<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, 1997
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
23, 1998, the aggregate market value of the Common Stock held by nonaffiliates
was $18,698,918.
As of the close of business on March 23, 1998, there were 1,359,194, shares
of the registrant's Common Stock, par value $1.00 per share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Stockholders for the fiscal year ended
December 31, 1997, are incorporated by reference in Part II.
Portions of the definitive proxy statement for the annual meeting of
stockholders to be held May 19, 1998, which the registrant intends to file no
later than 120 days after December 31, 1997 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 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 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 $146 million at December 31, 1997.
The region served by the Bank includes the communities of Portland (beginning
March 1998), Westbrook, Topsham, Brunswick, Freeport, Kennebunk and Saco, Maine.
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 industrial loans, and commercial
real estate mortgage loans. 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.
This Annual Report on Form 10-K may include "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. Any
statements with regard to the Company's expectations as to its financial
results, and other aspects of its business, as well as general economic
conditions, may constitute forward-looking statements. Although the Company
makes such statements based on assumptions which it believes to be reasonable,
there can be no assurance that actual results will not differ materially from
the Company's expectations. Accordingly, the Company hereby identifies the
following important factors, among others, which could cause results to differ
from any results which might be projected, forecasted or estimated based on such
forward-looking statements: (i) general economic and competitive conditions in
the markets in which the Company operates, and the risks inherent in its
operations, (ii) the Company's ability to continue to control its provision for
loan losses, noninterest expense, increase earning assets and noninterest
income, and maintain its margin, and (iii) the level of demand for new and
existing products. Should one or more of these risks or uncertainties
materialize, or should underlying assumptions prove incorrect, actual results
may vary materially from those described in the forward-looking statements. The
Company does not intend to update forward-looking statements.
2
<PAGE>
CERTAIN REGULATORY MATTERS
SATISFACTION OF THE CROSS GUARANTY SETTLEMENT OBLIGATION TO FDIC
On July 24, 1996, the Company completed its recapitalization plan whereby the
Company repaid in full its promissory note obligation (the "FDIC Note") to the
FDIC in the amount of $9.7 million ($9.0 million loan principal amount plus
accrued interest) incurred as a result of 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. 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 FDIC Note came 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. For further information see "Note I -- Borrowings" in the Company's
1997 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 of a minimum level of tier 1 capital to total assets of 3.0%
for bank holding companies with a composite rating of 1 under the bank holding
company rating system. All other 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 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 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 7.71%, 12.02%, and 13.29%, respectively, at December 31,
1997 were in compliance with such guidelines.
The FDIC has also adopted minimum capital requirements 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,
1997, the Bank had a Tier 1 capital to total assets ratio of 9.63%. In addition,
under such requirements insured non-member banks must maintain a minimum ratio
of qualifying total capital to risk-weighted assets of 8.0%, and a minimum ratio
of Tier 1 capital to risk-weighted assets of 4.0%. At December 31, 1997, the
Bank had a ratio of qualifying total capital to risk-weighted assets of 16.30%
and a ratio of Tier 1 capital to risk-weighted assets of 15.03%.
3
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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) 1997 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Real estate mortgage loans:
Residential $ 33,251 $30,981 $ 30,966 $ 33,158 $ 39,771
Commercial 48,705 48,456 50,797 57,997 61,953
Real estate construction loans 1,955 769 - - 429
Commercial and industrial loans 5,166 3,059 2,524 2,510 3,013
Consumer and other loans 15,227 15,281 16,263 15,991 18,305
-------- ------- -------- -------- --------
Total loans $104,304 $98,546 $100,550 $109,656 $123,471
======== ======= ======== ======== ========
Ratios of loans to:
Deposits 91% 86% 80% 84% 88%
Assets 71% 67% 69% 71% 72%
</TABLE>
The Bank's loan growth during the period from 1993 to 1996 was 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 as of 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 completion of 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 initially began expanding its residential and consumer lending
capabilities during late 1995. 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 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 commercial and
industrial loans, commercial mortgage loans and residential mortgage loans.
4
<PAGE>
With the opening of the new Portland business office and the expected
introduction of comprehensive commercial cash management products (including PC
banking for businesses) early in the second quarter of 1998, the Company is
undertaking to position itself for commercial loan and deposit growth, with a
particular focus on the Greater Portland market.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Loans" in the Company's 1997 Annual Report to Stockholders.
The following table sets forth the maturities of the loan portfolio by loan type
as of December 31, 1997:
<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 $ 64 $ 1,233 $ 31,954 $ 33,251
Commercial loans 4,956 29,636 14,113 48,705
Real estate construction loans 1,955 - - 1,955
Commercial and industrial loans 2,503 1,733 930 5,166
Consumer and other loans 142 1,562 13,523 15,227
------- ------- -------- --------
Total loans $ 9,620 $34,164 $ 60,520 $104,304
======= ======= ======== ========
Fixed interest rate $ 3,106 $12,774 $ 21,467 $ 37,347
Variable/adjustable interest rate 6,514 21,390 39,053 66,957
------- ------- -------- --------
$ 9,620 $34,164 $60,520 $104,304
======= ======= ======= ========
</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. 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 Bank's
prior origination strategy which relied heavily upon commission based mortgage
originations. While the Bank intends to continue its focus on growth in
residential lending in 1998, 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) 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Originations/(1)/ :
Residential real estate $18,216 $15,581 $4,168
Consumer 3,001 4,249 2,388
------- ------- ------
Total $21,217 $19,830 $6,556
======= ======= ======
</TABLE>
/(1)/ Includes refinancing of existing portfolio and off balance sheet serviced
loans.
5
<PAGE>
The commercial real estate mortgage portfolio of approximately $48.7 million at
December 31, 1997, as compared to $48.5 million at December 31, 1996, includes
loans secured by apartment buildings, mixed use commercial buildings, retail
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, 1997 and 1996, commercial and industrial loans totaled $5.2
million and $3.1 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 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, 1997, the Bank had approximately $15.2 million
in consumer loans, compared to $15.3 million as of December 31, 1996. 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 1997 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 management policy),
generate fee income and provide additional funds for lending and liquidity. In
most instances, 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, 1997, the Bank was servicing $42.9 million of loans which were owned by
others, as compared to $50.5 million at December 31, 1996. The decrease of $7.6
million is attributable to the sale of $7.9 million of Maine State Housing
Authority loans in the second quarter of 1997.
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 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 of Directors of the Bank.
The Bank generally is prohibited by the Federal Deposit Insurance Act from
acquiring
6
<PAGE>
or retaining, directly or indirectly, any equity investment of a type or in an
amount that is not permissible 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
also 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 utilized.
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) 1997 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Noninterest bearing demand deposits $ 7,599 $ 5,790 $ 5,128 $ 5,425 $ 5,871
Interest bearing demand deposits 17,117 15,090 15,741 17,300 18,470
Savings and escrow deposits 34,465 36,445 42,020 48,205 53,655
Time deposits 55,810 57,760 62,776 59,107 62,591
-------- -------- -------- -------- --------
Total $114,991 $115,085 $125,665 $130,037 $140,587
======== ======== ======== ======== ========
</TABLE>
In April 1996, the Bank sold its branch in Kezar Falls, Maine to Maine Bank &
Trust Company. Included in the sale were all of the branch deposits totaling
$9.9 million.
The Bank's total deposits for 1997 and 1996 remained essentially unchanged;
however, noninterest and interest bearing demand deposits increased $3.8 million
in 1997 as compared to 1996, primarily attributable to the new
7
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retail deposit program implemented in 1996. As a result of the Bank's strategic
focus on commercial business banking, including the implementation of business
PC banking, it is anticipated that these deposit categories will continue to
increase in 1998. These increases were offset by a $3.9 million decline in
savings and certificates of deposit balances. The decline in savings balances is
largely reflective of an industry-wide trend, reflecting the continuing impact
of deregulation on the banking industry, as well as increased competition for
funds from nonbank competitors, including money market and stock mutual funds.
At December 31, 1997, 1996 and 1995, Coastal's deposits consisted of the
following:
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------------
1997 1996 1995
----------------------------------------------------------
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 $ 6,483 - $ 5,323 - $ 4,973 -
Interest bearing demand deposits 18,197 2.45% 14,302 2.22% 15,958 2.24%
Savings deposits 34,831 2.71 39,128 2.76 44,201 2.91
Time deposits 56,801 5.40 60,428 5.51 61,344 5.43
-------- -------- ---------
Total $116,312 $119,181 $126,476
======== ======== =========
</TABLE>
At December 31, 1997, 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 $ 1,065 5.26%
over 3 - 6 100 5.07
over 6 - 12 410 5.33
over 12 753 5.81
-----
Total $ 2,328 5.44%
=====
</TABLE>
As of December 31, 1997, 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, 1997, 1996 and 1995:
<TABLE>
<CAPTION>
December 31,
-----------------------------------------
(in thousands) 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
FHLB advances $13,294 $15,000 $6,000
Savings Bank Notes 3,000 4,000 -
FDIC Note - - 9,000
------- ------- -------
$16,294 $19,000 $15,000
======= ======= =======
</TABLE>
8
<PAGE>
The following table sets forth information regarding the weighted average
interest expense at December 31 and the highest month end balances of the
Company's total borrowings:
<TABLE>
<CAPTION>
(in thousands) 1997 1996 1995
- --------------------------------------------------------------------
<S> <C> <C> <C>
Weighted average interest expenses of
total borrowings 5.99% 6.64% 5.37%
Highest month end balance of
total borrowings $20,887 $19,000 $10,412
</TABLE>
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 $45.3 million in additional short-
term borrowing capacity with the FHLB as of December 31, 1997. 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, 1997, the Bank had outstanding $13.3 million in borrowings with
a weighted average interest rate of 5.99% from the FHLB of Boston, maturing as
follows:
<TABLE>
<CAPTION>
Amount Maturing
Due Date (in thousands) Interest Rate
- ------------------------------------------------------
<S> <C> <C>
January 1998 $ 2,000 5.92%
March 1998 2,000 5.32
February 1999 1,000 6.03
November 2001 5,000 6.25
November 2001 3,294 6.05
-------
$13,294
=======
</TABLE>
SAVINGS BANK NOTES
On July 24, 1996, the Company borrowed $4.0 million from, 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.
On September 30, 1997, the Company made an unscheduled principal payment to the
Savings Banks of $1.0 million. 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 $1.4 million. The Savings Bank Notes are
collateralized by a pledge by the Company of all the shares of 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 1997 Annual Report to Stockholders.
9
<PAGE>
EMPLOYEES
As of December 31, 1997, the Company and its subsidiary had 74 full-time
equivalent employees.
COMPETITION
The Bank is a full service savings bank with eight banking offices in the
southern Maine communities of Portland (beginning March 1998), Westbrook,
Brunswick, Topsham, Freeport, Kennebunk and Saco. 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
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 and the Federal Reserve's 1997 comprehensive
revisions to its bank holding company regulations streamlined certain
applications to the Federal Reserve for approval to acquire a bank or nonbanking
company or 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. 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 regulations of the
appropriate federal banking agency 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
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<PAGE>
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
acquire any bank or nonbanking company or to engage in any new nonbanking
activities.
Under the Change in Bank Control Act, persons who intend to acquire control of a
bank holding company, acting directly or indirectly, or through or in concert
with one or more persons, generally must give 60 days prior written notice to
the Federal Reserve. "Control" exists when 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 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. 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. The Federal Reserve's capital adequacy guidelines also require bank
holding companies to maintain a minimum ratio of qualifying total capital to
risk-weighted assets of 8.0%, including a minimum ratio of tier 1 capital to
risk-weighted assets of 4.0%. The 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 7.71%, 12.02%, and 13.29%, respectively, at December 31,
1997 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 transaction would be subject to the prior approval of the
Superintendent. 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.
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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, branch offices and major
transactions, and must receive prior notice of any changes to the Bank's bylaws.
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 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, 1997.
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
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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, 1997, the Bank had a ratio of
qualifying total capital to risk-weighted assets of 16.30% and a ratio of Tier 1
capital to risk-weighted assets of 15.03%.
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 prompt corrective action regulations, insured institutions will be
considered (i) "well capitalized" if the institution has a total risk-based
capital ratio of 10% or greater, a Tier 1 risk-based capital ratio of 6% or
greater, and a leverage ratio of 5% or greater (provided that the institution is
not subject to an order, written agreement, capital directive or prompt
corrective action directive to meet and maintain a specified capital level for
any capital measure), (ii) "adequately capitalized" if the institution has a
total risk-based capital ratio of 8% or greater, a Tier 1 risk-based capital
ratio of 4% or greater and a leverage ratio of 4% or greater (3% or greater if
the institution is rated composite 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, 1997, the Bank was
classified as a "well capitalized" institution. The FDIC and the Federal
Reserve can impose severe restrictions upon undercapitalized institutions 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
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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.
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. Several proposals for combining the BIF and the SAIF were
introduced in Congress during 1997 in bills addressing financial services
modernization, including a proposal from the Treasury Department developed
pursuant to requirements of the 1996 legislation. While no legislation was
passed in 1997, proposals for financial services reform, including the
combination of the deposit insurance funds, continue to be discussed in
Congress. The Company and the Bank can give no assurances as to whether
legislation to merge the insurance funds will be enacted or when the insurance
funds will be merged.
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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, 1997 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, 1997, the Bank was in compliance with these requirements.
Various proposals were introduced in Congress in 1997 to permit the payment of
interest on required reserve balances, and to permit regulated financial
institutions to pay interest on business demand accounts. While this
legislation appears to have strong support from many constituencies, the Company
and the Bank are unable to predict whether such legislation will be enacted.
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.
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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 was
reduced by $4,811,000 for the year ended December 31, 1996.
In order to help maintain the benefit of the deferred tax asset, the Company
amended its Restated Certificate of Incorporation in June 1996 to provide that
absent approval by the Company's Board of Directors 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 provision 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.
STATE
The State of Maine imposes a franchise tax 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. Maine net income equals the Bank's net income or loss as reported on
its federal income tax return and apportioned to Maine. 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 1% franchise tax rate. Any unused credit may be carried
forward for up to five years. The Maine franchise tax is deductible in
determining federal taxable income.
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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 are located at 36 Thomas Drive,
Westbrook, Maine. The Bank currently maintains eight 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
Freeport 165 Main Street Owned n/a
Freeport, ME
Kennebunk 45 Portland Road Leased December 2000
Kennebunk, ME
Portland 120 Exchange Street Leased December 2002
Portland, ME
Saco 32 Saco Valley Shopping Ctr. Leased January 2001
Saco, ME
Topsham 47 Topsham Fair Mall Road Building Owned n/a
Topsham, ME Land Leased June 2000
Westbrook 36 Thomas Drive Owned n/a
Westbrook, ME
</TABLE>
ITEM 3. LEGAL PROCEEDINGS.
As of December 31, 1997, 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, 1997.
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<PAGE>
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 29 of the
Annual Report to Stockholders for the year ended December 31, 1997, 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 5 of the Annual Report to Stockholders for the
year ended December 31, 1997, 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 6 to 29 of the Annual Report to Stockholders for the year ended December
31, 1997, which information is hereby incorporated herein by reference and
specifically made a part hereof.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Information required by this Item and the auditor's report thereon are set forth
on pages 30 to 57 of the Annual Report to Stockholders for the year ended
December 31, 1997, 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 1998 annual meeting of stockholders. Such
information is hereby incorporated herein by reference and specifically made a
part hereof.
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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 1998
annual meeting of stockholders. Such information is hereby incorporated herein
by reference and specifically made a part hereof.
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 1998 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 1998 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, 1997, 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, 1997 and 1996
Consolidated Statements of Operations for each of the three years in the period
ended December 31, 1997
Consolidated Statements of Stockholders' Equity for each of the three years in
the period ended December 31, 1997
Consolidated Statements of Cash Flows for each of the three years in the period
ended December 31, 1997
Notes to Consolidated Financial Statements--December 31, 1997
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:
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<PAGE>
EXHIBIT NO. 3 ARTICLES OF INCORPORATION AND BYLAWS
3.1(i) Restated Certificate of Incorporation, as amended (filed herewith).
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
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).
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 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, 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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<PAGE>
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).
10.17 Rights Agreement, dated as of February 25, 1998, between First
Coastal Corporation and ChaseMellon Shareholder Services, L.L.C. (filed as
Exhibit No. 1 to Current Report on Form 8-K, filed March 3, 1998, and
incorporated herein by reference).
EXHIBIT NO. 13 ANNUAL REPORT TO SECURITY HOLDERS
First Coastal Corporation 1997 Annual Report (filed herewith). Portions of the
First Coastal Corporation 1997 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 L.L.P. to incorporation by reference of its report
dated February 20, 1998 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
27.1 Financial Data Schedule for the year ended December 31, 1997 (filed
herewith).
27.2 Restated Financial Data Schedule for the quarter ended September
30, 1997 (filed herewith).
27.3 Restated Financial Data Schedule for the quarter ended June 30,
1997 (filed herewith).
27.4 Restated Financial Data Schedule for the quarter ended March 31,
1997 (filed herewith).
21
<PAGE>
27.5 Restated Financial Data Schedule for the year ended December 31,
1996 (filed herewith).
14(b) No Reports on Form 8-K were filed by the Company during the fourth
quarter of 1997.
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.
22
<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 30, 1998 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 30, 1998 By: /s/ Gregory T. Caswell
-----------------------------
Gregory T. Caswell
President and Chief Executive Officer
(Principal Executive Officer)
March 30, 1998 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 30, 1998 By: /s/ Normand E. Simard
-----------------------------
Normand E. Simard
Chairman of the Board and Director
March 30, 1998 By: /s/ Gregory T. Caswell
-----------------------------
Gregory T. Caswell, Director
March 30, 1998 By: /s/ Dennis D. Byrd
-----------------------------
Dennis D. Byrd, Director
March 30, 1998 By: /s/ MaryEllen FitzGerald
-----------------------------
MaryEllen FitzGerald, Director
March 30, 1998 By: /s/ David B. Hawkes, Sr.
-----------------------------
David B. Hawkes, Sr., Director
March 30, 1998 By: /s/ Roger E. Klein
-----------------------------
Roger E. Klein, Director
March 30, 1998 By: /s/ Edward K. Simensky
-----------------------------
Edward K. Simensky, Director
March 30, 1998 By: /s/ Charles A. Stewart III
-----------------------------
Charles A. Stewart III, Director
23
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
3.1(i) Restated Certificate of Incorporation, as amended (filed
herewith).
3.1(ii) Amended and Restated Bylaws (filed herewith).
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 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).
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 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, 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).
<PAGE>
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).
10.17 Rights Agreement, dated as of February 25, 1998, between First
Coastal Corporation and ChaseMellon Shareholder Services, L.L.C.
(filed as Exhibit No. 1 to Current Report on Form 8-K, filed
March 3, 1998, and incorporated herein by reference).
13 First Coastal Corporation 1997 Annual Report (filed herewith).
21 Subsidiary of the Company (filed herewith).
23 Consent of Coopers & Lybrand L.L.P. to incorporation by reference
of its report dated February 20, 1998 into the Company's
Registration Statement on Form S-8 (No. 333-08631) filed with the
Securities and Exchange Commission on July 23, 1996.
27.1 Financial Data Schedule for the year ended December 31, 1997
(filed herewith).
27.2 Restated Financial Data Schedule for the quarter ended September
30, 1997 (filed herewith).
27.3 Restated Financial Data Schedule for the quarter ended June 30,
1997 (filed herewith).
27.4 Restated Financial Data Schedule for the quarter ended March 31,
1997 (filed herewith).
27.5 Restated Financial Data Schedule for the year ended December 31,
1996 (filed herewith).
<PAGE>
Exhibit 3.1(i)
STATE OF DELAWARE
RESTATED CERTIFICATE OF INCORPORATION
OF
FIRST COASTAL CORPORATION
First Coastal Corporation, a corporation organized on August 15, 1986 under
the name of "Suffield Financial Corporation" and existing under and by virtue of
the General Corporation Law of the State of Delaware (the "Corporation"), does
hereby certify that the Board of Directors of the Corporation at a meeting of
the Board of Directors duly called and held on December 20, 1995 approved and
adopted in accordance with the requirements of Section 245 of the Delaware
General Corporation Law ("DGCL"), the following resolution with respect to the
approval and adoption of the Restated Certificate of Incorporation of the
Corporation (the "Restated Certificate"), which Restated Certificate only
restates and integrates and does not further amend the provisions of the
Corporation's certificate of incorporation as theretofore amended or
supplemented, and that there is no discrepancy between those provisions and the
provisions of the Restated Certificate except as otherwise permitted by Section
245(c) of the DGCL:
RESOLVED, that the proposed Restated Certificate of Incorporation of the
Corporation (the "Restated Certificate") as herein set forth, which Restated
Certificate restates and integrates but does not further amend the certificate
of incorporation of the Corporation, as theretofore amended or supplemented in
accordance with the DGCL, hereby is approved and adopted in accordance with and
pursuant to Section 245 of the DGCL:
ARTICLE 1. CORPORATE TITLE. The name of the corporation is First Coastal
---------------
Corporation (the "Corporation").
ARTICLE 2. DURATION. The duration of the Corporation is perpetual.
--------
ARTICLE 3. PURPOSE. The purpose or purposes for which the Corporation is
-------
organized are to engage in any lawful act or activity for which corporations may
be organized under the General Corporation Law of the State of Delaware.
ARTICLE 4. CAPITAL STOCK. The total number of shares of all classes of
-------------
the capital stock which the Corporation has authority to issue is seven million
seven hundred thousand (7,700,000), of which six million seven hundred thousand
(6,700,000) shall be common stock, par value $1.00 per share, amounting in the
aggregate to six million seven hundred thousand dollars ($6,700,000), and one
million (1,000,000) shall be serial preferred stock, par value $1.00 per share,
amounting in the aggregate to one million dollars ($1,000,000). The shares may
be issued by the Corporation from time to time as approved by its Board of
Directors without the approval of its shareholders. The consideration for the
issuance of the shares shall be paid in full before their issuance and shall not
be less than the par value per share. Neither promissory notes nor future
services shall constitute payment or part payment for the issuance of the shares
of the Corporation. The
<PAGE>
consideration for the shares shall be in cash, services actually performed for
the Corporation, personal property, real property, leases of real property or
any combination of the foregoing. In the absence of actual fraud in the
transaction, the value of such property, labor or services, as determined by the
Board of Directors of the Corporation, shall be conclusive. Upon payment of such
consideration such shares shall be deemed to be fully paid and nonassessable.
Nothing contained in this Article 4 (or in any resolution or resolutions
adopted by the Board of Directors pursuant hereto) shall entitle the holders of
any class or series of capital stock to more than one vote per share.
A description of the different classes and series of the Corporation's
capital stock and a statement of the designations, and the powers, preferences
and rights, and the qualifications, limitations and restrictions of the shares
of each class of and series of capital stock are as follows:
A. Common Stock. Except as provided in this Article 4 (or in any
------------
resolution or resolutions adopted by the Board of Directors pursuant hereto),
the holders of the common stock shall exclusively possess all voting power.
Each holder of shares of common stock shall be entitled to one vote for each
share held by such holder, including the election of directors. There shall be
no cumulative voting rights in the election of directors.
Whenever there shall have been paid, or declared and set aside for payment,
to the holders of the outstanding shares of any class of stock having preference
over the common stock as to the payment of dividends, the full amount of
dividends and of sinking fund or retirement fund or other retirement payments,
if any, to which such holders are respectively entitled in preference to the
common stock, then dividends may be paid on the common stock and on any class or
series of stock entitled to participate therewith as to dividends, out of any
assets legally available for the payment of dividends; but only when as declared
by the Board of Directors.
In the event of any liquidation, dissolution or winding up of the
Corporation, after there shall have been paid to or set aside for the holders of
any class having preferences over the common stock in the event of liquidation,
dissolution or winding up of the full preferential amounts of which they are
respectively entitled, the holders of the common stock, and of any class or
series of stock entitled to participate therewith, in whole or in part, as to
distribution of assets, shall be entitled after payment or provision for payment
of all debts and liabilities of the Corporation, to receive the remaining assets
of the Corporation available for distribution, in cash or in kind.
Each share of common stock shall have the same relative rights as and be
identical in all respects with all the other shares of common stock.
B. Serial Preferred Stock. Except as provided in this Article 4, the
----------------------
Board of Directors of the Corporation is authorized by resolution or resolutions
from time to time adopted and by filing a certificate pursuant to the applicable
law of the
-2-
<PAGE>
State of Delaware, to provide for the issuance of serial preferred stock in
series and to fix and state the voting powers, full or limited, or no voting
powers, and such designations, preferences and relative, participating, optional
or other special rights of the shares of each such series and the
qualifications, limitations and restrictions thereof to the full extent now or
hereafter permitted by the General Corporation Law of the State of Delaware.
Without limiting the generality of the grant of authority contained in the
preceding sentence, the Board of Directors is authorized to determine any or all
of the following, and the shares of each series may vary from the shares of any
other series in any or all of the following respects:
(a) The distinctive serial designation and the number of shares
constituting such series;
(b) The dividend rate or the amount of dividends to be paid on the shares
of such series, whether dividends shall be cumulative and, if so, from which
date or dates, the payment date or dates for dividends, and the participating or
other special rights, if any, with respect to dividends;
(c) The voting powers, full or limited, if any, of shares of such series;
(d) Whether the shares of such series shall be redeemable and, if so, the
price or prices at which, and the terms and conditions on which, such shares may
be redeemed;
(e) The amount or amounts payable upon the shares of such series in the
event of voluntary or involuntary liquidation, dissolution or winding up of the
Corporation;
(f) Whether the shares of such series shall be entitled to the benefit of a
sinking or retirement fund to be applied to the purchase or redemption of such
shares, and if so entitled, the amount of such fund and the manner of its
application, including the price or prices at which such shares may be redeemed
or purchased through the application of such fund;
(g) Whether the shares of such series shall be convertible into, or
exchangeable for, shares of any other class or classes or of any other series of
the same or any other class or classes of stock of the Corporation and, if so,
convertible or exchangeable, the conversion price or prices, or the rate or
rates of exchange, and the adjustments thereof, if any, at which such conversion
or exchange may be made, and any other terms and conditions of such conversion
or exchange;
(h) The price or other consideration for which the shares of such series
shall be issued; and
(i) Whether the shares of such series which are redeemed or converted shall
have the status of authorized but unissued shares of preferred stock and whether
such shares may be reissued as shares of the same or any other series of
preferred stock.
-3-
<PAGE>
Dividends on outstanding shares of preferred stock shall be paid, or
declared and set apart for payment, before any dividends shall be paid or
declared and set apart for payment on the common stock with respect to the same
dividend period.
If upon any voluntary or involuntary liquidation, dissolution or winding up
of the Corporation, the assets available for distribution to holders of shares
of preferred stock of all series shall be insufficient to pay such holders the
full preferential amount to which they are entitled, then such assets shall be
distributed ratably among the shares of all series of preferred stock in
accordance with the respective preferential amounts (including unpaid cumulative
dividends, if any) payable with respect thereto.
Each share of each series of serial preferred stock shall have the same
relative rights as and be identical in all respects with all the other shares of
the same series.
ARTICLE 5. PREEMPTIVE RIGHTS. Holders of the capital stock of the
-----------------
Corporation shall not be entitled to preemptive rights with respect to any
shares or other securities of the Corporation which may be issued or any
securities convertible into any such shares, including, without limitation,
warrants, subscription rights and options to acquire shares.
ARTICLE 6. DIRECTORS. The Corporation shall be under the direction of a
---------
Board of Directors. The number of directors shall be as set forth in the
Corporation's Bylaws. The Board of Directors shall be divided into three
classes as nearly equal in number as possible, with one class to be elected
annually. When the number of directors is changed, the Board of Directors shall
determine the class or classes to which the increased or decreased number of
directors shall be apportioned; provided, that the directors in each class shall
be as nearly equal in number as possible; provided, further, that no decrease in
the number of directors shall affect the term of any director then in office.
The classification shall be such that the term of one class shall expire
each succeeding year. The Corporation's Board of Directors shall initially be
divided into three classes named Class I, Class II and Class III. The terms,
classifications, qualifications and election of the Board of Directors and the
filling of vacancies thereon shall be as provided herein and in the Bylaws.
The persons serving as members of the executive committee of the Board of
Directors of Suffield Savings Bank (the "Bank") on the date of incorporation of
the Corporation shall be designated the initial Board of Directors of the
Corporation and each such director shall continue to serve as a director of the
Corporation for the remainder of his or her term as a director of the Bank and
until their successors are elected and qualified.
Subject to the foregoing, at each annual meeting of shareholders the
successors to the class of directors whose term shall then expire shall be
elected to
-4-
<PAGE>
hold office for a term expiring at the third succeeding annual meeting and until
their successors shall be elected and qualified.
Any vacancy occurring in the Board of Directors, including any vacancy
created by reason of an increase in the number of directors, shall 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.
No director may be removed except for cause and then only by an affirmative
vote of at least two-thirds of the total votes eligible to be voted by
shareholders at a duly constituted meeting of shareholders called for such
purpose. At least 30 days prior to such meeting of shareholders, written notice
shall be sent to the director or directors whose removal will be considered at
such meeting.
No director shall be personally liable to the Corporation or its
shareholders for monetary damages for breach of a fiduciary duty as a director
other than liability (i) for any breach of the director's duty of loyalty to the
Corporation or its shareholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii) for
any payment of a dividend or approval of a stock repurchase that is illegal
under (S) 174 of the General Corporation Law of the State of Delaware, or (iv)
for any transaction from which the director derived an improper personal
benefit.
ARTICLE 7. BYLAWS. The Board of Directors or the shareholders may from
------
time to time adopt, alter, amend or repeal 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 expressly 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 expressly for such purpose.
ARTICLE 8. SPECIAL MEETINGS. Special meetings of shareholders may be
----------------
called at any time but only by the Chairman of the Board or the President of the
Corporation or by the Board of Directors of the Corporation.
ARTICLE 9. REGISTERED OFFICE. The street address of the Corporation's
-----------------
initial registered office in the State of Delaware is 1209 Orange Street, City
of Wilmington, County of New Castle, and the name of its initial registered
agent at such address is The Corporation Trust Company.
-5-
<PAGE>
ARTICLE 10. APPROVAL FOR ACQUISITIONS OF CONTROL AND OFFERS TO ACQUIRE
----------------------------------------------------------
CONTROL.
-------
Subsection 1. Three-Year Restrictions on
------------ Acquisitions of Control and Offers
to Acquire Control.
For a period of three years from the date of consummation of the conversion
of the Bank to a Connecticut capital stock savings bank, no Person shall acquire
Control of the Corporation, or make any Offer to acquire Control of the
Corporation, unless such acquisition or Offer has received the prior approval of
both the Banking Commissioner of the State of Connecticut and the Board of
Directors of the Corporation. The terms "Person," "Control" and "Offer" as used
in this Article 10 are defined in Subsection 5 hereof.
Subsection 2. Shareholder Vote and Regulatory
------------ Approval Required for
Acquisition of Control at any
Time.
No Person shall acquire Control of the Corporation at any time, unless such
acquisition of Control has been approved prior to its consummation by the
affirmative vote of the holders of at least two-thirds of the outstanding shares
of Voting Stock (as defined in Subsection 5 hereof) at a duly constituted
meeting of shareholders called for such purpose; provided, however, that this
provision shall not apply if such acquisition of Control has been approved by at
least two-thirds of the directors then in office at a duly constituted meeting
of the board of directors called for such purpose. In addition, no Person shall
acquire Control of the Corporation at any time without obtaining prior thereto
all regulatory approvals required under applicable federal and state statutes
and in the manner provided by all applicable regulations adopted thereunder. In
the event that Control is acquired without obtaining all such regulatory
approvals, such acquisition shall constitute a violation of this Article 10 and
the Corporation shall be entitled to institute a private right of action to
enforce such statutory and regulatory provisions.
Subsection 3. Excess Shares.
------------
In the event that Control of the Corporation is acquired in violation of
this Article 10, all shares of Voting Stock owned by the Person so acquiring
Control in excess of the number of shares the beneficial ownership of which is
deemed under Subsection 5 hereof to confer Control of the Corporation shall be
considered from and after the date of their acquisition by such Person to be
"excess shares" for purposes of this Article 10. Such excess shares shall
thereafter no longer (i) be entitled to vote on any matter, (ii) be entitled to
take other shareholder action, (iii) be entitled to be counted in determining
the total number of outstanding shares for purposes of any matter involving
shareholder action, or (iv) be transferable, except with the approval of the
Board of Directors or by an independent trustee appointed
-6-
<PAGE>
by the Board of Directors for the purpose of having such excess shares sold on
the open market or otherwise. The proceeds from the sale by the trustee of such
excess shares shall be paid (i) first, to the trustee in an amount equal to the
trustee's reasonable fees and expenses, (ii) second, to the "beneficial owner"
(as defined in Article 12, Subsection 3, paragraph C hereof) of such excess
shares in an amount up to such owner's federal income tax basis in such excess
shares, and (iii) third, to the Corporation as to any remaining balance.
Subsection 4. Approval Required for Offers to
------------ Acquire Control after Three
Years.
After three years from the date of consummation of the conversion of the
Bank to a Connecticut capital stock savings bank, no Person shall make any Offer
to acquire Control of the Corporation, if the common stock is then traded on a
national securities exchange or quoted on the National Association of Securities
Dealers, Inc. Automated Quotation System, unless such Person has received prior
approval to make such Offer by complying with either of the following
procedures:
1. The Offer shall have been approved by the Board of Directors of the
Corporation, or
2. The Person proposing to make such Offer shall have:
(a) obtained all required federal and state regulatory approvals;
and
(b) furnished to the Board of Directors of the Corporation,
concurrently with such Person's filing thereof with federal and
state regulatory authorities, a complete copy of all notices,
submissions and documents (including all exhibits thereto) and
other information filed by such Person pursuant to applicable
federal and state law and regulations.
Subsection 5. Certain Definitions.
------------
For purposes of this Article 10:
A. "Control" means the sole or shared power to vote or to direct the
voting of, or to dispose or to direct the disposition of, 10 percent or more of
the Voting Stock; provided, that the solicitation, holding and voting of proxies
obtained by the Board of Directors of the Corporation pursuant to a solicitation
under Regulation 14A of the General Rules and Regulations under the Securities
Exchange Act of 1934, as amended (the "Exchange Act") shall not constitute
"Control."
B. "Group Acting in Concert" includes Persons seeking to combine or pool
their voting or other interests in the Voting Stock for a common purpose,
pursuant to any contract, understanding, relationship, agreement or other
arrangement,
-7-
<PAGE>
whether written or otherwise; provided, that a "Group Acting in Concert" shall
not include the Board of Directors of the Corporation in its solicitation,
holding and voting of proxies obtained by it pursuant to a solicitation under
Regulation 14A of the General Rules and Regulations under the Exchange Act.
C. "Offer" means every offer to buy or acquire, solicitation of an offer
to sell, tender offer for, or request or invitation for tender of, Voting Stock.
D. "Person" means any individual, firm, corporation or other entity
including a Group Acting in Concert.
E. "Voting Stock" means the then outstanding shares of capital stock of
the Corporation entitled to vote generally in the election of directors.
Subsection 6. Inapplicability to Public Offering.
------------
This Article 10 shall not apply to the purchase of securities of the
Corporation by underwriters in connection with a public offering of such
securities.
ARTICLE 11. CRITERIA FOR EVALUATING CERTAIN OFFERS. The Board of
--------------------------------------
Directors of the Corporation, when evaluating any offer to (i) make a tender or
exchange offer for the common stock of the Corporation, (ii) merge or
consolidate the Corporation with another institution, or (iii) purchase or
otherwise acquire all or substantially all of the properties and assets of the
Corporation, shall, in connection with the exercise of its judgment in
determining what is in the best interests of the Corporation and its
shareholders, give due consideration to all relevant factors, including without
limitation the economic effects of acceptance of such offer on (a) depositors,
borrowers and employees of the insured bank or institution subsidiary or
subsidiaries of the Corporation, and on the communities in which such subsidiary
or subsidiaries operate or are located and (b) the ability of such subsidiary or
subsidiaries to fulfill the objectives of an insured institution under
applicable federal and state statutes and regulations.
ARTICLE 12. CERTAIN BUSINESS COMBINATIONS.
-----------------------------
The votes of shareholders and directors required to approve any Business
Combination shall be as set forth in this Article 12. The term "Business
Combination" is used as defined in Subsection 1 of this Article 12. All other
capitalized terms not otherwise defined in this Article 12 or elsewhere in this
Certificate of Incorporation are used as defined in Subsection 3 of this Article
12.
Subsection 1. Vote Required for Certain
------------ Business Combinations.
A. Higher Vote for Certain Business Combinations. In addition to any
---------------------------------------------
affirmative vote required by law or this Certificate of Incorporation, and
except as otherwise expressly provided in Subsection 2 of this Article 12:
-8-
<PAGE>
(i) any merger, consolidation or share exchange of the Corporation
or any Subsidiary (as hereinafter defined) with (a) any Interested
Shareholder (as hereinafter defined) or (b) any other corporation (whether
or not itself an Interested Shareholder) which is, or after the merger,
consolidation or share exchange would be, an Affiliate or Associate (as
those terms are hereinafter defined) of such Interested Shareholder; or
(ii) any sale, lease, exchange, mortgage, pledge, transfer or other
disposition other than in the usual and regular course of business (in one
transaction or a series of transactions in any twelve-month period) to or
with any Interested Shareholder or any Affiliate or Associate of such
Interested Shareholder, other than the Corporation or any of its
Subsidiaries, of any assets of the Corporation or any Subsidiary having,
measured at the time the transaction or transactions are approved by the
Board of Directors of the Corporation, an aggregate book value as of the
end of the Corporation's most recent fiscal quarter of five percent or more
of the total Market Value (as hereinafter defined) of the outstanding
shares of the Corporation or of its net worth as of the end of its most
recent fiscal quarter; or
(iii) any purchase, exchange, lease or other acquisition by the
Corporation or any Subsidiary involving more than five percent of the
assets or business of an Interested Shareholder or any Affiliate or
Associate of an Interested Shareholder; or
(iv) the issuance or transfer by the Corporation or any Subsidiary
(in one transaction or a series of transactions) of any equity securities
of the Corporation or any Subsidiary having an aggregate Market Value of
five percent or more of the total Market Value of the outstanding shares of
the Corporation to any Interested Shareholder or any Affiliate or Associate
of any Interested Shareholder, other than the Corporation or any of its
Subsidiaries, except pursuant to the exercise of warrants, rights or
options to subscribe for or purchase securities offered, issued or granted
pro rata to all holders of the Voting Stock (as hereinafter defined) of the
Corporation or any other method affording substantially proportionate
treatment to the holders of Voting Stock; or
(v) the adoption of any plan or proposal for the liquidation or
dissolution of the Corporation or any Subsidiary proposed by or on behalf
of an Interested Shareholder or any Affiliate or Associate of such
Interested Shareholder, other than the Corporation or any of its
Subsidiaries; or
(vi) any reclassification of securities (including any reverse stock
split), or recapitalization of the Corporation, or any merger or
-9-
<PAGE>
consolidation of the Corporation with any of its Subsidiaries or any other
transaction (whether or not with or into or otherwise involving an
Interested Shareholder) which has the effect, directly or indirectly, in
one transaction or a series of transactions, of increasing the
proportionate amount of the outstanding shares of any class of equity or
convertible securities of the Corporation or any Subsidiary which is
directly or indirectly owned by any Interested Shareholder or any Affiliate
or Associate of any Interested Shareholder, other than the Corporation or
any of its Subsidiaries;
shall be approved by affirmative vote of the holders of at least 80 percent of
the total number of outstanding shares of Voting Stock. Such affirmative vote
shall be required notwithstanding the fact that no vote may be required, or that
a lesser percentage may be specified, by law or in any agreement with any
national securities exchange or otherwise.
B. Definition of "Business Combination." The term "Business Combination"
-----------------------------------
as used in this Article 12 shall mean any transaction which is referred to in
any one or more of clauses (i) through (vi) of paragraph A of this Subsection 1.
Subsection 2. When Higher Vote Is Not
------------ Required.
The provisions of Subsection 1 of this Article 12 shall not be applicable
to any particular Business Combination, and such Business Combination shall
require only such affirmative vote as is required by law and any other provision
of this Certificate of Incorporation, if all of the conditions specified in
either paragraph A or paragraph B of this Subsection 2 are met:
A. Approval by Continuing Directors. The Business Combination shall have
--------------------------------
been approved by a majority of the Continuing Directors (as hereinafter defined)
then in office at a duly constituted meeting of the Board of Directors of the
Corporation called for such purpose.
B. Price and Procedure Requirements. All of the following conditions
--------------------------------
shall have been met:
(i) The aggregate amount of the cash and the Market Value as of the
Valuation Date (as hereinafter defined) of the Business Combination of
consideration other than cash to be received per share by holders of common
stock in such Business Combination shall be at least equal to the highest
of the following:
(a) (if applicable) the highest per share price (including any
brokerage commissions, transfer taxes and soliciting dealers' fees) paid by
the Interested Shareholder for any shares of common stock acquired by it
(1) within the two-year period immediately prior to the
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<PAGE>
first public announcement of the proposal of the Business Combination (the
"Announcement Date") or (2) in the transaction in which it became an
Interested Shareholder, whichever is higher; or
(b) the Market Value per share of common stock of the same class
or series on the Announcement Date or on the date on which the Interested
Shareholder became an Interested Shareholder (such latter date is referred
to in this Article 12 as the "Determination Date"), whichever is higher; or
(c) the price per share equal to the Market Value per share of
common stock of the same class or series determined pursuant to subdivision
(i)(b) hereof, multiplied by the fraction of (1) the highest per share
price (including brokerage commissions, transfer taxes and soliciting
dealers' fees) paid by the Interested Shareholder for any shares of common
stock of the same class or series acquired by it within the two-year period
immediately prior to the Announcement Date, over (2) the Market Value per
share of common stock of the same class or series on the first day in such
two-year period on which the Interested Shareholder acquired shares of
common stock.
(ii) The aggregate amount of the cash and the Market Value as of the
Valuation Date of consideration other than cash to be received per share by
holders of shares of any class or series of outstanding Voting Stock, other
than common stock, shall be at least equal to the highest of the following
(it being intended that the requirements of this paragraph B(ii) shall be
required to be met with respect to every class of outstanding Voting Stock,
whether or not the Interested Stockholder has previously acquired any
shares of a particular class of Voting Stock):
(a) (if applicable) the highest per share price (including any
brokerage commissions, transfer taxes and soliciting dealers' fees) paid by
the Interested Shareholder for any shares of such class or series of Voting
Stock acquired by it: (1) within the two-year period immediately prior to
the Announcement Date or (2) in the transaction in which it became an
Interested Shareholder, whichever is higher; or
(b) (if applicable) the highest preferential amount per share to
which the holders of shares of such class or series of Voting Stock are
entitled in the event of any voluntary or involuntary liquidation,
dissolution or winding up of the Corporation; or
(c) the Market Value per share of such class or series of Voting
Stock on the Announcement Date or on the Determination Date, whichever is
higher; or
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<PAGE>
(d) the price per share equal to the Market Value per share of
such class or series of stock determined pursuant to subdivision (ii)(c)
hereof multiplied by the fraction of (1) the highest per share price
(including any brokerage commissions, transfer taxes and soliciting
dealers' fees) paid by the Interested Shareholder for any shares of any
class or series of Voting Stock acquired by it within the two-year period
immediately prior to the Announcement Date over (2) the Market Value per
share of the same class or series of Voting Stock on the first day in such
two-year period on which the Interested Shareholder acquired any shares of
the same class or series of Voting Stock.
(iii) The consideration to be received by holders of a particular
class or series of outstanding Voting Stock shall be in cash or in the same
form as the Interested Shareholder has previously paid for shares of such
class or series of Voting Stock. If the Interested Shareholder has paid
for shares of any class or series of Voting Stock with varying forms of
consideration, the form of consideration for such class or series of Voting
Stock shall be either cash or the form used to acquire the largest number
of shares of such class or series of Voting Stock previously acquired by
it.
(iv) After such Interested Shareholder has become an Interested
Shareholder and prior to the consummation of such Business Combination:
(a) there shall have been no failure to declare and pay at the regular date
therefor any full quarterly dividends (whether or not cumulative) on any
outstanding preferred stock of the Corporation; (b) there shall have been
(1) no reduction in the annual rate of dividends paid on any class or
series of the capital stock of the Corporation (except as necessary to
reflect any stock split, stock dividend or subdivision of the capital
stock), and (2) an increase in such annual rate of dividends as necessary
to reflect any reclassification (including any reverse stock split),
recapitalization, reorganization or any similar transaction which has the
effect of reducing the number of outstanding shares of capital stock; and
(c) such Interested Shareholder shall have not become the Beneficial Owner
(as hereinafter defined) of any additional shares of capital stock except
as part of the transaction which results in such Interested Shareholder
becoming an Interested Shareholder or by virtue of proportionate stock
splits or stock dividends.
The provisions of subdivisions (iv)(a) and (iv)(b) of this Subsection
2 do not apply if the Interested Shareholder or any Affiliate or Associate
of the Interested Shareholder voted as a director of the Corporation in a
manner inconsistent with such subdivisions, and the Interested Shareholder,
within ten days after any act or failure to act inconsistent with such
subdivisions, notifies the Board of Directors of
-12-
<PAGE>
the Corporation in writing that the Interested Shareholder disapproves
thereof and requests in good faith that the Board of Directors rectify such
act or failure to act.
(v) After such Interested Shareholder has become an Interested
Shareholder, such Interested Shareholder shall not have received the
benefit, directly or indirectly (except proportionately as a shareholder),
of any loans, advances, guarantees, pledges or other financial assistance
or any tax credits or other tax advantages provided by the Corporation or
any of its Subsidiaries (whether in anticipation of or in connection with
such Business Combination or otherwise).
(vi) A proxy or information statement describing the proposed Business
Combination and complying with the requirements of the Securities Exchange
Act of 1934, as amended, and the rules and regulations thereunder (or any
subsequent provisions replacing such Act, rules or regulations) shall be
mailed to public shareholders of the Corporation at least 20 days prior to
the consummation of such Business Combination (whether or not such proxy or
information statement is required to be mailed pursuant to such Act or
subsequent provisions).
Subsection 3. Certain Definitions.
------------
For the purposes of this Article 12:
A. "Person" shall mean any individual, firm or corporation, partnership,
association, joint stock company, trust, unincorporated organization, group
acting in concert or other entity.
B. "Interested Shareholder" shall mean any Person (other than the
Corporation or any Subsidiary) who or which:
(i) is the Beneficial Owner, directly or indirectly, of 10 percent
or more of the voting power of the then outstanding Voting Stock; or
(ii) is an Affiliate of the Corporation and at any time within the
two-year period immediately prior to the date in question was the
Beneficial Owner, directly or indirectly, of 10 percent or more of the
voting power of the then outstanding Voting Stock.
C. "Beneficial Owner," when used with respect to any Voting Stock, means a
Person:
(i) that, individually or with any of its Affiliates or Associates,
beneficially owns Voting Stock directly or indirectly; or
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<PAGE>
(ii) that, individually or with any of its Affiliates or Associates,
has (a) the right to acquire Voting Stock (whether such right is
exercisable immediately or only after passage of time), pursuant to any
agreement, arrangement or understanding or upon the exercise of conversion
rights, exchange rights, warrants or options, or otherwise; (b) the right
to vote or direct the voting of Voting Stock pursuant to any agreement,
arrangement or understanding; or (c) the right to dispose of or to direct
the disposition of Voting Stock pursuant to any agreement, arrangement or
understanding; or
(iii) that, individually or with any of its Affiliates or Associates,
has any agreement, arrangement or understanding for the purpose of
acquiring, holding, voting or disposing of Voting Stock with any other
person that beneficially owns, or whose Affiliates or Associates
beneficially own, directly or indirectly, such shares of Voting Stock.
D. For the purposes of determining whether a Person is an Interested
Shareholder pursuant to paragraph B of this Subsection 3, the number of shares
of Voting Stock deemed to be outstanding shall include shares deemed owned
through application of paragraph C of this Subsection 3 but shall not include
any other shares of Voting Stock which may be issuable pursuant to any
agreement, arrangement or understanding, or upon exercise of conversion rights,
warrants or options, or otherwise.
E. "Affiliate" means a Person that directly or indirectly through one or
more intermediaries controls, or is controlled by, or is under common control
with, a specified person.
F. "Associate" when used to indicate a relationship with any Person,
means: (1) any domestic or foreign corporation or organization, other than the
Corporation or a Subsidiary of the Corporation, of which such Person is an
officer, director or partner or is, directly or indirectly, the Beneficial Owner
of ten percent or more of any class of equity securities; (2) any trust or other
estate in which such Person has a substantial beneficial interest or as to which
such Person serves as a trustee or in a similar fiduciary capacity; and (3) any
relative or spouse of such Person, or any relative of such spouse who has the
same home as such Person or who is a director or officer of the Corporation or
any of its Affiliates.
G. "Subsidiary" means any corporation of which Voting Stock having a
majority of the votes entitled to be cast is owned, directly or indirectly, by
the Corporation.
H. "Continuing Director" means any member of the Board of Directors of the
Corporation who is unaffiliated with the Interested Shareholder and was a member
of the Board of Directors of the Corporation prior to the time that the
Interested Shareholder (including any Affiliate or Associate of such Interested
Shareholder) became an Interested Shareholder, and any successor of a Continuing
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<PAGE>
Director who is unaffiliated with the Interested Shareholder and is recommended
to succeed a Continuing Director by a majority of Continuing Directors then on
the Board of Directors of the Corporation.
I. "Market Value" means:
(i) in the case of stock, the highest closing sale price during the
30-day period immediately preceding the date in question of a share of such
stock on the composite tape for New York Stock Exchange-listed stocks, or,
if such stock is not quoted on the composite tape, on the New York Stock
Exchange, or, if such stock is not listed on such exchange, on the
principal United States securities exchange registered under the Securities
Exchange Act of 1934 on which such stock is listed, or, if such stock is
not listed on any such exchange, the highest closing sales price or bid
quotation with respect to a share of such stock during the 30-day period
preceding the date in question on the National Association of Securities
Dealers, Inc. Automated Quotation System or any system then in use, or if
no such quotations are available, the fair market value on the date in
question of a share of such stock as determined by the Board of Directors
of the Corporation in good faith; and
(ii) in the case of property other than cash or stock, the fair market
value of such property on the date in question as determined by a majority
of the Board of Directors of the Corporation in good faith.
J. "Valuation Date" means: (A) For a Business Combination voted on by
shareholders, the later of the day prior to the date of the shareholders' vote
or the date twenty days prior to the consummation of the Business Combination;
and (B) for a Business Combination not voted upon by the shareholders, the date
of the consummation of the Business Combination.
K. "Voting Stock" means the then outstanding shares of capital stock of
the Corporation entitled to vote generally in the election of directors.
L. In the event of any Business Combination in which the Corporation is
the surviving corporation, the phrase "consideration other than cash to be
received" as used in paragraphs B(i) and B(ii) of Subsection 2 of this Article
12 shall include the shares of common stock and/or the shares of any other class
or series of outstanding Voting Stock retained by the holders of such shares.
Subsection 4. Powers of the Board of Directors.
------------
A majority of the Continuing Directors then in office shall have the power
and duty to determine for the purposes of this Article 12, on the basis of
information known to them after reasonable inquiry, all of the terms and
provisions of this Article 12 including, without limitation, (A) whether a
Person is an Interested Shareholder, (B) the number of shares of Voting Stock
beneficially owned by any
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<PAGE>
Person, (C) whether a Person is an Affiliate or Associate of another, (D)
whether the assets that are the subject of a Business Combination represent more
than five percent of the assets or business of the Interested Shareholder or any
Affiliate or Associate of an Interested Shareholder, (E) whether an action is
with, proposed by, or on behalf of an Interested Shareholder or an Affiliate or
an Associate thereof, and (F) whether the requirements of paragraph B of Section
2 have been met with respect to any Business Combination; and the good faith
determination of a majority of the Continuing Directors on such matters shall be
conclusive and binding for all the purposes of this Article 12.
Subsection 5. No Effect on Fiduciary
------------ Obligations of Interested
Shareholders.
Nothing contained in this Article 12 shall be construed to relieve any
Interested Shareholder from any fiduciary obligation imposed by law.
ARTICLE 13. ANTI-GREENMAIL. Any direct or indirect purchase or other
--------------
acquisition by the Corporation of any Voting Stock (as defined in Article 12
hereof) from any Significant Shareholder (as hereinafter defined) who has been
the Beneficial Owner (as defined in Article 12 hereof) of such Voting Stock for
less than two years prior to the date of such purchase or other acquisition
shall, except as hereinafter expressly provided, require the affirmative vote of
the holders of at least a majority of the total number of outstanding shares of
Voting Stock, excluding in calculating such affirmative vote and the total
number of outstanding shares all Voting Stock beneficially owned by such
Significant Shareholder. Such affirmative vote shall be required
notwithstanding the fact that no vote may be required, or that a lesser
percentage may be specified, by law or in any agreement with any national
securities exchange or otherwise, but no such affirmative vote shall be required
(i) with respect to any purchase or other acquisition of Voting Stock made as
part of a tender or exchange offer by the Corporation to purchase Voting Stock
on the same terms from all holders of the same class of Voting Stock and
complying with the applicable requirements of the Securities Exchange Act of
1934 and the rules and regulations thereunder or (ii) with respect to any
purchase of Voting Stock, where the Board of Directors has determined that the
purchase price per share of the Voting Stock does not exceed the fair market
value of the Voting Stock. Such fair market value shall be calculated on the
basis of the average closing price or the mean of the bid and ask prices of a
share of Voting Stock for the 20 trading days immediately preceding the date of
the execution of a definitive agreement to purchase the Voting Stock from a
Significant Shareholder.
For the purposes of this Article 13, "Significant Shareholder" shall mean
any person (other than the Corporation or any Subsidiary (as defined in Article
12 hereof)) who or which is the Beneficial Owner, directly or indirectly, of
five percent or more of the voting power of the outstanding Voting Stock.
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<PAGE>
ARTICLE 14. SHAREHOLDER ACTION. Any action required or permitted to be
------------------
taken by the shareholders of the Corporation must be effected at a duly called
annual or special meeting of such holders and may not be effected by any consent
in writing by such holders, unless such consent is unanimous.
Except as provided in Article 12, any merger or consolidation involving the
Corporation shall, as a condition to its effectiveness, be approved by the
affirmative vote of at least two-thirds of the issued and outstanding shares of
each class of capital stock.
ARTICLE 15. AMENDMENT OF CERTIFICATE OF INCORPORATION. Except as set
-----------------------------------------
forth in this Article 15 or as otherwise specifically required by law, no
amendment of any provision of this Certificate of Incorporation shall be made
unless such amendment has been first proposed by the Board of Directors of the
Corporation upon 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 and thereafter approved by the shareholders of the Corporation
by the affirmative vote of the holders of at least a majority of the shares
entitled to vote thereon at a duly called annual or special meeting; provided,
however, that if such amendment is to the provisions set forth in this clause of
Article 15 or in Article 6, 7, 8, 10, 11, 13 or 14 hereof, such amendment must
be approved by the affirmative vote of the holders of at least two-thirds of the
shares entitled to vote thereon rather than a majority; provided, further, that
if such amendment is to the provisions set forth in this clause of Article 15 or
in Article 12 hereof, such amendment must be approved by the affirmative vote of
the holders of at least 80 percent of the shares entitled to vote thereon rather
than a majority.
IN WITNESS WHEREOF, First Coastal Corporation has caused this Certificate
to be signed by Gregory T. Caswell, its President and Chief Executive Officer,
and attested to by Dennis D. Byrd, its Treasurer, this 2nd day of January, 1996.
FIRST COASTAL CORPORATION
By: /s/ Gregory T. Caswell
-------------------------------------
Gregory T. Caswell
President and Chief Executive Officer
ATTEST:
By: /s/ Dennis D. Byrd
--------------------
Dennis D. Byrd
Treasurer
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<PAGE>
CERTIFICATE OF AMENDMENT
of
RESTATED CERTIFICATE OF INCORPORATION
of
FIRST COASTAL CORPORATION
First Coastal Corporation, a corporation organized and existing under
and by virtue of the General Corporation Law of the State of Delaware (the
"Corporation"), DOES HEREBY CERTIFY:
FIRST: This Certificate of Amendment was duly adopted in accordance
with the provisions of Section 242 of the General Corporation Law of the State
of Delaware, and was approved by the affirmative vote of the holders of at least
two-thirds of the shares entitled to vote thereon.
SECOND: The Restated Certificate of Incorporation of the Corporation
hereby is amended (a) to delete the caption of Article 10 in its entirety and to
replace it with a new caption of Article 10 to read in its entirety as follows:
"APPROVAL FOR CERTAIN STOCK ACQUISITIONS AND OFFERS TO ACQUIRE STOCK AND
-----------------------------------------------------------------------
ACQUISITIONS OF CONTROL AND OFFERS TO ACQUIRE CONTROL"; and (b) to delete
- -----------------------------------------------------
Subsection 1 of Article 10 in its entirety and to replace it with a new
Subsection 1 of Article 10 to read in its entirety as follows:
"Subsection 1. Three-Year Restriction on Certain
------------
Acquisitions and Offers to Acquire Voting Stock
In addition to and not in limitation of the provisions of
Subsections 2 through 6 of this Article 10 and except as otherwise
provided by this Subsection 1, for a period of three years from the
Effective Date, no Person shall become, or make any Offer to become, a
Beneficial Owner of 5% or more of the Voting Stock of the Corporation
(a "Prohibited 5% Owner") without the prior approval of the Board of
Directors of the Corporation. A Person who is a Beneficial Owner of
5% or more of the Voting Stock of the Corporation on the Effective
Date (an "Existing 5% Owner") shall not be deemed to be a Prohibited
5% Owner in violation of this Subsection 1 solely as a result of such
status; provided, however, that if after the Effective Date, any
-------- -------
Existing 5% Owner shall become, or make any Offer to become, at any
time the Beneficial Owner of any additional shares of Voting Stock of
the Corporation, then such Person shall be deemed to be a Prohibited
5% Owner if, following the acquisition of such additional shares, such
Existing 5% Owner is or will be the Beneficial Owner of 5% or more of
the Voting Stock of the Corporation.
No Person shall become a Prohibited 5% Owner as the result of an
acquisition of shares of Voting Stock by the Corporation which, by
reducing the number of shares of Voting Stock of the Corporation
outstanding, increases the proportionate number of shares of Voting
Stock beneficially owned by such Person to 5% or more of the shares of
Voting Stock of the Corporation then outstanding; provided, however,
-------- -------
that if a Person shall become a Beneficial Owner of 5% or
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<PAGE>
more of the Voting Stock of the Corporation then outstanding by reason
of share purchases by the Corporation and shall, after such share
purchases by the Corporation, become the Beneficial Owner of any
additional shares of Voting Stock of the Corporation, then such Person
shall be deemed to be a Prohibited 5% Owner if such Person is then the
Beneficial Owner of 5% or more of the Voting Stock then outstanding.
In the event that any Person becomes a Prohibited 5% Owner in
violation of this Article 10, such number of the shares of Voting
Stock of which such Person is the Beneficial Owner, in excess of the
number of shares of Voting Stock of which such Person might be the
Beneficial Owner without becoming a Prohibited 5% Owner, shall be
considered from and after the date such Person becomes a Prohibited 5%
Owner to be "excess shares" for purposes of this Subsection 1. Such
excess shares shall thereafter no longer (i) be entitled to vote on
any matter, (ii) be entitled to take other shareholder action, (iii)
be entitled to be counted in determining the total number of
outstanding shares for purposes of any matter involving shareholder
action, or (iv) be transferable, except with the approval of the Board
of Directors or by an independent trustee appointed by the Board of
Directors for the purpose of having such excess shares sold on the
open market or otherwise. The proceeds from the sale by the trustee
of such excess shares shall be paid (i) first, to the trustee in an
amount equal to the trustee's reasonable fees and expenses, (ii)
second, to the Beneficial Owner of such excess shares in an amount up
to such owner's federal income tax basis in such excess shares, and
(iii) third, to the Corporation as to any remaining balance.
If the Board of Directors of the Corporation determines in good
faith that a Person who would otherwise be a Prohibited 5% Owner, as
defined pursuant to the foregoing provisions, has inadvertently become
a Prohibited 5% Owner and such Person ceases to be the Beneficial
Owner and disposes of a sufficient number of shares of Voting Stock
within the time fixed by the Board of Directors incident to the
foregoing determination, so that such Person would no longer be a
Prohibited 5% Owner, pending and upon such disposition of shares of
Voting Stock, such Person shall not be deemed a Prohibited 5% Owner
for purposes of this Subsection 1 unless and until such Person shall
subsequently become a Prohibited 5% Owner.
For purposes of this Subsection 1, the term "Effective Date"
shall mean June 11, 1996, and the term "Beneficial Owner" shall have
the meaning ascribed to such term in Article 12, Subsection 3.C.
hereof. For purposes of this Article 10, the terms "Control,"
"Offer," "Person" and "Voting Stock" shall have the meanings ascribed
to such terms in Subsection 5 of this Article 10."
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<PAGE>
IN WITNESS WHEREOF, the Corporation has caused this Certificate of
Amendment of Restated Certificate of Incorporation to be signed by Gregory T.
Caswell, its President and Chief Executive Officer, and attested to by Dennis D.
Byrd, its Treasurer, on this 11th day of June, 1996.
FIRST COASTAL CORPORATION
By:/s/ Gregory T. Caswell
-------------------------------------
Gregory T. Caswell
President and Chief Executive Officer
ATTEST:
By:/s/ Dennis D. Byrd
------------------
Dennis D. Byrd
Treasurer
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<PAGE>
CERTIFICATE OF DESIGNATION, PREFERENCES AND
RIGHTS OF
SERIES A JUNIOR PARTICIPATING PREFERRED STOCK
of
FIRST COASTAL CORPORATION
Pursuant to Section 151 of the General Corporation Law
of the State of Delaware
I, Gregory T. Caswell, President and Chief Executive Officer, of First
Coastal Corporation, a corporation organized and existing under the General
Corporation Law of the State of Delaware, in accordance with the provisions of
Section 103 thereof, DO HEREBY CERTIFY:
That pursuant to the authority conferred upon the Board of Directors
by the Restated Certificate of Incorporation, as amended, of the said
Corporation, the said Board of Directors on February 25, 1998 adopted the
following resolution creating a series of 200,000 shares of Preferred Stock
designated as Series A Junior Participating Preferred Stock:
RESOLVED, that pursuant to the authority granted to and vested in the
Board of Directors of this Corporation (the "Board") in accordance with the
provisions of its Restated Certificate of Incorporation, as amended, a series of
Preferred Stock of the Corporation be and it hereby is created, and that the
designation and amount thereof and the voting rights or powers, preferences and
relative, participating, optional and other special rights of the shares of such
series, and the qualifications, limitations or restrictions thereof are as
follows:
Section 1. Designation and Amount. The shares of such series, par
----------------------
value $1.00 per share, shall be designated as "Series A Junior Participating
Preferred Stock" and the number of shares constituting such series shall be
200,000. Such number of shares may be increased or decreased by resolution of
the Board of Directors; provided, that no decrease shall reduce the number of
shares of Series A Junior Participating Preferred Stock to a number less than
the number of shares then outstanding plus the number of shares reserved for
issuance upon the exercise of outstanding options, rights or warrants or upon
the conversion of any outstanding securities issued by the Corporation
convertible into Series A Junior Participating Preferred Stock.
<PAGE>
Section 2. Dividends and Distributions.
---------------------------
(A) Subject to the prior and superior rights of the holders of any
shares of any series of Preferred Stock ranking prior and superior to the shares
of Series A Junior Participating Preferred Stock with respect to dividends, the
holders of shares of Series A Junior Participating Preferred Stock shall be
entitled to receive, when, as and if declared by the Board of Directors out of
funds legally available for the purpose, quarterly dividends payable in cash on
the 15th day of April, July, October and January, in each year (each such date
being referred to herein as a "Quarterly Dividend Payment Date"), commencing on
the first Quarterly Dividend Payment Date after first issuance of a share or
fraction of a share of Series A Junior Participating Preferred Stock, in an
amount per share (rounded to the nearest cent) equal to the greater of (a) $.10
or (b) subject to the provision for adjustment hereinafter set forth, 10 times
the aggregate per share amount of all cash dividends, and 10 times the aggregate
per share amount (payable in kind) of all non-cash dividends or other
distributions, other than a dividend payable in shares of common stock, par
value $1.00 per share, of the Corporation (the "Common Stock"), or a subdivision
of the outstanding shares of Common Stock (by reclassification or otherwise),
declared on the Common Stock, since the immediately preceding Quarterly Dividend
Payment Date, or, with respect to the first Quarterly Dividend Payment Date,
since the first issuance of any share or fraction of a share of Series A Junior
Participating Preferred Stock. In the event the Corporation shall at any time
after February 25, 1998 (the "Rights Declaration Date") (i) declare or pay any
dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the
outstanding Common Stock, or (iii) combine the outstanding Common Stock into a
smaller number of shares, then in each such case the amount to which holders of
shares of Series A Junior Participating Preferred Stock were entitled
immediately prior to such event under clause (b) of the preceding sentence shall
be adjusted by multiplying such amount by a fraction, the numerator of which is
the number of shares of Common Stock outstanding immediately after such event
and the denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
(B) The Corporation shall declare a dividend or distribution on the
Series A Junior Participating Preferred Stock as provided in paragraph (A) above
immediately after it declares a dividend or distribution on the Common Stock
(other than a dividend payable in shares of Common Stock); provided that, in the
event no dividend or distribution shall have been declared on the Common Stock
during the period between any Quarterly Dividend Payment Date and the next
subsequent Quarterly Dividend Payment Date, a dividend of $.10 per share on the
Series A Junior Participating Preferred Stock shall nevertheless be payable on
such subsequent Quarterly Dividend Payment Date.
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<PAGE>
(C) Dividends shall begin to accrue and be cumulative on outstanding
shares of Series A Junior Participating Preferred Stock from the Quarterly
Dividend Payment Date next preceding the date of issue of such shares of Series
A Junior Participating Preferred Stock, unless the date of issue of such shares
is prior to the record date set for the first Quarterly Dividend Payment Date,
in which case dividends on such shares shall begin to accrue from the date of
issue of such shares, or unless the date of issue is a Quarterly Dividend
Payment Date or is a date after the record date for the determination of holders
of shares of Series A Junior Participating Preferred Stock entitled to receive a
quarterly dividend and before such Quarterly Dividend Payment Date, in either of
which event such dividends shall begin to accrue and be cumulative from such
Quarterly Dividend Payment Date. Accrued but unpaid dividends shall not bear
interest. Dividends paid on the shares of Series A Junior Participating
Preferred Stock in an amount less than the total amount of such dividends at the
time accrued and payable on such shares shall be allocated pro rata on a share-
by-share basis among all such shares at the time outstanding. The Board of
Directors may fix a record date for the determination of holders of shares of
Series A Junior Participating Preferred Stock entitled to receive payment of a
dividend or distribution declared thereon, which record date shall be no more
than 50 days prior to the date fixed for the payment thereof.
Section 3. Voting Rights. The holders of shares of Series A Junior
-------------
Participating Preferred Stock shall have the following voting rights:
(A) Subject to the provision for adjustment hereinafter set forth,
each share of Series A Junior Participating Preferred Stock shall entitle the
holder thereof to one vote on all matters submitted to a vote of the
stockholders of the Corporation. In the event the Corporation shall at any time
after the Rights Declaration Date (i) declare any dividend on Common Stock
payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock,
or (iii) combine the outstanding Common Stock into a smaller number of shares,
then in each such case the number of votes per share to which holders of shares
of Series A Junior Participating Preferred Stock were entitled immediately prior
to such event shall be adjusted by multiplying such number by a fraction the
numerator of which is the number of shares of Common Stock outstanding
immediately after such event and the denominator of which is the number of
shares of Common Stock that were outstanding immediately prior to such event;
provided that in no event shall each share of Series A Junior Participating
Preferred Stock entitle the holder thereof to more than one vote on all matters
submitted to a vote of the stockholders of the Corporation.
(B) Except as otherwise provided by law, the holders of shares of
Series A Junior Participating Preferred Stock and the holders of shares of
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<PAGE>
Common Stock shall vote together as one class on all matters submitted to a vote
of stockholders of the Corporation.
(C) Except as set forth herein, holders of Series A Junior
Participating Preferred Stock shall have no special voting rights and their
consent shall not be required (except to the extent they are entitled to vote
with holders of Common Stock as set forth herein) for taking any corporate
action.
Section 4. Certain Restrictions.
--------------------
(A) Whenever dividends or distributions payable on the Series A Junior
Participating Preferred Stock as provided in Section 2 are not paid, thereafter
and until such dividends and distributions, whether or not declared, on shares
of Series A Junior Participating Preferred Stock outstanding shall have been
paid in full, the Corporation shall not:
(i) declare or pay dividends on, or make any other distributions on,
or redeem or purchase or otherwise acquire for consideration any shares of stock
ranking junior (either as to dividends or upon liquidation, dissolution or
winding up) to the Series A Junior Participating Preferred Stock; or
(ii) declare or pay dividends on, or make any other distributions on,
any shares of stock ranking on a parity (either as to dividends or upon
liquidation, dissolution or winding up) with the Series A Junior Participating
Preferred Stock, except dividends paid ratably on the Series A Junior
Participating Preferred Stock and all such parity stock on which dividends are
payable in proportion to the total amounts to which the holders of all such
shares are then entitled; or
(iii) redeem or purchase or otherwise acquire for consideration
shares of any stock ranking on a parity (either as to dividends or upon
liquidation, dissolution or winding up) with the Series A Junior Participating
Preferred Stock, provided that the Corporation may at any time redeem, purchase
or otherwise acquire shares of any such parity stock in exchange for shares of
any stock of the Corporation ranking junior (either as to dividends or upon
dissolution, liquidation or winding up) to the Series A Junior Participating
Preferred Stock; or
(iv) redeem or purchase or otherwise acquire for consideration any
shares of Series A Junior Participating Preferred Stock, or any shares of stock
ranking on a parity with the Series A Junior Participating Preferred Stock,
except in accordance with a purchase offer made in writing or by publication (as
determined by the Board of Directors) to all holders of such shares upon such
terms as the Board of Directors, after consideration of the
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<PAGE>
respective annual dividend rates and other relative rights and preferences of
the respective series and classes, shall determine in good faith will result in
fair and equitable treatment among the respective series or classes.
(B) The Corporation shall not permit any subsidiary of the Corporation
to purchase or otherwise acquire for consideration any shares of stock of the
Corporation unless the Corporation could, under paragraph (A) of this Section 4,
purchase or otherwise acquire such shares at such time and in such manner.
Section 5. Reacquired Shares. Any shares of Series A Junior
-----------------
Participating Preferred Stock purchased or otherwise acquired by the Corporation
in any manner whatsoever shall be retired and canceled promptly after the
acquisition thereof. All such shares shall upon their cancellation become
authorized but unissued shares of Preferred Stock and may be reissued as part of
a new series of Preferred Stock to be created by resolution or resolutions of
the Board of Directors, subject to the conditions and restrictions on issuance
set forth herein.
Section 6. Liquidation, Dissolution or Winding Up.
--------------------------------------
(A) Upon any liquidation (voluntary or otherwise), dissolution or
winding up of the Corporation, no distribution shall be made to the holders of
shares of stock ranking junior (either as to dividends or upon liquidation,
dissolution or winding up) to the Series A Junior Participating Preferred Stock
unless, prior thereto, the holders of shares of Series A Junior Participating
Preferred Stock shall have received $500.00 per share, plus any unpaid dividends
and distributions payable thereon, whether or not declared, to the date of such
payment (the "Series A Liquidation Preference"). Following the payment of the
full amount of the Series A Liquidation Preference, no additional distributions
shall be made to the holders of Series A Junior Participating Preferred Stock
unless, prior thereto, the holders of shares of Common Stock shall have received
an amount per share (the "Common Adjustment") equal to the quotient obtained by
dividing (i) the Series A Liquidation Preference by (ii) 10 (as appropriately
adjusted as set forth in subparagraph (C) below to reflect such events as stock
splits, stock dividends and recapitalizations with respect to the Common Stock)
(such number in clause (ii) immediately above being referred to as the
"Adjustment Number"). Following the payment of the full amount of the Series A
Liquidation Preference and the Common Adjustment in respect of all outstanding
shares of Series A Junior Participating Preferred Stock and Common Stock,
respectively, holders of Series A Junior Participating Preferred Stock and
holders of shares of Common Stock shall receive their ratable and proportionate
share of the remaining assets to be distributed in the ratio of the Adjustment
Number to one
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<PAGE>
(1) with respect to such Preferred Stock and Common Stock, on a
per share basis, respectively.
(B) In the event, however, that there are not sufficient assets
available to permit payment in full of the Series A Liquidation Preference and
the liquidation preferences of all other series of preferred stock, if any,
which rank on a parity with the Series A Junior Participating Preferred Stock,
then such remaining assets shall be distributed ratably to the holders of such
parity shares in proportion to their respective liquidation preferences. In the
event, however, that there are sufficient assets available to permit payment in
full of the Common Adjustment, then such remaining assets shall be distributed
ratably to the holders of Common Stock.
(C) In the event the Corporation shall at any time after the Rights
Declaration Date (i) declare any dividend on Common Stock payable in shares of
Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the
outstanding Common Stock into a smaller number of shares, then in each such case
the Adjustment Number in effect immediately prior to such event shall be
adjusted by multiplying such Adjustment Number by a fraction the numerator of
which is the number of shares of Common Stock outstanding immediately after such
event and the denominator of which is the number of shares of Common Stock that
were outstanding immediately prior to such event.
Section 7. Consolidation, Merger, etc. In case the Corporation shall
---------------------------
enter into any consolidation, merger, combination or other transaction in which
the shares of Common Stock are exchanged for or changed into other stock or
securities, cash and/or any other property, then in any such case the shares of
Series A Junior Participating Preferred Stock shall at the same time be
similarly exchanged or changed in an amount per share (subject to the provision
for adjustment hereinafter set forth) equal to 10 times the aggregate amount of
stock, securities, cash and/or any other property (payable in kind), as the case
may be, into which or for which each share of Common Stock is changed or
exchanged. In the event the Corporation shall at any time after the Rights
Declaration Date (i) declare any dividend on Common Stock payable in shares of
Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the
outstanding Common Stock into a smaller number of shares, then in each such case
the amount set forth in the preceding sentence with respect to the exchange or
change of shares of Series A Junior Participating Preferred Stock shall be
adjusted by multiplying such amount by a fraction the numerator of which is the
number of shares of Common Stock outstanding immediately after such event and
the denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
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<PAGE>
Section 8. Redemption. The outstanding shares of Series A Junior
----------
Participating Preferred Stock may be redeemed as a whole, but not in part, at
any time, or from time to time, at the option of the Board, at a cash price per
share equal to 105 percent of (i) the product of the Adjustment Number times the
Average Market Value (as such term is hereinafter defined) of the Common Stock,
plus (ii) all dividends which on the redemption date are payable on the shares
to be redeemed and have not been paid or declared, and a sum sufficient for the
payment thereof set apart, without interest. The "Average Market Value" is the
average of the closing sale prices of the Common Stock during the 30 day period
immediately preceding the date before the redemption date on the Composite Tape
for New York Stock Exchange Listed Stocks, or, if such stock is not quoted on
the Composite Tape, on the New York Stock Exchange, or, if such stock is not
listed on such Exchange, on the principal United States securities exchange
registered under the Securities Exchange Act of 1934, as amended, on which such
stock is listed, or, if such stock is not listed on any such exchange, the
average of the closing sale prices with respect to a share of Common Stock
during such 30 day period, as quoted on the National Association of Securities
Dealers, Inc. Automated Quotations System or any system then in use, or if no
such quotations are available, the fair market value of the Common Stock as
determined by the Board in good faith.
Section 9. Ranking. Notwithstanding anything contained herein to the
-------
contrary, the Series A Junior Participating Preferred Stock shall rank junior to
all other series of the Corporation's Preferred Stock as to voting rights, the
payment of dividends and the distribution of assets in liquidation, unless the
terms of any such series shall provide otherwise.
Section 10. Amendment. The Restated Certificate of Incorporation, as
---------
amended, of the Corporation shall not be further amended in any manner which
would materially alter or change the powers, preferences or special rights of
the Series A Junior Participating Preferred Stock so as to affect them adversely
without the affirmative vote of the holders of at least a majority of the
outstanding shares of Series A Junior Participating Preferred Stock, voting
separately as a class.
Section 11. Fractional Shares. Series A Junior Participating
-----------------
Preferred Stock may be issued in fractions of a share which shall entitle the
holders, in proportion to such holders fractional shares, to exercise voting
rights, receive dividends, participate in distributions and to have the benefit
of all other rights of holders of Series A Junior Participating Preferred Stock.
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<PAGE>
IN WITNESS WHEREOF, I have executed and subscribed this Certificate
and do affirm the foregoing as true under the penalties of perjury this 25th day
of February, 1998.
FIRST COASTAL CORPORATION
By:/s/ Gregory T. Caswell
----------------------
Gregory T.Caswell
President and Chief Executive
Officer
Attest:
By:/s/ Dennis D. Byrd
--------------------
Dennis D. Byrd
Treasurer
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<PAGE>
EXHIBIT 3.1(ii)
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
<PAGE>
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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<PAGE>
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
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<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 eight. 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 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
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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
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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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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
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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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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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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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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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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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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.
Section 1 of ARTICLE III was amended on January 28, 1998.
-14-
<PAGE>
EXHIBIT 13
FIRST COASTAL CORPORATION
1997
ANNUAL
REPORT
INCLUDING ITS SUBSIDIARY
COASTAL BANK
<PAGE>
<TABLE>
- ------------------------------------------------------
<S> <C>
Letter to Stockholders 1
Selected Consolidated Financial Data 4
Management's Discussion and Analysis of
Financial Condition and Results of Operations 6
Market for Registrant's Common Equity
and Related Stockholder Matters 29
Report of Independent Accountants 30
Consolidated Financial Statements 31
Notes to Consolidated Financial Statements 35
Corporate and Stockholder Information 56
- ------------------------------------------------------
</TABLE>
<PAGE>
PRESIDENT'S LETTER
[PHOTO]
TO OUR STOCKHOLDERS:
ACCOMPLISHMENTS IN 1997...
We are pleased to report that 1997 was a year of significant accomplishment for
First Coastal Corporation ("First Coastal" or the "Company"). In particular,
progress was made in the areas of improved core earnings, asset quality and
positioning the Company for profitable growth.
Net income equaled $1.3 million, or $.91 per share fully diluted. Pre-tax
earnings, adjusted for loan and security gains, the 1996 recapitalization
expenses and the 1996 sale of the Kezar Falls branch, were $286,000 higher in
1997 than 1996.
As a result of a significant increase in loan originations, total loans
outstanding increased $5.6 million (or 5.9%). This was the first increase in
loan outstandings since the late 1980's. The bulk of the increase in loan
balances was distributed between commercial and industrial loans ($2.1 million)
and residential mortgage loans ($2.3 million). We are particularly pleased with
the progress we are making with regard to increasing commercial loan volume. We
have developed a strong commercial banking team and believe there is significant
potential for growth in this area.
Asset quality exhibited significant further improvement in 1997. The level of
nonperforming assets declined 69% during the year, from $2.6 million to $0.8
million. We have come a long way since July 31, 1992, when nonperforming assets
peaked at $29.2 million. There was also further significant improvement in the
area of potential problem loans which declined 39.3%, from $6.1 million to $3.7
million. For the first time since First Coastal commenced its long climb from
its distressed financial position of the early 1990's, asset quality is no
longer a pressing issue.
For the third year in a row the Company experienced no provision expense and for
the second year in a row loan charge-offs were almost exactly offset by loan
loss recoveries. As a result, despite a three year absence of provision
expense, for three years the allowance for loan losses has remained essentially
unchanged, at $2.7 million (2.6% of total loans at December 31, 1997). While
this is a positive development, and management believes that the level of the
allowance is adequate at the present time, loan loss recoveries of the amounts
experienced in recent years are unlikely to continue and the need for provision
expense, enhanced by expected loan growth or the possibility of a weaker future
economy or real estate market, will at some point necessitate the return of
provision expense.
1
<PAGE>
In February 1998, First Coastal's Board of Directors adopted a Stockholders
Rights Plan to assist the Board in protecting the rights and investment of First
Coastal stockholders. The plan is designed to protect the rights of all
stockholders against potential acquirors who may seek to take advantage of First
Coastal and its stockholders through coercive or unfair tactics aimed at gaining
control of First Coastal without paying all shareholders a full and fair price.
1998 AND BEYOND...
Perhaps the most significant accomplishment of 1997 was the development of a
long term strategic plan. This was a lengthy, comprehensive process through
which management explored a number of alternatives for positioning Coastal Bank
as a growing, increasingly profitable provider of financial services within its
chosen markets. The strategic plan has resulted in the identification of an
overall strategic focus and supporting initiatives we feel have great potential.
The essence of this plan can be summarized as follows:
COASTAL BUSINESS BANK - The Bank's market area, in particular the Greater
Portland market, is dominated by three large banks. Businesses seeking
personal, customer focused relationships with smaller banking companies have
limited alternatives, far fewer than years past. As a result of our strengths in
this area, in particular our strong team of commercial lending and deposit
professionals, we believe we can compete successfully against these banks and
others, providing customers with a responsive, local choice for commercial
banking services. Unlike many sectors of the retail financial services industry
which have become more commodity-like and transaction oriented, successful
commercial banking continues to remain heavily reliant upon customer service and
the development and maintenance of reliable business relationships. We have
committed ourselves to becoming the bank of choice for certain business customer
segments in our market. Coastal Business Bank is a division of Coastal Bank,
though not a separate legal entity. The name Coastal Business Bank is symbolic
of Coastal Bank's strong emphasis on commercial banking, and will be utilized in
conjunction with commercial banking marketing materials such as the downtown
branch signage, business cards and letterhead utilized by Coastal's commercial
banking professionals.
DOWNTOWN PORTLAND OFFICE - In support of our Coastal Business Bank initiative,
in late March we opened a new branch in downtown Portland, at 120 Exchange
Street. Though officially a full-service branch, the primary focus of this
office is the attraction of new commercial banking customers. Centrally located
to the downtown shopping, legal and financial services district, this facility
is staffed with experienced commercial lenders and deposit services
professionals, and provides drive-thru, night deposit and ATM services. With
large banks holding a substantial portion of Greater Portland area deposits, and
the elimination through merger of one of two other Portland-based community bank
alternatives, we feel the branch will be well received and provide a critical
launch point for the Coastal Business Bank initiative.
ENHANCED COMMERCIAL DEPOSIT PRODUCTS - In part to support the Coastal Business
Bank commercial banking strategic thrust, but more importantly to take advantage
of a market opportunity to increase the Bank's core commercial deposit levels,
growth of commercial deposit balances will be a significant focus of the Company
beginning in the second quarter of 1998. We have redesigned and enhanced the
Bank's commercial checking and cash management products to better suit the needs
of business customers. We feel these products offer customers certain
advantages with regard to pricing and ease of use, and believe they will be well
received by the business community. During the second quarter we plan to
initiate a significant marketing effort with regard to these products,
particularly in the Greater Portland market.
COASTAL BUSINESS PC - Again in support of the business banking strategic
initiative, early in the second quarter, 1998 we will be launching our new PC
banking product. Designed for businesses, this state-of-the-art system utilizes
web browser technology, as opposed to proprietary software requiring individual
PC software installations, and provides access either through direct phone line
connections or via the Internet. The software utilized is an Edify product, the
same company chosen by Chase Manhattan for their planned PC banking product. We
believe business customers will find Coastal Business PC easy to use and that
this delivery system represents an efficient and effective means for business
customers to do a significant portion of their banking. The ability to enable
customers to transfer funds between their Coastal accounts and
2
<PAGE>
those held at other banks will allow business customers to bank with Coastal
that previously found this impractical due to our lack of a comprehensive branch
system. Perhaps most importantly, Coastal Business PC will be supported through
superior, local service, taking advantage of Coastal's local technological and
deposit operations expertise.
ENHANCEMENT OF EXISTING BRANCH AND RETAIL CUSTOMER BASE - While the High
Performance Checking program generated a large number of new retail checking
account customers, it did not generate the growth in retail deposits that was
anticipated. We have identified two new initiatives we believe can produce
retail deposit growth and expand overall retail deposit and loan relationships.
In late March, 1998 we launched High Rise Savings, a high interest, tiered
statement savings product. We believe this product will bring new customers to
the bank, broaden existing banking relationships, help retain existing customers
and generate cost-effective growth in core deposit levels. In addition, in 1997
the Bank purchased Harland Max-Sell software which provides the Bank with the
ability to target market its existing customers, by mail or by phone, utilizing
demographic data, likely lifestyle profiles and the extent of their existing
Coastal relationship. We have plans to utilize this capability to expand and
deepen the banking relationships we have with our existing and newly acquired
customers.
IN CLOSING...
While the economic outlook for the Bank's market area remains good, the current
economic recovery has been ongoing for some time and we are mindful that
conditions could worsen. Also, over the past year we have seen a marked
increase in competition among financial institutions in our market, particularly
for loan volume. These competitive pressures could have the effect of lower
margins or lower loan volume for the Bank than is currently anticipated. There
is some anecdotal evidence that, as a result of intense competition, banks are
feeling pressured to reduce margins. Regardless of competitive pressures, First
Coastal will continue to focus upon maintaining sound asset quality standards.
Though competition for loans could result in less loan volume than is currently
contemplated, we feel the various business development initiatives underway will
allow us to develop increased levels of loan volume at satisfactory margins,
without sacrificing credit quality.
We have many reasons to be excited about our prospects for the future. We
believe that the strategic direction identified and strategic initiatives
underway provide us with exceptional opportunities for long term, profitable
growth, as well as the opportunity to emerge as a well known, relevant provider
of banking services in our market. This is particularly true with regard to
commercial banking services. Though the costs connected with these initiatives
could have a dampening effect in 1998, we do not expect the implementation costs
associated with these initiatives to have a significant adverse impact on
earnings.
In many ways 1998 promises to be the most exciting year in memory. We have an
exceptional team of banking professionals that are hard at work implementing an
exciting and promising business plan. We believe we will continue to make
worthwhile the exceptional support we have received from our stockholders, our
employees, our customers and the Board of Directors.
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, 1997.
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------
(dollars in thousands, except share and per share data) 1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Interest income $ 11,894 $ 11,331 $ 11,707 $ 11,780 $ 12,748
Interest expense /(1)/ 5,876 5,653 5,850 5,726 7,254
---------- -------- -------- -------- --------
Net interest income 6,018 5,678 5,857 6,054 5,494
Provision for loan losses - - (425) 107 (30)
---------- -------- -------- -------- --------
Net interest income
after provision for loan losses 6,018 5,678 6,282 5,947 5,524
Investment securities/loan gains 370 45 13 30 705
Noninterest income /(2)/ 620 945 559 399 717
Operating expenses /(3)/ 5,067 5,142 5,194 6,278 6,158
Income tax expense (benefit) /(4)/ 679 (4,859) - - (4)
---------- -------- -------- -------- --------
Income before minority
interest and extraordinary item 1,262 6,385 1,660 98 792
Minority interest in net income - - - - 44
---------- -------- -------- -------- --------
Income before Extraordinary Item 1,262 6,385 1,660 98 748
Extraordinary Item -
Charge to earnings as a result of the
settlement of the cross guaranty claim /(5)/ - - - 9,000 -
---------- -------- -------- -------- --------
Net income (loss) $ 1,262 $ 6,385 $ 1,660 $ (8,902) $ 748
========== ======== ======== ======== ========
EARNINGS PER SHARE BEFORE EXTRAORDINARY ITEM:
Basic earnings per share data:
Weighted average shares outstanding 1,358,730 933,578 600,361 600,361 600,361
Net income $ .93 $ 6.84 $ 2.77 $ .16 $ 1.25
Diluted earnings per share data:
Weighted average shares outstanding 1,391,272 940,480 600,361 600,361 600,361
Net income $ .91 $ 6.79 $ 2.77 $ .16 $ 1.25
EARNINGS PER SHARE AFTER EXTRAORDINARY ITEM:
Basic earnings per share data:
Weighted average shares outstanding 1,358,730 933,578 600,361 600,361 600,361
Net income (loss) $ .93 $ 6.84 $ 2.77 $ (14.83) $ 1.25
Diluted earnings per share data:
Weighted average shares outstanding 1,391,272 940,480 600,361 600,361 600,361
Net income (loss) $ .91 $ 6.79 $ 2.77 $ (14.83) $ 1.25
</TABLE>
There were no cash dividends declared during the year ended December 31, 1993
through the year ended December 31, 1997.
/(1)/ The 1997, 1996 and 1995 interest expense includes $477,000, $525,000 and
$419,000, respectively, in interest expense associated with the notes
payable, representing interest due on (i) the promissory note in the
principal amount of $9.0 million issued to the FDIC in connection with the
1995 settlement of the FDIC's cross guaranty claim against its subsidiary
Coastal Bank, and paid in full on July 24, 1996, and (ii) the promissory
notes in the aggregate principal amount of $4.0 million issued to a group
of four Maine savings banks in connection with the recapitalization of the
Company in July 1996.
/(2)/ In 1996, Coastal Bank sold its branch in Kezar Falls, Maine 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 Coastal
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 results reflect a $9.0 million extraordinary charge to earnings
as a result of the issuance by the Company of the promissory note in the
principal amount of $9.0 million in settlement of the FDIC's cross
guaranty claim against Coastal Bank.
4
<PAGE>
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------
(dollars in thousands) 1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets $146,400 $147,734 $145,453 $154,212 $170,819
Investment securities 22,887 26,692 19,712 16,746 1,036
Assets held for sale 3,565 1,490 281 185 3,421
Loans, net of fees 104,165 98,515 100,528 109,625 123,468
Allowance for loan losses 2,665 2,666 2,659 4,042 3,642
Nonperforming assets 818 2,623 7,517 9,006 11,627
Deposits /(1)/ 114,991 115,085 125,665 130,037 140,587
Borrowings 13,294 15,000 6,000 12,612 18,108
Notes payable /(2)/ 3,000 4,000 9,000 9,000 -
Stockholders' equity 14,808 13,388 3,997 2,014 9,878
FINANCIAL RATIOS:
Net interest rate spread 3.98% 4.12% 4.13% 3.79% 3.26%
Net interest rate margin 4.32 4.28 4.19 3.97 3.31
Return on average assets before
extraordinary item .84 4.57 1.14 .06 .41
Return on average assets .84 4.57 1.14 (5.48) .41
Return on average equity before
extraordinary item 8.72 102.60 58.20 .92 7.63
Return on average equity 8.72 102.60 58.20 (83.78) 7.63
Equity to assets 10.11 9.06 2.75 1.31 5.78
Dividend payout ratio -- -- -- -- --
Tier 1 leverage capital 7.71 6.62 2.74 1.41 5.63
Total risk-based capital 13.29 11.54 5.54 3.46 9.69
</TABLE>
/(1)/ The sale of the Bank's Kezar Falls, Maine branch in April 1996 included
deposits totaling $9.9 million.
/(2)/ Notes payable consists of the FDIC Note and the Savings Bank Notes.
The 1996 financial results reflect the completion of the Company's
recapitalization plan, whereby the Company repaid in full its obligation to the
FDIC in the amount of $9.7 million ($9.0 million principal amount plus accrued
interest) arising from the 1995 settlement of the FDIC's cross guaranty claim
against its subsidiary, Coastal Bank (the "Bank"). The recapitalization plan
included (i) the sale of 750,000 shares of the Company's common stock at $5.00
per share, (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. For further information, see Note B to the Company's
Consolidated Financial Statements.
5
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
BUSINESS
First Coastal Corporation (the "Company"), a Delaware corporation, is a bank
holding company whose sole operating subsidiary is Coastal Bank (the "Bank"), a
Maine chartered 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 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.
The Bank conducts its business from eight 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.
This Annual Report, including statements made in this Management's Discussion
and Analysis of Financial Condition and Results of Operations, may include
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Any statements with regard to the Company's
expectations as to its financial results and other aspects of its business, as
well as general economic conditions, may constitute forward-looking statements.
Although the Company makes such statements based on assumptions which it
believes to be reasonable, there can be no assurance that actual results will
not differ materially from the Company's expectations. Accordingly, the Company
hereby identifies the following important factors, among others, which could
cause results to differ from any results which might be projected, forecasted or
estimated based on such forward-looking statements: (i) general economic and
competitive conditions in the markets in which the Company operates, and the
risks inherent in its operations, (ii) the Company's ability to continue to
control its provision for loan losses, noninterest expense, increase earning
assets and noninterest income, and maintain its margin, and (iii) the level of
demand for new and existing products. Should one or more of these risks or
uncertainties materialize, or should underlying assumptions prove incorrect,
actual results may vary materially from those described in the forward-looking
statements. The Company does not intend to update forward-looking statements.
SIGNIFICANT EVENTS
SATISFACTION OF THE CROSS GUARANTY SETTLEMENT OBLIGATION TO FDIC;
RECAPITALIZATION AND ISSUANCE OF COMMON STOCK
On July 24, 1996, the Company completed its recapitalization plan, whereby the
Company repaid in full its promissory note obligation (the "FDIC Note") to the
FDIC in the amount of $9.7 million ($9.0 million loan principal plus accrued
interest) incurred as a result of the January 1995 settlement of the cross
guaranty claim against the Bank. The cross guaranty claim was the result of the
September 1991 failure of Suffield Bank. The funds utilized to repay the FDIC
Note came from (i) the sale of 750,000 shares of the Company's common stock by
means of a registered public offering; (ii) the borrowing of $4.0 million from a
group of four Maine savings banks (the "Savings Banks") pursuant to which the
Company issued promissory notes in the aggregate principal amount of $4.0
million (the "Savings Bank Notes") which mature on December 31, 2001, secured by
the pledge by the Company of 100% of the outstanding common stock of the Bank.
6
<PAGE>
RESULTS OF OPERATIONS
COMPARISON OF YEAR ENDED DECEMBER 31, 1997 TO YEAR ENDED DECEMBER 31, 1996
OVERVIEW
The Company reported net income of $1.3 million (basic earnings per share of
$.93) for the year ended December 31, 1997, compared to net income of $6.4
million (basic earnings per share of $6.84) for the year ended December 31,
1996. The results for 1997 include securities and loan sales gains of $370,000
as compared to $45,000 for 1996. Income tax expense for the year ended December
31, 1997 equaled $679,000 versus an income tax benefit of $4,859,000 for the
year ended December 31, 1996. Additionally, the earnings for 1996 included a
$366,000 gain in the second quarter as a result of the sale of the Bank's branch
in Kezar Falls, Maine and $170,000 in expenses related to the Company's July
1996 recapitalization. The Company incurred no provision for loan losses
expense for the years ended December 31, 1997 and 1996.
NET INTEREST INCOME
Net interest income equaled $6.0 million and $5.7 million for the years ended
December 31, 1997 and 1996, respectively. Changes in net interest income 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>
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,
---------------------------------------------------------------------------------------------
1997 1996 1995
------------------------------ ---------------------------- ---------------------------
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)/ $103,678 $ 9,651 9.31% $ 98,223 $ 9,226 9.39% $106,114 $ 9,662 9.11%
Investments
Available for sale /(3)/ 19,305 1,256 6.51 13,350 834 6.25 9,782 606 6.20
Held to maturity 7,774 512 6.58 11,470 759 6.62 7,917 494 6.24
Interest earning deposits 8,550 475 5.56 9,559 512 5.36 15,889 945 5.95
-------- ------- -------- ------- -------- -------
Total interest earning assets 139,307 11,894 8.54 132,602 11,331 8.55 139,702 11,707 8.38
Noninterest earning assets 10,799 7,077 6,444
-------- -------- --------
Total assets $150,106 $139,679 $146,146
======== ======== ========
LIABILITIES:
Savings and checking $ 53,028 1,391 2.62% $ 53,430 1,396 2.61% $ 60,159 1,644 2.73%
Other time deposits 56,801 3,068 5.40 60,428 3,328 5.51 61,344 3,333 5.43
FHLB advances 15,497 940 6.07 7,226 404 5.59 7,253 454 6.26
Notes payable /(4)/ 3,641 477 13.09 6,757 525 7.77 9,000 419 4.66
-------- ------- -------- ------- -------- -------
Total interest bearing
liabilities 128,967 5,876 4.56 127,841 5,653 4.42 137,756 5,850 4.25
Noninterest bearing deposits 6,483 5,323 4,973
Noninterest bearing liabilities 189 292 565
Stockholders' equity 14,467 6,223 2,852
-------- ------- --------
Total liabilities and
stockholders' equity $150,106 $139,679 $146,146
======== ======== ========
Net interest income $ 6,018 $ 5,678 $ 5,857
======= ======= =======
Net interest rate spread /(5)/ 3.98% 4.12% 4.13%
Net interest margin /(6)/ 4.32% 4.28% 4.19%
</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 $195,000, $152,000
and $95,000 for the years ended December 31, 1997, 1996 and 1995,
respectively.
/(3)/ Yields on available for sale securities are calculated based on historical
cost.
/(4)/ Notes payable consists of the FDIC Note and 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.
8
<PAGE>
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).
<TABLE>
<CAPTION>
Year Ended December 31, 1997 Year Ended December 31, 1996
Compared to Compared to
Year Ended December 31, 1996 Year Ended December 31, 1995
----------------------------------- ----------------------------------------
Increase (Decrease) Increase (Decrease)
Due to Due to
------------------------ -----------------------
(in thousands) Rate Volume Total Rate Volume Total
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Loans/(1)/ $ (87) $ 512 $ 425 $283 $(719) $(436)
Investments available for
sale 50 372 422 7 221 228
Investments held to maturity (2) (245) (247) 43 222 265
Interest earning deposits 17 (54) (37) (57) (376) (433)
----- ----- ----- ---- ----- -----
Total interest income (22) 585 563 276 (652) (376)
----- ----- ----- ---- ----- -----
Interest expense:
Savings and checking 7 (11) (4) (64) (184) (248)
Other time deposits (61) (200) (261) 45 (50) (5)
FHLB advances 74 462 536 (48) (2) (50)
Notes payable 194 (242) (48) 210 (104) 106
----- ----- ----- ---- ----- -----
Total interest expense 214 9 223 143 (340) (197)
----- ----- ----- ---- ----- -----
Net change in net interest
income before provision for loan
losses $(236) $ 576 $ 340 $133 $(312) $(179)
===== ===== ===== ==== ===== =====
</TABLE>
/(1)/ For purposes of these computations, loans held for sale and nonaccrual
loans are included in loans.
9
<PAGE>
Overall, net interest income increased by $340,000 for the year ended December
31, 1997 compared to the year ended December 31, 1996. This increase is
primarily attributable to an increase in the level of loan outstandings in 1997
as compared to 1996. The Company's net interest rate spread for December 31,
1997 decreased to 3.98% as compared to 4.12% for the year ended December 31,
1996. The net interest margin increased from 4.28% at December 31, 1996 to
4.32% at December 31, 1997. The decrease in the net interest rate spread is
primarily the result of an increase in the Company's cost of funds, from 4.42%
in 1996 to 4.56% in 1997, with this increase primarily attributable to increased
borrowing from the Federal Home Loan Bank ("FHLB") of Boston and the higher rate
of interest associated with the Savings Bank Notes.
Interest income for the year ended December 31, 1997 increased $563,000 as
compared to the year ended December 31, 1996. The increase is primarily
attributable to an increase in the level of loan outstandings in 1997 compared
to 1996, partially offset by a decrease in the yield on loans from 9.39% at
December 31, 1996 to 9.31% at December 31, 1997. As competitive pressures
continue, the rates the Bank is able to charge 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, 1997 increased $223,000 as
compared to the year ended December 31, 1996. The increase is primarily
attributable to an increase of $536,000 in FHLB borrowing expense as a result of
$9.0 million in advances taken in November of 1996. This increase was offset in
part by a decline in deposit expense of $265,000, primarily the result of a
decrease in both the balances outstanding and rates paid for 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 years ended December 31, 1997 and
1996. The absence of a provision for loan losses in 1997 and 1996 is primarily
attributable to the decline in nonperforming loans and potential problem loans
and management's review of the portfolio and its determination of the adequacy
of the allowance for loan losses (the "Allowance") at December 31, 1997.
Despite the absence of provision expense, the level of the Allowance remained
essentially unchanged as charged-off loans of $339,000 and $289,000 for the
years ended December 31, 1997 and 1996, respectively, were offset by recoveries
totaling $338,000 and $296,000, for the same respective periods.
NONINTEREST INCOME
Noninterest income remained relatively unchanged, at $990,000 for the years
ended December 31, 1997 and 1996. Other income for 1996 includes a $366,000
gain on the sale of the Bank's branch in Kezar Falls, Maine, while in 1997
noninterest income includes a $325,000 increase in gains on securities and loan
sales as compared to 1996. In addition, deposit fee income increased $104,000
from 1996 to 1997, primarily attributable to the Bank's new deposit program
which was implemented in April 1996. (The Bank terminated the deposit program
as of December 31, 1997 and is currently in the process of developing a new
relationship deposit program focused on building a higher level of accounts per
individual. As a result, it is undetermined if the increase in deposit fee
income experienced in 1997 will continue into 1998.) The increase in deposit
fee income was partially offset by reduced fee income on loans serviced for
others totaling $51,000 resulting from a reduction in the amount of off balance
sheet loans serviced for others. This reduction in loans serviced for others is
primarily attributable to the sale of $7.9 million of Maine State Housing
Authority loans in the second quarter of 1997.
10
<PAGE>
OPERATING EXPENSES
Operating expenses decreased $75,000, or 1.5%, for the year ended December 31,
1997 as compared to the year ended December 31, 1996, as described in more
detail below:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------
(in thousands) 1997 1996
- -----------------------------------------------------------------------
<S> <C> <C>
Salaries and benefits $2,367 $2,142
Occupancy 446 428
Net cost of operations of real estate owned 67 81
Data processing 239 421
Equipment 374 295
FDIC insurance 15 37
Insurance - general 141 180
Office/postage 296 315
Legal 65 182
Advertising 255 291
Other expenses 802 770
------ ------
Total Operating Expenses $5,067 $5,142
====== ======
</TABLE>
Overall, total operating expense declined by $75,000 for the year ended December
31, 1997 as compared to the year ended December 31, 1996. However, management
anticipates an increase in operating expense for 1998, primarily as a result of
the opening of the Bank's Portland branch and the introduction of its new PC
business banking product (planned for early in the second quarter 1998), with
the additional annual expense associated with these initiatives anticipated to
equal $150,000 and $65,000, respectively. The variance in operating expenses
for the year ended December 31, 1997 as compared to the year ended December 31,
1996 are attributable to several factors. The increase in salaries and benefits
expense during 1997 was primarily due to changes in staffing levels, annual
salary increases and an increase in pension expense of $75,000 resulting from
the implementation of the Bank's 401(k) plan in August 1997 and costs incurred
in connection with the termination of the Bank's defined benefit plan. 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. However, equipment expense increased in 1997 as a result of additional
depreciation expense incurred as a result of the purchase of approximately
$500,000 of hardware and software for the new in-house system in June of 1996.
Legal costs were lower in 1997 as compared to 1996, with 1996 legal expense
higher primarily due to the 1996 recapitalization.
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 fourth quarter reduction in the amount
of the valuation allowance previously established against the Company's deferred
tax asset (established utilizing an effective tax rate of 34%). In addition,
the Company received $48,000 in interest applicable to a 1992 carryback tax
refund. For the year ended December 31, 1997, the Company incurred income tax
expense of $679,000 and subsequently reduced its deferred tax asset by the same
amount.
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
11
<PAGE>
financial reporting purposes, and the estimated benefit from future income taxes
the Company will not have to pay as a result of the net operating loss
carryforwards. Prior to the fourth quarter of 1996, 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, in accordance with Financial
Accounting Standards Board ("FASB") Statement of Financial Accounting Standard
("SFAS") No. 109, the valuation allowance against the deferred tax asset was
reduced by $4,811,000 in the fourth quarter of 1996.
In order to help maintain the benefit of the deferred tax asset, the Company
amended its Restated Certificate of Incorporation in June 1996 to provide that
absent approval by the Company's Board of Directors 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 provision 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, 1996 TO YEAR ENDED DECEMBER 31, 1995
OVERVIEW
The Company reported net income of $6.4 million for the year ended December 31,
1996, compared to net income of $1.7 million 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 branch in Kezar
Falls, Maine. For 1996, the Company incurred no provision for loan losses
expense as compared to a negative provision for loan losses 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.
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
12
<PAGE>
compared to 1995, 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 April 1, 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 charge 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, Maine
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.
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, 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 as compared
to 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.
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 $366,000 net gain on the sale of the
Bank's Kezar Falls, Maine 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.
13
<PAGE>
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
- --------------------------------------------------------------------------------------
<S> <C> <C>
Salaries and benefits $2,142 $2,092
Occupancy 428 440
Net cost of operations of real estate owned 81 56
Data processing 421 530
Equipment 295 340
FDIC insurance 37 190
Insurance - general 180 168
Office/postage 315 273
Legal 182 282
Advertising 291 112
Other expenses 770 711
------ ------
Total Operating Expenses $5,142 $5,194
====== ======
</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, Maine
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. 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 introduced in April 1996.
INCOME TAX EXPENSE (BENEFIT)
The Company recognized an income tax benefit of $4,859,000 in 1996. 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 (established utilizing 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 is principally the result of the Company's accumulation
of net operating loss carry forwards. This amount represents the estimated
amount of future deductions for tax reporting purposes previously expensed for
financial reporting purposes, and the estimated benefit from future income taxes
the Company will not have to pay as a result of the net operating loss
carryforwards. Prior to the fourth quarter of 1996, 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, in accordance with SFAS No.
109, the valuation allowance against the deferred tax asset was reduced by
$4,811,000 in the fourth quarter of 1996.
14
<PAGE>
In order to help maintain the benefit of the deferred tax asset, the Company
amended its Restated Certificate of Incorporation in June 1996 to provide that
absent approval by the Company's Board of Directors 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 provision expires June 11,
1999. For additional information relating to income taxes, refer to Note M to
the Company's Consolidated Financial Statements.
FINANCIAL CONDITION
Set forth below is a discussion of the material changes in the financial
condition of the Company.
GENERAL
At December 31, 1997, the Company's total assets equaled $146.4 million, as
compared to $147.7 million at December 31, 1996. The decline in total assets is
primarily attributable to a decrease in cash and securities, with these funds
being utilized to fund loan growth, pay off maturing FHLB borrowings and a $1
million unscheduled principal payment on the Savings Bank Notes, resulting in a
net decline in total assets of $1.3 million.
INVESTMENT SECURITIES
The Company's investment portfolio is comprised primarily of U.S. government and
agency obligations, as well as some equity securities. Total investment
securities at December 31, 1997 were $22.9 million compared to $26.7 million at
December 31, 1996. This decrease is attributable to sales of available for sale
U.S. treasury securities of $8.9 million; sales of mutual funds of $1.0 million;
sales of available for sale mortgage backed securities of $3.9 million; $1.6
million in prepayments and amortization on mortgage backed securities;
maturities of U.S. treasury securities totaling $1.0 million; and $3.0 million
of U.S. government agency callable notes which were called in 1997; and
partially offset by the purchase of $5.2 million in U.S. government obligations
and $10.5 million in mortgage backed 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.
15
<PAGE>
The following table sets forth the carrying amounts and maturities of investment
securities and weighted average rates at December 31, 1997, 1996 and 1995.
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996 December 31, 1995
----------------- ----------------- -----------------
Carrying Carrying Carrying
(dollars in thousands) Amount Yield Amount Yield Amount Yield
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Available for sale (at market)/ (1)/:
U.S. government obligations
maturing in 1-5 years - - $ 4,948 5.9% $ 5,014 5.6%
Mortgage backed securities
maturing in over 10 years $15,798 6.9% 10,848 7.1 787 7.5
Equity (mutual fund) - - 995 6.0 2,000 6.2
Other equity 89 19.1 99 - 125 -
------- ------- -------
$15,887 7.0% $16,890 6.6% $ 7,926 5.9%
======= ======= =======
Held to maturity (at cost):
U.S. government obligations
maturing in one year or less $ 200 4.94% - - $ 993 6.5%
U.S. government agency
callable notes maturing after
1-5 years (final maturity) 4,000 6.4 $ 7,000 6.4% 8,991 6.6
5-10 years (final maturity) 2,800 6.9 2,802 6.9 1,802 7.3
------- ------- -------
6,800 6.6 9,802 6.6 10,793 6.7
------- ------- -------
$ 7,000 6.5% $ 9,802 6.6% $11,786 6.7%
======= ======= =======
</TABLE>
/(1)/ Yields on available for sale securities are calculated based on
historical cost.
LOANS HELD FOR SALE
Loans held for sale at December 31, 1997 equaled $3,565,000 as compared to
$1,490,000 at December 31, 1996, an increase of $2,075,000. This increase was
primarily due to an increase in the volume of residential mortgage loans being
originated for sale in the secondary market in 1997 as compared to 1996. At
December 31, 1997, the Bank had binding commitments for the sale of mortgage
loans held for sale totaling $2.0 million.
16
<PAGE>
LOANS
Loans increased $5.8 million (or 5.8%), from $98.5 million at December 31, 1996
to $104.3 million at December 31, 1997. The increase was primarily attributable
to an increase of $3.5 million in residential and construction lending and $2.1
million in commercial and industrial lending.
The following table sets forth the composition of the Company's loan portfolio
at the dates indicated:
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------
(in thousands) 1997 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Real estate mortgage loans:
Residential $ 33,251 $30,981 $ 30,966 $ 33,158 $ 39,771
Commercial 48,705 48,456 50,797 57,997 61,953
Real estate construction loans 1,955 769 - - 429
Commercial and industrial loans 5,166 3,059 2,524 2,510 3,013
Consumer and other loans 15,227 15,281 16,263 15,991 18,305
-------- ------- -------- -------- --------
Total loans $104,304 $98,546 $100,550 $109,656 $123,471
======== ======= ======== ======== ========
Ratios of loans to:
Deposits 91% 86% 80% 84% 88%
Assets 71% 67% 69% 71% 72%
</TABLE>
The Bank's loan growth during the period from 1993 to 1996 was 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 a Memorandum of Understanding among the FDIC, the Maine Bureau of
Banking and the Bank, which was subsequently terminated as of 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 completion of 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 initially began expanding its residential and consumer lending
capabilities during late 1995. In addition, the combination of continued
improvement in overall asset quality and the completion of the
17
<PAGE>
Company's recapitalization plan have been beneficial to the Bank's loan
origination activities. The completion of the recapitalization also 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 commercial
and industrial loans, commercial mortgage loans and residential mortgage loans.
With the opening of the new Portland business office and the introduction of
comprehensive commercial cash management products, including PC banking for
businesses (all planned for late in the first quarter, early second quarter
1998), the Company is undertaking to position itself for commercial loan and
deposit growth, with a particular focus on the Greater Portland market.
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. 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 Bank's
prior origination strategy which relied heavily upon commission based mortgage
originations. While the Bank intends to continue its focus on growth in
residential lending in 1998, 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) 1997 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Originations/(1)/ :
Residential real estate $18,216 $15,581 $4,168
Consumer 3,001 4,249 2,388
------- ------- ------
Total $21,217 $19,830 $6,556
======= ======= ======
</TABLE>
/(1)/ Includes refinancing of existing portfolio and off balance sheet serviced
loans.
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 management policy),
generate 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, 1997, the Bank was servicing $42.9 million of loans which were owned by
others, as compared to $50.5 million at December 31, 1996. The decrease of $7.6
million is mainly attributable to the sale of $7.9 million of Maine State
Housing Authority loans in the second quarter of 1997. Servicing fee income
related to these loans is reported as other
18
<PAGE>
income in the consolidated statements of operations, and for the three years
ended December 31, 1997, 1996 and 1995, was $75,000, $126,000 and $179,000,
respectively.
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, 1997, 1996 and 1995. The
percentages represent the percent of loans in each category to total loans.
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------------
1997 1996 1995
---------------------- ------------------- ------------------
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 $ 157 31.9% $ 61 31.4% $ 82 30.8%
Commercial 1,303 46.7 1,811 49.2 2,216 50.5
Real estate construction loans 12 1.9 7 .8 -- --
Commercial and industrial loans 67 4.9 40 3.1 13 2.5
Consumer and other loans 174 14.6 151 15.5 120 16.2
Unallocated 952 -- 596 -- 228 --
------ ------ ------- ------ ------- ------
Total $2,665 100.0% $ 2,666 100.0% $ 2,659 100.0%
====== ====== ======= ====== ======= ======
Allowance as a percentage of loans 2.56% 2.71% 2.65%
Allowance as a percentage of
nonperforming loans 353.92% 124.29% 47.96%
Allowance as a percentage of
nonperforming loans
(excluding restructured loans) 546.11% 124.29% 125.60%
</TABLE>
The balance of the Allowance has remained relatively unchanged at December 31,
1997, 1996 and 1995.
19
<PAGE>
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) 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at beginning
of period $2,666 $2,659 $ 4,042 $3,642 $ 4,280
Charge-offs:
Real estate mortgage loans (298) (93) (1,113) (178) (1,197)
Real estate construction loans - - -- -- (28)
Commercial and industrial loans - - ( 142) -- ( 55)
Consumer and other loans (41) ( 196) ( 78) ( 112) ( 89)
------ ------ ------- ------ -------
Total charge-offs (339) ( 289) (1,333) ( 290) (1,369)
Recoveries:
Real estate mortgage loans 304 163 172 127 179
Commercial and industrial loans 3 55 170 410 543
Consumer and other loans 31 78 33 46 39
------ ------ ------- ------ -------
Total recoveries 338 296 375 583 761
------ ------ ------- ------ -------
Net (charge-offs) recoveries (1) 7 ( 958) 293 ( 608)
Provision for loan losses - - ( 425) 107 ( 30)
------ ------ ------- ------ -------
Balance at end of period $2,665 $2,666 $ 2,659 $4,042 $ 3,642
====== ====== ======= ====== =======
Net charge-offs as a percentage
of average loans .00% (.01)% .91% (.25)% .46%
</TABLE>
Provision for loan losses has been nominal the past five years as compared to
prior years. Four of the five 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 improvement in the overall credit quality of these loans or loan payoffs,
and (iii) significant loan loss recoveries.
Management believes that in accordance with the Bank's Allowance for Loan Loss
Policy, the Allowance is adequate at December 31, 1997. 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, growth in the size or changes in the
mix or concentration risk of the loan portfolio, 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.
20
<PAGE>
IMPAIRED LOANS
Information with respect to the carrying amount of impaired loans is set forth
below:
<TABLE>
<CAPTION>
December 31,
------------------------------------
1997 1996
---------------- ------------------
Allowance Allowance
for Loan for Loan
(in thousands) Amount Loss Amount Loss
- -------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Real estate mortgage loans:
Residential $ 114 - - -
Commercial 566 $72 $3,485 $615
Real estate construction loans - - - -
Commercial and industrial loans - - - -
Consumer and other loans 37 19 - -
----- --- ------ ---------
Total $ 717 $91 $3,485 $615
===== === ====== =========
</TABLE>
NONPERFORMING ASSETS
Information with respect to nonperforming assets is set forth below:
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------
(in thousands) 1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nonaccrual loans $ 387 $1,944 $1,948 $4,340 $ 1,220
Accruing loans past due
90 days or more 101 201 169 258 249
Restructured loans 265 - 3,427 1,483 4,212
Real estate owned and repossessions 65 478 1,973 2,222 5,299
Financed real estate owned - - - - 450
In-substance repossessions n/a n/a n/a 703 197
----- ------ ------ ------ -------
$ 818 $2,623 $7,517 $9,006 $11,627
===== ====== ====== ====== =======
</TABLE>
21
<PAGE>
Nonperforming loans (consisting of nonaccrual loans, accruing loans past due 90
days or more and restructured loans) are comprised of the following:
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------
(in thousands) 1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Real estate mortgage loans:
Residential $ 114 - $ 386 $ 115 $ 126
Commercial 501 $1,944 5,007 5,667 5,420
Real estate construction loans - - - - -
Commercial and industrial loans - - - 156 12
Consumer and other loans 138 201 151 143 123
----- ------ ------ ------ ------
Total loans $ 753 $2,145 $5,544 $6,081 $5,681
===== ====== ====== ====== ======
</TABLE>
The following table sets forth certain information regarding nonperforming
commercial loans (dollars in thousands):
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996 December 31, 1995
------------------------ ---------------------- -----------------------
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 3 $107 4 $ 211 2 $ 128
5 or more family residential 1 129 4 869 5 977
Non-residential real estate 1 265 3 864 6 3,902
Commercial and industrial - - - - - -
- ---- -- ------ -- ------
5 $501 11 $1,944 13 $5,007
= ==== == ====== == ======
</TABLE>
The level of nonperforming assets declined 68.8%, from $2.6 million at December
31, 1996 to $818,000 at December 31, 1997. This decline was primarily
attributable to a decline in nonaccrual loans of $1.6 million, including the pay
off of one nonaccrual loan equaling $1.2 million in the fourth quarter of 1997.
While the downward trend in nonperforming assets that has developed since 1993
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 real estate owned ("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. Although the southern Maine real estate market has improved from
the depressed conditions of the early 1990's, a portion of the Company's loan
portfolio remains particularly susceptible to changes in market conditions in
southern Maine. The collateral coverage for these loans, should they become
nonperforming, may not be adequate to protect the Bank from potential losses.
Deterioration in the local economy or real estate market, 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.
22
<PAGE>
POTENTIAL PROBLEM LOANS
Although the real estate market and the economy in the Bank's primary market,
southern Maine, has improved 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 loans,
accruing loans past due 90 days or more or as a troubled debt restructurings),
are largely collateralized by income-producing properties. In many cases,
borrowers on these loans have historically experienced inadequate rental
revenues, high vacancy levels and cash flow problems.
At December 31, 1997, the Bank had identified approximately $3.7 million of
currently performing but potential problem loans. Such loans represented 2.5%
of total assets, ranging in size from $11,000 to $1,792,000. This compares to
$6.1 million of potential problem loans at December 31, 1996, a 40.3% decrease.
The following table sets forth certain information regarding potential problem
loans at December 31, 1997:
<TABLE>
<CAPTION>
Number of Balance
Type of Security Property Outstanding Loans (in thousands)
- ------------------------------------------------------------------------------
<S> <C> <C>
Apartments 4 $2,216
Industrial 1 1,289
Single family 3 134
Other 1 27
- ------
9 $3,666
= ======
</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 or
potential problem loans could result in the need for increased provision for
loan losses. As of December 31, 1997, 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, 1997, REO totaled $65,000, consisting of a
single parcel of land. This represents a $413,000 decline as compared to the
December 31, 1996 level of $478,000.
23
<PAGE>
LIQUIDITY
BANK
Deposits totaled $115.0 million at December 31, 1997, essentially unchanged from
the level of $115.1 million at December 31, 1996.
At December 31, 1997 and 1996, unfunded loan commitments equaled $14.2 million
and $11.2 million, respectively. Loan commitments include unfunded portions of
real estate, construction and other loans and unused lines of credit, including
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 $7.1 million at December 31, 1997,
representing 50.6% of total home equity loan commitments. Home equity
outstanding balances totaled $6.9 million at December 31, 1997, representing
49.4% 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 principal amount of $3.0 million, the Company's expenses consist primarily
of 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 September 25, 1997, March 26, 1997, July 24, 1996, May 3, 1996 and November
13, 1995, the Bank paid the Company cash dividends of $1.0 million, $500,000,
$3.2 million, $200,000 and $200,000, respectively.
24
<PAGE>
CAPITAL
BANK
The table below sets forth the regulatory capital requirements and capital
ratios for the Bank at December 31, 1997 and 1996:
<TABLE>
<CAPTION>
(dollars in thousands) 1997 1996
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Tier 1 capital (Leverage) to total assets /(1)/ratio
- -------------------------------------------------------
Qualifying capital $ 13,877 $ 12,738
Actual % 9.63% 9.28%
Minimum requirement for capital adequacy % 4.00% 4.00%
Average assets for fourth quarter $144,138 $137,317
Tier 1 capital to risk-weighted assets
- --------------------------------------
Qualifying capital $ 13,877 $ 12,738
Actual % 15.03% 14.31%
Minimum requirement for capital adequacy % 4.00% 4.00%
Total capital to risk-weighted assets
(Tier 1 and Tier 2)
- -------------------------------------
Qualifying capital $ 15,050 $ 13,888
Actual % 16.30% 15.60%
Minimum requirement for capital adequacy % 8.00% 8.00%
Risk-weighted assets $ 92,335 $ 89,026
</TABLE>
/(1)/ Calculated on an average quarterly basis.
See Notes B and I to the Company's Consolidated Financial Statements for certain
capital restrictions.
25
<PAGE>
COMPANY
The table below sets forth the regulatory capital requirements and capital
ratios for the Company at December 31, 1997 and 1996:
<TABLE>
<CAPTION>
(dollars in thousands) 1997 1996
- ----------------------------------------------------------------------------------
<S> <C> <C>
Tier 1 capital (Leverage) to total assets /(1)/ratio
- ----------------------------------------------------
Qualifying capital $ 11,106 $ 9,104
Actual % 7.71% 6.62%
Minimum requirement for capital adequacy % 4.00-5.00% 4.00-5.00%
Average assets for fourth quarter $ 144,004 $ 137,488
Tier 1 capital to risk-weighted assets
- --------------------------------------
Qualifying capital $ 11,106 $ 9,104
Actual % 12.02% 10.21%
Minimum requirement for capital adequacy % 4.00% 4.00%
Total capital to risk-weighted assets
(Tier 1 and Tier 2)
- --------------------------------------
Qualifying capital $ 12,279 $ 10,291
Actual % 13.29% 11.54%
Minimum requirement for capital adequacy % 8.00% 8.00%
Risk-weighted assets $ 92,378 $ 89,162
</TABLE>
/(1)/ Calculated on an average quarterly basis.
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.
ASSET LIABILITY MANAGEMENT AND MARKET RISK
The Company's actions with regard to interest rate risk, market 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 market loan rates are substantially higher than rates on existing loans
and, conversely, decrease when rates on existing loans are substantially higher
than current market 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.
26
<PAGE>
Net interest income sensitivity to movements in interest rates is measured
through the use of various models. One method used to measure the interest rate
risk exposure of the Company's balance sheet is the interest rate sensitivity
"gap," which is the difference between rate sensitive assets and rate sensitive
liabilities repricing or maturing within specific time periods. A gap is
considered positive when the amount of interest rate sensitive assets exceeds
the amount of interest rate sensitive liabilities, and is considered negative
when the amount of interest rate sensitive liabilities exceeds the amount of
interest rate sensitive assets. However, this method does not take into
consideration management's ability to exert some control over the ability to
change certain interest rates on deposits.
The following table shows the estimated maturity/repricing structure of the
interest sensitive assets and interest sensitive liabilities of the Company at
December 31, 1997.
<TABLE>
<CAPTION>
Maturing/Repricing
-----------------------------------------------------------------------------------------
After Three After One After Three
Months Year but Years but After
Within but within within within Five Non-Rate
(dollars in thousands) Three Months One Year Three Years Five Years Years Sensitive Total
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
INTEREST-SENSITIVE ASSETS
Interest earning deposits $ 3,939 - - - - - $ 3,939
Securities:
Available for sale/(1)/ 2 - - - $15,796 $ 1,404 17,202
Held to maturity 200 - $ 4,000 - 2,800 - 7,000
Mortgage loans held for sale 3,565 - - - - - 3,565
Loans/(2)/ 10,376 $52,983 9,183 $ 10,707 20,668 (2,417) 101,500
Other assets - - - - - 13,194 13,194
-------- ------- ------- -------- ------- --------- --------
TOTAL INTEREST-SENSITIVE ASSETS $ 18,082 $52,983 $13,183 $ 10,707 $39,264 $ 12,181 $146,400
======== ======= ======= ======== ======= ========= ========
INTEREST-SENSITIVE LIABILITIES
Savings and money market accounts $ 7,898 - - - - $ 31,450 $ 39,348
Certificate of deposit accounts 15,453 $24,257 $13,530 $ 2,362 $ 208 - 55,810
Other deposits - - - - - 19,833 19,833
FHLB advances 4,000 - 1,000 8,294 - - 13,294
Other borrowings - - - 3,000 - - 3,000
Other liabilities - - - - - 307 307
Equity - - - - - 14,808 14,808
-------- ------- ------- -------- ------- --------- --------
TOTAL INTEREST-SENSITIVE LIABILITIES $ 27,351 $24,257 $14,530 $ 13,656 $ 208 $ 66,398 $146,400
======== ======= ======= ======== ======= ========= ========
Periodic repricing difference
(Periodic gap) ($9,269) $28,726 ($ 1,347) ($ 2,949) $39,056 ($54,217)
Cumulative repricing difference
(Cumulative gap) ($9,269) $19,457 $18,110 $ 15,161 $54,217
Cumulative gap to total assets (6.33%) 13.29% 12.37% 10.36% 37.03%
</TABLE>
/(1)/ FHLB stock is classified as available for sale and included in the non-
rate sensitive column.
/(2)/ The allowance for loan losses, deferred origination fees and nonaccrual
loans are included in the non-rate sensitive column.
27
<PAGE>
The degree to which various categories of assets and liabilities are rate
sensitive with regard to changes in interest rates are debatable, making any
assumptions in this regard subjective and therefore imprecise. Therefore, the
proforma interest rate sensitivity of the Company's assets and liabilities could
vary substantially from that shown if different assumptions are utilized for
analytical purposes. For example, if all savings and money market accounts were
assumed to reprice in one year or less, the Company's one-year cumulative gap to
total assets would be a negative 8.19% as compared to a positive 13.29% at
December 31, 1997.
Another model used is the 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
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, 1997,
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 management's 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. For further information, see Note A
to the Company's Consolidated Financial Statements.
Regardless of the methodologies utilized to attempt to predict the impact that
changes in interest rates could have on the behavior of the Bank's assets and
liabilities, and ultimately earnings, there is no way of estimating this with
any degree of certainty. As discussed above the assumptions utilized are very
subjective and economic conditions and market forces, such as competition and
market product offerings are in constant state of change.
IMPACT OF INFLATION AND CHANGING PRICES
The Company's financial statements have been prepared in terms of historical
dollars, without considering changes in the relative purchasing power of money
over time due to inflation. Unlike most industrial companies, virtually all of
the assets and liabilities of a financial institution are monetary in nature.
As a result, interest rates have a more significant impact on a financial
institution's performance than the effect of general levels of inflation.
Interest rates do not necessarily move in the same direction or in the same
magnitude as the prices of goods and services.
Inflation can directly affect the value of loan collateral, in particular real
estate. Sharp decreases in real estate prices, as discussed previously, have in
the past resulted in significant loan losses and losses on real estate acquired.
Inflation, or disinflation, could significantly affect the Company's earnings in
future periods.
YEAR 2000 ISSUE
The Company is aware of potential problems that may be experienced with
computerized and other electronic systems at the turn of the millennium. These
problems exist because many systems rely on two digit fields instead of four
digit fields to store the year of date sensitive information. The result will be
that some systems will interpret the 00 in its year field to mean 1900 instead
of 2000. This problem will not only affect software programs but hardware as
well, and could result in a system failure or miscalculations causing
disruptions of operations including, among other things, a temporary inability
to process transactions or engage in similar normal business activities.
In response, the Company has formed a Year 2000 Action Committee which is
comprised of various members of the Bank's senior and middle management. The
Bank has implemented a detailed process for ensuring the Bank's systems are Year
2000 compliant, which includes systems assessment, systems renovation, systems
testing and systems implementation phases. The Committee has already completed
the awareness and
28
<PAGE>
assessment phases, which includes assessing computer software, hardware, third
party vendors and other electronic devices for compliance with the year 2000.
Since a majority of the Bank's processing systems are provided by third party
vendors, management is working to receive on-going assurance that these systems
will be Year 2000 compliant. Though the Company is diligently working to ensure
that there is no disruption in its operations due to Year 2000 systems problems,
and believes it will be successful in this regard, there can be no guarantee
that all of the systems critical to the operational performance of the Bank will
be Year 2000 compliant and fully functional at the turn of the millennium.
Though management is working diligently to protect the Company against such an
occurrence, it is possible that a vendor upon whom the Bank is reliant could,
despite possible assurances to the contrary, ultimately fail to provide Year
2000 compliant services to the Company, or said services could prove
incompatible with the Company's systems. A significant systems failure could
have a material adverse impact on the financial condition of the Company.
Management does not expect the costs associated with the year 2000 issues to
have a material effect on the Company's financial statements.
MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
As of December 31, 1997, the Company had approximately 1,523 holders of record
and 1,359,194 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, 1996 and
ending July 24, 1996, the high and low closing bid prices for the Company's
common stock on the OTC Bulletin Board as reported by Nasdaq Trading and Market
Services, and (ii) for the period beginning July 25, 1996 and ending December
31, 1997, 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.
<TABLE>
<CAPTION>
High Low
------- ------
<S> <C> <C>
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
1997
First Quarter $10.125 $ 7.25
Second Quarter 10.00 8.875
Third Quarter 13.188 9.25
Fourth Quarter 15.75 12.50
</TABLE>
No dividends were declared by the Company during the years 1992 through 1997.
Excluding the cash obtained as a result of the July 24,1996 recapitalization,
which included $3.1 million raised through a registered public offering and $4.0
million borrowed from four Maine 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.
29
<PAGE>
FINANCIAL STATEMENTS.
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors and Stockholders
First Coastal Corporation:
We have audited the accompanying consolidated balance sheets of First Coastal
Corporation (the "Company") and subsidiary as of December 31, 1997 and 1996, and
the related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1997. 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, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997 in conformity with generally
accepted accounting principles.
Coopers & Lybrand L.L.P.
Portland, Maine
February 20, 1998
30
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
First Coastal Corporation and Subsidiary
December 31,
--------------------
(in thousands, except share and per share amounts) 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Noninterest earning deposits and cash - Note C $ 3,615 $ 2,898
Interest earning deposits 3,939 8,555
-------- --------
Cash and Cash Equivalents 7,554 11,453
Investment securities - Note D:
Available for sale (at market value) 15,887 16,890
Held to maturity (at cost) (fair value of $6,973 and $9,710 at
December 31, 1997 and 1996, respectively) 7,000 9,802
-------- --------
22,887 26,692
Federal Home Loan Bank stock-at cost 1,315 1,315
Loans held for sale (at market value) - Note A 3,565 1,490
Loans - Note E 104,304 98,546
Less: Deferred loan fees, net (139) (31)
Allowance for loan losses - Note F (2,665) (2,666)
-------- --------
101,500 95,849
Premises and equipment - Note G 3,554 3,428
Accrued income receivable 970 1,079
Real estate owned and repossessions 65 478
Deferred tax asset - Note M 4,095 4,811
Other assets 895 1,139
-------- --------
TOTAL ASSETS $146,400 $147,734
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits - Note H $114,991 $115,085
Advances from Federal Home Loan Bank - Note I 13,294 15,000
Savings Bank Notes - Note I 3,000 4,000
Accrued expenses and other liabilities 307 261
-------- --------
TOTAL LIABILITIES 131,592 134,346
Commitment and Contigencies - Note N
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 1997 and 1996 -
1,359,194 and 1,357,861 shares, respectively 1,359 1,358
Paid-in capital 31,746 31,740
Retained earnings (deficit) (18,369) (19,631)
Unrealized gain (loss) on available for sale securities 72 (79)
-------- --------
TOTAL STOCKHOLDERS' EQUITY 14,808 13,388
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $146,400 $147,734
======== ========
</TABLE>
See notes to consolidated financial statements.
31
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
First Coastal Corporation and Subsidiary
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
(in thousands, except share and per share amounts) 1997 1996 1995
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST AND DIVIDEND INCOME
Interest and fees on loans $ 9,651 $ 9,226 $ 9,662
Interest and dividends on investment securities:
Investment interest income 1,674 1,414 832
Dividends 94 179 268
Other interest income 475 512 945
---------- -------- --------
Total Interest and Dividend Income 11,894 11,331 11,707
INTEREST EXPENSE
Deposits - Note H 4,459 4,724 4,977
Borrowings:
Advances from Federal Home Loan Bank 940 404 454
Savings Bank Notes 477 190 -
FDIC Note - 335 419
---------- -------- --------
Total Interest Expense 5,876 5,653 5,850
---------- -------- --------
Net Interest Income Before Provision for Loan Losses 6,018 5,678 5,857
Provision for loan losses - Note F - - (425)
---------- -------- --------
Net Interest Income After Provision for Loan Losses 6,018 5,678 6,282
NONINTEREST INCOME
Service charges on deposit accounts 466 362 257
Other service charges and fees 76 84 78
Gain (loss) on investment securities transactions 271 38 (4)
Gain on sales of mortgage loans 99 7 17
Gain on sale of branch - 366 -
Other 78 133 224
---------- -------- --------
990 990 572
---------- -------- --------
OPERATING EXPENSES
Salaries and employee benefits - Note L 2,367 2,142 2,092
Occupancy - Note G 446 428 440
Net cost of operation of real estate owned 67 81 56
Other 2,187 2,491 2,606
---------- -------- --------
5,067 5,142 5,194
---------- -------- --------
INCOME BEFORE INCOME TAXES 1,941 1,526 1,660
Income tax expense (benefit) - Note M 679 (4,859) -
---------- -------- --------
NET INCOME $ 1,262 $ 6,385 $ 1,660
========== ======== ========
PER SHARE AMOUNTS - NOTE Q
Basic earnings per share:
Weighted average shares outstanding 1,358,730 933,578 600,361
Net Income per share $ .93 $ 6.84 $ 2.77
========== ======== ========
Diluted earnings per share:
Weighted average shares outstanding 1,391,272 940,480 600,361
Net Income per share $ .91 $ 6.79 $ 2.77
========== ======== ========
</TABLE>
See notes to consolidated financial statements
32
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
First Coastal Corporation and Subsidiary
<TABLE>
<CAPTION>
Net
Unrealized
Gain (Loss)
Retained on Available
Common Paid-In Earnings for Sale
(in thousands) Stock Capital (Deficit) Securities Total
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balances at December 31, 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
1997 net income 1,262 1,262
Increase in net unrealized gain on
available for sale securities 151 151
Exercise of common stock options 1 6 - - 7
------ ------- ------------ ---------- -------
Balances at December 31, 1997 $1,359 $31,746 $(18,369) $ 72 $14,808
====== ======= ============ ========== =======
</TABLE>
See notes to consolidated financial statements.
33
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
First Coastal Corporation and Subsidiary
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------
(in thousands) 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 1,262 $ 6,385 $ 1,660
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses - - (425)
Writedowns of REO 2 11 13
Depreciation and amortization 319 270 292
Amortization of investment security discounts 63 (27) (248)
Realized investment securities (gains) losses (271) (38) 4
Gains from assets held in trading accounts - - (33)
Realized gains on assets held for sale (99) (7) (17)
Decrease in trading account securities - - 948
Loans originated and acquired for resale (7,366) (6,147) (3,376)
Sales of loans originated and acquired for resale 5,390 4,945 3,297
Decrease (increase) in interest receivable 109 (75) (221)
Increase (decrease) in interest payable 2 (466) 392
Net change in other assets 1,371 (3,499) 1,988
Net change in other liabilities 44 (64) (150)
-------- -------- --------
Net cash provided by operating activities 826 1,288 4,124
INVESTING ACTIVITIES
Decrease in federal funds sold - 10,000 -
Maturities of securities held to maturity 3,000 7,000 8,000
Maturities of securities available for sale 1,000 4,000 -
Sales of securities available for sale 15,831 3,506 2,324
Purchases of investment securities available for sale (15,469) (16,535) (2)
Purchases of investment securities held to maturity (198) (5,003) (12,721)
Net change in loans (5,651) 2,592 7,187
Net purchases of premises and equipment (445) (625) (424)
-------- -------- --------
Net cash provided (used) by investing activities (1,932) 4,935 4,364
FINANCING ACTIVITIES
Net change in deposits (94) (10,580) (4,372)
Proceeds from borrowings 2,000 13,000 -
Payments on borrowings (4,706) (9,000) (6,612)
Proceeds from sale of common stock - 3,085 -
Proceeds from exercise of common stock options 7 - -
Finance cost associated with Savings Bank Notes - (116) -
-------- -------- --------
Net cash used by financing activities (2,793) (3,611) (10,984)
-------- -------- --------
Increase (decrease) in cash and cash equivalents (3,899) 2,612 (2,496)
Cash and cash equivalents at beginning of period 11,453 8,841 11,337
-------- -------- --------
Cash and cash equivalents (interest and noninterest bearing) at end of period $ 7,554 $ 11,453 $ 8,841
======== ======== ========
SUPPLEMENTAL DISCLOSURES OF INFORMATION
Interest paid on deposits and borrowings $ 5,874 $ 6,107 $ 5,459
Income tax refund - (48) -
NONCASH INVESTING AND FINANCING ACTIVITIES
Change in unrealized holding gains (losses) on investment securities available for sale $ 151 $ (117) $ 323
Transfer of loans to real estate owned and repossessions 21 572 952
Issuance of restricted stock - 38 -
</TABLE>
See notes to consolidated financial statements.
34
<PAGE>
Notes to Consolidated Financial Statements
First Coastal Corporation and Subsidiary
December 31, 1997
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 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 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, 1997 are
collateralized by real estate in Maine. Many of these loans were made at or
near the peak of the commercial real estate market in the late 1980's 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
primary market area) has recovered from the depressed market conditions of the
early 1990's, the ultimate collectibility of a portion of the Company's loan
portfolio remains 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 (the "Allowance") or REO
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 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 130, Reporting
Comprehensive Income. SFAS No. 130 will require that all items that are
required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. The requirements of the
pronouncement are effective for the Company's fiscal year beginning after
December 15, 1997 and are not expected to have a material effect on the
Company's financial statements.
35
<PAGE>
In June 1997, FASB issued SFAS No. 131, Financial Reporting for Segments of a
Business Enterprise. SFAS No. 131 will require that a public business
enterprise report financial and descriptive information about its reportable
operating segments. The requirements of this pronouncement are effective for
financial statements for the periods beginning after December 15, 1997. The
requirements of this pronouncement are not expected to have a material effect on
the Company's financial statements.
In February 1998, FASB issued SFAS No. 132, Employers' Disclosures about
Pensions and Other Postretirement Benefits. SFAS No. 132 will revise employers'
disclosures about pension and other postretirement benefit plans. The
requirements of this pronouncement are effective for financial statements for
the periods beginning after December 15, 1997. The Company has not yet
determined the impact of this pronouncement on its financial statements.
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.
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 follows SFAS No. 114, Accounting by Creditors for Impairment of a
Loan. Under this standard, a loan is considered impaired, based on current
information and events, if it is probable that the
36
<PAGE>
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.
Troubled debt restructurings 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.
Effective January 1, 1996, the Company adopted SFAS No. 122, Accounting for
Mortgage Servicing Rights, which eliminated the distinction between the
purchased and originated mortgage servicing rights and established the use of a
valuation allowance to recognize any impairment in the fair value of mortgage
servicing rights. SFAS No. 122 did not have any effect on the Company's
financial statements or results of operations.
Effective January 1, 1997, the Company adopted SFAS 125, Accounting for
Transfers of Financial Assets and Liabilities. Under the financial-components
approach of SFAS 125, after a transfer of financial assets, an entity recognizes
all financial and servicing assets it controls and liabilities it has incurred
and derecognizes all financial and servicing assets it no longer controls and
liabilities that have been extinguished. If a transfer does not meet the
criteria for a sale, the transfer is accounted for as a secured borrowing with a
pledge of collateral. The adoption of SFAS 125 did not have a material impact
on the Company's financial statements.
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, financial
condition of its borrowers, 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.
Effective December 31, 1996 management concluded that the completion of the July
1996 recapitalization, the payoff of the $9.0 million promissory note to the
FDIC,
37
<PAGE>
incurred as a result of the January 1995 settlement of the cross guaranty claim,
and the improved financial condition of the Company 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. Accordingly, for financial purposes
for the year ended December 31, 1997, income tax expense was incurred.
RISKS AND UNCERTAINTIES
In the normal course of its business, the Company encounters two significant
types of risk: economic and regulatory. There are three main components of
economic risk: interest rate risk, credit risk and market risk. The Company is
subject to interest rate risk to the degree that its interest-bearing
liabilities mature or reprice at different speeds, or on a different basis, than
its interest-earning assets. Credit risk is the risk of default on the
Company's loan portfolio that results from borrowers inability or unwillingness
to make contractually required payments. Market risk results from changes in
the value of assets and liabilities which may impact, favorably or unfavorably,
the realizability of those assets and liabilities held by the Company.
The Company is subject to the regulations of various government agencies. These
regulations can and do change significantly from period to period. The Company
also undergoes periodic examinations by the regulatory agencies, which may
subject it to further changes with respect to asset valuations, amounts of
required loss allowances and operating restrictions resulting from the
regulators' judgments based on information available to them at the time of
their examination. For further information, see Note B.
COMPUTATION OF EARNINGS PER SHARE
In February 1997, FASB issued SFAS No. 128, Earnings Per Share. SFAS 128
provides reporting standards for basic and diluted earnings per share and is
effective for financial statement periods ending after December 15, 1997. Basic
earnings per share is computed by dividing income available to common
stockholders by the weighted-average number of common shares outstanding for the
period, which during 1997, 1996 and 1995 were 1,358,730, 933,578 and 600,361,
respectively. Diluted earnings per share reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of common
stock that then shared in the earnings of the entity. The diluted weighted
average number of common shares outstanding for 1997, 1996 and 1995 were
1,391,272, 940,480 and 600,361, respectively. All prior period earnings per
share data has been restated to conform to the provisions of this statement.
RETIREMENT BENEFITS
The Board of Directors of the Bank terminated the Bank's defined benefit plan
and implemented a 401(k) defined contribution plan during 1997. The defined
benefit plan was frozen effective July 31, 1997 and terminated effective
September 30, 1997. The termination of the defined benefit plan is not expected
to have a material effect on the Company's financial statements. Effective
August 1, 1997, the Bank began to incur pension expense in the form of matching
401(k) contributions.
NOTE B. REGULATORY MATTERS
SATISFACTION OF CROSS GUARANTY SETTLEMENT OBLIGATION TO FDIC; RECAPITALIZATION
AND ISSUANCE OF COMMON STOCK
On July 24, 1996, the Company completed its recapitalization plan, whereby the
Company repaid in full its promissory note obligation (the "FDIC Note") to the
FDIC incurred as a result of the settlement of the cross guaranty claim against
the Bank. The cross guaranty claim was the result of the September 1991 failure
of Suffield Bank. The funds utilized to repay the FDIC Note came 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") pursuant to which the Company issued
promissory notes in the aggregate
38
<PAGE>
principal amount of $4.0 million (the "Savings Bank Notes") which mature on
December 31, 2001, secured by the pledge by the Company of 100% of the
outstanding common stock of the Bank.
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
Bank's 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, 1997, the Bank meets all capital adequacy requirements
to which it is subject.
As of September, 1997, the most recent notification from the FDIC categorized
the Bank as well capitalized under the regulatory framework for prompt
corrective action. There are no conditions or events since that notification
that management believes has changed the Bank's category.
The tables below set forth the actual capital ratios and minimum regulatory
requirements for capital adequacy and under prompt corrective action for the
Bank at December 31, 1997 and 1996:
<TABLE>
<CAPTION>
Minimum
Requirement to be
Minimum well capitalized
Requirement for under Prompt
1997 Actual Capital Adequacy Corrective Action
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Tier 1 capital (Leverage) to total assets /(1)/ ratio 9.63% 4.00% 5.00%
Tier 1 capital to risk-weighted assets 15.03 4.00 6.00
Total capital to risk-weighted assets
(Tier 1 and Tier 2) 16.30 8.00 10.00
/(1)/ Calculated on an average quarterly basis
<CAPTION>
Minimum
Requirement to be
Minimum well capitalized
Requirement for under Prompt
1996 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
/(1)/ Calculated on an average quarterly basis
</TABLE>
For further information, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Capital -- Bank."
39
<PAGE>
NOTE C. NONINTEREST EARNING DEPOSITS AND CASH
Noninterest bearing deposits and cash balances at December 31, 1997 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, 1997:
<TABLE>
<CAPTION>
December 31, 1997
------------------------------------------------
Gross Gross Fair
Amortized Unrealized Unrealized Market
(in thousands) Cost Gains Losses Value
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available for Sale:
Mortgage backed securities $15,689 $112 $ (3) $15,798
Other 89 - - 89
------- ---- ------- -------
$15,778 $112 $ (3) $15,887
======= ==== ======= =======
Held to Maturity:
U.S. government obligations $ 200 - - $ 200
U.S. government agency callable notes 6,800 $ 1 $ (28) 6,773
------- ---- ------- -------
$ 7,000 $ 1 $ (28) $ 6,973
======= ==== ======= =======
</TABLE>
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 agency callable notes $ 9,802 $ 12 $ (104) $ 9,710
------- ----- ------- -------
$ 9,802 $ 12 $ (104) $ 9,710
======= ===== ======= =======
</TABLE>
40
<PAGE>
The following is a summary of gross realized gains and losses on investment
securities sold for 1997, 1996 and 1995. 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,
--------------------------------------------------
1997 1996 1995
Gross Realized Gross Realized Gross Realized
-------------- --------------- ---------------
(in thousands) Gains Losses Gains Losses Gains Losses
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Sales of:
U.S. government obligations $ 62 - $ 17 - - -
U.S. government agency - - - - $ 1 -
Mortgage-backed securities 39 - - - - -
Equity securities 170 - 24 $(3) 7 $(12)
---- ------ ----- ------ ----- ----
$271 - $ 41 $(3) $ 8 $(12)
==== ====== ===== ====== ===== ====
</TABLE>
The following table represents the contractual maturities, amortized cost and
fair value for investments in debt securities for each major security type at
December 31, 1997:
<TABLE>
<CAPTION>
Held to Maturity Securities Available for Sale Securities
--------------------------- -----------------------------
Amortized Amortized
(in thousands) Cost Fair Value Cost Fair Value
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Due in one year or less $ 200 $ 200 - -
Due from 1 - 5 years 4,000 3,988 - -
Due from 5 - 10 years 2,800 2,785 - -
Due after ten years - - $15,689 $15,798
------ ------ ------- -------
$7,000 $6,973 $15,689 $15,798
====== ====== ======= =======
</TABLE>
At December 31, 1997, the Company's securities pledged as collateral for public
and private deposits totaled $750,000.
NOTE E. LOANS
The composition of the loan portfolio was as follows:
<TABLE>
<CAPTION>
December 31,
-------------------
(in thousands) 1997 1996
- --------------------------------------------------------
<S> <C> <C>
Real estate mortgage loans:
Residential $ 33,251 $30,981
Commercial 48,705 48,456
Real estate construction loans 1,955 769
Commercial and industrial loans 5,166 3,059
Consumer and other loans 15,227 15,281
-------- -------
$104,304 $98,546
======== =======
</TABLE>
Included in interest and fees on loans as reported in the consolidated
statements of operations are origination fees, commitment fees, late charges and
application fees for the years ended December 31, 1997, 1996 and 1995 of
$195,000, $152,000 and $95,000, respectively.
41
<PAGE>
As of December 31, 1997 and 1996, the Company was servicing loans for others of
$42.9 million and $50.5 million, respectively. The decrease of $7.6 million in
loans serviced for others is attributable to the sale of $7.9 million of Maine
State Housing Authority loans in the second quarter of 1997. As of December 31,
1997 and 1996, the Bank had excess residential mortgage servicing asset of
$307,000 and $508,000, respectively, net of a valuation allowance of $132,000
for both years. This amount is being amortized over the expected average life
of the loans.
At December 31, 1997, the Bank had binding commitments for the sale of mortgage
loans held for sale totaling $2.0 million.
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, 1997, the recorded investment in
loans for which impairment has been recognized in accordance with SFAS No. 114
totaled $717,000, as compared to $3,845,000 at December 31, 1996. The
corresponding portion of the Allowance allocated against the total recorded
investment in loans ("Allocated Reserves") was $91,000 as of December 31, 1997
and $615,000 as of December 31, 1996. An amount equal to $652,000 of the
$717,000 total impaired loans was classified as either nonaccrual or troubled
debt restructures and the remaining $65,000 was classified as potential problem
loans at December 31, 1997. The income recorded on a cash basis relating to
impaired loans equaled $21,000 and $38,000 at December 31, 1997 and 1996,
respectively. The average balance of outstanding impaired loans was $2.3
million and $2.0 million for 1997 and 1996, respectively, and an effective yield
of 3.92% and 1.88%, respectively. All of the impaired loans were collateralized
by real estate at December 31, 1997 and accounted for by the lower of the fair
value of the collateral (net of the $91,000 Allocated Reserves) or amortized
loan value.
NON-PERFORMING ASSETS
The table below sets forth information with respect to nonperforming assets:
<TABLE>
<CAPTION>
December 31,
-----------------------
(in thousands) 1997 1996 1995
- ----------------------------------------------------------------
<S> <C> <C> <C>
Nonaccrual loans $ 387 $1,944 $1,948
Accruing loans past due
90 days or more 101 201 169
Restructured loans 265 - 3,427
Real estate owned and repossessions 65 478 1,973
----- ------ ------
$ 818 $2,623 $7,517
===== ====== ======
</TABLE>
Interest income recognized on nonaccrual and restructured loans totaled
$122,000, $41,000 and $406,000 in 1997, 1996 and 1995, 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 1997,
1996 and 1995 of $26,000, $148,000 and $81,000, respectively.
NOTE F. ALLOWANCE FOR LOAN LOSSES
Changes in the Allowance were as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------
(in thousands) 1997 1996 1995
- --------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of year $2,666 $2,659 $ 4,042
Charge-offs (339) (289) (1,333)
Recoveries 338 296 375
------ ------ -------
Net charge-offs (1) 7 (958)
Provision for loan losses - - (425)
------ ------ -------
Balance at end of year $2,665 $2,666 $ 2,659
====== ====== =======
</TABLE>
The Company's Allowance was $2.7 million at December 31, 1997 and December 31,
1996. The Allowance represented 2.56% and 2.71% of total loans, and 353.92% and
124.29% of nonperforming loans at December 31,
42
<PAGE>
1997 and December 31, 1996, respectively. See "Management's 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) 1997 1996
- ---------------------------------------------------------------------------------
<S> <C> <C>
Land $ 408 $ 408
Buildings and building improvements 2,708 2,663
Leasehold improvements 443 371
Equipment 3,630 3,290
-------- --------
7,189 6,732
Less: Accumulated depreciation
and amortization 3,635 3,304
-------- --------
$ 3,554 $ 3,428
======== ========
</TABLE>
NOTE H. DEPOSITS
Deposit balances at year end consisted of the following:
<TABLE>
<CAPTION>
December 31,
-------------------
(in thousands) 1997 1996
- ---------------------------------------------------------------------------------
<S> <C> <C>
Noninterest bearing demand deposits $ 7,599 $ 5,790
Interest bearing demand deposits 17,117 15,090
Savings and escrow deposits 34,465 36,445
Time deposits 55,810 57,760
-------- --------
$114,991 $115,085
======== ========
</TABLE>
Included in 1997 and 1996 time deposits are $2,328,000 and $2,186,000,
respectively, of deposits of $100,000 or more.
At December 31, 1997, the maturities and weighted average interest rates of time
deposits of $100,000 or more were as follows:
<TABLE>
<CAPTION>
Balance Weighted Average
Maturities (in months) (in thousands) Interest Rate
- --------------------------------------------------------------
<S> <C> <C>
3 months or less $1,065 5.26%
over 3 - 6 100 5.07
over 6 - 12 410 5.33
over 12 753 5.81
------
Total $2,328 5.44%
======
</TABLE>
The following is a detail of interest expense paid on deposits for the three
years ending December 31, 1997, 1996 and 1995:
<TABLE>
<CAPTION>
December 31,
------------------------
(in thousands) 1997 1996 1995
- ------------------------------------ ------ ------ ------
<S> <C> <C> <C>
Interest bearing demand deposits $ 446 $ 318 $ 357
Savings deposits 945 1,079 1,286
Other time deposits 2,915 3,196 3,237
Time deposits of $100,000 or more 153 131 97
------ ------ ------
$4,459 $4,724 $4,977
====== ====== ======
</TABLE>
43
<PAGE>
NOTE I. BORROWINGS
ADVANCES FROM FEDERAL HOME LOAN BANK ("FHLB") OF BOSTON
Maturities of advances from the FHLB of Boston outstanding at December 31, 1997
are as follows:
<TABLE>
<CAPTION>
Weighted Average
(in thousands) Rates Interest Rate
- ----------------------------------------------------------------
<S> <C> <C> <C>
1998 $ 4,000 5.32%-5.92% 5.62%
1999 1,000 6.03% 6.03%
2001 8,294 6.05%-6.25% 6.16%
-------
$13,294 5.99%
=======
</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.
SAVINGS BANK NOTES
On July 24, 1996 the Company borrowed $4.0 million from the Savings Banks and
issued the Savings Bank Notes in the aggregate principal amount of $4.0 million
as part of the Company's recapitalization plan pursuant to which the Company
repaid in full its obligation to the FDIC in the amount of $9.7 million arising
under the promissory note issued by the Company to the FDIC in settlement of the
FDIC's cross guaranty claim against the Bank. 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. On
September 30, 1997, the Company made an unscheduled principal payment to the
Savings Banks of $1.0 million, reducing the unpaid principal balance to $3.0
million. 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
and the $1.0 million prepayment, will be $1.4 million. The Savings Bank Notes
are collateralized by a pledge by the Company of all the shares of 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.
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.
44
<PAGE>
NOTE J. RESTRICTIONS ON SUBSIDIARY DIVIDENDS, LOANS OR ADVANCES
Payment of dividends by the Company on its stock is subject to various
restrictions. Among these restrictions is a requirement under Delaware
corporate law that dividends may be paid by the Company out of its surplus or,
in the event there is no surplus, out of its net profits for the fiscal year in
which the dividend is declared and/or the preceding fiscal year.
The 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 September 25, 1997, March 26, 1997, July 24, 1996, May 3, 1996 and November
13, 1995, the Bank paid the Company cash dividends of $1.0 million, $500,000,
$3.2 million, $200,000, and $200,000, respectively.
NOTE K. REVERSE STOCK SPLIT
On May 31, 1995, the Company effected a one-for-ten reverse stock split with
respect to the issued and outstanding shares of the Company's common stock,
which was approved by the Company's stockholders on January 31, 1995. As a
result of the reverse stock split, the number of outstanding shares of common
stock of the Company was reduced from 6,006,745 shares (determined at the close
of business on May 31, 1995) to 600,361 shares. As a result, approximately
$5,407,000 was transferred from the Company's common stock account to paid-in
capital. All applicable share and per share data appearing in the consolidated
financial statements and notes thereto have been retroactively adjusted for the
reverse stock split.
NOTE L. BENEFIT PLANS
PENSION PLAN
The Board of Directors of the Bank terminated the Bank's defined benefit plan
and implemented a defined contribution plan ("401(k) Plan") for all elgible
employees effective August 1, 1997. All employees of the Bank are eligible to
participate in the 401(k) Plan upon completion of 1,000 hours of service
subsequent to their date of hire. Plan participants may elect to contribute up
to 15% of their salary on a pre-tax basis. The Bank provides matching
contributions up to 6% of compensation. The Bank incurred expenses relating to
the 401(k) Plan totaling $46,000 for the year ended December 31, 1997.
Future benefit accruals under the defined benefit plan were eliminated as of
July 31, 1997 and the plan was terminated as of September 30, 1997. The Bank is
currently awaiting a determination ruling from the Internal Revenue Service
("IRS") with respect to the termination of the defined benefit plan. Pension
expense for the defined benefit plan was $1,000, $3,000 and $14,000 for the
years ended December 31, 1997, 1996 and 1995, respectively.
45
<PAGE>
The following table sets forth the defined benefit plan's funded status and
amounts recognized in the consolidated financial statements:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------
(in thousands) 1997 1996
- --------------------------------------------------------------------------------------
<S> <C> <C>
Actuarial Present Value of Benefit Obligations:
Accumulated benefit obligation
(including vested benefit obligation of
$1,896 in 1997 and $1,379 in 1996) $1,896 $1,449
Effects of future salary increases - 177
------ ------
Projected benefit obligation 1,896 1,626
Fair value of plan assets (primarily listed
stocks, U.S. bonds and insurance contracts) 2,387 2,082
------ ------
Plan assets in excess of projected benefit obligation 491 456
Unrecognized prior service cost - (4)
Unrecognized transition amount (68) (95)
Unrecognized (gain) loss 40 (53)
------ ------
Prepaid pension expense $ 463 $ 304
====== ------
</TABLE>
The components of net pension expense are as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------
(in thousands) 1997 1996 1995
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost - benefits $ 69 $ 61 $ 62
Interest cost of projected benefits 122 116 110
Actual return on plan assets (164) (230) (300)
Net amortization and deferral (26) 56 142
------ ------ ------
Net pension expense $ 1 $ 3 $ 14
====== ====== ======
</TABLE>
The weighted average discount rate used was 7.25%, 7.5% and 7.5% in 1997, 1996
and 1995, respectively, and the increase in future compensation levels used was
5.5% for 1996 and 1995, in determining the actuarial present value of the
projected benefit obligation. The expected long-term rate of return on assets
was 8.0% for 1997, 1996 and 1995.
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.
In 1997, 2,500 options were granted to directors which vest immediately and
15,000 options were granted to executive officers which vest over a three year
period. Options granted under the Plan must have an exercise price not less
than 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 option's 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). Upon adoption of the Plan, there were 130,000 shares
of common stock of the Company reserved for issuance in connection with option
grants and restricted stock awards. At December 31, 1997, there were 59,500
shares of common stock of the Company reserved for issuance in connection with
options available for grant and restricted stock awards.
46
<PAGE>
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.
<TABLE>
<CAPTION>
1997 1996
----------------------- -----------------------
As reported Pro Forma As Reported Pro Forma
----------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Net income (in thousands) $1,262 $1,243 $6,385 $6,337
Basic earnings per share $ .93 $ .91 $ 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 1997 and 1996, respectively: dividend yield
of 0.0%, expected volatility of 35%, risk free interest rate of 6.83% and
expected term of options equal to 7 years.
A summary of the status of the Plan as of December 31, 1997 and 1996, and
changes during the year then ended is presented below:
<TABLE>
<CAPTION>
1997 1996
--------------------------------- --------------------------------
Weighted Weighted
Average Exercise Average Exercise
Shares Price Per Share Shares Price Per Share
--------------- ---------------- -------------- ----------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 57,000 $5.59 - -
Granted 17,500 $14.45 57,000 $5.59
Exercised (1,333) $5.00 - -
Forfeited (2,667) $5.00 - -
------ ------
Outstanding at end of year 70,500 $7.82 57,000 $5.59
====== ======
</TABLE>
The following table summarizes information about the Plan's stock options at
December 31, 1997 and 1996:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------------------- --------------------------------
Range of Number Weighed-average Weighted Number Weighted
Exercise Outstanding Remaining Average Exercisable Average
Prices at December 31 Contractual life Exercise Price at December 31 Exercise Price
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1997 $ 5.00-$ 7.25 53,000 8.6 years $ 5.64 21,667 $ 5.52
$ 9.63-$15.25 17,500 9.9 years $14.45 2,500 $ 9.63
1996 $ 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, 1997, 3,333 shares of
stock have not yet vested and the related compensation expense of approximately
$18,000 has not been recognized.
47
<PAGE>
NOTE M. INCOME TAXES
A summary of income tax expense (benefit) is as follows:
<TABLE>
<CAPTION>
December 31,
-----------------------
(in thousands) 1997 1996 1995
- -------------------------------------------
<S> <C> <C> <C>
Current - $ (48) -
Deferred $ 679 (4,811)
----- ------- ----
$ 679 $(4,859) -
===== ======= ====
</TABLE>
A reconciliation of the difference between income tax expense (benefit) and the
amount computed by applying the statutory federal income tax rate to income
before income taxes is as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------
(in thousands) 1997 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal income tax at statutory rate $ 660 $ 519 $ 564
Increase (decrease) resulting from:
Expiration of capital loss carryforwards - - 2,060
Change in net operating loss carryforwards - - (253)
Expiration of net operating loss carryforwards - 1,180 -
Change in valuation allowance - (6,773) (2,454)
Other items, net 19 215 83
----- ------- -------
Income tax expense (benefit) $ 679 $(4,859) $ 0
===== ======= =======
</TABLE>
Significant components of deferred income tax assets and liabilities at December
31, 1997 and 1996 are presented below:
<TABLE>
<CAPTION>
December 31,
------------------
(in thousands) 1997 1996
- --------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Loans, principally due to allowance for losses $ 906 $ 907
REO, principally due to writedowns 7 167
Mark to market adjustments (24) 27
Deferred loan fees 47 10
Reserve for mortgage servicing rights 45 45
Investment writedowns - 17
Federal net operating loss credit and tax credit carryforward 3,604 3,980
Investment tax credit carryforward 77 77
Other (6) 21
------ ------
Total gross deferred tax assets before valuation reserve 4,656 5,251
Valuation reserve (77) (77)
------ ------
Total gross deferred tax asset 4,579 5,174
------ ------
Deferred tax liabilities:
Difference between tax and book basis of fixed assets 210 163
Capital loss on stock transaction 74 -
Other 200 200
------ ------
Total gross deferred tax liabilities 484 363
------ ------
Net deferred taxes $4,095 $4,811
====== ======
</TABLE>
48
<PAGE>
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 reduced the uncertainties relating to the Company's ability to realize
the benefits of the deferred tax asset. During 1996 the valuation allowance
against the deferred tax asset (in accordance with SFAS No. 109) was reduced by
$4,811,000. 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, 1997, the Company had a NOL carryforward for federal income tax
return purposes of approximately $10.4 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, the Company amended its Restated Certificate of
Incorporation in June of 1996 to provide that absent approval by the Company's
Board of Directors 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 provision expires June 11, 1999.
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, 1997 and 1996 were approximately
$14.2 million and $11.2 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, 1997 and 1996.
The breakdown of such loan commitments is as follows:
<TABLE>
<CAPTION>
(in thousands) 1997 1996
- ----------------------------------------------------------------------
<S> <C> <C>
Real estate:
Commitments to originate residential mortgages $ 1,903 $ 1,150
Commitments to originate commercial mortgages 1,700 1,400
Unadvanced portions of construction loans 620 990
Commercial lines of credit (unused) 2,651 837
Consumer lines of credit (unused) 7,288 6,849
------- -------
Total $14,162 $11,226
======= =======
</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.
49
<PAGE>
LEASE OBLIGATIONS
The Company currently leases two of its seven branches and has a ground lease
relating to a third branch (rental expense for this ground lease is zero until
June 17, 2000) under terms of operations leases which include renewal options
ranging from one to five years. On October 6, 1997, the Bank entered into a
lease agreement to open a branch in downtown Portland, with an anticipated
opening date in the first quarter of 1998. The lease payments for this new
branch are reflected in the table below. Rental expense totaled approximately
$91,000, $77,000 and $75,000 for the three years ended December 31, 1997, 1996
and 1995, respectively.
Approximate minimum lease payments over the remaining term of the leases at
December 31, 1997 are as follows:
<TABLE>
<CAPTION>
(in thousands) December 31,
- ----------------------------------------------------------------------
<S> <C>
1998 $119
1999 123
2000 136
2001 60
2002 55
----
$493
====
</TABLE>
LITIGATION
As of December 31, 1997, 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, 1997, the Bank had approximately $49.1 million of commercial
real estate mortgage loans, representing 47.1% of total loans at such date,
comprised primarily of loans collateralized by apartment buildings, mixed use
commercial buildings, retail 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 33.5% and
34.6% of total assets at December 31, 1997 and 1996, respectively. At December
31, 1997, the Bank also had approximately $5.2 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.
50
<PAGE>
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, 1997 December 31, 1996
------------------- -------------------
Book Fair Book Fair
(in thousands) Value Value Value Value
- ------------------------------------ -------- -------- -------- --------
<S> <C> <C> <C> <C>
Financial Assets:
Cash and cash equivalents /(1)/ $ 7,554 $ 7,554 $11,453 $11,453
Investment securities /(2)/
Available for sale (at market value) 15,887 15,887 16,890 16,890
Held-to-maturity 7,000 6,973 9,802 9,710
Federal Home Loan Bank stock 1,315 1,315 1,315 1,315
Loans held for sale 3,565 3,565 1,490 1,490
Loans, net of allowance /(3)/ 101,500 104,951 95,849 97,284
Financial Liabilities:
Deposits /(4)/ $114,991 $115,330 $115,085 $112,373
Borrowings /(5)/ 16,294 18,039 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. EARNINGS PER SHARE
The following is a reconciliation of the numerators and denominators of the
basic and diluted earnings per share ("EPS") calculations:
<TABLE>
<CAPTION>
For the years ended December 31,
---------------------------------------------------------------------------------------------------------
1997 1996 1995
--------------------------------- --------------------------------- ---------------------------------
Number Per Number Per Number Per
Income of Shares Share Income of Shares Share Income of Shares Share
Numerator Denominator Amount Numerator Denominator Amount Numerator Denominator Amount
--------------------------------- --------------------------------- ---------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET INCOME $1,262,000 $6,385,000 $1,660,000
BASIC EPS
Income available to
common stockholders 1,262,000 1,358,730 $0.93 6,385,000 933,578 $6.84 1,660,000 600,361 $2.77
Effect of dilutive
securities options 32,542 6,902 -
DILUTED EPS
Income available to
common stockholders
and assumed
conversions $1,262,000 1,391,272 $0.91 $6,385,000 940,480 $6.79 $1,660,000 600,361 $2.77
========== ========== ========== =========== ========== ===========
</TABLE>
51
<PAGE>
Outstanding options to purchase 15,000 shares of common stock at $15.25 were not
included in the computation of diluted earnings per share because the exercise
price of the options was greater than the average market price of common shares.
NOTE R. FIRST COASTAL CORPORATION
(UNAUDITED PARENT COMPANY ONLY)
FINANCIAL INFORMATION
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-------------------
(in thousands) 1997 1996
- --------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash $ 142 $ 261
Investment in subsidiaries 14,504 14,173
Deferred tax asset 3,076 2,850
Other assets 106 164
------- -------
Total assets $17,828 $17,448
======= =======
LIABILITIES
Savings Bank Notes $ 3,000 $ 4,000
Other liabilities 20 60
Stockholders' equity 14,808 13,388
------- -------
Total liabilities and stockholders' equity $17,828 $17,448
======= =======
</TABLE>
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------
(in thousands) 1997 1996 1995
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Dividends $1,500 $ 3,400 $ 200
Interest Income 12 7 4
------ ------- -------
1,512 3,407 204
Interest Expense:
FDIC Note - 335 419
Savings Bank Notes 477 190 -
------ ------- -------
477 525 419
------ ------- -------
Net Interest Income (loss) 1,035 2,882 (215)
Operating Expenses:
Salary and benefits 12 5 -
Stockholder relations 48 117 76
Professional fees 58 177 293
Other 61 3 14
------ ------- -------
179 302 383
Income (loss) before income tax and equity in
undistributed net income of subsidiaries 856 2,580 (598)
Income tax benefit (226) (2,850) -
Equity in undistributed net income of subsidiaries 180 955 2,258
------ ------- -------
NET INCOME $1,262 $ 6,385 $ 1,660
====== ======= =======
</TABLE>
52
<PAGE>
<TABLE>
<CAPTION>
STATEMENTS OF CASH FLOWS
Year Ended December 31,
------------------------------
(in thousands) 1997 1996 1995
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 1,262 $ 6,385 $ 1,660
Increase (decrease) in interest payable - (419) 419
Net change in other assets (168) (2,853) 6
Net change in other liabilities (40) 35 (18)
Equity in undistributed earnings of subsidiaries (180) (955) (2,258)
------- ------- -------
Net cash provided (used) by operating activities 874 2,193 (191)
FINANCING ACTIVITIES:
Proceeds from issuance of Savings Bank Note - 4,000 -
Payment on borrowings (1,000) (9,000) -
Finance cost associated with Savings Bank Note - (116) -
Net proceeds from sale of common stock 7 3,085 -
------- ------- -------
Net cash used by financing activities (993) (2,031) -
------- ------- -------
Increase (decrease) in cash and cash equivalents (119) 162 (191)
Cash and cash equivalents at beginning of year 261 99 290
------- ------- -------
Cash and cash equivalents at end of year $ 142 $ 261 $ 99
======= ======= =======
SUPPLEMENTAL DISCLOSURES OF INFORMATION
Interest paid on borrowings $ 477 $ 944 -
NON-CASH INVESTING AND FINANCING ACTIVITIES
Change in unrealized holding gains (losses) on
investment securities available for sale $ 151 $ (117) $ 323
Issuance of restricted stock $ 38 -
</TABLE>
See Note J for restrictions on the payment of dividends by Subsidiary to the
Company.
53
<PAGE>
NOTE S. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Quarter Ended,
---------------------------------------------------
(in thousands, except share and per share information) 3/31 6/30 9/30 12/31
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1997
- ----
Interest income $ 2,844 $ 3,011 $ 3,002 $ 3,037
Interest expense 1,455 1,491 1,521 1,409
---------- ---------- ---------- ----------
Net interest income 1,389 1,520 1,481 1,628
Provision for loan losses - - - -
Noninterest income 135 143 174 168
Securities and loan sales gains 126 114 109 21
Operating expense 1,244 1,231 1,252 1,340
---------- ---------- ---------- ----------
Income before income taxes 406 546 512 477
Income tax expense 139 195 178 167
---------- ---------- ---------- ----------
Net income $ 267 $ 351 $ 334 $ 310
========== ========== ========== ==========
Basic earnings per share:
Weighted average shares outstanding 1,357,861 1,358,652 1,359,194 1,359,194
Earnings per share $ .20 $ .26 $ .25 $ .23
========== ========== ========== ==========
Diluted earnings per share:
Weighted average shares outstanding 1,370,414 1,373,571 1,377,562 1,391,736
Earnings per share $ .19 $ .26 $ .24 $ .22
========== ========== ========== ==========
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
========== ========== ========== ==========
Basic earnings per share:
Weighted average shares outstanding 600,361 600,361 1,160,252 1,357,861
Earnings per share $ .56 $ .93 $ .26 $ 3.82
========== ========== ========== ==========
Diluted earnings per share:
Weighted average shares outstanding 600,361 600,361 1,165,070 1,363,943
Earnings per share $ .56 $ .93 $ .26 $ 3.80
========== ========== ========== ==========
</TABLE>
54
<PAGE>
NOTE T. SUBSEQUENT EVENTS
On February 25, 1998 the Board of Directors of the Company adopted a
Stockholders Rights Plan in which preferred stock purchase rights have been
granted as a dividend at the rate of one Right for each share of Common Stock
held of record as of the close of business on March 10, 1998. The Rights will
be exercisable only if a person or group in the future becomes the beneficial
owner of 10% or more of the Common Stock or announces a tender or exchange offer
which would result in its ownership of 10% or more of the Common Stock.
Each Right, when exercisable at $50.00 per Right, would entitle the holder
thereof to purchase 1/10th of a share of a newly created series of preferred
stock of the Company designated as "Series A Junior Participating Preferred
Stock." Each holder of a Right, other than the acquiring person, would be
entitled to purchase a certain number of shares of Common Stock of the Company
for each right at one-half of the then-current market price. If the Company is
acquired in a merger, or 50% or more of the Company's assets are sold in one or
more related transactions, each Right would entitle the holder thereof to
purchase common stock of the acquiring company at half of the then-current
market price of such common stock.
When exercisable, the Board of Directors may exchange one share of Common Stock
for each Right, other than Rights held by the acquiring person. The Rights are
redeemable for $.001 per Right until becoming exercisable and will expire on
February 24, 2008.
55
<PAGE>
- -------------------------------------------------------------------------------
CORPORATE AND STOCKHOLDER INFORMATION
- -------------------------------------------------------------------------------
FIRST COASTAL CORPORATION
DIRECTORS
NORMAND E. SIMARD
Chairman of the Board
First Coastal Corporation and
Coastal Bank
President
York County Biscuit Company
GREGORY T. CASWELL
President and Chief Executive Officer
First Coastal Corporation and
Coastal Bank
DENNIS D. BYRD
Treasurer
First Coastal Corporation
Executive Vice President, Chief Financial
Officer and Treasurer
Coastal Bank
MARYELLEN FITZGERALD
President/Owner
Critical Insights
Marketing Research
DAVID B. HAWKES, SR.
Business Consultant/Owner
Cloudhawk, 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 BANK
CORPORATE OFFICE
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
MaryEllen FitzGerald
David B. Hawkes, Sr.
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
OFFICERS (CONT.)
ROBERT S. BLACKWOOD, JR.
Senior Vice President, Commercial Lending
EDWARD M. WILLIAMS
Senior Vice President Retail Banking
KEVIN G. CLOUTIER
Vice President and Controller
DAVID C. CYR
Vice President, Credit Administration
CYNTHIA M. MCDOUGALL
Vice President, Residential Lending
EUGENE R. MCKENNA
Vice President, Commercial Lending
JANET S. ROSS
Vice President, Commercial Lending
VENITA M. SMITH
Vice President, Human Resources
TIMOTHY J. TOWER
Vice President, Commercial Lending
DANIEL P. WALSH
Vice President, Commercial Lending
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, Business Banking Marketing Mgr.
PATRICIA J. BRIAND
Secretary
BRANCH OFFICES
120 Exchange Street
Portland, ME 04101
Robert S. Blackwood, SVP
Commercial Lending
83 Maine Street
Brunswick, ME 04011
Stephen D. Lovejoy, AVP/Manager
14 Gurnett Road
Brunswick, ME 04011
Teri L. Dutton, Branch Manager
47 Topsham Fair Mall Road
Topsham, ME 04086
Kevin Concaugh, Manager
165 Main Street
Freeport, ME 04032
Lisa M. Esposito, Manager
36 Thomas Drive
Westbrook, ME 04092
Debra J. McPhail, AVP
32 Saco Valley Shopping Center
Saco, ME 04072
Laurie L. Mooney, AVP/Manager
45 Portland Road
Kennebunk, ME 04043
Lisa A. St. Lawrence, Manager
56
<PAGE>
- -------------------------------------------------------------------------------
CORPORATE AND STOCKHOLDER INFORMATION
- -------------------------------------------------------------------------------
CORPORATE HEADQUARTERS
First Coastal Corporation
Colonel Westbrook Executive Park
36 Thomas Drive
Westbrook, ME 04092
(207) 774-5000
ANNUAL MEETING
The 1998 Annual Meeting of the Stockholders of First Coastal Corporation will be
held at 10:00 a.m. on Tuesday, May 19, 1998 at the Portland Marriott, South
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
INTERNET ADDRESS
First Coastal Corporation
www.firstcoastal.com
Coastal Bank
www.coastalbankme.com
57
<PAGE>
EXHIBIT 21
SUBSIDIARY OF THE REGISTRANT
Subsidiary State of Incorporation
- ---------- ----------------------
Coastal 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 20, 1998 on
our audits of the consolidated financial statements of First Coastal Corporation
and subsidiary as of December 31, 1997 and 1996 and for each of the three years
in the period ended December 31, 1997, which report is included in this Annual
Report on Form 10-K.
Coopers & Lybrand L.L.P.
Portland, Maine
March 30, 1998
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</TABLE>
