6,223 2,852 10,625
-------- -------- --------
Total liabilities and
stockholders' equity $139,679 $146,146 $162,587
======== ======== ========
Net interest income $ 5,678 $ 5,857 $ 6,054
======== ======== ========
Net interest rate spread (5) 4.12% 4.13% 3.79%
Net interest margin (6) 4.28% 4.19% 3.97%
</TABLE>
(1) For purposes of these computations, loans held for sale and nonaccrual
loans are included in the average loan amounts outstanding.
(2) Included in interest income on loans are loan fees of $152,000, $95,000 and
$277,000 for the years ended December 31, 1996, 1995 and 1994,
respectively.
(3) Yields on available for sale securities are calculated based on historical
cost.
(4) Notes Payable consists of the FDIC Note and the promissary note in the
aggregate principal amount of $4.0 million issued to the The Savings Banks
(the "Savings Bank Notes").
(5) Return on interest earning assets less cost of interest bearing
liabilities.
(6) Net interest income divided by average earning assets.
The following table 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).
8
<PAGE>
MANAGEMENT'S FINANCIAL REVIEW
<TABLE>
<CAPTION>
Year Ended December 31, 1996 Compared To
Year Ended December 31, 1995
---------------------------------------
Increase (Decrease)
Due To
--------------------------
(in thousands) Rate Volume Total
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income:
Loans(1) $283 $(719) $(436)
Investments available for sale 7 221 228
Investments held to maturity 43 222 265
Interest earning deposits (57) (376) (433)
---- ----- -----
Total interest income 276 (652) (376)
---- ---- ----
Interest expense:
Savings (64) (184) (248)
Other time deposits 45 (50) (5)
FHLB advances (48) (2) (50)
Notes payable 210 (104) 106
---- ----- -----
Total interest expense 143 (340) (197)
---- ----- -----
Net change in net interest income
before provision for loan losses $133 $(312) $(179)
===== ====== ======
</TABLE>
(1) For purposes of these computations, loans held for sale and nonaccrual
loans are included in loans.
Overall, net interest income declined by $179,000 for the year ended
December 31, 1996 compared to the year ended December 31, 1995. The Company's
net interest rate spread remained relatively unchanged at 4.12% and 4.13% for
the years ended December 31, 1996 and 1995, respectively. The net interest
margin increased from 4.19% at December 31, 1995 to 4.28% at December 31, 1996.
The increase in the margin is primarily the result of a decline in the level of
interest bearing liabilities relative to the level of interest earning assets.
Interest income for the year ended December 31, 1996 declined $376,000 as
compared to the year ended December 31, 1995. The decrease is primarily
attributable to the reduced level of loan outstandings in 1996 compared to 1995
and partially offset by an increase in the yield on loans from 9.11% at December
31, 1995 to 9.39% at December 31, 1996. During the first quarter of 1996, the
Company experienced a significant reduction ($4.5 million) in loan outstandings
resulting primarily from the prepayment of loans in advance of their scheduled
maturity dates. However, from March 31, 1996 to December 31, 1996, the Company's
loan outstandings increased $2.5 million. As competitive pressures continue, the
rates the Bank is able to obtain for its loans may decline, thereby narrowing
the spread received on interest earning assets as compared to interest bearing
liabilities.
Interest expense for the year ended December 31, 1996 declined $197,000 as
compared to the year ended December 31, 1995. The decrease is primarily
attributable to two factors: (i) the sale of the Bank's Kezar Falls branch in
the second quarter of 1996 included approximately $9.3 million in interest
bearing deposits, and (ii) the average cost of funds increased from 4.25% at
December 31, 1995 to 4.42% at December 31, 1996. The increase in the cost of
funds was attributable to an increased cost in notes payable and certificates of
deposits. As competitive pressures continue, the cost of funds to financial
institutions may continue to rise, thereby narrowing the spread received on
interest earning assets as compared to interest bearing liabilities.
PROVISION FOR LOAN LOSSES
There was no provision for loan losses for the year ended December 31,
1996, as compared to a negative provision for loan losses of $425,000 for the
year ended December 31, 1995, which was largely the result of a $675,000
provision expense reversal in the fourth quarter of 1995. The absence of a
provision for loan losses in 1996 is attributable to several factors: (i) the
essentially unchanged level of the Allowance for Loan Losses (the "Allowance"),
both in dollars ($2.7 million at December 31, 1996 and 1995) and as a percentage
of total loans (2.71% at December 31, 1996 versus 2.65% at December 31, 1995);
(ii) the decline in nonperforming loans during the period from 1995 to 1996; and
(iii) management's review of the portfolio and its determination of the adequacy
of the Allowance as of December 31, 1996.
9
<PAGE>
MANAGEMENT'S FINANCIAL REVIEW
NONINTEREST INCOME
Noninterest income increased $418,000, or 73.08%, from $572,000 for the year
ended December 31, 1995 to $990,000 for the year ended December 31, 1996. The
primary reason for this increase was the result of the $366,000 net gain on the
sale of the Bank's Kezar Falls branch in April 1996. In addition, deposit fee
income increased $105,000 from 1995 to 1996, primarily attributable to the
Bank's new deposit program which was implemented in April 1996. These increases
were partially offset by reduced fee income on loans serviced for others
totaling $53,000 resulting from a reduction in the amount of off balance sheet
loans serviced for others.
OPERATING EXPENSES
Operating expenses decreased $52,000, or 1% for the year ended December 31,
1996 as compared to the year ended December 31, 1995, as described in more
detail below:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------
(in thousands) 1996 1995 1994
- ----------------------------------------------------------------------
<S> <C> <C> <C>
Salaries and benefits $2,142 $2,092 $2,020
Occupancy 428 440 568
Net cost of operations of real estate owned 81 56 527
Data processing 421 530 534
Equipment 295 340 338
FDIC insurance 37 190 406
Insurance - general 180 168 268
Office/postage 315 273 258
Legal 182 282 676
Advertising 291 112 30
Other expenses 770 711 653
------ ------ ------
Total Operating Expenses $5,142 $5,194 $6,278
====== ====== ======
</TABLE>
The increase in salaries and benefits expense during 1996 was primarily due
to changes in staffing levels and annual salary increases. The decrease in
occupancy expense was due primarily to the sale of the Bank's Kezar Falls branch
in April 1996. Data processing expense decreased as a result of the conversion
of the Bank's computer system from an out-sourced service bureau relationship to
an in-house system. This expense reduction is expected to continue into 1997.
However, equipment expense is anticipated to increase in 1997 as a result of
additional depreciation expense incurred with the purchase of approximately
$500,000 of hardware and software for the new in-house computer system. FDIC
insurance expense declined as a result of a decrease in the Bank's deposit
insurance premiums. Office/postage expense and advertising expense increased
during 1996 as compared to 1995 as a result of increased postage and marketing
expenses associated with the Bank's new deposit program which was introduced in
April 1996. Legal costs for 1996 have declined as a result of the completion of
the Company's recapitalization plan and management anticipates this trend to
continue into 1997.
INCOME TAX EXPENSE (BENEFIT)
The Company recognized an income tax benefit in 1996 of $4,859,000. Of
this amount, $4,811,000 was attributable to a reduction in the amount of the
valuation allowance previously established against the Company's deferred tax
asset (having an effective tax rate of 34%). In addition, the Company received
$48,000 in interest applicable to a 1992 carryback refund.
The deferred tax asset and offsetting valuation allowance as of September
30, 1996 and prior periods were principally the result of the Company's
accumulation of net operating loss carryforwards. The deferred tax asset
represents the estimated amount of future deductions for tax reporting purposes
previously expensed for financial reporting purposes, and the benefit from
future income taxes the Company will not have to pay as a result of the net
operating loss carryforwards. Previously, a 100% valuation allowance was
maintained against the deferred tax asset as there were significant
uncertainties regarding the Company's future and its ability to utilize its net
operating loss carry forwards through sustained, profitable operations.
Management believes that the completion of the July 1996 recapitalization, the
payoff of the FDIC Note and the improved financial condition of the Company have
reduced the uncertainties relating to the Company's ability to realize the
benefits of the deferred tax asset. As a result, the valuation allowance
against the deferred tax asset (in accordance with Financial
10
<PAGE>
MANAGEMENT'S FINANCIAL REVIEW
Accounting Standards Board ("FASB") Statement of Financial Accounting Standard
("SFAS") No. 109) was reduced by $4,811,000. On a going forward basis for
financial reporting purposes only, earnings will now be subject to federal and
state income tax expense.
In order to help maintain the benefit of the deferred tax asset, at the
Company's June 1996 annual meeting of stockholders, the Company's stockholders
approved an amendment to the Restated Certificate of Incorporation of the
Company which generally provides that no person shall become or make an offer to
become a beneficial owner of five percent or more of the Company's voting stock
for a three year period, which expires June 11, 1999. For additional information
relating to income taxes, refer to Note M to the Company's Consolidated
Financial Statements.
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 factors: (i) the 1994 net
loss included a $9.0 million extraordinary charge to earnings upon the issuance
of the FDIC Note in consideration of the waiver and release of the cross
guaranty claim against the Bank, (ii) 1995 earnings were augmented by a negative
provision for loan losses of $425,000, and (iii) in 1995 there was 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 FDIC
Note.
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 for 1995 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.
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).
<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) $ 446 $ (956) $ (510)
Investments available for sale 37 65 102
Investments held to maturity 123 160 283
Interest earning deposits 294 (242) 52
----- ------ ------
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, loans held for sale and nonaccrual
loans are included in loans.
11
<PAGE>
MANAGEMENT'S FINANCIAL REVIEW
PROVISION FOR LOAN LOSSES
The provision for loan losses for the year ended December 31, 1995 was a
negative $425,000 (benefit) as compared to an expense of $107,000 for the year
ended December 31, 1994. In the fourth quarter of 1995, the Company recorded a
$675,000 provision for loan losses reversal resulting from the determination by
management that 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.
NONINTEREST INCOME
Noninterest 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 asset as a result of
higher than anticipated prepayments of serviced loans.
OPERATING 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 repossessions 56 527 (471)
Other expenses 2,606 3,163 (557)
------ ------ -------
$5,194 $6,278 $(1,084)
====== ====== =======
</TABLE>
The decrease in total expenses from 1994 to 1995 is mainly attributable to
four factors: (i) in 1994 the Company incurred $812,000 in expenses associated
with the settlement of the cross guaranty claim as compared to approximately
$300,000 in 1995, (ii) the net cost of real estate owned and repossessions
("REO") declined by $471,000-$258,000 from reduced expenses (net of revenues)
which was largely the result of fewer REO properties owned and decreased
vacancies, and $213,000 resulting from a reduction in write downs of REO
properties, (iii) the cost of FDIC insurance expense on deposits declined
$216,000 resulting from a decrease in the Bank's deposit insurance premium, and
(iv) a reduction in occupancy expenses resulting from the closure of two banking
offices in the second and third quarters of 1994.
FINANCIAL CONDITION
Set forth below is a discussion of the material changes in the financial
condition of the Company.
GENERAL
At December 31, 1996, the Company's total assets equaled $147.7 million as
compared to $145.5 million at December 31, 1995. The most significant changes in
assets consisted of a $7.0 million increase in investment securities and a $4.8
million increase in the Company's deferred tax asset, partially offset by a
$10.0 million decrease in federal funds sold. The change in liabilities and
stockholder's equity consisted of a $4.0 million increase in borrowings and a
$9.4 million increase in equity (resulting from (i) net proceeds of $3.1 million
raised in the July 1996 registered public offering, (ii) a $4.8 million income
tax benefit from the reduction in the Company's valuation allowance established
on its deferred tax asset, and (iii) before tax income of $1.5 million),
partially offset by a $10.6 million decline in total deposits ($9.9 million of
which was the result of the April 1996 sale of the Bank's Kezar Falls branch).
INVESTMENT SECURITIES
The Company's investment portfolio is comprised primarily of U.S.
government and agency obligations and equity securities. Total investment
securities at December 31, 1996 were $26.7 million compared to $19.7 million at
December 31, 1995. This increase is attributable to the purchase of $5.0 million
in U.S. government callable notes, $10.6 million in mortgage-backed securities
and $6.0 million in U.S. treasury securities, partially offset by maturities of
U.S. treasury securities totaling $5.0 million, sales of available for sale U.S.
treasury securities of $2.0 million, sales of mutual funds of $1.0 million and
$6.0 million of U.S. government agency callable notes which were called in 1996.
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 stockholder's equity. Investment securities held to
maturity are stated at cost, adjusted for amortization of bond premiums and
accretion of bond discounts.
12
<PAGE>
MANAGEMENT'S FINANCIAL REVIEW
The following table sets forth the carrying amounts and maturities of
investment securities and weighted average rates at December 31, 1996, 1995 and
1994.
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995 December 31, 1994
-------------------------------------------------------------
Carrying Carrying Carrying
(dollars in thousands) Amount Yield Amount Yield Amount Yield
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
AVAILABLE FOR SALE (AT MARKET):
U.S. government obligations maturing in 1-5 years $ 4,948 5.9% $ 5,014 5.6% $4,852 5.8%
Mortgage backed securities maturing in over 10 years 10,848 7.1 787 7.5 858 7.5
Equity (mutual fund) 995 6.0 2,000 6.2 3,894 5.6
Other equity 99 - 125 - 320 2.9
------ ------- -----
$16,890 6.6% $ 7,926 5.9% $9,924 5.9%
======= ======= ======
HELD TO MATURITY (AT COST):
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) $ 7,000 6.4% 8,991 6.6 - -
5-10 years (final maturity) 2,802 6.9 1,802 7.3 - -
------- ------ ----- -----
9,802 6.6 10,793 6.7 - -
------- ------ ----- -----
$ 9,802 6.6% $11,786 6.7% $6,822 5.2%
======= ======= ====== =====
</TABLE>
LOANS HELD FOR SALE
Loans held for sale at December 31, 1996 equaled $1,490,000 as compared to
$281,000 at December 31, 1995, an increase of $1,209,000. This increase was due
to an increased volume of residential mortgage loans being originated for sale
in the secondary market in 1996 as compared to 1995.
LOANS
Loans decreased $2.0 million (or 2.0%) from $100.5 million at December 31,
1995 to $98.5 million at December 31, 1996. The decrease was attributable to
declines in commercial real estate mortgages and consumer and other loans of
$2.4 million and $1.0 million, respectively, partially offset by increases in
real estate construction loans and commercial and industrial loans of $0.8
million and $0.6 million, respectively.
The following table sets forth the composition of the Company's loan
portfolio at the dates indicated:
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------
(in thousands) 1996 1995 1994 1993 1992
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Real estate mortgage loans:
Residential $30,981 $ 30,966 $ 33,158 $ 39,771 $ 51,898
Commercial 48,456 50,797 57,997 61,953 65,567
Real estate construction loans 769 - - 429 669
Commercial and industrial loans 3,059 2,524 2,510 3,013 3,703
Consumer and other loans 15,281 16,263 15,991 18,305 22,208
------- -------- -------- -------- --------
Total loans $98,546 $100,550 $109,656 $123,471 $144,045
======= ======== ======== ======== ========
Ratios of loans to:
Deposits 86% 80% 84% 88% 92%
Assets 67% 69% 71% 72% 76%
</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. At approximately this same time the Bank began to experience
significant asset quality problems and significant operat-
13
<PAGE>
MANAGEMENT'S FINANCIAL REVIEW
ing losses, resulting in a curtailment in loan volume as management sought to
address these problems. 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 entered into on January 23, 1992 (the "Order") (the
Order was terminated on December 8, 1994 and replaced by the Memorandum of
Understanding). 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 (Tier 1 capital to total assets ratio equaled 6.24% at
December 31, 1993). This requirement caused management to effect a strategy of
selective balance sheet shrinkage, including a reduction in loan originations.
The uncertainties with regard to the Bank's prospects and the likelihood it
could successfully address it core operating problems, including its asset
quality problems, the pre-settlement uncertainties arising from the FDIC cross
guaranty claim and the post-settlement uncertainty as to finding a means for
repaying the FDIC Note further contributed to the decrease in the size of the
Bank's loan portfolio due to borrower concern as to the Bank's future. The Banks
ability to originate commercial and industrial and commercial real estate loans
was particularly impacted by borrower uncertainties with regard to the Bank's
future until the Company's recapitalization. Additionally, management's focus on
the Bank's asset quality problems, the cross guaranty claim and post-settlement
recapitalization plan took away from its ability to devote all efforts and
resources to loan growth until the recapitalization was completed.
The Bank began expanding its residential and consumer lending
capabilities during late 1995 and throughout 1996. In addition, the combination
of continued improvement in overall asset quality and the completion of the
Company's recapitalization plan, have been beneficial to the Bank's loan
origination activities. The completion of the recapitalization also has allowed
the Bank to focus additional efforts 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.
During the first quarter of 1996, the Company experienced a significant
reduction ($4.5 million) in loan outstandings resulting primarily from the
prepayment of loans in advance of their scheduled maturity dates. However, from
March 31, 1996 to December 31, 1996 the Company's loan outstandings increased
$2.5 million.
LOAN ORIGINATIONS
Residential 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, the majority 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 1995, the Bank commenced an effort to substantially improve the overall
effectiveness of its branch system, including its ability to originate
residential and consumer loans. Five branches have been re-staffed to support
these efforts. The Bank's residential and consumer loan originations have
increased since mid-1995, as set forth below, and most of these loans were
originated through the branch system as opposed to the prior origination
strategy which relied heavily upon commission based mortgage origination. While
the Bank intends to continue its focus on growth in residential and consumer
lending in 1997, the level of such lending will depend upon a number of factors,
including the level of interest rates, general economic conditions and overall
profitability of these loans.
<TABLE>
<CAPTION>
For the Year Ended December 31,
------------------------------------
(in thousands) 1996 1995 1994
- ---------------------------------------------------------------
<S> <C> <C> <C>
Originations (1) :
Residential real estate $15,581 $4,168 $4,721
Consumer 4,249 2,388 1,816
------- ------ ------
Total $19,830 $6,556 $6,537
====== ====== ======
</TABLE>
(1) Includes refinancing of existing portfolio and off balance sheet serviced
loans.
The continued improvement in overall asset quality, along with the
completion of the July 1996 recapitalization have resulted in the Bank being
able to devote more resources towards the generation of new commercial loans.
As a result, management anticipates an increase in 1997 in the level of
commercial loan originations, which includes commercial and industrial loans and
commercial real estate loans.
14
<PAGE>
MANAGEMENT'S FINANCIA REVIEW
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 Banks 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 and the timing between the commitment to the borrower and the
closing and subsequent sale of the loan in the secondary market, such sales will
be made at a premium or discount (depending on the current interest rate
environment) 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 the FNMA. At
December 31, 1996, the Bank was servicing $50.5 million of loans which were
owned by others, as compared to $53.7 million at December 31, 1995. Servicing
fee income related to these loans is reported as other income in the
consolidated statements of operations, and for the three years ended December
31, 1996, 1995 and 1994, was $126,000, $179,000 and $58,000, respectively.
Servicing fee income for 1994 reflects a $132,000 charge for the establishment
of a valuation reserve against the Company's deferred mortgage servicing asset,
resulting from higher than anticipated prepayments of serviced loans.
ALLOWANCE FOR LOAN LOSSES
The Company's policy is to fund the Allowance by charging operations in the
form of provision for loan losses based on periodic evaluations of the loan
portfolio and current economic trends. 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. 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.
The following table represents the manner in which the Allowance is
allocated among the various loan categories at December 31, 1996, 1995 and 1994.
The percentages represent the percent of loans in each category to total loans.
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------------
1996 1995 1994
--------------------- ------------------ -------------------
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 $ 61 31.4% $ 82 30.8% $ 66 30.2%
Commercial 1,811 49.2 2,216 50.5 3,322 54.6
Real estate construction loans 7 .8 - - - -
Commercial and industrial loans 40 3.1 13 2.5 46 .6
Consumer and other loans 151 15.5 120 16.2 141 14.6
Unallocated 596 - 228 - 467 -
------ ------ ------ ----- ------ -----
Total $2,666 100.0% $2,659 100.0% $4,042 100.0%
====== ===== ====== ===== ====== =====
Allowance as a percentage of loans 2.71% 2.65% 3.67%
Allowance as a percentage of nonperforming loans 124.29% 47.96% 66.47%
Allowance as a percentage of nonperforming loans
(excluding restructured loans) 124.29% 125.60% 87.90%
</TABLE>
15
<PAGE>
The balance of the Allowance has remained relatively unchanged at December
31, 1996 as compared to December 31, 1995.
The following table sets forth the changes in the Allowance, including
charge-offs and recoveries, by loan category, for the past five years:
<TABLE>
<CAPTION>
December 31,
------------------------------------------------
(dollars in thousands) 1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $2,659 $ 4,042 $3,642 $ 4,280 $ 6,098
Charge-offs:
Real estate mortgage loans (93) (1,113) (178) (1,197) (2,726)
Real estate construction loans - - - ( 28) ( 121)
Commercial and industrial loans - ( 142) - ( 55) ( 178)
Consumer and other loans ( 196) ( 78) ( 112) ( 89) ( 143)
------ ------- ------- ------- -------
Total charge-offs ( 289) (1,333) ( 290) (1,369) (3,168)
Recoveries:
Real estate mortgage loans 163 172 127 179 165
Commercial and industrial loans 55 170 410 543 21
Consumer and other loans 78 33 46 39 28
------ ------- ------- ------- -------
Total recoveries 296 375 583 761 214
------ ------- ------- ------- -------
Net (charge-offs) recoveries 7 ( 958) 293 ( 608) (2,954)
Provision for loan losses - ( 425) 107 ( 30) 1,136
------ ------- ------- ------- -------
Balance at end of period $2,666 $ 2,659 $4,042 $ 3,642 $ 4,280
====== ======= ====== ======= =======
Net charge-offs as a percentage
of average loans (.01)% .91% (.25)% .46% 1.76%
</TABLE>
Provision for loan losses has been nominal the past four years as compared
to prior years. Three of the four years have resulted in either zero or negative
provision for loan losses. 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 resulting
from the improvement in the overall credit quality of these loans or loan
payoffs, and (iii) significant loan loss recoveries.
There was a significant increase in consumer and other loan charge offs
during the year, from $78,000 in 1995 to $196,000 in 1996. The preponderance of
these losses relate to mobile home and boat loans originated over five years
ago. It is currently uncertain as to whether or not this increase in consumer
loan charge offs is representative of the beginning of a trend or is a one time
occurrence.
While the balance of the Allowance remained relatively unchanged at
December 31, 1996 as compared to December 31, 1995, the balance of the Allowance
declined $1,383,000 during the year ended December 31, 1995 as compared to 1994.
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 as potential identified loan loss exposure is quantified.
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 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 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 for loan losses reversal. As a result, a provision for loan
losses 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 for loan losses for the year ended December 31, 1995 of $425,000.
Overall, the combination of a higher level of net charge offs of $958,000 plus
the negative provision for loan losses for 1995 of $425,000 resulted in the
decline in the balance of the Allowance of $1,383,000.
16
<PAGE>
MANAGEMENT'S FINANCIAL REVIEW
Management believes that in accordance with the Bank's Allowance for Loan
Loss Policy, the Allowance is adequate at December 31, 1996. However, future
additions to the Allowance may be necessary based on changes in the financial
condition of various borrowers, new information that becomes available relative
to various borrowers and loan collateral, as well as changes in local, regional
or national economic conditions. In addition, various regulatory authorities, as
an integral part of their examination process, periodically review the Bank's
Allowance. Such authorities may require the Bank to recognize additional
provision for loan losses based upon information available to them and their
judgments at the time of their examination.
NONPERFORMING ASSETS
Information with respect to nonperforming assets is set forth below:
<TABLE>
<CAPTION>
December 31,
-------------------------------------------
(in thousands) 1996 1995 1994 1993 1992
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nonaccrual loans $1,944 $1,948 $4,340 $ 1,220 $ 4,103
Accruing loans past due
90 days or more 201 169 258 249 194
Restructured loans - 3,427 1,483 4,212 7,455
Real estate owned and repossessions 478 1,973 2,222 5,299 3,833
Financed real estate owned - - - 450 1,535
In-substance repossessions n/a n/a 703 197 7,262
------ ------ ------ ------- -------
$2,623 $7,517 $9,006 $11,627 $24,382
====== ====== ====== ======= =======
</TABLE>
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) 1996 1995 1994 1993 1992
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Real estate mortgage loans:
Residential - $ 386 $ 115 $ 126 $ 113
Commercial $1,944 5,007 5,667 5,420 10,753
Real estate construction loans - - - - 118
Commercial and industrial loans - - 156 12 756
Consumer and other loans 201 151 143 123 12
------ ------ ------ ------ -------
Total loans $2,145 $5,544 $6,081 $5,681 $11,752
====== ====== ====== ====== =======
</TABLE>
The following table sets forth certain information regarding nonperforming
commercial loans: (dollars in thousands)
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995 December 31, 1994
-------------------------- --------------------------- ---------------------------
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 4 $ 211 2 $ 128 3 $ 308
5 or more Family Residential 4 869 5 977 5 1,073
Non-Residential Real Estate 3 864 6 3,902 3 4,286
Commercial and Industrial - - - - 2 156
--- ------ --- ------ --- -------
11 $1,944 13 $5,007 13 $ 5,823
=== ====== === ====== === =======
</TABLE>
The level of nonperforming assets declined 65.1%, from $7.5 million at
December 31, 1995 to $2.6 million at December 31, 1996. This decline was
primarily attributable to a decline in restructured loans of $3.4 million, as
these loans were reclassified to performing status in 1996 and a decline in the
level of REO. REO declined $1.5 million, primarily as a result of the sale of
two REO properties totaling $1.4 million.
While the downward trend in nonperforming assets that has developed
since 1992 is significant, the Company continues to hold a large concentration
of commercial real estate loans. Many of these loans were made at or near the
peak in the commercial real estate market in the late 1980's or represent the
financing of Bank REO properties. Bank financing of its REO properties
generally involves higher loan amounts relative to the sale price of these
properties than would be the case in a standard third party loan transaction.
The collateral coverage for many commercial real estate loans may not be
adequate to pro-
17
<PAGE>
MANAGEMENT'S FINANCIAL REVIEW
tect the Bank from potential losses in the event such loans become
nonperforming. Deterioration in the local economy or real estate market, upward
movements in interest rates, or adverse changes in the financial condition of
various borrowers, could have an adverse impact on the Bank's loan portfolio,
and in particular, currently performing commercial real estate loans. These
factors could result in an increased incidence of loan defaults and, as a
result, an increased level of nonperforming loans and assets. For further
information, see Note E to the Company's Consolidated Financial Statements.
POTENTIAL PROBLEM LOANS
Although the real estate market in the Bank's market area in Maine has
improved to some degree as compared to the depressed conditions of several years
ago, management recognizes that the overall Maine economy remains relatively
soft, with most economic forecasts predicting slow growth, if any, over the next
several years. As a result, there continues to be an increased risk that the
real estate market could decline and currently performing loans could become
nonperforming. In particular, management believes that an area of potential
exposure is that of currently performing potential problem commercial real
estate loans.
These loans, not otherwise identified as nonperforming (nonaccrual,
accruing loans past due 90 days or more or as a troubled debt restructurings),
are largely secured by income-producing properties. In many cases, the
borrowers on these loans have experienced inadequate rental revenues, high
vacancy levels and cash flow problems. Most of these potential problem loans
were originated in the late 1980's.
At December 31, 1996, the Bank had identified approximately $6.1
million of currently performing but potential problem loans. Such loans
represented 4.16% of total assets, ranging in size from $27,000 to $1,815,000.
This compares to $6.9 million of potential problem loans at December 31, 1995, a
10.78% decrease.
The following table sets forth certain information regarding potential
problem loans at December 31, 1996:
<TABLE>
<CAPTION>
Number of Balance
Type of Security Property Outstanding Loans (in thousands)
- --------------------------------------------------------------
<S> <C> <C>
Apartments 4 $2,822
Industrial 1 1,322
Single family 1 67
Other 3 1,932
-- ------
9 $6,143
== ======
</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, 1996, the Company believes the Bank's aggregate
allocated loan loss reserves against these potential problem loans, in
combination with the Bank's overall Allowance adequacy, including the
unallocated portion of the Allowance, is adequate to cover the loss exposure
estimated to be contained within these potential problem loans.
REAL ESTATE OWNED AND REPOSSESSIONS
REO consists of properties acquired through mortgage loan foreclosure
proceedings, repossessions or in full or partial satisfaction of outstanding
loan obligations. At December 31, 1996, REO totaled approximately $478,000,
consisting of $228,000 for 1-4 family residential real estate, $160,000 for land
and $90,000 for other repossessed assets.
LIQUIDITY
BANK
Deposits totaled $115.1 million at December 31, 1996, a decrease of
$10.6 million (or 8.4%) from the level of $125.7 million at December 31, 1995.
In April 1996, the Bank sold its Kezar Falls branch to Maine Bank & Trust
Company. Included in the sale were all of the branch's deposits (totaling $9.9
million), the real estate and certain of the furniture, fixtures and equipment
of the branch.
At December 31, 1996 and 1995, unfunded loan commitments equaled $11.2
million and $8.0 million, respectively. Loan commitments include unfunded
portions of real estate, construction and other loans and unused lines of
credit, includ-
18
<PAGE>
MANAGEMENT'S FINANCIAL REVIEW
ing home equity loans. Loan commitments are subject to the same credit policies
as loans and generally have expiration dates and termination clauses. Unused
home equity line of credit commitments totaled $6.6 million at December 31,
1996, representing 59.0% of total unfunded loan commitments. Home equity
outstanding balances totaled $6.5 million at December 31, 1996, representing
49.6% of total home equity commitments.
The Bank has the capability of borrowing additional funds from the Federal
Home Loan Bank ("FHLB") of Boston. The Bank is also approved by the Federal
Reserve Bank of Boston to obtain liquidity from its "Discount Window", however,
no funds have been or are anticipated to be obtained from this source. The
Company believes that its liquidity sources will continue to provide funding
sufficient to support operating activities, loan originations and commitments,
and deposit withdrawals.
PARENT
On a parent company only basis, the Company conducts no separate
operations. The Company's business consists primarily of the operations of its
bank subsidiary. In addition to debt service relating to the Savings Bank Notes
in the aggregate principal amount of $4.0 million, 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 the Bank and the Company based upon the relative benefits
derived. For further information, see Note R to the Company's Consolidated
Financial Statements.
The principal source of cash for the Company is dividend payments from the
Bank. However, as described in Note J to the Consolidated Financial Statements,
there exist certain restrictions regarding the ability of the Bank to transfer
funds.
On July 24, 1996, May 3, 1996, November 13, 1995 and November 30, 1994
the Bank paid the Company cash dividends of $3.2 million, $200,000, $200,000 and
$175,000, respectively.
CAPITAL
BANK
The table below sets forth the regulatory capital requirements and capital
ratios for the Bank at December 31, 1996 and 1995:
<TABLE>
<CAPTION>
(dollars in thousands) 1996 1995
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Tier 1 capital (Leverage) to total assets (1)ratio
- --------------------------------------------------
Qualifying capital $ 12,738 $ 13,296
Actual % 9.28% 9.19%
Minimum requirement for capital adequacy %(2) 4.00% 6.00%
Average assets for fourth quarter $137,317 $144,658
Tier 1 capital to risk-weighted assets
- --------------------------------------
Qualifying capital $ 12,738 $ 13,296
Actual % 14.31% 14.32%
Minimum requirement for capital adequacy % 4.00% 4.00%
Total capital to risk-weighted assets
(Tier 1 and Tier 2)
- -------------------------------------
Qualifying capital $ 13,888 $ 14,475
Actual % 15.60% 15.59%
Minimum requirement for capital adequacy % 8.00% 8.00%
Risk-weighted assets $ 89,026 $ 92,821
</TABLE>
(1) Calculated on an average quarterly basis
(2) The 1995 minimum requirement was 6.0% as imposed by the Memorandum of
Understanding. Effective September 1996, the Memorandum of Understanding
was terminated and accordingly the Bank's minimum requirement for capital
adequacy was 4.0%.
See Notes B and I to the Company's Consolidated Financial Statements for certain
capital restrictions arising from the Savings Bank Notes.
19
<PAGE>
MANAGEMENT'S FINANCIAL REVIEW
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, such as the Company, 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. 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, and qualifying total capital to risk-weighted assets of
9.28%, 14.31%, and 15.60%, respectively, at December 31, 1996 were in compliance
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 6.62%, 10.21% and 11.54%, respectively, as compared to the
minimum required levels of 4.0% to 5.0%, ,4.0% and 8.0%, 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 Note J to the Company's Consolidated Financial
Statements for dividend restrictions.
INTEREST RATE RISK AND ASSET LIABILITY MANAGEMENT
The Company's actions in regard to interest rate risk and asset and
liability management are the responsibility of the Asset and Liability Committee
("ALCO") which is, in part, comprised of members of the Bank's senior
management. ALCO is responsible for directing asset liability management ("ALM")
activities, including the development of specific ALM strategies to achieve the
Bank's objectives, including the management of interest rate risk. Interest rate
risk can be defined as the exposure of the Company's net income or financial
position to adverse movements in interest rates. In addition to impacting net
interest income, changes in the level of interest rates also affect (i) the
amount of loans originated, (ii) the ability of borrowers to repay loans, (iii)
the average maturity of loans, which tends to increase when current loan rates
are substantially higher than rates on existing loans and, conversely, decrease
when rates on existing loans are substantially higher than current loan rates
(due to refinancings of loans at lower rates), and (iv) the carrying value of
investment securities classified as available for sale and resultant adjustments
to stockholders' equity.
The principal objective of the Company is to maintain an appropriate
balance between income enhancement and the risks associated with maximizing
income through the mismatch of the timing of interest rate changes between
assets and liabilities. Matching asset and liability maturities and interest
rate changes can reduce interest rate risk; however, net interest income may not
necessarily be enhanced as a result of such a strategy. The Company seeks to
reduce the volatility of its net interest income by managing the relationship of
interest-rate sensitive assets to interest-rate sensitive liabilities.
Net interest income sensitivity to movements in interest rates is
measured through the use of a simulation model which analyzes resulting net
income under various interest rate scenarios. Projected net interest income is
modeled based on gradual movements in interest rates over a twelve month period.
The model is based on the actual maturity and repricing characteristics of
interest rate sensitive assets and liabilities and factors in budget projections
for anticipated activity levels in the various asset and liability categories.
The simulation model incorporates assumptions regarding the impact of changing
interest rates on the prepayment of certain assets and liabilities. The model
also takes into account the Company's ability to exert greater control over the
setting of interest rates on certain deposit products than it has over variable
and adjustable rate loans which are tied to published indices, such as
designated prime lending rates and the rate on U.S. Treasury securities.
Based on the information and assumptions in effect at December 31, 1996,
management of the Company believes that a 200 basis point gradual change in
interest rates over a twelve month period, up or down, would not have a
significant adverse impact on the Company's annualized net interest income. This
assessment is based to some extent on managements ability to exert some control
with respect to the extent and timing of the change in rates paid on deposits,
and therefore, to exert some control over the degree to which changing interest
rates impact net interest income.
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
20
<PAGE>
MANAGEMENT'S FINANCIAL REVIEW
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.
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 significantly affect the Company's earnings in
future periods.
MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
As of December 31, 1996, the Company had approximately 1,620 holders of
record and 1,357,861 outstanding shares of common stock. The common stock is
traded on The Nasdaq SmallCap Market tier of the Nasdaq Stock Market under the
symbol FCME.
The following table sets forth (i) for the period beginning January 1, 1995
and ending July 24, 1996, the high and low closing bid prices for the Companys
common stock on the OTC Bulleting Board as reported by Nasdaq Trading and Market
Services, and (ii) for the period beginning July 25, 1996 and ending December
31, 1996, the high and low sales prices for the Company's common stock traded on
The Nasdaq SmallCap Market. All such quotations represent prices between dealers
without adjustments 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>
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
1996
First Quarter $ 5.00 $2.00
Second Quarter 5.00 2.00
Third Quarter (July 1 - July 24) 5.00 2.00
Third Quarter (July 25 - September. 30) 7.875 5.00
Fourth Quarter 7.875 6.50
</TABLE>
No dividends were declared by the Company in 1992 through 1996. Excluding
the cash obtained as a result of the July 1996 recapitalization, which included
$3.1 million raised through a registered public offering and $4.0 million
borrowed from the Savings Banks, the Company's only source of cash has been and
is currently anticipated to be from dividends from the Bank. There are certain
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
Note J to the Company's Consolidated Financial Statements.
21
<PAGE>
REPORT ON 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, 1996 and
1995, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended December
31, 1996. 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, 1996 and
1995, and the consolidated results of their operations and their cash flows for
each of the three years in the period ended December 31, 1996 in conformity with
generally accepted accounting principles.
As discussed in Note A to the consolidated financial statements, on
January 1, 1996, the Company changed its method of accounting for mortgage
servicing rights to adopt the provisions of Financial Accounting Standards Board
Statement No. 122.
Coopers & Lybrand, L.L.P.
Portland, Maine
February 10, 1997
22
<PAGE>
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
FIRST COASTAL CORPORATION AND SUBSIDIARY
December 31,
---------------------------
(in thousands, except share and per share amounts) 1996 1995
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Noninterest earning deposits and cash - Note C $ 2,898 $ 4,466
Interest earning deposits 8,555 4,375
-------- --------
Cash and Cash Equivalents 11,453 8,841
Federal funds sold - 10,000
Investment securities - Note D:
Available-for-sale (at market value) 16,890 7,926
Held-to-maturity (at cost) 9,802 11,786
-------- --------
26,692 19,712
Federal Home Loan Bank stock-at cost 1,315 1,315
Loans held for sale (at market value) - Note A 1,490 281
Loans - Note E 98,546 100,550
Less: Deferred loan fees, net (31) (22)
Allowance for loan losses - Note F (2,666) (2,659)
-------- --------
95,849 97,869
Premises and equipment - Note G 3,428 3,073
Accrued income receivable 1,079 1,004
Real estate owned and repossessions 478 1,973
Deferred tax asset - Note M 4,811 -
Other assets 1,139 1,385
-------- --------
TOTAL ASSETS $147,734 $145,453
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits - Note H $115,085 $125,665
Borrowings - Note I
Advances from Federal Home Loan Bank 15,000 6,000
Savings Bank Note 4,000 -
FDIC Note - 9,000
Accrued expenses and other liabilities 261 791
-------- --------
TOTAL LIABILITIES 134,346 141,456
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
as of 1996 and 1995 1,357,861 and 600,361 shares, respectively 1,358 600
Paid-in capital 31,740 29,375
Retained earnings (deficit) (19,631) (26,016)
Unrealized gain (loss) on available for sale
securities (79) 38
-------- --------
TOTAL STOCKHOLDERS' EQUITY 13,388 3,997
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY $147,734 $145,453
======== ========
</TABLE>
See notes to consolidated financial statements.
23
<PAGE>
CONSOLIDATED STATEMENT OF OPERATIONS
FIRST COASTAL CORPORATION AND SUBSIDIARY
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------
(in thousands, except per share amounts) 1996 1995 1994
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST AND DIVIDEND INCOME
Interest and fees on loans $ 9,226 $ 9,662 $ 10,172
Interest and dividends on investment securities:
Investment interest income 1,414 832 425
Dividends 179 268 290
Other interest income 512 945 893
-------- -------- --------
Total Interest and Dividend Income 11,331 11,707 11,780
INTEREST EXPENSE
Deposits - Note H 4,724 4,977 4,610
Borrowings:
Advances from Federal Home Loan Bank 404 454 1,116
Savings Bank Notes 190 - -
FDIC Note 335 419 -
-------- -------- --------
Total Interest Expense 5,653 5,850 5,726
-------- -------- --------
Net Interest Income Before Provision for Loan Losses 5,678 5,857 6,054
Provision for loan losses - Note F - (425) 107
-------- -------- --------
Net Interest Income After Provision for Loan Losses 5,678 6,282 5,947
NONINTEREST INCOME
Service charges on deposit accounts 362 257 284
Other service charges and fees 84 78 81
Gain (loss) on investment securities transactions 38 (4) 38
Gain (loss) on sales of mortgage loans 7 17 (8)
Other 499 224 34
-------- -------- --------
990 572 429
-------- -------- --------
OPERATING EXPENSES
Salaries and employee benefits - Note L 2,142 2,092 2,020
Occupancy - Note G 428 440 568
Net cost of operation of real estate owned 81 56 527
Other - Note Q 2,491 2,606 3,163
-------- -------- --------
5,142 5,194 6,278
-------- -------- --------
INCOME BEFORE INCOME TAXES AND EXTRAORDINARY ITEM 1,526 1,660 98
Income tax benefit - Note M (4,859) - -
-------- -------- --------
INCOME BEFORE EXTRAORDINARY ITEM 6,385 1,660 98
Extraordinary Item - Charge to earnings as a result
of the settlement of the cross guaranty
claim - Note B - - 9,000
-------- -------- --------
NET INCOME (LOSS) $ 6,385 $ 1,660 $ (8,902)
======== ======== ========
PER SHARE AMOUNTS
Weighted Average Shares Outstanding 931,509 600,361 600,361
Income Per Share before Extraordinary item $6.85 $2.77 $.16
-------- -------- --------
Net Income (Loss) per share $6.85 $2.77 $(14.83)
======== ======== ========
</TABLE>
See notes to consolidated financial statements
24
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S 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, 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)
Purchase of Coastal Bancorp's
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
1996 net income 6,385 6,385
Increase in net unrealized loss on
available for sale securities (117) (117)
Isssuance of restricted stock 8 30 38
Issuance of common stock 750 2,335 - - 3,085
------- -------- -------- ------ -------
Balances at December 31, 1996 $ 1,358 $ 31,740 $(19,631) $ (79) $13,388
======== ======== ======== ====== =======
</TABLE>
See notes to consolidated financial statements.
25
<PAGE>
CONSOLIDATED STATEMENTS OF CASHFLOWS
FIRST COASTAL CORPORATION AND SUBSIDIARY
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------
(in thousands) 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 6,385 $ 1,660 $ (8,902)
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
Writedowns of REO 11 13 226
Depreciation and amortization 270 292 300
Amortization of investment security discounts (27) (248) (183)
Realized investment securities (gains) losses (38) 4 (38)
(Gains) losses from assets held in trading
accounts - (33) 93
Realized gains on assets held for sale (7) (17) (8)
(Increase) decrease in trading account securities - 948 (1,008)
Loans originated and acquired for resale (6,147) (3,376) (3,497)
Sales of loans originated and acquired for resale 4,945 3,297 6,741
Increase in interest receivable (75) (221) (78)
Increase (decrease) in interest payable (466) 392 (45)
Net change in other assets (3,499) 1,988 4,016
Net change in other liabilities (64) (150) (129)
-------- -------- --------
Net cash provided by operating activities 1,288 4,124 6,595
INVESTING ACTIVITIES
(Increase) decrease in federal funds sold 10,000 - (10,000)
Maturities of securities held to maturity 7,000 8,000 634
Sales and maturities of securities available for
sale 7,506 2,324 233
Purchases of investment securities available for
sale (16,535) (2) (8,990)
Purchases of investment securities held to
maturity (5,003) (12,721) (6,648)
Net change in loans 2,592 7,187 12,306
Net purchases of premises and equipment (625) (424) (86)
-------- -------- --------
Net cash provided (used) by investing activities 4,935 4,364 (12,551)
FINANCING ACTIVITIES
Net change in deposits (10,580) (4,372) (10,550)
Proceeds from borrowings 13,000 - -
Payments on borrowings (9,000) (6,612) (5,496)
Purchase of Coastal Bancorps minority interest - - (200)
Proceeds from sale of common stock 3,085 - -
Finance cost associated with Savings Bank Notes (116) - -
-------- -------- --------
Net cash used by financing activities (3,611) (10,984) (16,246)
-------- -------- --------
Increase (decrease) in cash and cash equivalents 2,612 (2,496) (22,202)
Cash and cash equivalents at beginning of period 8,841 11,337 33,539
-------- -------- --------
Cash and cash equivalents (interest and noninterest
bearing) at end of period $ 11,453 $8,841 $11,337
======== ======== ========
SUPPLEMENTAL DISCLOSURES OF INFORMATION
Interest paid on deposits and borrowings $ 6,107 $ 5,459 $ 5,579
Income tax refund (48) - -
NONCASH INVESTING AND FINANCING ACTIVITIES
FDIC Note - - $ 9,000
Change in unrealized holding gains (losses) on
investment securities available for sale $ (117) $ 323 (285)
Securities available for sale collateralized by
portfolio mortgage loans - - 1,003
Transfer of loans to real estate owned
and repossessions 572 952 827
Issuance of restricted stock 38 - -
</TABLE>
See notes to consolidated financial statements.
26
<PAGE>
NOTES TO FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FIRST COASTAL CORPORATION AND SUBSIDIARY
December 31, 1996
NOTE A. ACCOUNTING POLICIES
BUSINESS
First Coastal Corporation (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, which was the bank holding company of
Coastal Savings Bank, a Maine chartered, stock savings bank (the "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 only
operating subsidiary. On July 26, 1994, Coastal Bancorp was dissolved, and 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, which is administered by the Federal Deposit
Insurance Corporation ("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.
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. All significant
intercompany transactions and balances have been eliminated in consolidation.
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.
Most of the Company's commercial real estate loans as of December 31, 1996 are
collateralized by real estate in Maine. Many of these loans were made at or near
the peak in the commercial real estate market in the late 1980s or represent the
financing of real estate owned and repossessions ("REO"), generally at higher
loan amounts relative to the sales prices of these properties than would be the
case in a standard third party loan transaction. Although the southern Maine
real estate market (which comprises the Bank's market area) has to some extent
recovered from the depressed market conditions of the early 1990's, the market
has not returned to the levels reached in the late 1980's. In addition, all of
the REO are located in this same market. Accordingly, the ultimate
collectibility of a significant portion of the Companys loan portfolio and the
recovery of the carrying amount of REO remain particularly susceptible to
changes in market conditions in southern 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 June 1996, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 125, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,
which provides accounting and reporting standards for transfers and servicing of
financial assets and extinguishment of liabilities. SFAS No. 125 distinguishes
transfers of financial assets that are sales from transfers that are secured
borrowings. SFAS No. 125 is effective for transfers and servicing of financial
assets and extinguishments of liabilities occurring after December 31, 1996 and
is to be applied prospectively. The adoption of SFAS No. 125 is not expected to
have a material effect on the Company's financial position or results of
operations.
In February 1997, FASB issued SFAS No. 128, Earings Per Share and SFAS No.
129, Disclosure of Information about Capital Structure. SFAS No. 128 will
require a change in how the Company calculates earnings per share and SFAS No.
129 will require disclosure of certain information about the Company's capital
structure. The requirements of these pronounce-
27
<PAGE>
NOTES TO FINANCIAL STATEMENTS
ments are effective for the Company's fiscal year ending December 31, 1997 and
the impact of these statements on the Company's financial statements has not yet
been determined.
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
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. At December 31, 1996, investment securities
classified as available for sale reflected an unrealized loss of $79,000.
Securities that may be sold as part of the Company's asset/liability or
liquidity management or in response to or in anticipation of changes in interest
rates and resulting prepayment risk, or for other similar factors, are
classified as available-for-sale and carried at their fair market value.
Unrealized holding gains and losses on such securities are reported net of
related taxes, if applicable, as a separate component of stockholders' equity.
Securities that the Company has the ability and positive intent to hold to
maturity are classified as held-to-maturity and carried at amortized cost.
Realized gains and losses on the sales of all securities are reported in
earnings and computed using the specific identification cost basis.
LOANS HELD FOR SALE STATED AT MARKET VALUE
Loans held for sale are valued at the lower of cost or market as determined by
outstanding commitments from investors or current investor yield requirements
calculated on the aggregate loan basis. Changes in the carrying value are
reported in earnings as gains and losses on mortgage loans. Realized gains and
losses on sales of mortgage loans are reported in earnings when the proceeds are
received from investors.
LOANS
Loans are reported at their principal outstanding balance net of charge-offs,
unearned income and deferred loan origination fees and costs. Interest is
generally recognized when income is earned using the accrual method. Loan
origination and commitment fees and certain direct origination costs are
deferred and recognized over the life of the related loan as an adjustment of
yield, or taken into income when the related loan is sold.
The accrual of interest on loans is generally discontinued when principal or
interest is past due by ninety days or more, or earlier when, in the opinion of
management, full collection of principal or interest is unlikely unless such
loans are well collateralized and in the process of collection. When a loan is
placed on nonaccrual status, unpaid interest credited to income in the current
year is reversed and interest accrued in prior years is charged to the
Allowance. Income on such loans is then recognized only to the extent that cash
is received and future collection of principal is probable.
Loans are restored to accrual status when principal and interest payments are
brought current and future payments are reasonably assured, following a
sustained period of repayment performance by the borrower in accordance with the
loan's contractual terms.
The Company adopted SFAS 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 it is probable 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. Though the measurement of impaired loans
is generally based on the present value of expected future cash flows discounted
at the historical effective interest rate, all of the Company's impaired loans
were collateral-dependent, which are measured for impairment based on the fair
value of the collateral. The adoption of SFAS No. 114 resulted in no additional
provision for loan losses as determined at January 1, 1995 and December 31,
1996.
Troubled debt restructurings ("TDR") are renegotiated loans for which
concessions, such as the reduction of interest rates, deferral of interest or
principal payments, or partial forgiveness of principal and interest, have been
granted, generally due to a deterioration in a borrower's financial condition.
Interest to be paid on a deferred or contingent basis is reported in earnings
only as collected.
In May 1995, the FASB issued SFAS No. 122, Mortgage Servicing Rights, which
amends SFAS 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 serv-
28
<PAGE>
icing rights. There was no effect to the Company's financial statements or
results of operations on January 1, 1996 and December 31, 1996 as a result of
implementing SFAS No. 122.
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 in accordance
with the Bank's Allowance for Loan Loss Policy. 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 conditions, trends in loan
outstandings and diversification of the loan portfolio, the results of the most
recent regulatory examinations, the results of loan portfolio reviews completed
by outside consultants, the nature and level of nonperforming assets, impaired
loans and loans that have been identified as potential problems, the adequacy of
loan collateral and other relevant factors. The Allowance is increased by
provisions for loan losses charged against income and recoveries on loans
previously charged off.
REAL ESTATE OWNED AND REPOSSESSIONS
REO, other than bank premises, consists of properties acquired through
mortgage loan foreclosure proceedings or in full or partial satisfaction of
loans. REO is initially recorded at the lower of cost or fair value (minus
estimated costs to sell) at the date the property is acquired 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. All expenses and income related to REO properties are
included in the net cost of operations and real estate owned in the Company's
Consolidated Financial Statements of Operations.
PREMISES AND EQUIPMENT
Bank premises, furniture and equipment are carried at cost, less accumulated
depreciation and amortization computed using the straight-line method over the
estimated useful lives of the assets. Leasehold improvements are amortized on
the straight-line basis over the shorter of the estimated useful lives of the
improvements or the term of the related leases.
INCOME TAXES
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. Due to the uncertainty that the benefit of net deferred tax assets would
be realized, a full valuation allowance was recorded at December 31, 1995.
Management is now of the opinion that the completion of the July 1996
recapitalization, the payoff of the $9.0 million FDIC Note, incurred as a result
of the settlement of the cross guaranty claim, and the improved financial
condition of the Company have reduced the uncertainties relating to the
prospective utilization of the net operating loss carryforwards. As a result,
in accordance with SFAS No. 109, in the fourth quarter of 1996 the valuation
allowance against the deferred tax asset was reduced and the $4.8 million income
tax benefit was recognized.
COMPUTATION OF EARNINGS PER SHARE
Earnings per share is computed by dividing net income by the weighted average
number of common shares and common stock equivalents outstanding during the
period, which during 1996, 1995 and 1994 were 931,509, 600,361 and 600,361,
respectively. The computation does not give effect to shares issuable upon
exercise of stock options where the effect of that inclusion would be anti-
dilutive.
RETIREMENT BENEFITS
The Bank has a non-contributory defined benefit pension plan covering
substantially all of their officers and employees. The benefit formula is based
on a covered employees 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, as amended ("ERISA"), plus such additional amounts
as the Bank may periodically
29
<PAGE>
NOTES TO FINANCIAL STATEMENT
determine to be appropriate. The Company is currently exploring the feasibility
of freezing the non-contributory defined benefit plan and establishing a 401(k)
plan.
NOTE B. REGULATORY MATTERS
SATISFACTION OF CROSS GUARANTY SETTLEMENT OBLIGATION TO FDIC
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. Following the receivership of Suffield Bank, management's efforts
were focused for an extended period of time on resolving the cross guaranty
claim, as described below, and improving the operations of the Bank.
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, 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 "FDIC Note"), secured by the
Company's pledge of 100% of the outstanding common stock of the Bank. In 1994,
the Company incurred an extraordinary charge to earnings resulting from the
issuance of the FDIC Note. Principal and interest under the FDIC Note were
deferred until its maturity date, January 31, 1997.
The Company announced on January 31, 1996 that it intended to pursue a
recapitalization of the Company as the means to facilitate the satisfaction of
the FDIC Note. On July 24, 1996, the Company completed its recapitalization
plan, whereby the Company repaid in full its obligation to the FDIC in the
amount of $9.7 million ($9.0 million loan principal amount plus accrued
interest). The funds utilized to repay the FDIC Note were derived from (i) the
sale of 750,000 shares of the Company's common stock at $5.00 per share by means
of a registered public offering; (ii) a dividend of $3.2 million from the Bank
to the Company; and (iii) the borrowing of $4.0 million from a group of four
Maine savings banks(the "Savings Banks"), secured by the pledge by the Company
of 100% of the outstanding common stock of the Bank.
TERMINATION OF THE MEMORANDUM OF UNDERSTANDING
On September 9, 1996 and September 16, 1996, the Company was notified by the
Superintendent of the Maine Bureau of Banking and the Regional Director of the
Boston Regional Office of the FDIC, respectively, that the Memorandum of
Understanding previously entered into among the FDIC, the Maine Bureau of
Banking and the Bank on November 22, 1994 (the "Memorandum of Understanding"),
was terminated.
BANK REGULATORY REQUIREMENTS
The Bank is subject to various regulatory capital requirements administered by
federal and state banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the Bank's consolidated financial statements. Under capital
adequacy guidelines issued by the Federal Reserve Board and the regulatory
framework for prompt corrective action administered by the FDIC, the Bank must
meet specific capital requirements that involve quantitative measures of the
Banks assets, liabilities, and certain off-balance sheet items. The Bank's
capital amounts and classifications are also subject to qualitative judgments by
the regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital compliance
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of Tier 1 capital (leverage) to total assets, Tier 1 capital to risk-
weighted assets, and Total capital to risk-weighted assets. Management believes
that, as of December 31, 1996, the Bank meets all capital adequacy requirements
to which it is subject.
30
<PAGE>
NOTES TO FINANCIAL STATEMENTS
As of September 16, 1996, the most recent notification from the FDIC
categorized the Bank as well capitalized under the regulartory framework for
Prompt Corrective Action. There are no conditions or events since that
notification that management believes have changed the Bank's category.
The table below sets forth the actual capital ratios and minimum regulatory
requirements for capital adequacy and under Prompt Corrective Action for the
Bank at December 31, 1996:
<TABLE>
<CAPTION>
Minimum
Requirments to be
Minimum well capitalized
Requirement for under Prompt
Actual Capital Adequacy Corrective Action
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Tier 1 capital (Leverage) to total assets
(1) ratio 9.28% 4.00% 5.00%
Tier 1 capital to risk-weighted assets 14.31 4.00 6.00
Total capital to risk-weighted assets
(Tier 1 and Tier 2) 15.60 8.00 10.00
</TABLE>
(1) Calculated on an average quarterly basis
For further information, see Management's Discussion and Analysis of Financial
Condition and Results of Operations-Capital-Bank.
NOTE C. NONINTEREST EARNING DEPOSITS AND CASH
Noninterest bearing deposits and cash balances at December 31, 1996 are
subject to withdrawal and usage restrictions of $100,000 to be maintained at the
Federal Reserve Bank of Boston to meet the Bank'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, 1996:
<TABLE>
<CAPTION>
December 31, 1996
-------------------------------------------
Gross Gross Fair
Amortized Unrealized Unrealized Market
(in thousands) Cost Gains Losses Value
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available for Sale:
U.S. government obligations $ 4,947 $ 8 $ (7) $ 4,948
Mortgage backed securities 10,926 9 (87) 10,848
Equity (mutual fund) 997 - (2) 995
Other 99 - - 99
------- --- ----- -------
$16,969 $17 $ (96) $16,890
------- --- ----- -------
Held to Maturity:
U.S. government obligations - - - -
U.S. government agency callable notes $ 9,802 $12 $(104) $ 9,710
------- --- ----- -------
$ 9,802 $12 $(104) $ 9,710
======= === ===== =======
</TABLE>
31
<PAGE>
NOTES TO FINANCIAL STATEMENTS
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
-------------------------------------------
Gross Gross Fair
Amortized Unrealized Unrealized Market
(in thousands) Cost Gains Losses Value
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available for Sale:
U.S. government obligations $ 4,998 $ 23 $(7) $ 5,014
Mortgage backed securities 765 22 - 787
Equity (mutual fund) 2,000 - - 2,000
Other 125 - - 125
------- ---- --- -------
$ 7,888 $ 45 $(7) $ 7,926
======= ==== === =======
Held to Maturity:
U.S. government obligations $ 993 $ 2 - 995
U.S. government agency callable notes 10,793 121 - 10,914
------- ---- --- -------
$11,786 $123 - $11,909
======= ==== === =======
</TABLE>
The following is a summary of gross realized gains and losses on investment
securities sold for 1996, 1995 and 1994. All security gains and losses were
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,
--------------------------------------------------------------------------
1996 1995 1994
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 $17 - - - - -
U.S. government agency - - $1 - - -
Mortgage-backed securities - - - - - -
Equity securities 24 $(3) $7 $ (12) $ 38 -
--- --- -- ----- ----- --
$41 $(3) $8 $ (12) $ 38 -
=== === == ===== ===== ==
</TABLE>
The following table represents the contractual maturities for investments in
debt securities for each major security type at December 31, 1996:
<TABLE>
<CAPTION>
December 31, 1996
------------------------------------------------
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 (at market):
U.S. government obligations $ 999 $ 3,949 -
Mortgage backed securities - - - $10,848
------ ------- ------- -------
$ 999 $ 3,949 - $10,848
====== ======= ======= =======
Held to maturity (at cost):
U.S. government obligations - - - -
U.S. government agency callable
notes (final maturity) - $ 7,000 $ 2,802 -
------ ------- ------- -------
- $ 7,000 $ 2,802 -
====== ======= ======= =======
</TABLE>
32
<PAGE>
NOTES TO FINANCIAL STATEMENTS
NOTE E. LOANS
The composition of the loan portfolio was as follows:
<TABLE>
<CAPTION>
December 31,
----------------
(in thousands) 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C>
Real estate mortgage loans:
Residential $30,981 $ 30,966
Commercial 48,456 50,797
Real estate construction loans 769 -
Commercial and industrial loans 3,059 2,524
Consumer and other loans 15,281 16,263
------- --------
$98,546 $100,550
======= ========
</TABLE>
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, 1996, 1995 and 1994 of
$152,000, $95,000 and $277,000, respectively.
As of December 31, 1996 and 1995, the Company was servicing loans for others
of $50.5 million and $53.7 million, respectively. As of December 31, 1996 and
1995, the Bank had a gross value of excess residential mortgage servicing fees
equal to $1,504,000, which is reflected in other assets. This amount is being
amortized over the expected average life of the loans. Accumulated amortization
was approximately $864,000 and $663,000 at December 31, 1996 and 1995,
respectively. At December 31, 1996 and 1995, the Bank's valuation reserve
against the deferred mortgage servicing asset totaled $132,000, as a result of
higher than anticipated prepayments on serviced loans.
At December 31, 1996, the Bank had no binding commitments for the sale of
mortgage loans held for sale.
IMPAIRED LOANS
Management reviews loans on a case by case basis to determine which loans
should be classified as impaired. If management believes that it is probable
that there will be a loss of scheduled principal or interest, then such loans
are determined to be impaired. At December 31, 1996, the recorded investment in
loans for which impairment has been recognized in accordance with SFAS No. 114
totaled $3,845,000, as compared to $3,728,000 at December 31, 1995. The
corresponding portion of the Allowance allocated against the total recorded
investment in these loans ("Allocated Reserves") was $615,000 as of December 31,
1996. An amount equal to $1,944,000 of the $3,845,000 total impaired loans were
classified as nonaccrual and the remaining $1,901,000 were classified as
potential problem loans at December 31, 1996. The income recorded on a cash
basis relating to impaired loans equaled $38,000 and the average balance of
outstanding impaired loans was $2.0 million at December 31, 1996. All of the
impaired loans were secured by real estate at December 31, 1996 and accounted
for by the lower of the fair value of the collateral (net of the $615,000
Allocated Reserves) or amortized loan value.
NONPERFORMING ASSETS
The table below sets forth information with respect to nonperforming assets:
<TABLE>
<CAPTION>
December 31,
---------------------
(in thousands) 1996 1995 1994
- -----------------------------------------------------------------
<S> <C> <C> <C>
Nonaccrual loans $1,944 $1,948 $4,340
Accruing loans past due 90 days or more 201 169 258
Restructured loans - 3,427 1,483
Real estate owned and repossessions 478 1,973 2,222
In-substance repossessions n/a n/a 703
------ ------ ------
$2,623 $7,517 $9,006
======= ====== ======
</TABLE>
Interest income recognized on nonaccrual and restructured loans totaled
$41,000, $406,000 and $154,000 in 1996, 1995 and 1994, 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 1996,
1995 and 1994 of $148,000, $81,000 and $130,000, respectively.
33
<PAGE>
NOTES TO FINANCIAL STATEMENTS
NOTE F. ALLOWANCE FOR LOAN LOSSES
Changes in the Allowance were as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------
(in thousands) 1996 1995 1994
- ----------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of year $2,659 $ 4,042 $3,642
Charge-offs (289) (1,333) (290)
Recoveries 296 375 583
------ ------- ------
Net charge-offs 7 (958) 293
Provision for loan losses - (425) 107
------ ------- ------
Balance at end of year $2,666 $ 2,659 $4,042
====== ======= ======
</TABLE>
The Company's Allowance was $2.7 million at December 31, 1996 and December 31,
1995. The Allowance represented 2.71% and 2.65% of total loans, and 124.29% and
47.96% of nonperforming loans at December 31, 1996 and December 31, 1995,
respectively. See "Managements Discussion and Analysis of Financial Condition
and Result of Operations - Allowance for Loan Losses".
NOTE G. PREMISES AND EQUIPMENT
Premises and equipment consisted of the following:
<TABLE>
<CAPTION>
December 31,
-----------------
(in thousands) 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C>
Land $ 408 $ 423
Buildings and building improvements 2,663 2,774
Leasehold improvements 371 371
Equipment 3,290 2,715
-------- --------
6,732 6,283
Less: Accumulated depreciation and amortization 3,304 3,210
-------- --------
$ 3,428 $ 3,073
======== ========
</TABLE>
NOTE H. DEPOSITS
Deposit balances at year end consisted of the following:
<TABLE>
<CAPTION>
December 31,
-----------------
(in thousands) 1996 1995
- ---------------------------------------------------------------------------------
<S> <C> <C>
Noninterest bearing demand deposits $ 5,790 $ 5,128
Interest bearing demand deposits 15,090 15,741
Savings and escrow deposits 36,445 42,020
Time deposits 57,760 62,776
-------- --------
$115,085 $125,665
======== ========
</TABLE>
Included in 1996 and 1995 time deposits are $2,186,000 and $1,709,000,
respectively, of deposits of $100,000 or more.
At December 31, 1996, the maturities and weighted average interest rates of
time deposits of $100,000 or more were as follows:
<TABLE>
<CAPTION>
Weighted
Balance Average
Maturities (in months) (in thousands) Interest Rate
- -------------------------------------------------------
<S> <C> <C>
3 months or less $1,262 5.61%
over 3 - 6 300 5.81
over 6 - 12 318 5.64
over 12 306 5.41
------ ----
Total $2,186 5.61%
====== ====
</TABLE>
34
<PAGE>
NOTES TO FINANCIAL STATEMENTS
The following is a detail of interest expense paid on deposits for the three
years ended December 31, 1996, 1995 and 1994:
<TABLE>
<CAPTION>
December 31,
---------------------
(in thousands) 1996 1995 1994
- -----------------------------------------------------------
<S> <C> <C> <C>
Interest bearing demand deposits $ 318 $ 357 $ 403
Savings deposits 1,079 1,286 1,402
Other time deposits 3,196 3,237 2,693
Time deposits of $100,000 or more 131 97 112
------ ------ ------
$4,724 $4,977 $4,610
====== ====== ======
</TABLE>
NOTE I. BORROWINGS
ADVANCES FROM FEDERAL HOME LOAN BANK OF BOSTON
Maturities of advances from the Federal Home Loan Bank ("FHLB") of Boston
outstanding at December 31, 1996 are as follows:
<TABLE>
<CAPTION> Weighted
Average
(in thousands) Rates Interest Rate
- ----------------------------------------------------------
<S> <C> <C> <C>
1997 $ 2,000 6.06% 6.06%
1998 4,000 5.32%-5.92 5.62
2001 9,000 6.05%-6.25 6.16
-------
$15,000 6.00%
=======
</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 established collateral maintenance level. The Bank maintains
qualified collateral sufficient to support the FHLB advances well in excess of
its current borrowings.
FDIC NOTE
On July 24, 1996, the Company repaid in full its obligation to the FDIC in the
amount of $9.7 million of which $754,000 was interest due for 1995 and 1996 (See
Note B).
SAVINGS BANK NOTES
On July 24, 1996 the Company borrowed $4.0 million and issued promissory notes
in the aggregate principal amount of $4.0 million (the "Savings Bank Notes") to
the Savings Banks as part of the Company's recapitalization plan, pursuant to
which the Company repaid in full its obligation to the FDIC. The Savings Bank
Notes bears interest at 10.85% annually, payable quarterly. Beginning June 30,
1998, and semi-annually thereafter, principal payments of $200,000 are required.
At the time the Savings Bank Notes mature on December 31, 2001, the unpaid
balance of the Savings Bank Notes, based on the scheduled amortization, will be
$2,400,000. The Savings Bank Notes are secured by a pledge by the Company of
100% of the common stock of the Bank pursuant to a stock pledge agreement
between the Company and the Savings Banks.
The loan agreement between the Company and the Savings Banks with respect to
the $4.0 million loan (the "Savings Bank Loan Agreement") contains certain
terms, restrictions and covenants, including (i) restrictions against the
payment of cash dividends by the Company to its stockholders in the event of
default or as long as the Company's debt to equity ratio on a parent company-
only basis exceeds 30%, (ii) certain restrictions on the amount and types of
borrowings that may be incurred by the Company and the Bank, including a
limitation that the Company cannot incur aggregate additional indebtedness in
excess of $1.0 million, (iii) a requirement that the Company and the Bank
maintain certain minimum capital ratios (for the Company a Tier 1 leverage
capital ratio of 4.0% and for the Bank a Tier 1 leverage capital ratio of 6.0%),
with a requirement that in no event shall the Tier 1 leverage capital ratios be
less than that required for the Company and the Bank to be considered adequately
capitalized by their respective regulators, (iv) a restriction that neither the
Company nor the Bank shall incur capital expenditures in excess of $500,000 in
the aggregate in any fiscal year, (v) certain other requirements relating to the
maintenance and timely payment of insurance and taxes and the delivery of
certain financial and other information to the agent for the Savings Banks, and
(vi) a requirement that the net worth of the Company on a consolidated basis
shall not decline below $6.5 million. In addition, the Savings Bank Loan
Agreement contains certain prepayment penalty restrictions equal to 5%, 4% and
3% of the principal amount prepaid in the first, second and third years of the
loan, respectively.
35
<PAGE>
NOTES TO FINANCIAL STATEMENTS
FEDERAL RESERVE BANK OF BOSTON
The Bank also has been approved by the Federal Reserve Bank of Boston to
obtain funds from its discount window for the purpose of maintaining the Bank's
liquidity. 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.
In addition, in connection with the recapitalization of the Company and as a
condition to the approval by the Maine Bureau of Banking of the payment on July
24, 1996 of the dividend in the amount of $3.2 million by the Bank to the
Company, the Maine Bureau of Banking required that the Company agree that it
would not pay cash dividends to its stockholders as long as the Company's debt
to equity ratio (on a parent company-only basis) exceeds 25% without the prior
approval of the Maine Bureau of Banking. The Company's debt to equity ratio (on
a parent company-only basis) at December 31, 1996 was 29.88%.
The principal source of cash for the Company would normally be a dividend from
the Bank; however, certain restrictions also exist regarding the ability of the
Bank to transfer funds to the Company in the form of cash dividends, loans or
advances. Maine corporate law generally provides that dividends may only be
paid out of unreserved and unrestricted earned surplus or unreserved and
unrestricted net earnings of the current fiscal year and the next preceding
fiscal year taken as a single period. Maine banking law also imposes certain
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 Savings Bank Loan Agreement contains certain terms, restrictions and
covenants, including covenants restricting the amount of borrowings that may be
incurred by the Company and the Bank, and restrictions regarding the conditions
under which cash dividends may be paid by the Company. For further information,
see "Note I - Borrowings - Savings Bank Notes".
On July 24, 1996, May 3, 1996, November 13, 1995 and November 30, 1994,
following the receipt of appropriate regulatory approvals, the Bank paid the
Company cash dividends of $3.2 million, $200,000, $200,000 and $175,000,
respectively. As a result of the termination of the Memorandum of
Understanding, the Bank is no longer required to obtain regulatory approval
prior to paying a cash dividend to the holding company.
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 Companys 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.
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 Employment Retirement Income
Security Act minimum funding requirements. Pension expense for the Pension Plan
was $3,000, $14,000 and $14,000 for the years ended December 31, 1996, December
31, 1995 and December 31, 1994, respectively.
36
<PAGE>
NOTES TO FINANCIAL STATEMENTS
The following table sets forth the Pension Plan's funded status and amounts
recognized in the consolidated financial statements:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
(in thousands) 1996 1995
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Actuarial Present Value of Benefit Obligations:
Accumulated benefit obligation
(including vested benefits obligation of
$1,379 in 1996 and $1,327 in 1995) $1,449 $1,414
Effects of future salary increases 177 185
------ ------
Projected benefit obligation 1,626 1,599
Fair value of plan assets (primarily listed
stocks, U.S. bonds and insurance contracts) 2,082 1,921
------ ------
Plan assets in excess of projected benefit obligation 456 322
Unrecognized prior service cost (4) (5)
Unrecognized transition amount (95) (120)
Unrecognized (gain) loss (53) 107
------ ------
Prepaid pension expense $ 304 $ 304
====== ======
</TABLE>
The components of net pension expense (credit) are as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------
(in thousands) 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost - benefits $ 61 $ 62 $ 67
Interest cost of projected benefits 116 110 102
Actual return on plan assets (230) (300) 18
Net amortization and deferral 56 142 (173)
----- ------ ------
Net pension expense $ 3 $ 14 $ 14
===== ====== ======
</TABLE>
The weighted average discount rate used was 7.5%, 7.5% and 8.25% in 1996, 1995
and 1994, respectively, and the increase in future compensation levels used was
5.5%, 5.5% and 6.0% for 1996, 1995 and 1994 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 1996, 1995 and 1994.
The Bank provides no post retirement benefits other than pensions.
STOCK OPTION AND EQUITY INCENTIVE PLAN
The Company adopted the First Coastal Corporation 1996 Stock Option and Equity
Incentive Plan (the "Plan") to provide for the grant of options to purchase
shares of common stock of the Company to directors and employees of the Company
and to employees of any subsidiary of the Company and to permit the award to
employees of the Company and of any subsidiary of the Company of shares of
common stock as a bonus, which shares may be subject to restrictions based on
continued service or performance. The Plan was adopted by the Company's
stockholders at its June 1996 annual meeting. During 1996, 6,000 options were
granted to directors which vested immediately and 51,000 options were granted to
executive officers and other key employees which vest over a three year period.
Options granted under the Plan must have an exercise price not less than 100% of
the fair market value of a share of common stock on the date of grant of the
option (or 110% in the case of an incentive stock option granted to an optionee
beneficially owning more than 10% of the outstanding common stock). The options
maximum term is 10 years (or five years in the case of an incentive stock option
granted to an optionee beneficially owning more than 10% of the outstanding
common stock).
37
<PAGE>
NOTES TO FINACIAL STATEMENTS
On January 1, 1996 the Company adopted SFAS No. 123, Accounting for Stock-
Based Compensation, to be effective May 2, 1996, the date on which the Company's
Board of Directors adopted the Plan. As permitted by SFAS No. 123, the Company
has chosen to apply APB Opinion No. 25, Accounting for Stock Issued to Employees
(APB 25) and related interpretations in accounting for its Plan. Accordingly,
no compensation cost has been recognized for options granted under the Plan.
Had compensation cost for the Company's Plan been determined based upon the fair
value at the grant dates for awards under the Plan consistent with the method of
SFAS No. 123, the Company's net income and earnings per share would have been
reduced to the pro forma amounts indicated below. The Company did not award any
option grants during the years ended December 31, 1995 and 1994. Therefore,
there is no pro forma amount for these periods.
<TABLE>
<CAPTION>
1996
----------------------
As reported Pro Forma
----------------------
<S> <C> <C>
Net income (in thousands) $6,385 $6,337
Earnings per share $6.85 $6.80
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted average
assumptions used for grants during 1996: dividend yield of 0.0%, expected
volatility of 45.34%, risk free interest rate of 6.81% and expected term of
options equal to 10 years.
A summary of the status of the Plan as of December 31, 1996 and changes during
the year then ended is presented below:
<TABLE>
<CAPTION>
Weighted
Average Exercise
Shares Price Per Share
- ------------------------------------------------------------------------------------
<S> <C> <C>
Outstanding at January 1, 1996 - -
Granted 57,000 $5.59
Exercised - -
Forfeited - -
------ -----
Outstanding at December 31, 1996 57,000 $5.59
====== =====
</TABLE>
The following table summarizes information about the Plan's stock options at
December 31, 1996:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------------------------------------------------------------
Number Weighed-average Weighted Number Weighted
Range of Outstanding Remaining Average Exercisable Average
Exercise prices at December 31, 1996 Contractual life Exercise Price at December 31, 1996 Exercise Price
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$5.00-$7.25 57,000 9.5 years $5.59 6,000 $5.00
</TABLE>
In addition, during 1996 the Company made restricted stock awards in the
aggregate amount of 7,500 shares of stock to certain executive officers. The
stock vests ratably over a three year period beginning May 2, 1996, subject to
acceleration upon the occurrence of certain events described within the
individual restricted stock agreements. At December 31, 1996, 5,833 shares of
stock have not yet vested and the related compensation expense of approximately
$32,000 has not been recognized.
38
<PAGE>
NOTES TO FINANCIAL STATEMENTS
NOTE M. INCOME TAXES
A summary of income tax benefits is as follows:
<TABLE>
<CAPTION>
December 31,
----------------------
(in thousands) 1996 1995 1994
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Current $ (48) - -
Deferred (4,811) - -
------- --- ---
$(4,859) - -
------- --- ---
</TABLE>
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:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------
(in thousands) 1996 1995 1994
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal income tax at statutory rate $ 519 $ 564 $ 33
Increase (decrease) resulting from:
Expiration of capital loss carryforwards - 2,060 -
Increase in net operating loss carryforwards - (253) -
Expiration of net operating loss carryforwards 1,180 - -
Change in valuation allowance (6,773) (2,454) (35)
Other items, net 215 83 2
------- ------- -----
Income tax benefit $(4,859) $ 0 $ 0
======= ======= =====
</TABLE>
Significant components of deferred income tax assets and liabilities at
December 31, 1996 and 1995 are presented below:
<TABLE>
<CAPTION>
December 31,
---------------
(in thousands) 1996 1995
- ----------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Loans, principally due to allowance for losses $ 907 $ 904
REO, principally due to writedowns 167 304
Mark to market adjustments 27 13
Deferred loan fees 10 8
Reserve for mortgage servicing rights 45 45
Investment writedowns 17 18
Federal net operating loss credit and tax credit carryforward 3,980 2,392
Capital loss carryforward - 11
State net operating loss credit carryforward 77 143
FDIC Note - 3,060
Other 21 90
------ -------
Total gross deferred tax assets before valuation reserve 5,251 6,988
Valuation reserve (77) (6,850)
------ -------
Total gross deferred tax asset 5,174 138
====== =======
Deferred tax liabilities:
Difference between tax and book basis of fixed assets 163 138
Other 200 -
------ -------
Total gross deferred tax liabilities 363 -
------ -------
Net deferred taxes $4,811 $ 0
====== =======
</TABLE>
39
<PAGE>
NOTES TO FINANCIAL STATEMENTS
The deferred tax asset and offsetting valuation allowance were principally the
result of the Company's accumulation of net operating loss ("NOL")
carryforwards. The deferred tax asset represents the estimated amount of future
deductions for tax reporting purposes previously expensed for financial
reporting purposes, and the benefit from future income taxes the Company will
not have to pay as a result of the NOL carryforwards. Previously, a 100%
valuation allowance was maintained against the deferred tax asset as there were
significant uncertainties regarding the Company's future and its ability to
utilize its NOL carryforwards through sustained, profitable operations.
Management believes that the completion of the July 1996 recapitalization, the
payoff of the $9.0 million FDIC Note and the improved financial condition of the
Company have reduced the uncertainties relating to the Company's ability to
realize the benefits of the deferred tax asset. As a result, the valuation
allowance against the deferred tax asset (in accordance with SFAS No. 109) was
reduced by $4,811,000. Earnings will now be subject to federal and state income
tax expense for financial reporting purposes only on a going forward basis. The
remaining valuation reserve of $77,000 represents the belief of the Company that
the current investment tax credit carryforwards of $77,000 will expire
unutilized.
At December 31, 1996, the Company had a NOL carryforward for federal income
tax return purposes of approximately $11.4 million available to offset future
taxable income. The NOL carryforward for federal income tax return purposes
will expire in the years 2007 to 2011. 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 Company's NOL carryforwards are subject to
limitation as provided by the Code. In order to help maintain the benefit of
the deferred tax asset, at the June 1996 annual meeting of stockholders, the
stockholders approved an amendment to the Restated Certificate of Incorporation
of the Company which generally provides that no person shall become or make an
offer to become a beneficial owner of five percent or more of the Company's
voting stock for a three year period, which expires June 11, 1999.
In addition, as of December 31, 1996, the Company had a capital loss
carryforward, which will expire in the years 1996 to 2000, of approximately
$26,900 to offset future capital gains, if any, from the sale of the Company's
capital assets.
As of December 31, 1996, 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.
NOTE N. COMMITMENTS AND CONTINGENCIES
UNFUNDED LOAN COMMITMENTS
Unfunded loan commitments for December 31, 1996 and 1995 were approximately
$11.2 million and $8.0 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, 1996 and 1995.
The breakdown of such loan commitments is as follows:
<TABLE>
<CAPTION>
(in thousands) 1996 1995
- ------------------------------------------------------------------
<S> <C> <C>
Real estate:
Commitments to originate residential mortgages $ 1,150 $ 174
Commitments to originate commercial mortgages 1,400 -
Unadvanced portions of construction loans 990 -
Commercial lines of credit (unused) 837 191
Consumer lines of credit (unused) 6,849 7,649
------- ------
Total $11,226 $8,014
======= ======
</TABLE>
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.
40
<PAGE>
NOTES TO FINANCIAL STATEMENTS
LEASE OBLIGATION
The Company currently leases two of its seven branches and has a ground lease
relating to a third branch under terms of operations leases which include
renewal options ranging from one to five years. Rental expense totaled
approximately $77,000, $75,000 and $163,000 for the three years ended December
31, 1996, 1995 and 1994, respectively.
Approximate minimum lease payments over the remaining term of the leases at
December 31, 1996 are as follows:
<TABLE>
<CAPTION>
(in thousands) December 31,
- -----------------------------------------------------
<S> <C>
1997 $71
1998 71
1999 74
2000 78
2001 5
----
$299
====
</TABLE>
LITIGATION
As of December 31, 1996, 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.
NOTE O. SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK
CONCENTRATION OF COMMERCIAL REAL ESTATE ASSETS
At December 31, 1996, the Bank had approximately $49.7 million of commercial
real estate mortgage loans, representing 50.4% of total loans at such date,
comprised primarily of loans secured by apartment buildings, mixed use
commercial buildings, office buildings and other income producing properties.
The Bank's concentration of commercial real estate assets (representing
commercial real estate loans and real estate owned) was 34.6% and 37.4% of total
assets at December 31, 1996 and 1995, respectively. At December 31, 1996, the
Bank also had approximately $2.0 million of commercial business loans.
Banks with loans concentrated in commercial real estate are likely to be
adversely affected by problems in the real estate market or the economy in
general. Commercial real estate lending involves significant additional risks
as compared to one-to-four family residential mortgage lending, and typically
accounts for a disproportionate share of charge-offs, delinquent loans and real
estate owned through foreclosure or by deed in lieu of foreclosure. Such
lending generally involves larger loan balances (to a single borrower or groups
of related borrowers) than is involved with residential and other types of
consumer lending, and is more susceptible to adverse future developments. If
the cash flow from income producing property securing real estate loans is
reduced (for example, because leases are not obtained or renewed, or lease rates
decline), the borrower's ability to repay these loans may be materially
impaired. These risks can be significantly affected by considerations of supply
and demand in the market and by general economic conditions. Management does not
expect either a significant increase or decrease in the foreseeable future in
the level of commercial real estate assets as a percentage of total assets. The
Bank's primary focus with respect to loan portfolio growth is expected to come
from various residential lending programs and commercial and industrial lending.
41
<PAGE>
NOTES TO FINANCIAL STATEMENTS
NOTE P. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments as determined
under SFAS No. 107 are as follows:
<TABLE>
<CAPTION>
December 31, 1996
------------------
Book Fair
(in thousands) Value Value
- --------------------------------------------------------------
<S> <C> <C>
Financial Assets:
Cash and cash equivalents (1) $ 11,453 $ 11,453
Investment securities (2)
Available for sale (at market value) 16,890 16,890
Held-to-maturity 9,802 9,710
Federal Home Loan Bank stock 1,315 1,315
Loans held for sale 1,490 1,490
Loans, net of allowance (3) 95,849 97,284
Financial Liabilities:
Deposits (4) $115,085 $112,373
Borrowings (5) 19,000 18,810
</TABLE>
(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 values 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 the Savings Bank Notes was estimated
using the discounted cash flow analysis.
NOTE Q. OPERATING EXPENSES
Included in operating expenses are:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------
(in thousands) 1996 1995 1994
- -----------------------------------------------------------------------
<S> <C> <C> <C>
Data processing $ 421 $ 530 $ 534
Equipment 295 340 338
FDIC insurance 37 190 406
Insurance-general 180 168 268
Office 315 273 258
Legal 182 282 676
Advertising 291 112 30
Other 770 711 653
----- ------ ------
$2,491 $2,606 $3,163
====== ====== ======
</TABLE>
42
<PAGE>
NOTES TO FINANCIAL STATEMENTS
NOTE R. FIRST COASTAL CORPORATION (PARENT COMPANY ONLY) FINANCIAL INFORMATION
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-------------------
(in thousands) 1996 1995
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash $ 261 $ 99
Investment in subsidiaries 14,173 13,334
Fixed assets - 8
Deferred tax asset 2,850 -
Other assets 164 -
------- -------
Total assets $17,448 $13,441
======= =======
Liabilities
FDIC Note - $ 9,000
Savings Bank Notes $ 4,000 -
Other liabilities 60 444
Stockholders' equity 13,388 3,997
------- -------
Total liabilities and stockholders' equity $17,448 $13,441
======= =======
</TABLE>
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------
(in thousands) 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Dividends $3,400 $200 $175
Interest Income 7 4 6
------ ---- ----
3,407 204 181
------ ---- ----
Interest Expense:
FDIC Note 335 419 -
Savings Bank Notes 190 - -
------ ---- ----
525 419 -
------ ---- ----
Net Interest Income (loss) 2,882 (215) 181
Operating Expenses:
Salary and benefits 5 - -
Stockholder relations 117 76 59
Professional fees 177 293 156
Other 3 14 -
------ ------ -------
302 383 215
Income (loss) before income tax, equity in undistributed
net income of subsidiaries and extraordinary item 2,580 (598) (34)
Income tax benefit (2,850) - -
Equity in undistributed net income of subsidiaries 955 2,258 132
------ ------ -------
Income before Extraordinary Item 6,385 1,660 98
Extraordinary Item - Charge to earnings as a result
of the settlement of the cross guaranty claim - - 9,000
------ ------ -------
Net Income (loss) $6,385 $1,660 $(8,902)
====== ====== =======
</TABLE>
43
<PAGE>
NOTES TO FINANCIAL STATEMENTS
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------
(in thousands) 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Activities:
Net income (loss) $ 6,385 $ 1,660 $ (8,902)
Charge to earnings as a result of the
settlement of the cross guaranty claim - 9,000
Increase (decrease) in interest payable (419) 419 -
Net change in other assets (2,853) 6 384
Net change in other liabilities 35 (18) (72)
Equity in undistributed earnings of subsidiaries (955) (2,258) (132)
-------- -------- ---------
Net cash provided (used) by operating activities 2,193 (191) 278
Financing Activities:
Proceeds from issuance of Savings Bank Notes 4,000 - -
Payment on borrowings (9,000) - -
Finance cost associated with Savings Bank Notes (116) - -
Net proceeds from sale of common stock 3,085 - -
-------- -------- ---------
Net cash used by financing activities (2,031) - -
-------- -------- ---------
Increase (decrease) in cash and cash equivalents 162 (191) 278
Cash and cash equivalents at beginning of year 99 290 12
-------- -------- ---------
Cash and cash equivalents at end of year $ 261 $ 99 $ 290
======== ======== =========
Supplemental Disclosures of Information
Interest paid on borrowings $ 944 - -
Non-Cash Investing and Financing Activities
FDIC Note - - $ 9,000
Change in unrealized holding gains (losses) on investment
securities available for sale $ (117) $ 323 (285)
Issuance of restricted stock 38 - -
</TABLE>
See Note J for restrictions on the payment of dividends by Subsidiary to the
Company.
44
<PAGE>
NOTES TO FINANCIAL STATEMENTS
NOTE S. 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>
1996
- ----
Interest income $ 3,003 $ 2,792 $ 2,753 $ 2,783
Interest expense 1,492 1,424 1,360 1,377
-------- -------- ---------- ----------
Net interest income 1,511 1,368 1,393 1,406
Provision for loan losses - - - -
Noninterest income 132 498 144 171
Securities and loan sales gains (losses) (1) 15 19 12
Operating expense 1,305 1,325 1,298 1,214
-------- -------- ---------- ----------
Income before income taxes 337 556 258 375
Income tax benefit - - (48) (4,811)
-------- -------- ---------- ----------
Net income $ 337 $ 556 $ 306 $ 5,186
======== ======== ========== ==========
Weighted average shares outstanding 600,361 600,361 1,160,252 1,357,861
Earnings per share $ .56 $ .93 $ .26 $ 3.82
======== ======== ========== ==========
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)
Noninterest income 168 137 125 129
Securities and loan sales gains - 2 3 8
Operating 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
======== ======== ========== ==========
Weighted average shares outstanding 600,361 600,361 600,361 600,361
Earnings per share $ .37 $ .36 $ .49 $ 1.55
======== ======== ========== ==========
</TABLE>
45
<PAGE>
CORPORATE AND STOCHOLDER INFORMATION
FIRST COASTAL CORPORATION
DIRECTORS
NORMAND E. SIMARD
Chairman of the Board
First Coastal Corporation and
Coastal Savings Bank
President
York County Biscuit Company
GREGORY T. CASWELL
President and Chief Executive Officer
First Coastal Corporation and
Coastal Savings Bank
DENNIS D. BYRD
Treasurer
First Coastal Corporation
Executive Vice President, Chief Financial Officer and Treasurer
Coastal Savings Bank
DAVID B. HAWKES
Business Consultant/Owner
Cloudhawke, Inc.
ROGER E. KLEIN
President
Interest Rate Futures Research Corporation
Investment Advisor
EDWARD K. SIMENSKY
President
Simensky & Thomson
Accountants
CHARLES A. STEWART III
Treasurer
M.C.S. Enterprises
Real Estate Investment
OFFICERS
GREGORY T. CASWELL
President and Chief Executive Officer
DENNIS D. BYRD
Treasurer
PATRICIA J. BRIAND
Secretary
- --------------------------------------------------------------------------------
COASTAL SAVINGS BANK
CORPORATE OFFICE
COASTAL SAVINGS BANK
Colonel Westbrook Executive Park
36 Thomas Drive
Westbrook, ME 04092
(207) 774-5000
DIRECTORS
Normand E. Simard, Chairman of the Board
DENNIS D. BYRD
GREGORY T. CASWELL
DAVID B. HAWKES
ROGER E. KLEIN
EDWARD K. SIMENSKY
Charles A. Stewart III
OFFICERS
GREGORY T. CASWELL
President and Chief Executive Officer
DENNIS D. BYRD
Executive Vice President, Chief Financial Officer and Treasurer
ROBERT S. BLACKWOOD, JR.
Senior Vice President, Commercial Lending
KEVIN G. CLOUTIER
Vice President and Controller
EUGENE R. MCKENNA
Vice President, Commercial Lending
KEVIN R. MEYER
Vice President, Commercial Lending
JANET S. ROSS
Vice President, Commercial Lending
VENITA M. WEATHERBIE
Vice President, Human Resources
KIRT T. BELL
AVP, Mortgage Services Manager
STEPHEN D. LOVEJOY
AVP, Business Development/Branch Mgr.
DEBRA J. MCPHAIL
AVP, Deposit Operations/Security
LAURIE L. MOONEY
AVP, Branch Manager
MAUREEN E. PRIDE
AVP, Branch Manager
PATRICIA J. BRIAND
Secretary
BRANCH OFFICES
83 Maine Street
Brunswick, ME 04011
STEPHEN D. LOVEJOY, MANAGER
14 Gurnett Road
Brunswick, ME 04011
MAUREEN E. PRIDE, MANAGER
47 Topsham Fair Mall Road
Topsham, ME 04086
STACEY L. PRITCHARD, MANAGER
165 Main Street
Freeport, ME 04032
JOHN G. LANCASTER, MANAGER
36 Thomas Drive
Westbrook, ME 04092
DEBRA J. MCPHAIL, AVP
32 Saco Valley Shopping Center
Saco, ME 04072
LAURIE L. MOONEY, MANAGER
Shoppers Village Plaza, Route 1
Kennebunk, ME 04043
LISA A. ST. LAWRENCE, MANAGER
46
<PAGE>
CORPORATE AND STOCKHOLDER INFORMATION
STOCKHOLDER INFORMATION
CORPORATE HEADQUARTERS
FIRST COASTAL CORPORATION
Colonel Westbrook Executive Park
36 Thomas Drive
Westbrook, ME 04092
(207) 774-5000
Annual Meeting
The 1997 Annual Meeting of the Stockholders of First Coastal Corporation will be
held at 10:00 a.m. on Wednesday, May 21, 1997 at the Holiday Inn By The Bay, 88
Spring Street, Portland, Maine.
Stock Listing
First Coastal Corporation stock is listed on The Nasdaq SmallCap Market tier of
The Nasdaq Stock Market under the symbol "FCME".
Transfer Agent/Registrar
ChaseMellon Financial Services
111 Founders Plaza, Suite 1100r
East Hartford, CT 06108
Independent Accountants
Coopers & Lybrand L.L.P.
130 Middle Street
Portland, ME 04104
Legal Counsel
Bernstein Shur Sawyer & Nelson
100 Middle Street
Portland, ME 04104
Hogan & Hartson L.L.P.
Columbia Square
555 Thirteenth Street, N.W.
Washington, D.C. 20004
Form 10-K
The Corporation's Annual Report on Form 10-K filed with the Securities and
Exchange Commission will be provided to stockholders upon written request.
Requests should be addressed to: Investor Relations, First Coastal Corporation,
36 Thomas Drive, Westbrook, ME 04092.
47
<PAGE>
EXHIBIT 21
SUBSIDIARY OF THE REGISTRANT
Subsidiary State of Incorporation
- ---------- ----------------------
Coastal Savings Bank Maine
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference into the Company's Registration
Statement on Form S-8 (File No. 333-08631) filed with the Securities and
Exchange Commission on July 23, 1996, of our report dated February 10, 1997 on
our audits of the consolidated financial statements of First Coastal Corporation
and subsidiary as of December 31, 1996 and 1995 and for each of the three years
in the period ended December 31, 1996, which report is included in this Annual
Report on Form 10-K.
Coopers & Lybrand L.L.P.
Portland, Maine
March 31, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 2,898
<INT-BEARING-DEPOSITS> 8,555
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 16,890
<INVESTMENTS-CARRYING> 11,117
<INVESTMENTS-MARKET> 11,025
<LOANS> 98,515
<ALLOWANCE> 2,666
<TOTAL-ASSETS> 147,734
<DEPOSITS> 115,085
<SHORT-TERM> 0
<LIABILITIES-OTHER> 261
<LONG-TERM> 19,000
0
0
<COMMON> 1,358
<OTHER-SE> 12,030
<TOTAL-LIABILITIES-AND-EQUITY> 147,734
<INTEREST-LOAN> 9,226
<INTEREST-INVEST> 1,593
<INTEREST-OTHER> 512
<INTEREST-TOTAL> 11,331
<INTEREST-DEPOSIT> 4,724
<INTEREST-EXPENSE> 5,653
<INTEREST-INCOME-NET> 5,678
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 38
<EXPENSE-OTHER> 5,142
<INCOME-PRETAX> 1,526
<INCOME-PRE-EXTRAORDINARY> 1,526
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,385
<EPS-PRIMARY> 6.85
<EPS-DILUTED> 6.85
<YIELD-ACTUAL> 8.55
<LOANS-NON> 1,944
<LOANS-PAST> 201
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 6,143
<ALLOWANCE-OPEN> 2,659
<CHARGE-OFFS> 289
<RECOVERIES> 296
<ALLOWANCE-CLOSE> 2,666
<ALLOWANCE-DOMESTIC> 2,666
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
