<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, 1999
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
14, 2000, the aggregate market value of the Common Stock held by nonaffiliates
was $10,805,485.
As of the close of business on March 14, 2000, there were 1,299,908 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, 1999, are incorporated by reference in Part II.
Portions of the definitive proxy statement for the annual meeting of
stockholders to be held May 16, 2000, which the registrant intends to file no
later than 120 days after December 31, 1999 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 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 $191 million at December 31, 1999.
The region served by the Bank includes the communities of Portland, Westbrook,
Topsham, Brunswick, Freeport and Saco, Maine.
The principal business of the Bank consists of retail and commercial community
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. Effective on or
about June 1, 2000, the principal executive offices of the Company and the Bank
will be located at 1200 Congress Street, Portland, Maine 04102; telephone (207)
774-5000.
This Annual Report on Form 10-K contains certain "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, including the Company's strategic business
initiatives, net interest margin, deposit growth, interest rates, additional
branches, market and growth opportunities and loan volume, constitute
forward-looking statements. Certain, but not necessarily all, of such
forward-looking statements can be identified by the use of forward-looking
terminology, such as "believes," "expects," "may," "will," "should,"
"estimates," or "anticipates" or the negative thereof or other variations
thereof or comparable terminology. All forward-looking statements involve known
and unknown risks, uncertainties and other factors which may cause the actual
transactions, results, performance or achievements of the Company to be
materially different from those expressed or implied by such forward-looking
statements. Although the Company has made such statements based on assumptions
which it believes to be reasonable, there can be no assurance that the actual
transactions, results, performance or
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achievements will not differ materially from the Company's expectations. For
example, there are a number of important factors with respect to such forward-
looking statements that could materially and adversely affect such forward-
looking statements, such as (i) the impact of changes in market rates of
interest, economic conditions or competitive factors on the Company's deposit
products and loan demand and asset quality; (ii) the possibility that certain
transactions, such as the successful transition to a suitable new headquarters
and operations center, the opening of new branches, the introduction of new
banking products or other planned or contemplated events, may not occur or may
not be initiated with the degree of success contemplated; (iii) the possibility
that operating expenses may be higher than anticipated; (iv) the effect that
changes in the general economic and competitive conditions in markets in which
the Company operates could have on the Company's financial performance and
condition; (v) the Company's ability to control its provision for loan losses,
and to achieve its goals with respect to net interest rate spread and margin;
and (vi) the level of demand for new and existing products. Should one or more
of these risks or other 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.
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"),
pursuant to which the Company issued promissory notes in the aggregate principal
amount of $4.0 million (the "Savings Bank Notes"), collateralized by the pledge
by the Company of 100% of the outstanding common stock of the Bank. The Savings
Bank Notes were amended effective August 4, 1999, whereby the terms were
modified to include, among other things, a reduction in the interest rate, an
extension of the maturity date until August 4, 2004 and to provide the Company
with a line of credit. For further information see "Amended Savings Bank Notes"
below and "Note 9 -- Borrowings" in the Company's 1999 Annual Report to
Stockholders.
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
8.37%, 14.56%, and 15.82%, respectively, at December 31, 1999 were in compliance
with such guidelines.
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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 and other factors.
At December 31, 1999, the Bank had a Tier 1 capital to total assets ratio of
9.22%. 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, 1999, the Bank had a ratio of qualifying total capital to
risk-weighted assets of 17.17% and a ratio of Tier 1 capital to risk-weighted
assets of 15.90%.
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,
-------------------------------------------------------------------
(dollars in thousands) 1999 1998 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Real estate mortgage loans:
Residential $ 28,460 $ 32,555 $ 33,251 $ 30,981 $ 30,966
Commercial 66,833 52,747 48,705 48,456 50,797
Real estate construction loans 2,832 1,384 1,955 769 --
Commercial and industrial loans 9,446 5,872 5,166 3,059 2,524
Consumer and other loans 12,962 13,315 15,227 15,281 16,263
-------- --------- --------- --------- ---------
Total loans $120,533 $ 105,873 $ 104,304 $ 98,546 $ 100,550
======== ========= ========= ========= =========
Ratio of loans to:
Deposits 86% 71% 91% 86% 80%
Assets 63% 55% 71% 67% 69%
</TABLE>
The Bank's loan growth during the period from the late 1980's until the
completion of the 1996 recapitalization was inhibited as a result of the
problems the Bank and the Company experienced during this period. 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. The completion of the 1996 recapitalization allowed the Bank to compete
more effectively for new loans. Since that time, and in conjunction with the
Company's strategic plan, significant effort and resources have been focused on
developing higher levels of loan volume. Particular focus has been given to
developing a strong commercial banking team as management believes this is an
area in which the Bank can develop a competitive edge, particularly with regard
to responsive customer service.
During the past three years the attrition previously reflected in the Company's
loan balances has ceased, with modest growth achieved during 1997 and 1998, and
a 13.9% increase in 1999. Commercial real estate loans showed the largest
increase for the year ended December 31, 1999, $14.1 million (26.7%) as compared
to December 31, 1998. The opening of the Bank's downtown Portland branch, the
introduction of commercial cash management products and the introduction of
Internet banking for businesses, all during the first half of 1998, have been
and will continue to be important to the Bank's ability to generate profitable
growth in commercial loans.
4
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Though commercial real estate loans are considered riskier than some other loan
types, and continue to make up a large percentage of the Company's loan
portfolio (55.5% at December 31, 1999), management believes that the combination
of its expertise in this area and its lending practices allows the Company to
manage the risk inherent in this type of lending.
Residential real estate loans declined $4.1 million during 1999, attributable to
a combination of a generally higher interest rate environment in 1999, resulting
in lower than anticipated originations, and competitive pressures resulting in a
higher percentage of the Bank's 1999 originations being secondary market
saleable as opposed to residential mortgage portfolio loans. The Bank has placed
a renewed emphasis on residential lending in 2000 though improved technology and
staffing in order to compete more effectively in this market.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Historical Background" - and -- "Loans" in the Company's 1999
Annual Report to Stockholders.
The following table sets forth the maturities of the loan portfolio by loan type
as of December 31, 1999:
<TABLE>
<CAPTION>
After
One But
Within Within After
Year Five Five
(dollars in thousands) One Years Years Total
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Real estate mortgage loans:
Residential loans $ 10 $ 794 $ 27,656 $ 28,460
Commercial loans 3,571 29,166 34,096 66,833
Real estate construction loans 2,832 -- -- 2,832
Commercial and industrial loans 4,665 3,805 976 9,446
Consumer and other loans 307 6,155 6,500 12,962
------- ------- -------- --------
Total loans $11,385 $39,920 $ 69,228 $120,533
======= ======= ======== ========
Fixed interest rate $ 5,640 $25,183 $ 42,661 $ 73,484
Variable/adjustable interest rate 5,745 14,737 26,567 47,049
------- ------- -------- --------
$11,385 $39,920 $ 69,228 $120,533
======= ======= ======== ========
</TABLE>
The commercial real estate mortgage portfolio of approximately $66.8 million at
December 31, 1999, as compared to $52.7 million at December 31, 1998, includes
loans collateralized by apartment buildings, mixed use commercial buildings,
retail buildings, office buildings and other income-producing properties.
Substantially all of these loans are collateralized by mortgages on properties
located in Maine. The maturities are set forth in the above table.
At December 31, 1999 and 1998, commercial and industrial loans totaled $9.4
million and $5.9 million, respectively. The Bank makes commercial and industrial
loans collateralized 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.
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Consumer loans originated by the Bank primarily include automobile, mobile home
and boat loans, home improvement loans, loans collateralized by deposits, lines
of credit collateralized 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, 1999, the Bank had approximately $13.0
million in consumer loans, compared to $13.3 million as of December 31, 1998.
All consumer loans originated are reviewed for creditworthiness, adequacy of
collateral and the borrowers' ability to repay.
Loan Originations
Residential mortgage loans originated by the Bank are primarily collateralized
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. In 1998 and years prior, the Bank continued to service
most of the loans it sold in the secondary market. Beginning in 1999 the Bank
began selling these loans on a servicing released basis. Most of the Bank's
residential loans are originated using the Federal National Mortgage Association
("FNMA") underwriting guidelines.
The Bank's residential loan originations decreased 61.6% ($15.0 million) in 1999
as compared to 1998, primarily as a result of the higher interest rate
environment, which resulted in decreased consumer demand to refinance
residential mortgages. Historically the Bank has relied upon the refinance
market for a significant portion of its residential loan originations. The Bank
has developed a plan that it believes will increase residential loan volume by
placing greater emphasis on originating purchase money residential loans as
opposed to refinances. The plan also includes improved utilization of technology
(an automated underwriting system) and increased use of commission based loan
originators, in addition to the Bank's branch-based originations.
Commercial loan originations increased in 1999, as is reflected in the $17.7
million increase (30.1%) in total commercial loan outstandings at December 31,
1999 as compared to December 31, 1998. The Bank currently plans to further
increase its commercial loan originations in 2000, however, the competition for
commercial loans continues to be intense and its ability to do so is affected by
both competitive and economic factors.
The level of residential, consumer and commercial loan originations going
forward will depend upon a number of factors, including the level of interest
rates, general economic conditions, the competitive environment and overall
profitability of these loans.
The following table represents residential real estate and consumer loan
originations for the years ended December 31, 1999, 1998 and 1997.
<TABLE>
<CAPTION>
For the Year Ended December 31,
---------------------------------
(in thousands) 1999 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Originations(1):
Residential real estate $ 9,345 $24,343 $18,216
Consumer 1,813 4,322 3,001
------- ------- -------
Total $11,158 $28,665 $21,217
======= ======= =======
</TABLE>
(1) Includes refinancing of existing portfolio and off balance sheet serviced
loans.
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 1999 Annual Report to Stockholders.
6
<PAGE>
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 serves as a means for the Bank to manage its overall interest
rate sensitivity risk (consistent with the Bank's asset liability management
policy), generates fee income and provides additional funds for lending and
liquidity. The Bank generally 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. However, on
January 31, 1999, the Bank sold all of its FNMA residential mortgage servicing
portfolio. The Bank currently sells all saleable loans on a servicing released
basis. At December 31, 1999, the Bank was not servicing loans for others as
compared to servicing $44.9 million of loans in its capacity as a subservicer at
December 31, 1998. There was no servicing fee income related to serviced loans
for the year ended December 31, 1999. Servicing fee income is reported as other
income in the consolidated statements of operations, and for the two years ended
December 31, 1998 and 1997, equaled $34,000 and $75,000, respectively.
INVESTMENT ACTIVITIES
The Company's investment portfolio is managed in accordance with a written
investment policy adopted by the Board of Directors and reviewed on an annual
basis. Under this policy, and in accordance with applicable provisions of the
Bank Holding Company Act of 1956, as amended (the "BHCA"), without the prior
approval of the Federal Reserve 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 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 1 and 4."
SOURCES OF FUNDS
General
Deposits and secured borrowings from customers 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 to compensate for
7
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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 following table sets forth the Company's deposit balances at the dates
indicated:
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------------------
(dollars in thousands) 1999 1998 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Noninterest bearing demand deposits $ 11,962 $ 10,447 $ 7,599 $ 5,790 $ 5,128
Interest bearing demand deposits 22,280 21,680 17,117 15,090 15,741
Savings and escrow deposits 58,775 63,393 34,465 36,445 42,020
Time deposits 47,120 53,025 55,810 57,760 62,776
-------- -------- -------- -------- --------
Total $140,137 $148,545 $114,991 $115,085 $125,665
======== ======== ======== ======== ========
</TABLE>
Deposits totaled $140.1 million at December 31, 1999, a decrease of $8.4 million
(or 5.7%) from the level of $148.5 million at December 31, 1998. This decrease
is primarily attributable to the sale of the Bank's Kennebunk branch, which
consisted of $12.5 million in deposits at the time of the sale in May 1999. For
further information see Note 8 to the Company's Consolidated Financial
Statements.
Additionally, 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.
For the years ended December 31, 1999, 1998 and 1997, Coastal's average deposits
and average rates consisted of the following:
<TABLE>
<CAPTION>
For the Year Ended December 31,
--------------------------------------------------------------------
1999 1998 1997
---------------------- ----------------------- -------------------
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 $ 10,198 $ 7,987 $ 6,483
Interest bearing demand deposits 19,548 2.32% 18,564 2.30% 18,197 2.46%
Savings Deposits 62,914 3.67 52,750 3.78 34,831 2.71
Time deposits 48,945 5.05 54,004 5.36 56,801 5.40
-------- -------- --------
Total $141,605 $133,305 $116,312
======== ======== ========
</TABLE>
8
<PAGE>
At December 31, 1999, the maturities and weighted average interest rates of
certificates of deposits over $100,000 were as follows:
<TABLE>
<CAPTION>
December 31, 1999
----------------------------------
Weighted
Balance Average
Maturities (in months) (in thousands) Interest Rate
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
3 months or less $ 725 4.82%
Over 3 - 6 months 100 4.50
Over 6 - 12 months 616 5.37
Over 12 months 496 5.27
------
Total $1,937 5.09%
======
</TABLE>
As of December 31, 1999, 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, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
For the Year Ended December 31,
------------------------------------------
(in thousands) 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
FHLB advances $ 27,748 $ 22,545 $ 13,294
Savings Bank Notes 2,268 2,600 3,000
Secured borrowings 2,980 967 --
-------- -------- --------
$ 32,996 $ 26,112 $ 16,294
======== ======== ========
</TABLE>
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) 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Weighted average interest rate of total borrowings 5.87% 5.95% 5.99%
Highest month end balance of total borrowings $36,138 $27,266 $20,887
Average month end balance of total borrowings $28,407 $27,150 $16,778
</TABLE>
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. At December 31, 1999, the Bank had pledged $10.1 million in 1-4
family residential real estate loans as collateral for future borrowings of up
to $9.1 million from the Federal Reserve. No funds have been obtained from this
source.
The Bank estimates that it has approximately $26.8 million in additional
short-term borrowing capacity with the FHLB as of December 31, 1999. 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.
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<PAGE>
At December 31, 1999, the Bank had outstanding $27.7 million in borrowings with
a weighted average interest rate of 5.62% from the FHLB of Boston, maturing as
follows:
<TABLE>
<CAPTION>
Amount Weighted
Maturting Average
Due Date (in thousands) Rates Interest Rate
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
2000 $8,000 5.74-5.79% 5.76%
2001 6,748 6.05-6.25 6.20
2003 3,000 4.99 4.99
2004 3,000 5.79 5.79
2005 4,000 5.06 5.06
2008 3,000 5.16 5.16
-------
$27,748 5.62%
=======
</TABLE>
Amended Savings Bank Notes
On August 4, 1999, the Company entered into the First Amendment to Loan
Agreement (the "First Amendment to Loan Agreement") amending the terms of the
Loan Agreement, dated as of July 24, 1996 (the "Loan Agreement"), between the
Company and a group of four Maine savings banks (the "Four Savings Banks").
Pursuant to the Loan Agreement, the Company borrowed a total of $4.0 million
evidenced by promissory notes (the "Savings Bank Notes") in the amount of $1.0
million to each of the Four Savings Banks. Prior to the effective date of such
modification to the Loan Agreement, the Savings Bank Notes bore interest,
payable quarterly, at an annual rate of 10.85%, with semi-annual principal
payments of $200,000 beginning in June 1998. The original maturity date was
December 31, 2001. Pursuant to the First Amendment to Loan Agreement and the
amended Savings Bank Notes (the "Amended Savings Bank Notes"), the term loan
(balance $2.4 million at the time of refinance) bears interest at an annual rate
of 8.0% until August 4, 2002, at which time the interest rate will convert to
the Prime Rate as published in THE WALL STREET JOURNAL (the "WSJ"), adjustable
daily, until the new maturity date of August 4, 2004. In addition, the Company
is entitled to draw against a working capital line of credit up to a combined
aggregate limit, including the balance outstanding at any time on the term loan,
of $4.0 million. The interest rate on the line of credit is equal to the Prime
Rate as published in the WSJ, adjusted daily and the maturity date is August 4,
2004.
In addition to reducing the interest rate, extending the maturity date, and
providing the Company with a line of credit, the First Amendment to Loan
Agreement modified or eliminated certain covenants and conditions contained in
the Loan Agreement including, among other things: (i) limitations on borrowings
by the Company and the Bank; (ii) prohibitions on transfers of assets of the
Company or any subsidiary; (iii) prohibition of capital expenditures over
$500,000 in any fiscal year; and (iv) certain provisions providing that it was a
default by the Company should it fail to make certain reports or payments within
specified time frames, which provisions have been made generally less
restrictive as to time or amount. In addition, the First Amendment to Loan
Agreement modified the prohibition on the payment of cash dividends by the
Company contained in the Loan Agreement when the Company's debt-to-equity ratio
on a parent only-basis exceeds 30% to increase the permissible ratio threshold
to 50%.
In connection with the Amended Savings Bank Notes, one of the Four Savings Banks
notes was purchased by one of the remaining three lenders. There is no
prepayment penalty associated with the Amended Savings Bank Notes. Other terms
and conditions, including the pledge of all of the Company's stock in the Bank
as collateral, were affirmed and remain in effect.
10
<PAGE>
Secured Borrowings
In May 1998, the Bank introduced a new cash management program for businesses.
The program represents secured borrowings, which include agreements similar to
repurchase agreements that are not FDIC insured. At December 31, 1999 and 1998
these secured borrowings totaled approximately $3.0 million and $1.0 million,
respectively, and were collateralized by approximately $3.0 million and $1.0
million, respectively, in Bank owned investment securities.
For additional information on Borrowings, see "Note 9 -- Borrowings" in the
Company's 1999 Annual Report to Stockholders.
EMPLOYEES
As of December 31, 1999, the Company and its subsidiary had 79 full-time
equivalent employees.
COMPETITION
The Bank is a full service bank with seven banking offices in the southern Maine
communities of Portland, Westbrook, Brunswick, Topsham, Freeport 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
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<PAGE>
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 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.
On November 12, 1999, President Clinton signed legislation to reform the U.S.
banking laws, including the BHCA. The changes made to the BHCA by this
legislation, referred to as the Gramm-Leach-Bliley Act, became effective on
March 11, 2000, and expanded the permissible activities of bank holding
companies like the Company. In order to engage in the expanded activities, the
Company would have to file a notice to become a financial holding company. As a
financial holding company, the Company would be permitted to own and control
depository institutions and to engage in activities that are financial in nature
or incidental to financial activities, or activities that are complementary to a
financial activity and do not pose a substantial risk to the safety and
soundness of depository institutions or the financial system generally. The
legislation identifies certain activities that are deemed to be financial in
nature, including nonbanking activities currently permissible for bank holding
companies to engage in both within and outside the United States, as well as
insurance and securities underwriting and merchant banking activities. The
Federal Reserve is authorized under the legislation to identify additional
activities that are permissible financial activities.
In order to become a financial holding company and take advantage of this new
authority, the Company's depository institution subsidiaries, currently the
Bank, must be well-capitalized and well-managed and have at least a satisfactory
record of performance under the Community Reinvestment Act. No prior notice to
the Federal Reserve would be required from a financial holding company to
acquire a company engaged in nonbanking activities or to commence these
activities directly or indirectly through a subsidiary. Although the Company
could qualify to become a financial holding company, it has no present plan to
change its status under the BHCA since it has no plans to acquire a nonbanking
company or 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.
12
<PAGE>
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 8.37%, 14.56%, and 15.82%, respectively, at December 31,
1999 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 there is a
"material" change in the ownership of the Company. Any person or company that
directly or indirectly acquires control of 5% or more of the Company's stock
must similarly notify the Superintendent. 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 a new
activity closely related to banking.
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 nonbanking activities.
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
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<PAGE>
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. 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.
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, 1999.
The FDIC, in conjunction with the Superintendent, periodically conducts
examinations of insured institutions and, based upon evaluations, may require a
revaluation of assets of an insured institution and may require the
establishment of specific reserves in amounts equal to the difference between
such revaluation and the book value of the assets.
The FDIC also has adopted minimum capital regulations for insured state
nonmember banks. Although there are some differences between the capital
adequacy guidelines adopted by the Federal Reserve with respect to the Company
and the FDIC with respect to the Bank, the primary elements of each are
generally identical. Under the minimum leverage-based capital requirement
adopted by the FDIC, insured state nonmember banks must maintain a ratio of Tier
1 capital to total assets of at least 3% to 5% depending on the Bank's CAMELS
rating. Under such regulations, state nonmember banks must maintain a minimum
ratio of qualifying total capital to risk-weighted assets of 8.0%, including a
minimum ratio of Tier 1 capital to risk-weighted assets of 4.0%. At December 31,
1999, the Bank had a ratio of qualifying total capital to risk-weighted assets
of 17.17%, a ratio of Tier 1 capital to risk-weighted assets of 15.90%, and a
leverage ratio of 9.22%.
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
14
<PAGE>
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, 1999, 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. Provisions of the
Gramm-Leach-Bliley Act permit national banks to establish financial subsidiaries
that may engage in the activities noted above that will be permissible for
financial holding companies, other than insurance underwriting, merchant banking
and real estate development and investment activities. In order to exercise this
authority, a bank and its depository institution affiliates must be
well-capitalized, well-managed and have CRA ratings of at least "satisfactory."
For a state bank, such activities also must be permissible under relevant state
law. Under Maine law, the Bank may engage in any activity that national banks
may engage in under federal law.
Transactions between the Bank and its affiliates are subject to certain
quantitative and qualitative limitations as set forth in Sections 23A and 23B of
the Federal Reserve Act, which is administered by the FDIC. For purposes of
these sections, the term "affiliate" with respect to the Bank refers to the
Company. A transaction is deemed to be one with an affiliate if the proceeds of
the transaction are transferred to, or used for the benefit of, an affiliate.
Under sections 23A and 23B, transactions between banks and their affiliates are
generally limited in the following ways: First, the aggregate amount of all
"covered transactions" (which include, among other things, loans or other
extensions of credit to or on behalf of an affiliate, purchases of assets from
an affiliate or investments in the securities of an affiliate) between a bank
(and its subsidiaries) and any one affiliate may not exceed 10% of the capital
stock and surplus of the bank, and the aggregate amount of covered transactions
between a bank (and its subsidiaries) and all affiliates may not exceed 20% of
the capital stock and surplus of the bank. Second, any loan or extension of
credit to, or guarantee, acceptance or letter of credit issued on behalf of an
affiliate by a bank or any of its subsidiaries must at all times be secured by
collateral having a market value equal to from 100% to 130% of the outstanding
balance
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<PAGE>
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.
The Gramm-Leach-Bliley Act imposes certain obligations on financial
institutions, including state-chartered savings banks like the Bank, to develop
privacy policies, restrict the sharing of nonpublic customer data with
nonaffiliated parties at the customer's request, and establish procedures and
practices to protect and secure customer data. These privacy provisions will be
implemented by regulations that will take effect on or after November 12, 2000.
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.
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
16
<PAGE>
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, 1999 of $1.4 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, 1999, the Bank was in compliance with these requirements.
Various proposals have been introduced in Congress 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.
TAXATION
Federal
The Company files a consolidated federal income tax return with the Bank using
the accrual method of accounting.
Internal Revenue Service ("IRS") guidance dealing with the tax consequences of
federal financial assistance (e.g., cash) provided by the FDIC requires all
federal financial assistance provided to an acquiring bank to be taxable to the
bank that has been seized. Accordingly, all federal financial assistance
provided to the acquiror of Suffield Bank's assets and liabilities may be
taxable income included in the consolidated federal income tax return of the
Company. This income may generally be offset by tax losses resulting from the
sale of assets sold by the FDIC. Although management has been informed by the
FDIC that there will be no net taxable income resulting from the seizure of
Suffield Bank, management has not been able to obtain written confirmation from
the FDIC at this time. Accordingly, income taxes disclosed in the Consolidated
Financial Statements do not take into account adjustments, if any, which may
result from the seizure of Suffield Bank.
The Company recognized an income tax benefit in 1996 of $4,859,000. Of this
amount, $4,811,000 was attributable to a reduction in the amount of the
valuation allowance previously established against the Company's deferred tax
asset (having an effective tax rate of 34%). In addition, the Company received
$48,000 in interest applicable to a 1992 carryback refund.
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<PAGE>
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 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 carryforwards 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 Statement of
Financial Accounting Standard 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 assist the Company in maintaining 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 expired June 11, 1999. For additional information relating to income
taxes, refer to Note 12 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 1996 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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<PAGE>
ITEM 2. PROPERTIES.
The Company primarily utilizes the premises, equipment and furniture of the Bank
without direct payment of any rental or other fees to the Bank. The Bank's
executive offices and operations center are located at 36 Thomas Drive,
Westbrook, Maine. Effective on or about June 1, 2000, the Bank's executive
offices and operations center will be located at 1200 Congress Street, Portland,
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 8 Mallet Drive Owned n/a
Freeport, ME
Portland 120 Exchange Street Leased December 2002
Portland, ME
Portland 1200 Congress Street Leased April 2010
Portland, ME
Saco Suite 32 Leased January 2001
4 Scammon Drive (currently negotiating
Saco, ME renewal)
Topsham 47 Topsham Fair Mall Road Building Owned n/a
Topsham, ME Land Leased June 2000
(lease provides for up
to five 5-year renewal
options)
Westbrook 36 Thomas Drive Leased July 2000
Westbrook, ME
</TABLE>
ITEM 3. LEGAL PROCEEDINGS.
As of December 31, 1999, 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, 1999.
19
<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 27 of the
Annual Report to Stockholders for the year ended December 31, 1999, 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 5 to 6 of the Annual Report to Stockholders for the
year ended December 31, 1999, 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, other than new accounting standards and
accounting standards adopted, is set forth under the caption "Management's
Discussion and Analysis of Financial Condition and Results of Operations" on
pages 7 to 27 of the Annual Report to Stockholders for the year ended December
31, 1999, which information is hereby incorporated herein by reference and
specifically made a part hereof. Information with regard to new accounting
standards and accounting standards adopted, is set forth under Note 1 to the
Company's Consolidated Financial Statements of the Annual Report to Stockholders
for the year ended December 31, 1999, 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 28 to 52 of the Annual Report to Stockholders for the year ended
December 31, 1999, 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.
20
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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 2000 annual meeting of stockholders. Such
information is hereby incorporated herein by reference and specifically made a
part hereof.
ITEM 11. EXECUTIVE COMPENSATION.
Information required by this Item will be set forth under the caption "Executive
Compensation" in the Company's definitive proxy statement for the Company's 2000
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 2000 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 2000 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, 1999, 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, 1999 and 1998
Consolidated Statements of Operations for each of the three years in the period
ended December 31, 1999
Consolidated Statements of Stockholders' Equity for each of the three years in
the period ended December 31, 1999
Consolidated Statements of Cash Flows for each of the three years in the period
ended December 31, 1999
21
<PAGE>
Consolidated Statements of Comprehensive Income for each of the three years in
the period ended December 31, 1999
Notes to Consolidated Financial Statements--December 31, 1999
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 as either not applicable or required information
is presented elsewhere.
(a)(3) Exhibits. The following exhibits are either filed herewith or are
incorporated herein by reference:
Exhibit No. 3 Articles of Incorporation and Bylaws
3.1(i) Restated Certificate of Incorporation (filed as Exhibit 3.1(i) to
Annual Report on Form 10-K for the year ended December 31, 1997, File No.
0-14087 ("1997 Form 10-K"), and incorporated herein by reference).
3.1(ii) Amended and Restated Bylaws (filed as Exhibit 3.1(ii) to 1997 Form
10-K, and incorporated herein by reference).
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 Agreement for Data Processing Services, dated February 28, 1996,
between Coastal Savings Bank and Data Dimensions Inc. (filed as Exhibit 10.12 to
Annual Report on Form 10-K for the year ended December 31, 1995, File No.
0-14087, and incorporated herein by reference).
10.3 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).
10.4 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).
10.5 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).
22
<PAGE>
10.6 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).
10.7 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).
10.8 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).
10.9 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).
10.10 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).
10.11 Agreement of Purchase and Sale, dated August 18, 1998, between
Coastal Bank and SYSCO Food Services of Northern New England, Inc. (filed as
Exhibit No. 99(a) to Current Report on Form 8-K, filed August 31, 1998, and
incorporated herein by reference).
10.12 Employment Agreement, dated as of September 4, 1998, among Coastal
Bank, First Coastal Corporation and Dennis D. Byrd (filed as Exhibit No. 10.12
to Quarterly Report on Form 10-Q for the quarter ended September 30, 1998, File
No. 0-14087 ("September 1998 Form 10-Q"), and incorporated herein by reference).
10.13 Employment Agreement, dated as of September 4, 1998, among Coastal
Bank, First Coastal Corporation and Gregory T. Caswell (filed as Exhibit No.
10.13 to September 1998 Form 10-Q, and incorporated herein by reference).
10.14 Amendment No. 1 to Rights Agreement, dated as of October 15, 1998,
between First Coastal Corporation and ChaseMellon Shareholder Services, L.L.C.
(filed as Exhibit No. 99(a) to Current Report on Form 8-K, filed October 22,
1998, and incorporated herein by reference).
10.15 Purchase and Assumption Agreement, dated February 22, 1999, between
Coastal Bank and Kennebunk Savings Bank (filed as Exhibit No. 10.15 to Annual
Report on Form 10-K for the year ended December 31, 1998, File No. 0-14087, and
incorporated herein by reference).
10.16 First Coastal Corporation 1996 Stock Option and Equity Incentive
Plan, as Amended, dated May 18, 1999 (filed herewith).
10.17 First Amendment to Loan Agreement, dated as of August 4, 1999, among
First Coastal Corporation and Androscoggin Savings Bank, Machias Savings Bank
and Norway Savings Bank (collectively, the "Lenders") and Machias Savings Bank,
as agent (filed as Exhibit 10.1 to Quarterly Report on Form 10-Q for the quarter
ended June 30, 1999, File No. 0-14087 ("June 1999 Form 10-Q"), and incorporated
herein by reference).
23
<PAGE>
10.18 Acknowledgment and Agreement, dated as of August 4, 1999, among First
Coastal Corporation and the Lenders (filed as Exhibit 10.2 to June 1999 Form
10-Q, and incorporated herein by reference).
10.19 Note Modification Agreement (Machias Note #1), dated as of August 4,
1999 for the benefit of Machias Savings Bank (filed as Exhibit 10.3 to June 1999
Form 10-Q, and incorporated herein by reference).
10.20 Note Modification Agreement (Machias Note #2), dated as of August 4,
1999 for the benefit of Machias Savings Bank (filed as Exhibit 10.4 to June 1999
Form 10-Q, and incorporated herein by reference).
10.21 Note Modification Agreement (Androscoggin Note), dated as of August
4, 1999 for the benefit of Androscoggin Savings Bank (filed as Exhibit 10.5 to
June 1999 Form 10-Q, and incorporated herein by reference).
10.22 Note Modification Agreement (Norway Note), dated as of August 4, 1999
for the benefit of Norway Savings Bank (filed as Exhibit 10.6 to June 1999 Form
10-Q, and incorporated herein by reference).
10.23 Lease Agreement, dated as of October 26, 1999, between Coastal Bank
and Olympia Equity Investors III, L.P. (filed as Exhibit 10.1 to Quarterly
Report on Form 10-Q for the quarter ended September 30, 1999, File No. 0-14087,
and incorporated herein by reference).
Exhibit No. 13 Annual Report to Security Holders
First Coastal Corporation 1999 Annual Report (filed herewith). Portions of the
First Coastal Corporation 1999 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 PricewaterhouseCoopers LLP to incorporation by reference of its
report dated February 8 , 2000 into the Company's Registration Statements on
Form S-8 (No. 333-08631 and 333-79475) filed with the Securities and Exchange
Commission on July 23, 1996 and May 27, 1999 (filed herewith).
Exhibit No. 27 Financial Data Schedule
27.1 Financial Data Schedule for the year ended December 31, 1999 (filed
herewith).
14(b) No Reports on Form 8-K were filed by the Company's during the fourth
quarter of 1999.
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.
24
<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 29, 2000 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 29, 2000 By: /s/ Gregory T. Caswell
-------------------------------
Gregory T. Caswell
President and Chief Executive
Officer (Principal Executive
Officer)
March 29, 2000 By: /s/ Dennis D. Byrd
-------------------------------
Dennis D. Byrd
Vice President and Treasurer
(Principal Financial and
Accounting Officer)
And by a majority of the Board of Directors of the Registrant.
March 29, 2000 By: /s/ David B. Hawkes, Sr.
-------------------------------
David B. Hawkes, Sr.
Chairman of the Board
and Director
March 29, 2000 By: /s/ Gregory T. Caswell
-------------------------------
Gregory T. Caswell, Director
March 29, 2000 By: /s/ Dennis D. Byrd
-------------------------------
Dennis D. Byrd, Director
March 29, 2000 By: /s/ MaryEllen FitzGerald
-------------------------------
MaryEllen FitzGerald, Director
March 29, 2000 By: /s/ Roger E. Klein
-------------------------------
Roger E. Klein, Director
March 29, 2000 By: /s/ Normand E. Simard
-------------------------------
Normand E. Simard
March 29, 2000 By: /s/ Edward K. Simensky
-------------------------------
Edward K. Simensky, Director
March 29, 2000 By: /s/ Charles A. Stewart III
-------------------------------
Charles A. Stewart III, Director
25
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
<S> <C>
10.16 First Coastal Corporation 1996 Stock Option and Equity Incentive Plan, as Amended, dated May
18, 1999.
13 First Coastal Corporation 1999 Annual Report.
21 Subsidiary of the Company.
23 Consent of PricewaterhouseCoopers LLP to incorporation by reference of its report dated
February 8, 2000 into the Company's Registration Statements on Form S-8 (No. 333-08631 and
333-79475) filed with the Securities and Exchange Commission on July 23, 1996 and May 27, 1999.
27.1 Financial Data Schedule for the year ended December 31, 1999.
</TABLE>
<PAGE>
Exhibit 10.16
FIRST COASTAL CORPORATION
1996 STOCK OPTION AND EQUITY INCENTIVE PLAN, AS AMENDED
FIRST COASTAL CORPORATION (the "Corporation") sets forth herein the terms
of this 1996 Stock Option and Equity Incentive Plan, as amended (the "Plan") as
follows:
1. PURPOSE
The Plan is intended to advance the interests of the Corporation by
providing eligible individuals (as designated pursuant to Section 4 below) with
an opportunity to acquire or increase a proprietary interest in the Corporation,
which thereby will create a stronger incentive to expend maximum effort for the
growth and success of the Corporation and its subsidiaries, and will encourage
such eligible individuals to remain in the employ or service of the Corporation
or that of one or more of its subsidiaries. To this end, the Plan provides for
the grant of stock options and the issuance of shares of stock as a bonus,
including restricted stock, all as set out herein.
Each stock option granted under the Plan (an "Option") is intended to be an
"incentive stock option" within the meaning of section 422 of the Internal
Revenue Code of 1986, as amended from time to time, or the corresponding
provision of any subsequently enacted tax statute (the "Code"), except (i) to
the extent that any such Option would exceed the limitations set forth in
Section 7 below; (ii) for Options specifically designated at the time of grant
as not being "incentive stock options" and (iii) for Options granted to
directors of the Corporation who are not officers or other salaried employees of
the Corporation or any of its subsidiaries ("Non-Employee Directors"). Shares of
stock may also be issued to employees pursuant to the Plan as a bonus or in lieu
of a cash bonus and such shares may be subject to vesting and transfer
restrictions, in accordance with the provisions of Section 6 below. Such grants
and awards are referred to collectively as "Incentive Awards." Each Incentive
Award shall be evidenced by a written agreement between the Corporation and the
recipient employee setting out the terms and conditions of the grant (an
"Agreement").
2. ADMINISTRATION
(a) Board. The Plan shall be administered by the Board of Directors of the
Corporation (the "Board"), which shall have the full power and authority to take
all actions, and to make all determinations required or provided for under the
Plan or any Incentive Award granted or Agreement entered into hereunder and all
such other actions and determinations not inconsistent with the specific terms
and provisions of the Plan deemed by the Board to be necessary or appropriate to
the administration of the Plan or any Incentive Award granted or Agreement
entered into hereunder. All such actions and determinations shall be by the
affirmative vote of a majority of the members of the Board present at a meeting
at which any issue relating to the Plan is properly raised for consideration or
by unanimous consent of the Board executed in writing in accordance with the
Corporation's Certificate of Incorporation and By-Laws, and with applicable law.
The interpretation and construction by the Board of any provision of the Plan or
of any Incentive Award granted or Agreement entered into hereunder shall be
final and conclusive.
(b) Committee. The Board may from time to time appoint an Incentive
Compensation Committee (the "Committee") consisting of not less than three
members of the Board, none of whom shall be an officer or other salaried
employee of the Corporation or any of its subsidiaries, and each of whom shall
qualify in all respects as an "outside director" for purposes of Treasury
Regulations ss. 1.162-27(e)(3) and, to the extent required to satisfy the
requirements of Rule 16b-3 of the Securities and Exchange Commission under the
Securities Exchange Act of 1934 (the
<PAGE>
"Exchange Act"), as a "disinterested person". The Board, in its sole discretion,
may provide that the role of the Committee shall be limited to making
recommendations to the Board concerning any determinations to be made and
actions to be taken by the Board pursuant to or with respect to the Plan, or the
Board may delegate to the Committee such powers and authorities related to the
administration of the Plan, as set forth in Section 2(a) above, as the Board
shall determine, consistent with the Certificate of Incorporation and By-Laws of
the Corporation and applicable law. The Board may remove members, add members,
and fill vacancies on the Committee from time to time, all in accordance with
the Corporation's Certificate of Incorporation and By-Laws, and with applicable
law. The majority vote of the Committee, or acts reduced to or approved in
writing by a majority of the members of the Committee, shall be the valid acts
of the Committee.
(c) No Liability. No member of the Board or of the Committee shall be
liable for any action or determination made in good faith with respect to the
Plan or any Incentive Award granted or Agreement entered into hereunder.
(d) Delegation to the Committee. In the event that the Plan or any
Incentive Award granted or Agreement entered into hereunder provides for any
action to be taken by or determination to be made by the Board, such action may
be taken by or such determination may be made by the Committee if the power and
authority to do so has been delegated to the Committee by the Board as provided
for in Section 2(b) above. Unless otherwise expressly determined by the Board,
any such action or determination by the Committee shall be final and conclusive.
(e) Action by the Board. Except as indicated below, the Board may act under
the Plan other than by, or in accordance with the recommendations of, the
Committee, constituted as set forth in Section 2(b) above with respect to
Incentive Awards granted to individuals who are subject to Section 16 of the
Exchange Act, only if a majority of the members of the Board are "disinterested
persons" as defined in Rule 16b-3 of the Securities and Exchange Commission
under the Exchange Act. This restriction on the Board's actions under the Plan,
however, shall not apply in the event the restriction ceases to be a requirement
for reliance upon the exemption provided by Rule 16b-3.
3. STOCK
The stock that may be issued pursuant to Incentive Awards granted under the
Plan shall be shares of Common Stock, par value $1.00 per share, of the
Corporation (the "Stock"), which shares may be treasury shares or authorized but
unissued shares. The number of shares of Stock that may be issued pursuant to
Incentive Awards granted under the Plan shall not exceed in the aggregate
260,000 shares, which number of shares is subject to adjustment as hereinafter
provided in Section 17 below. If any Incentive Award expires, terminates, or is
terminated or forfeited for any reason prior to exercise or vesting in full, the
shares of Stock that were subject to the unexercised or forfeited portion of
such Incentive Award shall be available for future Incentive Awards granted
under the Plan.
4. ELIGIBILITY
(a) Employees. Incentive Awards may be granted under the Plan to any
full-time employee of the Corporation or any "subsidiary corporation" thereof
within the meaning of Section 424(f) of the Code (a "Subsidiary") (including any
such employee who is an officer or director of the Corporation or any
Subsidiary) as the Board shall determine and designate from time to time prior
to expiration or termination of the Plan. The maximum number of shares of Stock
subject to Options that may be granted under the Plan to any officer or other
employee of the Corporation or any Subsidiary in any calendar year is 30,000
shares (subject to adjustment as provided in Section 17 hereof).
-2-
<PAGE>
(b) Non-Employee Directors. Subject to the availability of shares issued
under Section 3 of the Plan, (i) on the date of the first public offering of the
Corporation's Stock occurring after the effective date (as defined in Section
5(a) below) an Option to purchase up to 1,500 shares of Stock, at the price at
which the Stock is offered to the public in such offering and upon the other
terms and conditions specified in the Plan, shall be granted under the Plan to
each individual who is serving as a Non-Employee Director on that date, except
that such Options shall not be granted if no such offering occurs before
December 31, 1996, (ii) as of each annual meeting of stockholders of the Company
occurring after December 31, 1996 and before January 1, 1999, an Option to
purchase up to 500 shares of Stock, at the price and upon the other terms and
conditions specified in the Plan, shall be granted under the Plan to each
Non-Employee Director who is elected to the Board of Directors of the
Corporation by the stockholders at such meeting or whose term of office
continues after such meeting and (iii) as of each annual meeting of stockholders
of the Corporation occurring after December 31, 1998, an Option to purchase up
to 1,000 shares of Stock, at the price and upon the other terms and conditions
specified in the Plan, shall be granted under the Plan to each Non-Employee
Director who is elected to the Board of Directors of the Corporation by the
stockholders at such meeting or whose term of office continues after such
meeting.
5. EFFECTIVE DATE AND TERM OF THE PLAN
(a) Effective Date. The Plan shall be effective as of the date of adoption
by the Board, subject to approval of the Plan within one year of such effective
date by a majority of the votes present, either in person or by proxy, and
entitled to vote at a duly held meeting of the stockholders at which a quorum
representing at least one-third of all the outstanding voting stock is present,
either in person or by proxy; provided, however, that upon approval of the Plan
by the stockholders of the Corporation as set forth above, all Incentive Awards
granted under the Plan on or after the effective date shall be fully effective
as if the stockholders of the Corporation had approved the Plan on the effective
date. If the stockholders fail to approve the Plan within one year of such
effective date, any Incentive Awards granted hereunder shall be null and void
and of no effect.
(b) Term. The Plan shall terminate on the date ten years from April 2,
1999.
6. GRANT OF INCENTIVE AWARDS
(a) Options. Subject to the terms and conditions of the Plan, the Board
may, at any time and from time to time, prior to the date of termination of the
Plan, grant to such eligible individuals as the Board may determine
("Optionees"), Options to purchase such number of shares of the Stock on such
terms and conditions as the Board may determine, including any terms or
conditions which may be necessary to qualify such Options as "incentive stock
options" under Section 422 of the Code.
(b) Bonus and Restricted Stock Awards. Subject to the terms of the Plan,
the Board may, at any time and from time to time, prior to the date of
termination of the Plan, grant to such eligible individuals as the Board may
determine ("Holders"), shares of Stock, subject to the attainment of such
performance objectives, the completion of such service requirements (if any) and
the payment of such amount (if any) as the Board shall determine and specify as
a condition to making such grant. Each such grant shall be effected by the
execution of an Agreement setting out the terms and conditions applicable
thereto and by the issuance of shares of Stock or restricted Stock. Agreements
covering bonus or restricted Stock awards need not contain the same or similar
provisions, provided, that all such Agreements shall comply with the terms of
the Plan. Upon attainment of the specified objectives and requirements (or, to
the extent specified by the Board, partial attainment of such objectives and
requirements), the Holder shall be entitled to shares of Stock specified in the
grant (or the portion of such shares earned by partial attainment of the
objectives and requirements, as applicable) free of restrictions, except that
such shares of Stock shall continue to be subject to the
-3-
<PAGE>
restrictions set out in Sections 10(d) and 15. Except as shall otherwise have
been specified in the Agreement at the time of grant or in any duly executed
amendment thereto, the shares of restricted Stock (or appropriate portion
thereof) shall be forfeited and shall again be available for regrant under the
terms of the Plan upon (i) the failure of the Holder to pay the price (if any)
specified for the shares within the time set by the Board at the time of the
grant, (ii) upon the expiration of the specified period for attaining
performance objectives without such objectives having been achieved or (iii)
upon termination of the Holder's employment without the Holder having satisfied
the service requirement specified at the time of grant. The Board may require
that the certificates evidencing the grant of shares of restricted Stock
hereunder be held in escrow until such restrictions have expired. The Board may
also cause a legend to be placed on such certificates making appropriate
reference to the restrictions to which the shares are subject.
(c) Date of Grant. The date on which the Board approves the grant of an
Incentive Award shall be considered the date on which such Incentive Award is
granted.
7. LIMITATION ON INCENTIVE STOCK OPTIONS
An Option (other than an Option described in exception (ii) or (iii) of
Section 1) shall constitute an Incentive Stock Option to the extent that the
aggregate fair market value (determined at the time the option is granted) of
the Stock with respect to which Incentive Stock Options are exercisable for the
first time by any Optionee during any calendar year (under the Plan and all
other plans of the Optionee's employer corporation and its parent and subsidiary
corporations within the meaning of Section 422(d)(1) of the Code) does not
exceed $100,000.
8. OPTION AGREEMENTS
All Options granted pursuant to the Plan shall be evidenced by written
agreements ("Option Agreements"), to be executed by the Corporation and by the
Optionee, in such form or forms as the Board shall from time to time determine.
Option Agreements covering Options granted from time to time or at the same time
need not contain similar provisions; provided, however, that all such Option
Agreements shall comply with all terms of the Plan.
9. OPTION PRICE
The purchase price of each share of the Stock subject to an Option (the
"Option Price") shall be fixed by the Board and stated in each Option Agreement,
and shall be not less than the greater of par value or one hundred percent of
the fair market value of a share of the Stock on the date the Option is granted
(as determined in good faith by the Board); provided, however, that in the event
the Optionee would otherwise be ineligible to receive an "incentive stock
option" by reason of the provisions of Sections 422(b)(6) and 424(d) of the Code
(relating to stock ownership of more than ten percent), the Option Price of an
Option which is intended to be an "incentive stock option" (within the meaning
of Section 422 of the Code) shall be not less than the greater of par value or
one hundred and ten percent of the fair market value of a share of Stock at the
time such Option is granted. In the event that the Stock is listed on an
established national or regional stock exchange, is admitted to quotation on the
National Association of Securities Dealers Automated Quotation System, or is
publicly traded in an established securities market, in determining the fair
market value of the Stock, the Board shall use the closing price of the Stock on
such exchange or System or in such market (the highest such closing price if
there is more than one such exchange or market) on the trading date immediately
before the Option is granted (or, if there is no such closing price, then the
Board shall use the mean between the highest bid and lowest asked prices or
between the high and low prices on such date), or, if no sale of the Stock has
been made on such day, on the next preceding day on which any such sale shall
have been made.
-4-
<PAGE>
10. TERM AND EXERCISE OF OPTIONS
(a) Term. Each Option granted under the Plan shall terminate and all rights
to purchase shares thereunder shall cease upon the expiration of ten years from
the date such Option is granted, or, with respect to Options granted to persons
other than Non-Employee Directors, on such date prior thereto as may be fixed by
the Board and stated in the Option Agreement relating to such Option; provided,
however, that in the event the Optionee would otherwise be ineligible to receive
an "incentive stock option" by reason of the provisions of Sections 422(b)(6)
and 424(d) of the Code (relating to stock ownership of more than ten percent),
an Option granted to such Optionee which is intended to be an "incentive stock
option" (within the meaning of Section 422 of the Code) shall in no event be
exercisable after the expiration of five years from the date it is granted.
(b) Option Period and Limitations on Exercise. Each Option granted under
the Plan to persons other than Non-Employee Directors shall be exercisable, in
whole or in part, at any time and from time to time, over a period commencing on
or after the date of grant and ending upon the expiration or termination of the
Option, as the Board shall determine and set forth in the Option Agreement
relating to such Option. Without limiting the foregoing, the Board, subject to
the terms and conditions of the Plan, may in its sole discretion provide that an
Option may not be exercised in whole or in part for any period or periods of
time during which such Option is outstanding; provided, however, that any such
limitation on the exercise of an Option contained in any Option Agreement may be
rescinded, modified or waived by the Board, in its sole discretion, at any time
and from time to time after the date of grant of such Option, so as to
accelerate the time at which the Option may be exercised. Each Option granted to
a Non-Employee Director shall be exercisable, in whole or in part, at any time
and from time to time, over a period commencing on the date of grant and ending
upon the expiration of the Option. Notwithstanding any other provisions of the
Plan, no Option granted to an Optionee under the Plan shall be exercisable in
whole or in part prior to the date the Plan is approved by the stockholders of
the Corporation as provided in Section 5 above.
(c) Method of Exercise. An Option that is exercisable hereunder may be
exercised by delivery to the Corporation on any business day, at its principal
office, addressed to the attention of the Committee, of written notice of
exercise, which notice shall specify the number of shares with respect to which
the Option is being exercised, and shall be accompanied by payment in full of
the Option Price of the shares for which the Option is being exercised. The
minimum number of shares of Stock with respect to which an Option may be
exercised, in whole or in part, at any time shall be the lesser of 100 shares or
the maximum number of shares available for purchase under the Option at the time
of exercise. Payment of the Option Price for the shares of Stock purchased
pursuant to the exercise of an Option shall be made (i) in cash or in cash
equivalents; (ii) through the tender to the Corporation of shares of Stock,
which shares shall be valued, for purposes of determining the extent to which
the Option Price has been paid thereby, at their fair market value (determined
in the manner described in Section 9 above) on the date of exercise; or (iii) by
a combination of the methods described in (i) and (ii). Notwithstanding the
preceding sentence, payment in full of the Option Price need not accompany the
written notice of exercise provided the notice of exercise directs that the
Stock certificate or certificates for the shares for which the Option is
exercised be delivered to a licensed broker acceptable to the Corporation as the
agent for the individual exercising the Option and, at the time such Stock
certificate or certificates are delivered, the broker tenders to the Corporation
cash (or cash equivalents acceptable to the Corporation) equal to the Option
Price for the shares of Stock purchased pursuant to the exercise of the Option
plus the amount (if any) of federal and/or other taxes which the Corporation
may, in its judgment, be required to withhold with respect to the exercise of
the Option. An attempt to exercise any Option granted hereunder other than as
set forth above shall be invalid and of no force and effect. Promptly after the
exercise of an Option and the payment in full of the Option Price of the shares
of Stock covered thereby, the individual exercising the Option shall be entitled
to the issuance of a Stock certificate or certificates evidencing his ownership
of such shares. A separate Stock certificate or certificates shall be issued for
any shares purchased pursuant to the exercise of an Option which is an
"incentive stock option" (within the meaning of Section 422 of the
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Code) ("Incentive Stock Option"), which certificate or certificates shall not
include any shares which were purchased pursuant to the exercise of an Option
which is not an Incentive Stock Option. An individual holding or exercising an
Option shall have none of the rights of a stockholder until the shares of Stock
covered thereby are fully paid and issued to him and, except as provided in
Section 17 below, no adjustment shall be made for dividends or other rights for
which the record date is prior to the date of such issuance.
(d) Restrictions on Transfer of Stock and Rights of Corporation to
Repurchase Shares. If an Option is exercised before the date that is six months
from the later of (i) the date of grant of the Option or (ii) the date of
stockholder approval of the Plan and the individual exercising the Option is a
reporting person under Section 16(a) of the Exchange Act, then such certificate
or certificates shall bear a legend, if necessary to qualify for an exemption
under Rule 16b-3 under the Exchange Act, restricting the transfer of the Stock
covered thereby until the expiration of six months from the later of the date
specified in clause (i) above or the date specified in clause (ii) above. The
Board may provide in the Agreement relating to an Incentive Award granted to an
employee or in a separate instrument for (a) restrictions and limitations on the
transferability of the shares of Stock issued or to be acquired upon exercise of
an Option granted as a part of such Incentive Award, (b) an agreement between
the Optionee and the Corporation for the sale of such shares by the Optionee and
their purchase by the Corporation upon the happening of such events, and at such
price and under such other terms and conditions as the Board shall determine and
(c) such other restrictions or limitations on such shares as it may deem
advisable, including restrictions pursuant to Section 15 hereof. All share
certificates issued to evidence shares of Stock issued hereunder (including
shares issued as a result of the exercise of an Option) shall bear such legends
and statements as the Board shall deem appropriate or advisable to reflect any
such restrictions, limitations or agreements.
11. TRANSFERABILITY OF OPTIONS
During the lifetime of an Optionee to whom an Option is granted, only such
Optionee (or, in the event of legal incapacity or incompetency, the Optionee's
guardian or conservator, committee or other legal representative) may exercise
the Option, except that such restriction shall apply in the case of an Option
that is not an Incentive Stock Option only if such restriction is required to
satisfy the requirements of Rule 16b-3 under the Exchange Act. No Incentive
Stock Option shall be assignable or transferable by the Optionee to whom it is
granted, other than by will or the laws of descent and distribution.
12. TERMINATION OF EMPLOYMENT OR SERVICE
(a) Employees. Upon the termination of the employment of an Optionee with
the Corporation or a Subsidiary, other than by reason of the death or "permanent
and total disability" (within the meaning of Section 22(e)(3) of the Code) of
such Optionee, any Option granted to an Optionee pursuant to the Plan shall
terminate three months after the date of such termination of employment, unless
earlier terminated pursuant to Section 10(a) above, and such Optionee shall have
no further right to purchase shares of Stock pursuant to such Option; provided,
however, that the Board may provide, by inclusion of appropriate language in any
Option Agreement, that an Optionee may (subject to the general limitations on
exercise set forth in Section 10(b)), in the event of termination of employment
of the Optionee with the Corporation or a Subsidiary, exercise an Option, in
whole or in part, at any time after such termination of employment and before
termination of the Option as provided in Section 10(a) above, either subject to
or without regard to any installment limitation on exercise imposed pursuant to
Section 10(b) above. Upon the termination of the employment of a Holder with the
Corporation or a Subsidiary, other than by reason of the death or "permanent and
total disability" (within the meaning of Section 22(e)(3) of the Code) of such
Holder, any shares of restricted Stock that have not become vested shall be
forfeited. Whether a leave of absence or leave on military or government service
shall constitute a termination of employment for
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purposes of the Plan shall be determined by the Board, which determination shall
be final and conclusive. For purposes of the Plan, a termination of employment
with the Corporation or a Subsidiary shall not be deemed to occur if the
Optionee or Holder is immediately thereafter employed with the Corporation or
any Subsidiary.
(b) Non-Employee Directors. Any Option granted to a Non-Employee Director
shall not terminate until the expiration of the ten-year term of the Option
regardless of whether the Non-Employee Director continues to serve as a director
of the Corporation or any subsidiary of the Corporation, as applicable.
13. RIGHTS IN THE EVENT OF DEATH OR DISABILITY
(a) Death of an Employee. If the Optionee dies while employed by the
Corporation or a Subsidiary or after termination of employment and during the
period in which an Option may be exercised hereunder, except as otherwise is
provided in the Option Agreement relating to such Option, the executors or
administrators or legatees or distributees of such Optionee's estate shall have
the right (subject to the general limitations on exercise set forth in Section
10(b) above), at any time within one year after the date of the Optionee's death
and prior to termination of the Option as provided in Section 10(a) above, to
exercise any Option held by such Optionee at the date of such Optionee's death,
whether or not such Option was exercisable immediately prior to such Optionee's
death; provided, however, that the Board may provide, by inclusion of
appropriate language in any Option Agreement, that in the event of the death of
the Optionee, the holder of an Option may (subject to the general limitations on
exercise set forth in Section 10(b)), exercise an Option, in whole or in part,
at any time after the Optionee's death and before termination of the Option as
provided in Section 10(a) above, either subject to or without regard to any
installment limitation on exercise imposed pursuant to Section 10(b) above. The
extent to which shares of restricted Stock shall become vested as a result of
the Holder's death while employed by the Corporation or a Subsidiary shall be
specified in the Agreement with respect to such Incentive Award.
(b) Disability of an Employee. If the Optionee terminates employment with
the Corporation or a Subsidiary by reason of the "permanent and total
disability" (within the meaning of Section 22(e)(3) of the Code) of such
Optionee, then such Optionee shall have the right (subject to the general
limitations on exercise set forth in Section 10(b) above), at any time within
one year after such termination of employment and prior to termination of the
Option as provided in Section 10(a) above, to exercise, in whole or in part, any
Option held by such Optionee at the date of such termination of employment,
whether or not such Option was exercisable immediately prior to such termination
of employment; provided, however, that the Board may provide, by inclusion of
appropriate language in the Option Agreement, that the Optionee may (subject to
the general limitations on exercise set forth in Section 10(b) above), in the
event of the termination of employment of the Optionee with the Corporation or a
Subsidiary by reason of the "permanent and total disability" (within the meaning
of Section 22(e)(3) of the Code) of such Optionee, exercise an Option, in whole
or in part, at any time after such termination of employment and before
termination of the Option as provided in Section 10(a) above, either subject to
or without regard to any installment limitation on exercise imposed pursuant to
Section 10(b) above. Whether a termination of employment is to be considered by
reason of "permanent and total disability" for purposes of this Plan shall be
determined by the Board, which determination shall be final and conclusive. The
extent to which shares of restricted Stock shall become vested as a result of
the Holder's disability while employed by the Corporation or a Subsidiary shall
be specified in the Agreement with respect to such Incentive Award.
(c) Death or Disability of a Non-Employee Director. Any Option granted to a
Non-Employee Director shall continue to be exercisable following the death or
disability of the Non-Employee Director until the expiration of the Option under
Section 10(a) above.
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14. USE OF PROCEEDS
The proceeds received by the Corporation from the sale of Stock pursuant to
Incentive Awards granted under the Plan shall constitute general funds of the
Corporation.
15. REQUIREMENTS OF LAW
(a) Violations of Law. The Corporation shall not be required to sell or
issue any shares of Stock under any Incentive Award if the sale or issuance of
such shares would constitute a violation by the individual receiving such shares
or exercising an Option or by the Corporation of any provisions of any law or
regulation of any governmental authority, including without limitation any
federal or state securities laws or regulations. Specifically in connection with
the Securities Act of 1933 (as now in effect or as hereafter amended), upon
exercise of any Option, unless a registration statement under such Act is in
effect with respect to the shares of Stock covered by such Option, the
Corporation shall not be required to sell or issue such shares unless the Board
has received evidence satisfactory to it that the holder of such Option may
acquire such shares pursuant to an exemption from registration under such Act.
Any determination in this connection by the Board shall be final, binding, and
conclusive. The Corporation may, but shall in no event be obligated to, register
any securities covered hereby pursuant to the Securities Act of 1933 (as now in
effect or as hereafter amended). The Corporation shall not be obligated to take
any affirmative action in order to cause the exercise of an Option or the
issuance of shares pursuant thereto to comply with any law or regulation of any
governmental authority. As to any jurisdiction that expressly imposes the
requirement that an Option shall not be exercisable unless and until the shares
of Stock covered by such Option are registered or are subject to an available
exemption from registration, the exercise of such Option (under circumstances in
which the laws of such jurisdiction apply) shall be deemed conditioned upon the
effectiveness of such registration or the availability of such an exemption.
(b) Compliance with Rule 16b-3. The Plan is intended to comply with Rule
16b-3 or its successor under the Exchange Act. With respect to persons subject
to Section 16 of the Exchange Act, any provision of the Plan or action of the
Plan administrators that is inconsistent with such Rule shall be deemed null and
void to the extent permitted by law and deemed advisable by the Plan
administrators.
16. AMENDMENT AND TERMINATION OF THE PLAN
The Board may, at any time and from time to time, amend, suspend or
terminate the Plan as to any shares of Stock as to which Incentive Awards have
not been granted; provided, however, that no amendment by the Board shall,
without approval by a majority of the votes present, either in person or by
proxy, and entitled to vote at a duly held meeting of stockholders at which a
quorum representing at least one-third of all the outstanding voting stock of
the Corporation is present, either in person or by proxy, (a) change the
requirements as to eligibility to receive Incentive Awards; (b) increase the
maximum number of shares of Stock in the aggregate that may be issued pursuant
to Incentive Awards granted under the Plan (except as permitted under Section 17
hereof); or (c) materially increase the benefits accruing to eligible
individuals under the Plan. Except as permitted under Section 17 hereof, no
amendment, suspension or termination of the Plan shall, without the consent of
the holder of the Incentive Award, alter or impair rights or obligations under
any Incentive Award theretofore granted under the Plan.
17. EFFECT OF CHANGES IN CAPITALIZATION
(a) Changes in Stock. If the outstanding shares of Stock are increased or
decreased or changed into or exchanged for a different number or kind of shares
or other securities of the
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Corporation by reason of any recapitalization, reclassification, stock split-up,
combination of shares, exchange of shares, stock dividend or other distribution
payable in capital stock, or other increase or decrease in such shares effected
without receipt of consideration by the Corporation, occurring after the
effective date of the Plan, the number and kinds of shares for the issuance of
which Incentive Awards may be granted under the Plan shall be adjusted
proportionately and appropriately by the Corporation. In addition, the number
and kind of shares for which Options are outstanding shall be adjusted
proportionately and appropriately so that the proportionate interest of the
holder of the Option immediately following such event shall, to the extent
practicable, be the same as immediately prior to such event. Any such adjustment
in outstanding Options shall not change the aggregate Option Price payable with
respect to shares subject to the unexercised portion of the Option outstanding
but shall include a corresponding proportionate adjustment in the Option Price
per share.
(b) Reorganization in Which the Corporation Is the Surviving Corporation.
Subject to Subsection (c) hereof, if the Corporation shall be the surviving
corporation in any reorganization, merger, or consolidation of the Corporation
with one or more other corporations, any Option theretofore granted pursuant to
the Plan shall pertain to and apply to the securities to which a holder of the
number of shares of Stock subject to such Option would have been entitled
immediately following such reorganization, merger, or consolidation, with a
corresponding proportionate adjustment of the Option Price per share so that the
aggregate Option Price thereafter shall be the same as the aggregate Option
Price of the shares remaining subject to the Option immediately prior to such
reorganization, merger, or consolidation.
(c) Reorganization in Which the Corporation Is Not the Surviving
Corporation or Sale of Assets or Stock. Upon the dissolution or liquidation of
the Corporation, or upon a merger, consolidation or reorganization of the
Corporation with one or more other corporations in which the Corporation is not
the surviving corporation, or upon a sale of all or substantially all of the
assets of the Corporation to another corporation, or upon any transaction
(including, without limitation, a merger or reorganization in which the
Corporation is the surviving corporation) approved by the Board which results in
any person or entity owning eighty percent or more of the combined voting power
of all classes of stock of the Corporation, the Plan and all Options outstanding
hereunder shall terminate, except to the extent provision is made in writing in
connection with such transaction for the continuation of the Plan and/or the
assumption of the Options theretofore granted, or for the substitution for such
Options of new options covering the stock of a successor corporation, or a
parent or subsidiary thereof, with appropriate adjustments as to the number and
kinds of shares and exercise prices, in which event the Plan and Options
theretofore granted shall continue in the manner and under the terms so
provided. Except as otherwise provided in the Option Agreement with respect to
an Option granted other than to a Non-Employee Director, in the event of any
such termination of the Plan, each individual holding an Option shall have the
right (subject to the general limitations on exercise set forth in Section 10(b)
above), immediately prior to the occurrence of such termination and during such
period occurring prior to such termination as the Board in its sole discretion
shall determine and designate, to exercise such Option in whole or in part,
whether or not such Option was otherwise exercisable at the time such
termination occurs and without regard to any installment limitation on exercise
imposed pursuant to Section 10(b) above. The Board shall send written notice of
an event that will result in such a termination to all individuals who hold
Options not later than the time at which the Corporation gives notice thereof to
its stockholders.
(d) Adjustments. Adjustments under this Section 17 related to Stock or
securities of the Corporation shall be made by the Board, whose determination in
that respect shall be final, binding, and conclusive. No fractional shares of
Stock or units of other securities shall be issued pursuant to any such
adjustment, and any fractions resulting from any such adjustment shall be
eliminated in each case by rounding downward to the nearest whole share or unit.
(e) No Limitations on Corporation. The grant of an Incentive Award pursuant
to the Plan shall not affect or limit in any way the right or power of the
Corporation to make
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adjustments, reclassifications, reorganizations or changes of its capital or
business structure or to merge, consolidate, dissolve or liquidate, or to sell
or transfer all or any part of its business or assets.
18. DISCLAIMER OF RIGHTS
No provision in the Plan or in any Incentive Award granted or Agreement
entered into pursuant to the Plan shall be construed to confer upon any
individual the right to remain in the employ or service of the Corporation or
any Subsidiary, or to interfere in any way with the right and authority of the
Corporation or any Subsidiary either to increase or decrease the compensation of
any individual at any time, or to terminate any employment or other relationship
between any individual and the Corporation or any Subsidiary.
19. NONEXCLUSIVITY OF THE PLAN
Neither the adoption of the Plan nor the submission of the Plan to the
stockholders of the Corporation for approval shall be construed as creating any
limitations upon the right and authority of the Board to adopt such other
incentive compensation arrangements (which arrangements may be applicable either
generally to a class or classes of individuals or specifically to a particular
individual or individuals) as the Board in its discretion determines desirable,
including, without limitation, the granting of stock options otherwise than
under the Plan.
* * *
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This Plan was duly adopted and approved by the Board of Directors of the
Corporation by resolution at a meeting held on May 2, 1996 and was duly approved
by the stockholders of the Corporation at a meeting held on June 11, 1996. This
Plan was amended pursuant to certain amendments duly adopted and approved by the
Board of Directors of the Corporation by resolution at a meeting held on April
2, 1999 and which amendments were duly approved by the stockholders of the
Corporation at a meeting held on May 18, 1999.
/s/ Patricia Briand
----------------------------
Secretary of the Corporation
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Exhibit 13
First Coastal Corporation
1999
ANNUAL
REPORT
including its subsidiary
Coastal Bank
<PAGE>
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Letter to Stockholders 1
Selected Consolidated Financial Data 5
Management's Discussion and Analysis of
Financial Condition and Results of Operations 7
Market for Registrant's Common Equity and
Related Stockholder Matters 27
Report of Independent Accountants 28
Consolidated Financial Statements 29
Notes to Consolidated Financial Statements 34
Corporate and Stockholder Information 53
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<PAGE>
PRESIDENT'S LETTER
[PHOTO]
TO OUR STOCKHOLDERS:
During 1999 we made significant progress in a number of areas, both to further
improve shareholder value in First Coastal Corporation ("First Coastal" or the
"Company") and to reposition Coastal Bank ("Coastal" or the "Bank") for future
long-term, profitable growth. We are pleased to have the opportunity to bring
our shareholders up to date on what transpired in 1999, as well as the Company's
plans for the future.
ACCOMPLISHMENTS IN 1999
Net income for the year ended December 31, 1999 equaled $2.2 million, or $1.62
per share fully diluted. The Company's financial results were positively
impacted by after tax gains of approximately $733,000 and $300,000 recorded
during the first six months of 1999, resulting from the sale of the Bank's
Kennebunk branch and residential loan servicing portfolio, respectively. Net
income for the year ended December 31, 1998 equaled $1.6 million, after being
positively impacted by a nonrecurring $356,000 after tax gain associated with
the sale of real estate which presently houses the Bank's Westbrook headquarters
branch and operations center. While core 1999 earnings, adjusted for the
nonrecurring items noted above, were essentially the same as compared to 1998, a
benefit of the Company's actions over the past two years to align its resources
with its strategies is that we have been able to take advantage of one-time
gains to bolster net income and enhance the Company's capital base.
The Company's focus on commercial banking exhibited significant progress in
1999, evidenced by a $17.7 million (30.0%) increase in commercial loan balances,
to $76.3 million, and a $5.0 million (67.6%) increase in commercial deposits and
secured borrowings. The increase in commercial loan balances accounted for the
overall increase in total loan balances, by $14.7 million, to $120.5 million.
Deposit balances declined $8.4 million in 1999 as compared to 1998 as a result
of the Kennebunk branch sale, which included $12.5 million in deposits.
In June 1999, the Company commenced a stock repurchase program with the intent
to repurchase up to 5% (68,000 shares) of its then outstanding common stock. On
February 8, 2000, the Company announced that this program had been extended and
that it plans to repurchase up to an additional 68,000 shares, or a total of
136,000 shares (10% of the outstanding common stock as of the June 1999
commencement of the program). The stock repurchase program is expected to be
conducted for up to an additional twelve months, until February 2001. We
continue to believe that First Coastal's stock is currently undervalued by the
market and that the purchase of the Company's stock represents an effective
utilization of capital. As of March 27, 2000, the Company had repurchased
68,619 shares, totaling 5.04% of its outstanding common stock as of June 1999.
"BUILDING A NEW BANK" - FIRST COASTAL'S STRATEGY FOR 2000 AND BEYOND
The Company has made significant progress in addressing the numerous strategic
challenges that resulted from its problems which emerged in the late 1980's and
continued until the completion of the 1996 recapitalization. While the
recapitalization brought to an end a period of financial risk that for years
threatened First Coastal's solvency, the Company that emerged from this period
faced significant issues. For a summary of the Company's history, including its
difficulties during this period, please see "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Historical
Background," on page 7 following.
The Company's current strategic direction was formulated in 1997 and the plan
continues to evolve with changes in identified business opportunities as well as
changes in the financial services industry. The Company's primary, long term
strategic objectives can be summarized as follows:
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STRATEGIC OBJECTIVES
. Improve the Company's long-term prospects for sustained growth in core
earnings per share, with earnings and growth in earnings per share reaching or
exceeding peer averages.
. Develop Coastal Bank to become the independent community bank of choice for
both commercial and retail customers in the Bank's primary market, which
consists of the U.S. Interstate 95/295 corridor from Saco-to-Brunswick, with a
particular emphasis on becoming well-established in the Greater Portland
market.
. Maximize shareholder value through the development of Coastal Bank's
profitability, and overall market positioning and presence.
In order to position the Company to achieve these objectives while dealing with
the strategic challenges facing First Coastal following the 1996
recapitalization, we have been called upon, in essence, to "build a new bank."
The Company's strategic plan calls for the implementation of a number of
significant initiatives, some already implemented and some still pending, which
are intended to transform First Coastal into a better positioned financial
services company with excellent prospects for future profitable growth. The
following are the business areas that are receiving the most focus with regard
to "building a new Coastal":
COMMERCIAL BANKING - Over the past three years, we have assembled a strong
commercial banking team that, in combination with Coastal's relatively flat
organizational structure and bank-wide focus on service, provides a superior
level of expertise and commitment to commercial customers in our market. Unlike
some areas of banking which have become increasingly more commodity-like and
transaction oriented, commercial banking continues to remain heavily reliant
upon expertise and customer service, and the development and maintenance of
sustainable business relationships.
While our 1999 results reflect the strength of the professionals working in this
area, the overall capabilities of this team were just enhanced with the addition
of Gordon I. Erikson, Jr., who is joining Coastal in April as Senior Vice
President, Commercial Banking. Gordon comes to Coastal following a 24-year
career with a major competitor, most recently as Senior Vice President, Retail
and Small Business Sales Leader, responsible for Maine. Gordon will be managing
Coastal's commercial business development effort, including both commercial
lending and cash management.
BRANCH NETWORK EXPANSION - Coastal's branch network has historically been
unsynergistic and by 1996 had been reduced to a disjointed collection of seven
branches spread over approximately 50 miles of the coastal I-95/I-295 corridor.
A key challenge of our strategic plan has been the development of a synergistic
branch network that will enable us to attain the strategic objectives discussed
above. Of particular concern has been the lack of any visible presence (beyond
our Westbrook branch/operations center) in the State's most promising banking
market: the 35-mile stretch between Freeport and Saco, which encompasses the
Greater Portland market. While we have no intention of attempting to replicate
the branching systems currently employed by the three regional banks which
dominate the Southern Maine market, particularly given the high cost of new
branch facilities and an environment of rapidly expanding e-commerce, additional
branch coverage is a necessity if the Company is to achieve the market presence
and customer accessibility required to compete effectively in the Greater
Portland market.
We began addressing this issue with the 1998 opening of our Downtown Portland
branch, "Coastal Business Bank," which provided us with a Portland base for our
commercial banking initiative. In 1998 and 1999 we negotiated favorable terms
on the sale of the Westbrook headquarters and operations center and Kennebunk
branch as steps toward the redeployment of our resources in more strategically
significant locations.
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NEW PORTLAND MAIN OFFICE - As we announced during the fourth quarter 1999, the
Bank has leased a new facility at 1200 Congress Street, Portland that is
currently under construction and is expected to be available for occupancy
during the second quarter of this year to serve as the Bank's new main office.
The Bank will occupy the first two floors, totaling approximately 19,000 square
feet, of the modern three story building, which will provide the Bank with ample
parking and a three-lane drive through. The exciting aspect of this facility is
its exceptional accessibility and visibility - it will put Coastal Bank on the
map in a very significant way. The building is located on one of Portland's
most heavily traveled arteries, is immediately accessible from a newly installed
traffic interchange and abuts a U.S. Interstate 295 on-ramp, making the location
easily accessible from I-295, downtown Portland, other portions of Portland and
surrounding communities. In addition, the combination of the building's close
proximity to Congress Street, prominent architecture and proximity to I-295 will
provide excellent visibility from both Congress Street and I-295.
Coastal Bank will now have a "billboard" presence. This will serve as a
cornerstone for long-term future growth that will make it easier for prospective
new customers to identify, and relate to, Coastal Bank, with the enhanced public
awareness of the Bank greatly benefitting our marketing efforts. The facility
is a visible example of the Company's progress in "building a new Coastal."
ADDITIONAL BRANCHES -In addition to our new main office on Congress Street, our
strategic plan calls for at least two additional branches to be opened in the
Greater Portland market over the next three years. We believe that a minimum of
two additional, well-located facilities are required for us to provide the
minimum effective coverage to serve a significant portion of the Greater
Portland market. Though the cost of the main office and branch facilities is
significant, and will dampen earnings during their start-up periods, the
anticipated future growth in earnings associated with these facilities and their
overall impact on the Company's future is expected to be favorable.
OUR PEOPLE - We believe that in the highly competitive and rapidly changing
world of financial services, it is the quality and focus of our people that must
distinguish us, and will ultimately determine whether or not we are successful.
The hiring, retention and development of the right team is a continuous
priority. Our growth and commitment to the local market have enabled us to
retain and recruit high quality staff despite strong competition for people.
RETAIL BANKING - Over the past year, retail banking has moved to the forefront
as an area that is receiving significant management focus and is expected to
contribute in a major way to the Company's future growth. Beginning in the
second quarter of 2000, and in conjunction with the opening of the 1200 Congress
Street main office, we will launch three comprehensive life-cycle segment
programs, known together as CoastalWorks/SM/. These programs are designed to
increase customer loyalty by delivering uncommon value that sets Coastal apart
from other banks.
Related to the Bank's renewed focus on retail banking is the development of
Maine Cash Access/SM/. In partnership with another community bank, Coastal has
developed a statewide, surcharge-free ATM alliance as a means of extending the
geographic reach of the Bank's branch and ATM network. MaineCash Access/SM/,
consisting of approximately 16 Maine banks and 130 ATM machines, is anticipated
to be operational during the second quarter, 2000. The availability of
statewide, surcharge-free ATM coverage will provide another reason for customers
to bank with Coastal.
TECHNOLOGY - Coastal Bank, already a leader in Internet banking technology in
its market, continues to invest in its technological infrastructure. In
addition to the anticipated 2000 availability of expanded retail offerings such
as Internet banking and on-line mortgage lending, the Bank's investments in this
area are expected to improve the quality and efficiency of our service to
customers.
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RESIDENTIAL LENDING - We did not meet our performance objectives in 1999 for
residential lending. Loan originations declined $15.0 million (61.6%) to $9.3
million, compared to 1998, primarily as a result of higher interest rates which
led to a decline in originations associated with refinances, and our failure to
bolster origination volume through the use of outside originators. Despite the
reduced volume in 1999, a number of steps were taken during the year and the
first quarter of 2000 that will, we believe, lead to an increase in residential
loan originations in 2000 and beyond. These steps include significant staffing
changes, investment in market-leading technology, and securing additional
investors for the purchase of the Bank's secondary market loan products.
STOCK PRICE - First Coastal, along with a broad segment of the banking industry,
saw stock prices slump over the last year, continuing through the first quarter
of 2000. While we cannot influence the macroeconomic forces that cause such
broad movements, we can secure long-term shareholder value through a prudent
stock repurchase program and continual focus on development of our core business
value. We believe that by delivering an uncommon banking experience to our
customers, we offer exceptionally attractive value that will bring success to
our Company and our shareholders.
IN CLOSING...
We have made significant progress in repositioning First Coastal in a manner
that, we believe, will result in a much improved, more valuable banking company.
We have made this progress while still achieving favorable financial results, in
part augmented by the sale of non-strategic assets over the past two years. The
next two years will be critical to our overall success as we continue the
repositioning of the Bank's branching system (at some near-term cost), continue
the expansion of our commercial banking activities and launch several new retail
banking programs. We are proceeding on this course mindful of several risk
factors that could affect performance: the economy, the expansion of which has
now reached record duration; the stock market, which may be significantly
overvalued; increasingly fierce competition for loans; and the challenges
brought on by the technological revolution currently underway, one that in some
ways is significantly changing the banking industry.
2000 promises to be one of the most exciting years in the history of the
Company, with the new main office, potential other branching opportunities and
significant new products greatly enhancing Coastal's visibility in the market.
We believe we have the right combination of people, opportunity and business
plan to transform First Coastal into a strong performing banking company, one
that is well-positioned in Maine's best banking market for long term profitable
growth. On behalf of management, staff and the Board of Directors, I would like
to take this opportunity to thank you for your continued support.
Gregory T. Caswell
President and Chief Executive Officer
4
<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, 1999.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------------
(in thousands, except share and per share data) 1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Interest income $ 13,986 $ 13,059 $ 11,894 $ 11,331 $ 11,707
Interest expense (1) 6,864 6,567 5,876 5,653 5,850
---------- ---------- --------- --------- ---------
Net interest income before
provision for loan losses 7,122 6,492 6,018 5,678 5,857
Provision for loan losses -- -- -- -- (425)
---------- ---------- --------- --------- ---------
Net interest income after provision
for loan losses 7,122 6,492 6,018 5,678 6,282
Investment securities/loan gains (2) 580 215 370 45 13
Noninterest income (3)(4)(5) 1,730 1,166 620 945 559
Operating expenses
6,056 5,450 5,067 5,142 5,194
Income tax expense (benefit) (6) 1,150 859 679 (4,859) --
---------- ---------- --------- --------- ---------
Net income $ 2,226 $ 1,564 $ 1,262 $ 6,385 $ 1,660
Earnings Per Share: ========== ========== ========= ========= =========
Basic earnings per share data:
Weighted average shares outstanding 1,356,375 1,359,976 1,358,730 933,578 600,361
Net income per share $ 1.64 $ 1.15 $ .93 $ 6.84 $ 2.77
Diluted earnings per share data:
Weighted average shares outstanding 1,370,152 1,379,124 1,391,272 940,480 600,361
Net income per share $ 1.62 $ 1.13 $ .91 $ 6.79 $ 2.77
</TABLE>
(1) The 1999, 1998, 1997, 1996 and 1995 interest expense includes $258,000,
$332,000, $477,000, $525,000 and $419,000, respectively, in interest
expense associated with (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, which
note was paid in full on July 24, 1996, and (ii) the promissory notes in
the original 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 1999, Coastal Bank sold its mortgage servicing portfolio and recognized
a pre-tax gain of $460,000.
(3) In 1996, Coastal Bank sold its branch in Kezar Falls, Maine and recognized
a pre-tax gain of $366,000.
(4) In 1998, Coastal Bank sold its combination headquarters branch and
operations center located in Westbrook, Maine, resulting in a pre-tax gain
of $539,000.
(5) In 1999, Coastal Bank sold its branch in Kennebunk, Maine and recognized a
pre-tax gain of $1.1 million.
(6) 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 12 to the Company's Consolidated Financial Statements.
5
<PAGE>
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------------------------------
(dollars in thousands) 1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Total assets $190,582 $191,413 $146,400 $147,734 $145,453
Investment securities 51,823 47,048 22,887 26,692 19,712
Assets held for sale 83 83 3,565 1,490 281
Loans, net of fees 120,517 105,776 104,165 98,515 100,528
Allowance for loan losses 2,882 2,735 2,665 2,666 2,659
Nonperforming assets 540 566 818 2,623 7,517
Deposits(1)(2) 140,137 148,545 114,991 115,085 125,665
Borrowings 27,748 22,545 13,294 15,000 6,000
Notes payable(3) 2,268 2,600 3,000 4,000 9,000
Secured borrowings 2,980 967 -- -- --
Stockholders' equity 16,914 16,314 14,808 13,388 3,997
Financial Ratios:
Net interest rate spread 3.54% 3.68% 3.98% 4.12% 4.13%
Net interest rate margin 4.00 4.09 4.32 4.28 4.19
Return on average assets 1.19 .93 .84 4.57 1.14
Return on average equity 12.45 9.81 8.72 102.60 58.20
Equity to assets 8.87 8.52 10.11 9.06 2.75
Tier 1 leverage capital 8.37 7.20 7.71 6.62 2.74
Total risk-based capital 15.82 14.32 13.29 11.54 5.54
</TABLE>
(1) The sale of the Bank's Kezar Falls, Maine branch in April 1996 included
deposits totaling $9.9 million.
(2) The sale of the Bank's Kennebunk, Maine branch in May 1999 included
deposits totaling $12.5 million.
(3) Notes payable consists of the FDIC Note in 1995 and the Savings Bank
Notes in 1996, 1997, 1998 and 1999.
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) (the "FDIC Note"), 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 (the "Savings Banks") pursuant to which the
Company issued promissory notes in the aggregate principal amount of $4.0
million (the "Savings Bank Notes") with an original maturity date of December
31, 2001.
The Savings Bank Notes were amended effective August 4, 1999, whereby the terms
were modified to include, among other things, a reduction in the interest rate,
an extension of the maturity date until August 4, 2004 and to provide the
Company with a line of credit. For further information see "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Significant Events - Amended Savings Bank Notes."
6
<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 bank headquartered in Westbrook, Maine. The Company has no
separate operations and its business consists of the business of the Bank. The
principal business of the Bank consists of commercial and retail banking,
including attracting deposits from the general public and originating
residential mortgage, consumer, commercial real estate and small business loans.
The Bank conducts its business from seven offices in the counties of Cumberland,
Sagadahoc and York. The Bank's deposits are insured by the Federal Deposit
Insurance Corporation ("FDIC") up to the limits provided by law.
This Annual Report, including statements made in this Management's Discussion
and Analysis of Financial Condition and Results of Operations, contains certain
"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,
including the Company's strategic business initiatives, net interest margin,
deposit growth, interest rates, additional branches, market and growth
opportunities and loan volume, constitute forward-looking statements. Certain,
but not necessarily all, of such forward-looking statements can be identified by
the use of forward-looking terminology, such as "believes," "expects," "may,"
"will," "should," "estimates," or "anticipates" or the negative thereof or other
variations thereof or comparable terminology. All forward-looking statements
involve known and unknown risks, uncertainties and other factors which may cause
the actual transactions, results, performance or achievements of the Company to
be materially different from those expressed or implied by such forward-looking
statements. Although the Company has made such statements based on assumptions
which it believes to be reasonable, there can be no assurance that the actual
transactions, results, performance or achievements will not differ materially
from the Company's expectations. For example, there are a number of important
factors with respect to such forward-looking statements that could materially
and adversely affect such forward-looking statements, such as (i) the impact of
changes in market rates of interest, economic conditions or competitive factors
on the Company's deposit products and loan demand and asset quality; (ii) the
possibility that certain transactions, such as the successful transition to a
suitable new headquarters, branch and operations center, the opening of new
branches, the introduction of new banking products or other planned or
contemplated events, may not occur or may not be initiated with the degree of
success contemplated; (iii) the possibility that operating expenses may be
higher than anticipated; (iv) the effect that changes in the general economic
and competitive conditions in markets in which the Company operates could have
on the Company's financial performance and condition; (v) the Company's ability
to control its provision for loan losses, and to achieve its goals with respect
to net interest rate spread and margin; and (vi) the level of demand for new and
existing products. Should one or more of these risks or other 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. Investors are also
directed to other information related to the Company in documents filed by the
Company with the Securities and Exchange Commission.
HISTORICAL BACKGROUND
Coastal Bank was formed in 1981 through the consolidation of Brunswick Savings
Institution and York County Savings Bank, which were organized in 1858 and 1862,
respectively. The Bank converted from mutual to stock form in 1984. In 1987 the
Bank was acquired by Suffield Financial Corporation of Suffield, Connecticut,
the bank holding company for Suffield Bank ("Suffield"). Following the
transaction the two banks experienced significant financial difficulties as a
result of the late 1980's, early 1990's real estate downturn. In September 1991
Suffield was placed in receivership by the Connecticut Department of Banking,
leaving Coastal Bank as the Company's sole operating subsidiary. Subsequent to
Suffield's failure, the Company's headquarters was moved to Portland, Maine and
the name of the Company was changed to First Coastal Corporation.
As a result of its financial difficulties in January 1992, Coastal Bank was
placed under an Order to Cease and Desist ("C&D") by the FDIC and the Maine
Bureau of Banking. The Bank's financial condition improved, as evidenced by the
1994 termination of the C&D and the 1996 termination of the memorandum of
understanding (which had replaced the C&D). However, as a result of the failure
of Suffield, the Company faced another serious threat to its financial future.
In 1991 the FDIC assessed a cross guaranty claim against the Bank for the losses
sustained by the Bank Insurance Fund as a result of Suffield's failure. This
claim was settled in 1994 for $9.0 million, with a note executed in January 1995
calling for payment, with interest, within two years. In July 1996 the Company
completed a recapitalization whereby the $9.7 million obligation
7
<PAGE>
(with interest) was repaid in full. This was accomplished through a $3.1 million
registered public offering, $4.0 million in bank financing and a $3.2 million
dividend from the Bank. As part of the recapitalization, the Company's common
stock was listed on the Nasdaq SmallCap Market tier of the Nasdaq Stock Market
under the symbol "FCME".
Throughout the 1990's until the completion of the recapitalization in 1996, the
Company's attention and resources were largely focused on crisis management,
dealing with the Bank's financial difficulties and the cross guaranty claim that
represented significant threats to the Company's financial future. Following the
recapitalization the Company was able, for the first time in years, to focus
fully on its long term strategic direction and rebuilding the competitive
viability of the Bank. During the first half of 1997 the Company completed a
five year strategic plan, the implementation of which began during the second
half of 1997 and continued throughout 1999. Significant aspects to the plan
include the March 1998 opening of the Bank's new Downtown Portland office, which
is primarily focused on commercial lending and deposit services; the May 1998
introduction of Internet banking for businesses (Coastal Business PC) and new
cash management products for business; the continued development of a strong
commercial lending team and increased commercial loan volume; and the
introduction of a new savings account product which was largely responsible for
the Bank's 29.2% increase in total deposits in 1998. The strategic plan was
subsequently amended as additional opportunities were identified. The most
significant new initiatives involve the reorganization of the Bank's branching
network, evidenced by the 1998 sale of the Bank's combination headquarters
branch and operations center in Westbrook; the May 1999 sale of the Kennebunk
branch; the scheduled (second quarter 2000) opening of a new headquarters branch
and operations center in Portland; the contemplated opening of additional
branches in the Greater Portland market; and the planned 2000 launch of new
retail banking programs that represent significant improvements to the Bank's
retail product offerings.
SIGNIFICANT EVENTS
Sale of $44 Million Residential Mortgage Servicing Portfolio
On January 31, 1999 the Bank completed the sale of its residential mortgage
servicing portfolio, resulting in a pre-tax gain in the amount of $460,000
recorded in the first quarter of 1999. On a going forward basis, it is the
Bank's current intent to sell saleable residential loans on a servicing released
basis, subject to market conditions.
Sale of the Bank's Kennebunk Branch
On May 14, 1999, the Bank sold its branch located in Kennebunk, Maine and
recognized a pretax gain of $1.1 million. Under the terms of the purchase and
assumption agreement, the purchaser acquired all of the branch's deposits,
totaling $12.5 million, and certain branch assets, as well as assumed
responsibility for the Bank's lease obligations.
Stock Repurchase Program
In June 1999, the Company commenced a stock repurchase program with the intent
to purchase up to 68,000 shares of its common stock, representing approximately
5% of the 1,360,527 shares then outstanding. As of February 1, 2000, the Company
had repurchased 52, 619 shares, or 3.9% of its common stock.
On February 8, 2000, the Company announced that its Board of Directors
authorized an extension of the stock repurchase program and the repurchase of up
to an additional 68,000 shares, or a total of 136,000 shares (representing 10%
of the outstanding common stock as of the June 1999 commencement date of the
repurchase program). The stock repurchase program is expected to be in effect
for up to an additional twelve months, until approximately February 2001. Under
the program, no shares knowingly will be purchased from officers or directors of
the Company or from persons who hold in excess of five percent of the Company's
outstanding shares of common stock.
Pending Relocation of Headquarters Branch and Operations Center
In connection with the relocation of the Company's and the Bank's main office
(including the branch and operations center of the Bank) to a new facility
currently under construction at 1200 Congress Street, Portland, Maine, the Bank
entered into a lease agreement for 18,757 rentable square feet consisting of the
first two floors of a three-story building. The facility will include a branch
and three-lane drive-through, ATM, commercial and retail banking offices and
space to support the Bank's loan, deposit and computer operations. The new
facility is expected to improve customer accessibility, provide increased market
awareness of Coastal Bank, result in enhanced overall service for existing and
prospective customers and provide space for growth. The new facility will result
in increased operating expenses of approximately $300,000 on an annual basis as
compared to the Company's current 12,500 square foot facility. Occupancy is
expected to take place early in the second quarter of 2000. As a result, the
Bank's lease on its current headquarters, branch and operations center was
extended from March 15, 2000 to July 15, 2000.
8
<PAGE>
Amended Savings Bank Notes
On August 4, 1999, the Company entered into the First Amendment to Loan
Agreement (the "First Amendment to Loan Agreement") amending the terms of the
Loan Agreement, dated as of July 24, 1996 (the "Loan Agreement"), between the
Company and a group of four Maine savings banks (the "Four Savings Banks").
Pursuant to the Loan Agreement, the Company borrowed a total of $4.0 million
evidenced by promissory notes (the "Savings Bank Notes") in the amount of $1.0
million to each of the Four Savings Banks. Prior to the effective date of such
modification to the Loan Agreement, the Savings Bank Notes bore interest,
payable quarterly, at an annual rate of 10.85%, with semi-annual principal
payments of $200,000 beginning in June 1998. The original maturity date was
December 31, 2001. Pursuant to the First Amendment to Loan Agreement and the
amended Savings Bank Notes (the "Amended Savings Bank Notes"), the term loan
(balance $2.4 million at the time of refinance) bears interest at an annual rate
of 8.0% until August 4, 2002, at which time the interest rate will convert to
the Prime Rate as published in THE WALL STREET JOURNAL (the "WSJ"), adjustable
daily, until the new maturity date of August 4, 2004. In addition, the Company
is entitled to draw against a working capital line of credit up to a combined
aggregate limit, including the balance outstanding at any time of the term loan,
of $4.0 million. The interest rate on the line of credit is equal to the Prime
Rate as published in the WSJ, adjusted daily and the maturity date is August 4,
2004.
In addition to reducing the interest rate, extending the maturity date, and
providing the Company with a line of credit, the First Amendment to Loan
Agreement modified or eliminated certain covenants and conditions contained in
the Loan Agreement, including among other things: (i) limitations on borrowing
by the Company and the Bank; (ii) prohibitions on transfers of assets of the
Company or any subsidiary; (iii) prohibition of capital expenditures over
$500,000 in any fiscal year; and (iv) certain provisions providing that it was a
default by the Company not to make certain reports or payments within specified
time frames, which provisions have been made generally less restrictive as to
time or amount. In addition, the First Amendment to Loan Agreement modified the
prohibition on the payment of cash dividends by the Company contained in the
Loan Agreement when the Company's debt-to-equity ratio on a parent only-basis
exceeds 30% to increase the permissible ratio threshold to 50%.
In connection with the Amended Savings Bank Notes, one of the Four Savings Banks
notes was purchased by one of the remaining three lenders. There is no
prepayment penalty associated with the Amended Savings Bank Notes. Other terms
and conditions, including the pledge of all of the Company's stock in the Bank
as collateral, were affirmed and remain in effect.
RESULTS OF OPERATIONS
Comparison of Year Ended December 31, 1999 to Year Ended December 31, 1998
Overview
The Company reported net income of $2.2 million (diluted earnings per share of
$1.62) for the year ended December 31, 1999, compared to net income of $1.6
million (diluted earnings per share of $1.13) for the year ended December 31,
1998. The results for 1999 includes after-tax gains of $733,000 and $300,000,
resulting from the sale of the Bank's Kennebunk branch and the sale of the
Bank's residential mortgage servicing portfolio, respectively. The results for
1998 include an after-tax gain of $356,000 resulting from the sale of the Bank's
headquarters branch and operations center. Securities sales gains totaled
$22,000 for the year ended December 31, 1999, as compared to $104,000 for the
year ended December 31, 1998. The Company incurred no provision for loan losses
expense for the years ended December 31, 1999 and 1998.
Net Interest Income
Net interest income equaled $7.1 million and $6.5 million for the years ended
December 31, 1999 and 1998, 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.
9
<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,
----------------------------------------------------------------------------------------------
1999 1998 1997
------------------------------- ----------------------------- ----------------------------
Average Average Average
Balance Interest Yield Balance Interest Yield Balance Interest Yield
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets:
Interest earning cash $ 10,250 $ 521 5.01% $ 19,097 $ 1,014 5.24% $ 8,550 $ 475 5.56%
Investments
Available for sale (1) 53,906 3,445 6.39 30,548 1,942 6.36 19,305 1,256 6.51
Held to maturity 2,860 184 6.44 7,774 512 6.58
Loans (2) (3)
Residential real estate mortgages 31,439 2,510 7.98 34,867 2,975 8.53 36,722 3,141 8.55
Commercial real estate mortgages 61,928 5,620 9.08 51,610 5,044 9.77 47,848 4,644 9.71
Commercial and industrial loans 7,524 678 9.01 5,427 525 9.68 3,964 395 9.97
Consumer loans 13,135 1,212 9.23 14,211 1,375 9.68 15,144 1,471 9.71
-------- ------- -------- ------- -------- -------
Total loans 114,026 10,020 8.79 106,115 9,919 9.35 103,678 9,651 9.31
------- ------- -------
Total interest earning
assets 178,182 13,986 7.85 158,620 13,059 8.23 139,307 11,894 8.54
------- ------- -------
Noninterest earning assets 9,263 9,906 10,799
-------- --------- --------
Total assets $187,445 $168,526 $150,106
======== ======== ========
Liabilities:
Deposits
Savings $ 62,914 2,310 3.67% $ 52,750 1,993 3.78% $ 34,831 945 2.71%
NOW and money
market accounts 19,548 453 2.32 18,564 422 2.30 18,197 446 2.46
Certificates of deposit 48,945 2,471 5.05 54,004 2,893 5.36 56,801 3,068 5.40
-------- ------- -------- ------- -------- -------
Total interest bearing
deposits 131,407 5,234 3.98 125,318 5,308 4.24 109,829 4,459 4.06
Savings Bank Notes 2,473 258 10.44 2,898 332 11.46 3,641 477 13.09
FHLB Advances 22,832 1,273 5.57 15,593 900 5.77 15,497 940 6.07
Secured borrowings 2,463 99 4.03 646 27 4.21 -- -- --
-------- ------- -------- ------- -------- -------
Total interest bearing
liabilities 159,175 6,864 4.31 144,455 6,567 4.55 128,967 5,876 4.56
------- ------- -------
Noninterest bearing deposits 10,198 7,987 6,483
Noninterest bearing liabilities 195 149 189
Stockholders' equity 17,877 15,935 14,467
-------- -------- ---------
Total liabilities and
stockholders' equity $187,445 $168,526 $ 150,106
========= ======== =========
Net interest income $ 7,122 $ 6,492 $ 6,018
======= ======== =======
Net interest rate spread (4) 3.54% 3.68% 3.98%
Net interest rate margin (5) 4.00% 4.09% 4.32%
</TABLE>
(1) Yield on available for sale securities based on historical cost equaled
6.31%, 6.39% and 6.49% for the years ended December 31, 1999, 1998 and
1997, respectively.
(2) For purposes of these computations, loans held for sale and nonaccrual
loans are included in the average loan amounts outstanding.
(3) Included in interest income from loans for the years ended 1999, 1998 and
1997 are fees of $133,000, $262,000 and $195,000, respectively.
(4) Return on interest earning assets less cost of interest bearing
liabilities.
(5) Net interest income divided by average interest earning assets.
10
<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 (the
change in interest due to both rate and volume has been allocated to rate
and volume changes in proportion to the relationship of the absolute
dollar amounts of the change in each category).
<TABLE>
<CAPTION>
Year Ended December 31, 1999 Year Ended December 31, 1998
Compared to Compared to
Year Ended December 31, 1998 Year Ended December 31, 1997
------------------------------------ --------------------------------
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) $ (638) $ 739 $ 101 $ 41 $ 227 $ 268
Investments available for sale 18 1,485 1,503 (46) 732 686
Investments held to maturity -- (184) (184) (5) (323) (328)
Interest earning cash (23) (470) (493) (47) 586 539
------- ------- ------- ------- ------- -------
Total interest income (643) 1,570 927 (57) 1,222 1,165
------- ------- ------- ------- ------- -------
Interest expense:
Savings and checking (31) 379 348 551 473 1,024
Other time deposits (150) (272) (422) (24) (151) (175)
Secured borrowings (4) 76 72 -- 27 27
FHLB advances (45) 418 373 (46) 6 (40)
Savings Bank Notes (25) (49) (74) (48) (97) (145)
------- ------- ------- ------- ------- -------
Total interest expense (255) 552 297 433 258 691
------- ------- ------- ------- ------- -------
Net change in net interest
income before provision for
loan losses $ (388) $ 1,018 $ 630 $ (490) $ 964 $ 474
======= ======= ======= ======= ======= =======
</TABLE>
(1) For purposes of these computations, loans held for sale and nonaccrual loans
are included in loans.
Net interest income increased by $630,000 for the year ended December 31,
1999 as compared to the year ended December 31, 1998. This increase in net
interest income is mainly attributable to a $1.0 million increase related
to increased volume (an increase of $19.6 million in average interest
earning assets, partially offset by a $14.7 million increase in average
interest bearing liabilities). Offsetting this increase in net interest
income attributable to volume is a net decrease of $0.4 million
attributable to rate (net interest rate spread for the year ended December
31, 1999 declined to 3.54% as compared to 3.68% for the year ended December
31, 1998).
As a result of the increase in interest earning assets of $19.6 million,
total interest income increased $927,000. The increase in average earning
assets is primarily attributable to increased average securities balances
of $20.5 million for the year ended December 31, 1999, as compared to the
year ended December 31, 1998, resulting in an increase in interest income
attributable to securities of $1,319,000. Average loan balances increased
$7.9 million, however; as a result of lower average yields (8.79% for 1999
as compared to 9.35% for 1998), interest income attributable to the loan
portfolio increased only $101,000 as compared to 1998. The average balance
of interest earning cash declined $8.8 million, resulting in a $470,000
decrease in interest income attributable to volume as compared to 1998,
with the lower average yield earned on interest earning cash further
reducing interest income by $23,000 as compared to 1998.
11
<PAGE>
Total interest expense increased $297,000 for the year ended December 31, 1999
as compared to the year ended December 31, 1998. An increase in the average
balance of interest bearing liabilities of $14.7 million resulted in increased
interest expense of $552,000. This was offset in part by a decline in the
average yield on interest bearing liabilities of 0.24%, which resulted in
reduced interest expense of $255,000. Increases in average savings deposit
balances of $10.2 million, Federal Home Loan Bank advances of $7.2 million and
secured borrowings of $1.8 million accounted for the bulk of the increase in
interest bearing liabilities, resulting in increased interest expense
attributable to higher average balances in these categories of $379,000, 418,000
and $76,000, respectively. This increase was offset in part by a $5.1 million
decline in the average balance of certificates of deposits and a $425,000
decline in the average balance of the Savings Bank Notes, resulting in decreased
interest expense of $272,000 and $49,000, respectively (in addition to the
decline in total interest expense attributable to lower average yields). The
Company's average cost of interest bearing liabilities decreased to 4.31% for
the year ended December 31, 1999 as compared to 4.55% for the year ended
December 31, 1998.
As noted above, in part as a result of significant competitive pressure, the
yield on average loan balances declined 0.56% for the year ended December 31,
1999 as compared to the year ended December 31, 1998. Should competitive
pressure continue to increase, the cost of funds may rise and the loan yields
available may fall, thereby narrowing the spread 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, 1999 and
1998. The absence of provision for loan losses in 1999 and 1998 is primarily
attributable to the continued low level of 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,
1999. Despite the absence of provision expense, the level of the Allowance
increased modestly in both 1999 and 1998 as charged-off loans of $12,000 and
$77,000 for the years ended December 31, 1999 and 1998, respectively, were
offset by recoveries totaling $159,000 and $147,000, for the same respective
periods.
Noninterest Income
Noninterest income increased $929,000 for the year ended December 31, 1999 as
compared to the year ended December 31, 1998. The increase is attributable to a
$1.1 million pre-tax gain received on the sale of the Bank's Kennebunk branch in
the second quarter of 1999 and a $460,000 pre-tax gain received on the sale of
the Bank's residential mortgage servicing portfolio in the first quarter of
1999. Income for the year ended December 31, 1998 included a $539,000 pre-tax
gain received on the sale of the Bank's headquarters branch and operations
center located in Westbrook, Maine.
Operating Expenses
Operating expenses increased $606,000, or 11.1%, for the year ended December 31,
1999 as compared to the year ended December 31, 1998, as described in more
detail below:
Year Ended December 31,
-------------------------
(in thousands) 1999 1998
- -------------------------------------------------------------------------------
Salaries and benefits $2,932 $2,632
Occupancy 608 536
Net cost of operations of real estate owned 5 7
Data processing 384 280
Equipment 534 424
FDIC insurance 18 15
Insurance - general 111 137
Office/postage 247 246
Legal 73 31
Marketing 144 177
Other expenses 1,000 965
------ ------
Total Operating Expenses $6,056 $5,450
====== ======
12
<PAGE>
The increase in operating expenses was primarily the result of additional costs
associated with several business initiatives implemented by the Bank during
1998, and the sale and leaseback of the Bank's headquarters branch and
operations center in the third quarter of 1998. The business initiatives include
the opening of the Portland branch, the development and implementation of an
Internet banking program for businesses, the development and introduction of a
new line of cash management services for businesses, and additional staffing
resulting from increased commercial lending activity. The increase in salaries
and benefits was primarily attributable to changes in staffing levels and annual
salary increases. The increase in operating expenses was partially offset by the
elimination of operating expenses associated with the Bank's former branch in
Kennebunk, which was sold in the second quarter of 1999. Management anticipates
operating expenses for 2000 and 2001 to further increase as a result of several
additional business initiatives that are currently contemplated or underway,
including (i) the Bank's lease of a new headquarters, branch and operations
center and related furniture, fixtures and equipment expenses, which is
estimated to increase the Company's occupancy expense approximately $300,000
annually, (ii) the opening of additional branches over the next several years in
the Greater Portland market, (iii) the introduction of a number of new retail
banking products, and (iv) additional staffing related to the Bank's continued
expansion of its commercial lending activities and other business initiatives,
including the new headquarters facility.
Income Tax Expense
The Company incurred income tax expense of $1,150,000 for the year ended
December 31, 1999 as compared to $859,000 for the year ended December 31, 1998.
The effective tax rate used was 34.1% and 35.5% for the years ended December 31,
1999 and 1998, respectively.
Comparison of Year Ended December 31, 1998 to Year Ended December 31, 1997
Overview
The Company reported net income of $1.6 million (diluted earnings per
share of $1.13) for the year ended December 31, 1998, compared to net income of
$1.3 million (diluted earnings per share of $.91) for the year ended December
31, 1997. The results for 1998 included a pre-tax gain of $539,000 resulting
from the sale of the Bank's headquarters branch and operations center.
Securities and loan sales gains totaled $215,000 for the year ended December 31,
1998 as compared to $370,000 for the year ended December 31, 1997. The Company
incurred no provision for loan losses expense for the years ended December 31,
1998 and 1997.
Net Interest Income
Net interest income equaled $6.5 million and $6.0 million for the years ended
December 31, 1998 and 1997, 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.
Net interest income increased by $474,000 for the year ended December 31, 1998
as compared to the year ended December 31, 1997. This increase is primarily
attributable to an increase in the level of earning assets in 1998 as compared
to 1997, primarily in the categories of investments and interest earning
deposits. The Company's net interest rate spread for the year ended December 31,
1998 decreased to 3.68% as compared to 3.98% for the year ended December 31,
1997 and the net interest margin decreased to 4.09% for the year ended December
31, 1998 as compared to 4.32% for the year ended December 31, 1997. The decrease
in the net interest rate spread and net interest margin is primarily the result
of a .31% decline in the Company's yield on earning assets. The decline in the
yield on earning assets is primarily attributable to lower yielding investments
and interest earning deposits representing a larger percentage of the Bank's
total average assets, 33.1% for 1998 as compared to 25.6% for 1997. This shift
in the percentage of the Bank's assets allocated to these lower yielding assets
is largely the result of the growth in total deposits.
Interest income for the year ended December 31, 1998 increased $1,165,000 as
compared to the year ended December 31, 1997. The increase is primarily
attributable to an increase in average earning assets of $19.3 million,
including increases in investments available for sale ($11.2 million), interest
earning deposits ($10.5 million) and average loan balances ($2.4 million),
partially offset by a decline in investments held to maturity ($4.9 million).
The increase in interest earning assets was primarily the result of the increase
in total deposit balances, largely attributable to the introduction of the
Bank's new High Rise Savings product and also increased commercial deposit
balances. Savings deposits increased $28.9 million and commercial deposits
increased $2.9 million during the year ended December 31, 1998. This deposit
growth was primarily invested in cash and cash equivalents and investment
securities, increasing the Bank's concentration of these lower yielding assets,
as compared to loans, thereby lowering the overall yield on earning assets.
13
<PAGE>
As a result of significant competition with regard to loan originations, the
yields on new loan originations, and in particular commercial real estate and
commercial and industrial loans, declined relative to interest rates in general.
Competitive factors resulted in increased loan prepayments in 1998, as well as
some reductions in contract interest rates for existing customers.
Interest expense increased $691,000 for the year ended December 31, 1998 as
compared to the year ended December 31, 1997. The increase is primarily the
result of a $1.0 million increase in interest expense paid on savings deposits
(attributable to a $17.9 million increase in average deposit balances and a
1.07% increase in rate). This increase was partially offset by (i) a $201,000
decline in interest expense paid on certificates of deposits and interest
bearing checking deposits (attributable to a $2.4 million decline in average
deposit balances and a .12% decline in rates), (ii) a $40,000 reduction in
interest expense on advances from the Federal Home Loan Bank ("FHLB") of Boston,
primarily the result of more favorable rates on borrowings, and (iii) a $145,000
reduction in interest expense relating to the Amended Savings Bank Notes. The
decline in interest expense on the notes resulted from a $1.0 million
unscheduled principal payment made in September 1997 and $200,000 scheduled
principal payments made in June and December of 1998.
In March 1998, the Company introduced a new savings deposit product called High
Rise Savings. The introductory interest rate paid on this product was tiered
(initially ranging from 4.64% to 5.59%) and was guaranteed through December 31,
1998 for accounts opened during the initial introductory period which ended July
3, 1998 (following the initial introductory period, the product's interest rates
were reduced). This account generated net new deposits of $28.9 million for the
year ended December 31, 1998 (the bulk of which were at the introductory rate).
In addition, a portion of the Bank's deposit customers converted their
pre-existing accounts to High Rise Savings accounts (generally at higher rates)
with High Rise balances at December 31, 1998 equal to $36.4 million. As a result
of this program, average savings deposit balances increased significantly, from
$34.5 million to $63.4 million, and the average rate on savings deposits
increased from 2.71% to 3.78%, thereby increasing the overall cost of deposits
to the Bank.
Additionally, the Bank introduced its new cash management program for businesses
in May 1998. The program represents secured borrowings, which include agreements
similar to repurchase agreements that are not FDIC insured. At December 31, 1998
these secured borrowings totaled $967,000 and were collateralized by $967,000 in
Bank-owned investment securities.
As competitive pressures continue, the cost of funds to financial institutions
may rise relative to market interest rates, thereby narrowing the spread 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, 1998 and
1997. The absence of provision for loan losses in 1998 and 1997 is primarily
attributable to the continued decline in nonperforming loans and potential
problem loans and management's review of the portfolio and its determination of
the adequacy of the Allowance at December 31, 1998. Despite the absence of
provision expense, the level of the Allowance remained essentially unchanged as
charged-off loans of $77,000 and $339,000 for the years ended December 31, 1998
and 1997, respectively, were offset by recoveries totaling $147,000 and
$338,000, for the same respective periods.
Noninterest Income
Noninterest income for the year ended December 31, 1998 increased $391,000
compared to the year ended December 31, 1997. The increase is primarily
attributable to the $539,000 gain received on the sale of the Bank's office
building located in Westbrook, Maine, which currently serves as the Bank's
combination headquarters branch and operations center. The increase in
noninterest income was offset by a $155,000 decline in loan and securities gains
for the year ended December 31, 1998 as compared to the year ended December 31,
1997. In conjunction with the sale of the Bank's off balance sheet mortgage
servicing portfolio on January 31, 1999 and the Bank's revamped residential
mortgage lending program, the Bank currently intends to sell saleable loans on a
servicing released basis and recognize the servicing fee income at the time of
sale rather than recording the income on servicing fees over the life of the
loan.
14
<PAGE>
Operating Expenses
Operating expenses increased $383,000, or 7.5%, for the year ended December 31,
1998 as compared to the year ended December 31, 1997, as described in more
detail below:
Year Ended December 31,
-------------------------
(in thousands) 1998 1997
- -------------------------------------------------------------------------------
Salaries and benefits $2,632 $2,367
Occupancy 536 446
Net cost of operations of real estate owned 7 67
Data processing 280 239
Equipment 424 374
FDIC insurance 15 15
Insurance - general 137 141
Office/postage 246 296
Legal 31 65
Marketing 177 255
Other expenses 965 802
------ ------
Total Operating Expenses $5,450 $5,067
====== ======
The increase in operating expenses was primarily the result of additional costs
associated with several business initiatives implemented by the Bank during the
first and second quarters of 1998. These initiatives include the opening of the
Portland branch, Internet banking for businesses, the development and
introduction of a new line of cash management services for businesses, and
additional staffing resulting from increased commercial lending activity. The
increase in salaries and benefits represented $265,000 of the total increase and
was primarily attributable to changes in staffing levels, annual salary
increases and 401(k) matching contributions under the Bank's 401(k) defined
contribution plan.
Income Tax Expense
The Company incurred income tax expense of $859,000 for the year ended December
31, 1998 as compared to $679,000 for the year ended December 31, 1997. The
effective tax rate used was 35.5% and 35.0% for the years ended December 31,
1998 and 1997, respectively.
FINANCIAL CONDITION
Set forth below is a discussion of the material changes in the financial
condition of the Company.
General
At December 31, 1999, the Company's total assets equaled $190.6 million,
representing a decrease of $0.8 million (or 0.4%) from total assets of $191.4
million at December 31, 1998. This decline was the result of a $20.2 million
decline in cash and cash equivalents, offset by increases in loan balances
($14.7 million) and investment securities ($4.8 million). Deposits declined $8.4
million, largely as a result of the sale of the Bank's Kennebunk branch, which
consisted of $12.5 million in deposits at the time of the sale in May 1999. The
decline in deposit balances was partially offset by a $5.2 million increase in
FHLB borrowings and a $2.0 million increase in secured borrowings.
Investment Securities
The Company's investment portfolio is comprised primarily of U.S. government and
agency obligations. Total investment securities at December 31, 1999 was $51.8
million compared to $47.0 million at December 31, 1998. This increase is
primarily attributable to the purchase of $8.4 million in U.S. government
obligations (of which $4.0 million are Treasury Inflation Indexed Bonds), $3.0
million in U.S. government agency notes and $7.0 million in mortgage-backed
securities, partially offset by the sale of $3.1 million in U.S. government
obligations and $1.0 million in government agency notes, $7.5 million in
prepayment and amortization on mortgage-backed securities and amortization of
premiums or discounts on investment securities, and a $2.0 million pre-tax
unrealized loss on available for sale securities.
15
<PAGE>
The following table sets forth the carrying amounts and maturities of investment
securities and weighted average rates at December 31, 1999, 1998 and 1997.
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998 December 31, 1997
-------------------------------------------------------------
Carrying Carrying Carrying
(dollars in thousands) Amount Yield Amount Yield Amount Yield
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Available for sale (at market
value)(1):
U.S. Government obligations
maturing in 0-5 years $ 2,602 6.0% $ 2,227 5.65% --
maturing in 5-10 years 15,663 6.0 9,972 5.9 --
maturing in over 10 years 1,857 5.5 1,967 5.6 --
Mortgage backed securities
maturing in 5-10 years -- -- 904 6.8 --
maturing in over 10 years 31,229 6.4 31,493 7.2 $15,798 6.9%
Other 472 n/a 485 n/a 89 n/a
------- ------- -------
$51,823 6.2% $47,048 6.7% $15,887 6.9%
======= ======= =======
Held to maturity (at amortized cost):
U.S. government obligations
maturing in one year or less $ 200 4.9%
U.S. government agency callable
notes maturing after:
1-5 years (final maturity) 4,000 6.4
5-10 years (final maturity) 2,800 6.9
-------
6,800 6.6
-------
$ 7,000 6.5%
=======
</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, 1999 and 1998 equaled $83,000. The
outstanding dollar amount of loans held for sale can vary greatly from
period to period, affected by such factors as mortgage origination levels,
the timing and delivery of loan sales, changes in market interest rates and
asset/liability management strategies.
Loans
Loans increased $14.7 million (or 13.9%), from $105.9 million at December
31, 1998 to $120.5 million at December 31, 1999. The increase was
attributable to an increase of $14.1 million in commercial real estate
loans, a $3.6 million increase in commercial and industrial loans and a
$1.5 million increase in construction loans, partially offset by decreases
in residential and consumer and other loans of $4.1 million and $0.4
million, respectively.
The following table sets forth the composition of the Company's loan
portfolio at the dates indicated:
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------------------
(dollars in thousands) 1999 1998 1997 1996 1995
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Real estate mortgage loans:
Residential $ 28,460 $ 32,555 $ 33,251 $30,981 $ 30,966
Commercial 66,833 52,747 48,705 48,456 50,797
Real estate
construction loans 2,832 1,384 1,955 769 --
Commercial and
industrial loans 9,446 5,872 5,166 3,059 2,524
Consumer and other loans 12,962 13,315 15,227 15,281 16,263
-------- -------- -------- ------- --------
Total loans $120,533 $105,873 $104,304 $98,546 $100,550
======== ======== ======== ======= ========
Ratio of loans to:
Deposits 86% 71% 91% 86% 80%
Assets 63% 55% 71% 67% 69%
</TABLE>
16
<PAGE>
The Bank's loan growth during the period from the late 1980's until the
completion of the 1996 recapitalization was inhibited as a result of the
problems the Bank and the Company experienced during this period (see Historical
Background). 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. The completion of the 1996 recapitalization
allowed the Bank to compete more effectively for new loans. Since that time, and
in conjunction with the Company's strategic plan, significant effort and
resources have been focused on developing higher levels of loan volume.
Particular focus has been given to developing a strong commercial banking team
as management believes this is an area in which the Bank can develop a
competitive edge, particularly with regard to expertise and responsive customer
service.
During the past three years the attrition previously reflected in the Company's
loan balances has ceased, with modest growth achieved during 1997 and 1998, and
a 13.9% increase in 1999. Commercial real estate loans showed the largest
increase for the year ended December 31, 1999, $14.1 million (26.7%) as compared
to December 31, 1998. The opening of the Bank's downtown Portland branch, the
introduction of commercial cash management products and the introduction of
Internet banking for businesses, all during the first half of 1998, have been
and will continue to be important to the Bank's ability to generate profitable
growth in commercial loans.
Though commercial real estate loans are considered riskier than some other loan
types, and continue to make up a large percentage of the Company's loan
portfolio (55.5% at December 31, 1999), management believes that the combination
of its expertise in this area and its lending practices allow the Company to
manage the risk inherent in this type of lending.
Residential real estate loans declined $4.1 million during 1999, attributable to
a combination of a generally higher interest rate environment in 1999, resulting
in lower originations, and increased competitive pressures, resulting in a
higher percentage of the Bank's 1999 originations being secondary market
saleable as opposed to residential mortgage portfolio loans. The Bank has placed
a renewed emphasis on residential lending in 2000 through improved technology
and staffing in order to compete more effectively in this market.
Loan Originations
Residential mortgage loans originated by the Bank are primarily collateralized
by property located within its existing market area in Maine. The Bank is an
active residential mortgage lender. A significant percentage of residential
loans originated are 1-4 family residential real estate loans, the majority of
which are sold in the secondary market. In 1998 and years prior, the Bank
continued to service most of the loans it sold in the secondary market.
Beginning in 1999 the Bank began selling these loans on a servicing released
basis. Most of the Bank's residential loans are originated using the Federal
National Mortgage Association ("FNMA") underwriting guidelines.
The Bank's residential loan originations decreased 61.6% ($15.0 million) in 1999
as compared to 1998, primarily as a result of the higher interest rate
environment, which resulted in decreased consumer demand to refinance
residential mortgages. Historically, the Bank has relied upon the refinancing
market for a significant portion of its residential loan originations. The Bank
has developed a plan that it believes will increase residential loan volume by
placing greater emphasis on originating purchase money residential loans as
opposed to refinancings. The plan also includes improved utilization of
technology (an automated underwriting system) and increased use of commission
based loan originators, in addition to the Bank's branch-based originations.
Commercial loan originations increased in 1999, as is reflected in the $17.7
million increase (30.1%) in total commercial loans outstanding at December 31,
1999 as compared to December 31, 1998. The Bank currently plans to further
increase its commercial loan originations in 2000; however, the competition for
commercial loans continues to be intense and its ability to do so is affected by
both competitive and economic factors.
The level of residential, consumer and commercial loan originations going
forward will depend upon a number of factors, including the level of interest
rates, general economic conditions, the competitive environment and overall
profitability of these loans.
17
<PAGE>
The following table represents residential real estate and consumer loan
originations for the years ended December 31, 1999, 1998 and 1997.
<TABLE>
<CAPTION>
For the Year Ended December 31,
---------------------------------
(in thousands) 1999 1998 1997
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Originations (1):
Residential real estate $9,345 $24,343 $18,216
Consumer 1,813 4,322 3,001
------- ------- -------
Total $11,158 $28,665 $21,217
======= ======= =======
</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 serves as a means for the Bank to manage its overall interest
rate sensitivity risk (consistent with the Bank's asset liability management
policy), generates fee income and provides additional funds for lending and
liquidity. The Bank generally 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. However, on
January 31, 1999, the Bank sold all of its FNMA residential mortgage servicing
portfolio. The Bank currently sells all saleable loans on a servicing released
basis. At December 31, 1999, the Bank was not servicing loans for others as
compared to servicing $44.9 million of loans in its capacity as a subservicer at
December 31, 1998. There was no servicing fee income related to serviced loans
for the year ended December 31, 1999. Servicing fee income is reported as other
income in the consolidated statements of operations, and for the two years ended
December 31, 1998 and 1997, equaled $34,000 and $75,000, respectively.
Allowance For Loan Losses
The Bank's policy is to increase the Allowance by charging a 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, upward
movement in interest rates, or deterioration in the repayment capabilities or
intentions of individual borrowers, could have an adverse impact on the loan
portfolio that could result in the need for increased provision for loan losses.
The Bank holds a large concentration of commercial real estate loans and the
ultimate collectibility of this loan portfolio is particularly susceptible to
changes in local real estate market conditions.
18
<PAGE>
The following table represents the manner in which the Allowance is
allocated among the various loan categories at December 31, 1999, 1998,
1997, 1996 and 1995. The percentages represent the percent of loans in each
category to total loans.
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
--------------- ---------------- ---------------- --------------- ---------------
Percent Percent Percent Percent Percent
of Loans of Loans of Loans of Loans of Loans
to Total to Total to Total to Total to Total
(dollars in thousands) Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate mortgage
loans:
Residential $ 137 23.6% $ 165 30.8% $ 157 31.9% $ 61 31.4% $ 82 30.8%
Commercial 1,798 55.5 1,453 49.8 1,303 46.7 1,811 49.2 2,216 50.5
Real estate
construction loans 44 2.3 14 1.3 12 1.9 7 .8 -- --
Commercial and
industrial loans 243 7.8 133 5.5 67 4.9 40 3.1 13 2.5
Consumer and other
loans 113 10.8 124 12.6 174 14.6 151 15.5 120 16.2
Unallocated 547 -- 846 -- 952 -- 596 -- 228 --
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total $2,882 100.0% $2,735 100.0% $2,665 100.0% $2,666 100.0% $2,659 100.0%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
Allowance as a
percentage of loans 2.39% 2.58% 2.56% 2.71% 2.65%
Allowance as a
percentage of
nonperforming loans 533.70% 496.37% 353.92% 124.29% 47.96%
Allowance as a
percentage of
nonperforming loans
(excluding restructured loans) 533.70% 496.37% 546.11% 124.29% 125.60%
</TABLE>
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) 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $ 2,735 $ 2,665 $ 2,666 $ 2,659 $ 4,042
Charge-offs:
Real estate mortgage loans (5) (35) (298) (93) (1,113)
Commercial and industrial loans -- -- -- -- (142)
Consumer and other loans (7) (42) (41) (196) (78)
------- ------- ------- ------- -------
Total charge-offs (12) (77) (339) (289) (1,333)
Recoveries:
Real estate mortgage loans 105 114 304 163 172
Commercial and industrial loans -- -- 3 55 170
Consumer and other loans 54 33 31 78 33
------- ------- ------- ------- -------
Total recoveries 159 147 338 296 375
------- ------- ------- ------- -------
Net (charge-offs) recoveries 147 70 (1) 7 (958)
Provision for loan losses -- -- -- -- (425)
------- ------- ------- ------- -------
Balance at end of period $ 2,882 $ 2,735 $ 2,665 $ 2,666 $ 2,659
======= ======= ======= ======= =======
Net charge-offs as a percentage
of average loans (.13)% (.07)% .00% (.01)% .91%
</TABLE>
The balance of the Allowance increased by $147,000 at December 31, 1999 as
compared to December 31, 1998 as a result of recoveries exceeding charge
offs for the year ended 1999 (there was no provision expense recorded in
1999, 1998 or 1997). The Allowance as a percentage of total loans declined
to 2.39% at December 31, 1999 as compared to 2.58% at December 31, 1998.
There has been no provision for loan losses in the last four years, with
the Allowance remaining relatively unchanged during this period. In
addition, the year ended December 31, 1995 reflected provision expense of a
negative $425,000 as a result of provision for loan losses reversals. This
is in contrast to years preceding 1993 when provision for loan losses was
high as a result of the Bank's asset quality problems. The improvement in
the amount of provision for loan losses is the result of 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
when provision for loan losses was higher, (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, 1999. 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,
------------------------------------------------------------
1999 1998
-------------------------- -----------------------
Allowance Allowance
for Loan for Loan
Loss Loss
(Allocated (Allocated
(in thousands) Amount Reserve) Amount Reserve)
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Real estate mortgage loans:
Commercial $373 $ 25 $ 430 $ 53
Commercial and industrial loans -- -- 9 2
---- ---- ----- ----
Total $373 $ 25 $ 439 $ 55
==== ==== ===== ====
</TABLE>
<TABLE>
<CAPTION>
Nonperforming Assets
Information with respect to nonperforming assets is set forth below:
December 31,
-----------------------------------------------------
(in thousands) 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nonaccrual loans $373 $430 $387 $1,944 $1,948
Accruing loans past due 90
days or more 167 121 101 201 169
Restructured loans -- -- 265 -- 3,427
Real estate owned and -- 15 65 478 1,973
repossessions ---- ---- ---- ------ ------
$540 $566 $818 $2,623 $7,517
==== ==== ==== ====== ======
</TABLE>
Nonperforming loans (consisting of nonaccrual loans, accruing loans past due 90
days or more and restructured loans) are comprised of the following:
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------
(in thousands) 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Real estate mortgage loans:
Residential -- $ 86 $114 -- $ 386
Commercial $373 430 501 $1,944 5,007
Consumer and other loans 167 35 138 201 151
---- ---- ---- ------ ------
Total nonperforming loans $540 $551 $753 $2,145 $5,544
==== ==== ==== ====== ======
</TABLE>
The following table sets forth certain information regarding nonperforming
commercial loans (dollars in thousands):
<TABLE>
<CAPTION>
December 31,1999 December 31, 1998 December 31, 1997
------------------- -------------------- ---------------------
Number Number Number
Type of Property of Outstanding of Outstanding of Outstanding
Security Loans Balance Loans Balance Loans Balance
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1-4 family
residential 1 $ 8 1 $ 58 3 $107
5 or more family
residential 1 68 1 69 1 129
Non-residential
real estate 2 297 1 303 1 265
--- ---- ---- ---- ---- ----
4 $373 3 $430 5 $501
=== ==== ==== ==== ==== ====
</TABLE>
21
<PAGE>
The Bank holds a large concentration of commercial real estate loans of which
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, or upward movements in interest rates could
adversely impact the performance and/or value of the underlying collateral for
these loans and could have an adverse impact on the Bank's loan portfolio, and
in particular, currently performing commercial real estate loans. In addition,
deterioration in the local economy or adverse changes in the financial condition
of various borrowers could have an impact on the Bank's entire loan portfolio
(including commercial real estate). These factors could result in an increased
incidence of loan defaults and, as a result, an increased level of nonperforming
loans and assets. In addition, while the current favorable trend in
nonperforming assets is encouraging, the current level of nonperforming assets
is considered by management to be at such a low level that it is not likely to
be sustained. For further information, see Note 5 to the Company's Consolidated
Financial Statements.
Potential Problem Loans
Potential problem loans are loans not otherwise identified as nonperforming
(nonaccrual loans, accruing loans past due 90 days or more and troubled debt
restructurings), which have some identified inherent risk of loss, yet are still
performing. In many cases borrowers have historically experienced, or are
currently experiencing, such problems as inadequate rental revenues, high
vacancy levels and cash flow problems, excessive debt loads, personal problems,
competitive pressures, or other difficulties.
At December 31, 1999, the Bank had identified approximately $1.0 million of
currently performing but potential problem loans, representing 0.5% of total
assets, ranging in size from $6,000 to $638,000. This compares to $173,000 of
potential problem loans at December 31, 1998. Management does not consider the
increase in potential problem loans to be reflective of a material decline in
overall asset quality as the level of potential problem loans at December 31,
1999 is still very low by historical standards and the level of potential
problem loans at December 31, 1998 was considered by management to be so low as
to represent an anomaly, and not reasonably sustainable.
The following table sets forth certain information regarding potential problem
loans at December 31, 1999:
<TABLE>
<CAPTION>
Number of
Type of Security Outstanding Balance
Property Loans In thousands)
- -------------------------------------------------------------------------------
<S> <C> <C>
Single family 1 $ 83
Commercial real estate 2 63
Commercial other 6 893
---- ------
9 $1,039
==== ======
</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, 1999, 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
Real estate owned ("REO") consists of properties acquired through mortgage loan
foreclosure proceedings, repossessions or in full or partial satisfaction of
outstanding loan obligations. The Bank had no REO properties at December 31,
1999, as compared to $15,000 at December 31, 1998.
22
<PAGE>
LIQUIDITY
Bank
Deposits totaled $140.1 million at December 31, 1999, a decrease of $8.4 million
(or 5.7%) from the level of $148.5 million at December 31, 1998. This decrease
is primarily attributable to the sale of the Bank's Kennebunk branch, which
consisted of $12.5 million in deposits at the time of the sale in May 1999.
Included in deposit balances at December 31, 1999 are money market demand
account deposits totaling $5.2 million from one class of commercial deposits.
Subsequent to year end, these deposits grew to exceed $10 million and in March
2000, were transferred to secured borrowings. These borrowings have no term and
may fluctuate or terminate at any time. For further information on deposits see
Note 8 to the Company's Consolidated Financial Statements.
At December 31, 1999 and 1998, unfunded loan commitments equaled $20.2 million
and $17.5 million, respectively. Loan commitments include unfunded portions of
real estate, construction, commercial and other loans, unused lines of credit,
and the unused portion of home equity lines of credit, as well as contingent
obligations such as letters of credit. Loan commitments are subject to the same
credit policies as loans and generally have expiration dates and termination
clauses. Unused home equity line of credit commitments totaled $6.7 million at
December 31, 1999 as compared to home equity outstanding balances of $5.2
million.
The Bank has the capability of borrowing additional funds from the FHLB of
Boston, with an approximate availability of $26.8 million at December 31, 1999.
The Bank is also approved by the Federal Reserve Bank of Boston to obtain
liquidity from its "Discount Window". At December 31, 1999, the Bank had pledged
$10.1 million in 1-4 family residential real estate loans as collateral for
future borrowings of up to $9.1 million from the Federal Reserve. No funds have
been 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 $2.3 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 Notes 10 and 17 to the Company's Consolidated Financial
Statements.
Capital
Company
The table below sets forth the regulatory capital requirements and capital
ratios for the Company at December 31, 1999 and 1998:
<TABLE>
<CAPTION>
(dollars in thousands) 1999 1998
- ------------------------------------------------------------------------------------
<S> <C> <C>
Tier 1 capital (Leverage) to total assets
(1) ratio
Qualifying capital $ 15,756 $ 13,453
Actual % 8.37% 7.20%
Minimum requirements for
capital adequacy % 4.00-5.00% 4.00-5.00%
Average quarterly assets $ 188,154 $ 186,757
Tier 1 capital to
risk-weighted assets
Qualifying capital $ 15,756 $ 13,453
Actual % 14.56% 13.05%
Minimum requirements for
capital adequacy % 4.00% 4.00%
Total capital to risk-weighted
assets (Tier 1 and Tier 2)
Qualifying capital $ 17,128 $ 14,759
Actual % 15.82% 14.32%
Minimum requirement for
capital adequacy % 8.00% 8.00%
Risk-weighted assets
$ 108,243 $ 103,071
</TABLE>
(1) Calculated on an average quarterly basis less disallowed portion of
the deferred tax asset.
23
<PAGE>
Bank
The table below sets forth the regulatory capital requirements and capital
ratios for the Bank at December 31, 1999 and 1998:
<TABLE>
<CAPTION>
(dollars in thousands) 1999 1998
- ----------------------------------------------------------------------------------------
<S> <C> <C>
Tier 1 capital (Leverage) to total assets
(1) ratio
Qualifying capital $ 17,244 $ 14,709
Actual % 9.22% 7.90%
Minimum requirements for
capital adequacy % 4.00% 4.00%
Average quarterly assets $187,070 $186,077
Tier 1 capital to
risk-weighted assets
Qualifying capital $ 17,244 $ 14,709
Actual % 15.90% 14.33%
Minimum requirements for
capital adequacy % 4.00% 4.00%
Total capital to risk-weighted
assets (Tier 1 and Tier 2)
Qualifying capital $ 18,618 $ 16,010
Actual % 17.17% 15.60%
Minimum requirement for
capital adequacy % 8.00% 8.00%
Risk-weighted assets $108,419 $102,612
</TABLE>
(1) Calculated on an average quarterly basis.
See Note 2 to the Company's Consolidated Financial Statements for certain
capital restrictions.
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 10 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, and 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 length of time loans remain outstanding, 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.
Management's efforts to control exposure to interest rate risk is complicated by
the uncertainty of the maturity, repricing and/or run off characteristics of a
portion of the Company's assets and liabilities, such as the Company's interest
bearing checking and savings products that have no contractual maturity, and the
unexpected changes in the balance of these products as a result of changes in
competitive or market conditions. Similarly, customers have the right to prepay
certain loans, for example residential mortgage loans, without prepayment
penalties. As a result, a significant portion of the Company's assets, including
mortgage based assets such as mortgage loans and mortgage backed securities, are
subject to prepayment risks. To measure the sensitivity of its income to changes
in interest rates, the Company utilizes a variety of methods, including
simulation models and gap analysis. The gap analysis measures the difference
between
24
<PAGE>
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 timing of interest rate changes on certain deposits
and the ability to change the estimated maturity/repricing of those deposits
with no contractual maturity. Additionally, the gap analysis does not take into
account the prepayment characteristics of loans in a changing interest rate
environment. Therefore, the gap analysis is viewed as a complement to the
simulation model.
The following table shows the estimated maturity/repricing structure of the
interest sensitive assets and interest sensitive liabilities of the Company at
December 31, 1999.
<TABLE>
<CAPTION>
Maturing/Repricing
--------------------------------------------------------------------------------------------
After One
After Three Year but After Three
Within Months but within Years but
Three within One Three within Five After Five Non-Rate
(dollars in thousands) Months Year Years Years Years Sensitive Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Assets
Interest earning deposits $ 5,793 $ 5,793
Securities:
Available for sale(1) 2,815 $ 5,023 $ 9,289 $ 3,600 $ 32,015 $ 472 53,214
Mortgage loans held for sale 83 -- -- -- -- -- 83
Loans(2) 18,927 25,600 18,658 23,767 33,254 (2,571) 117,635
Other assets -- -- -- -- -- 13,857 13,857
-------- ------- ------- -------- -------- -------- --------
Total Assets $ 27,618 $ 30,623 $ 27,947 $ 27,367 $ 65,269 $ 11,758 $190,582
======== ======= ======= ======== ======== ======== ========
Liabilities and Equity
Savings, money market and NOW accounts $ 48,118 -- -- -- -- $ 32,937 $ 81,055
Certificate of deposit accounts 11,724 $ 20,321 $ 11,230 $ 3,801 $ 44 -- 47,120
Other deposits -- -- -- -- -- 11,962 11,962
FHLB advances 3,000 5,000 9,748 3,000 7,000 -- 27,748
Secured borrowings 2,980 -- -- -- -- -- 2,980
Savings Bank Notes 101 316 942 909 -- -- 2,268
Other liabilities -- -- -- -- -- 535 535
Equity -- -- -- -- -- 16,914 16,914
-------- -------- ------- -------- -------- -------- --------
Total Liabilities and Equity $ 65,923 $ 25,637 $ 21,920 $ 7,710 $ 7,044 $ 62,348 $190,582
======== ======= ======= ======== ======== ======== ========
Periodic repricing difference
(Periodic gap) (38,305) $ 4,986 $ 6,027 $ 19,657 $ 58,225 $(50,590) --
Cumulative repricing difference
(Cumulative gap) $(38,305) $(33,319) $(27,292) $ (7,635) $ 50,590 -- --
Cumulative gap to total
assets (20.1)% (17.5)% (14.3)% (4.0)% 26.5% -- --
</TABLE>
(1) FHLB stock is classified as available for sale.
(2) The allowance for loan losses, deferred origination fees and nonaccrual
loans are included in the non-rate sensitive column.
A more meaningful approach to measuring interest rate sensitivity is
the simulation model, which analyzes resulting net income under
various interest rate scenarios. Projected net interest income is
modeled based on immediate movements or shifts in interest rates of
100 and 200 basis points up or down, analyzed over a twelve month
period. The model is based on the actual maturity and repricing
characteristics of interest rate sensitive assets and liabilities and
25
<PAGE>
factors in budget projections for anticipated activity levels in the
various asset and liability categories. Assumptions are also made with
regard to principal prepayment speeds on loans and mortgage backed
securities. 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.
The following table reflects the estimated percentage change in net
interest income for the next 12 months resulting from a change in interest
rates of 200 basis points utilizing the Bank's simulation model.
<TABLE>
<CAPTION>
Change in Rates (1) % Change in Net Interest Income
- -------------------------------------------------------------------------------
<S> <C> <C>
+200 basis points (1.7)%
-200 basis points (1.3)%
</TABLE>
(1) Includes various interest rate floors and ceilings established for certain
deposit accounts: NOWs - floor 1%, ceiling 3%; Savings (other than High
Rise Savings) - floor 1.50%, ceiling 3.75%; Money Market accounts - floor
1.5%, ceiling 3.75%. At December 31, 1999 the average interest rates paid
on NOWs, Savings (other than High Rise Savings) and Money Market accounts
were 1.81%, 2.26% and 3.57%, respectively.
Based on the information and assumptions in effect at December 31, 1999,
management of the Company believes that a 200 basis point change in interest
rates up or down, and the resulting impact over a twelve month period, would not
adversely impact the Company's annualized net interest income by more than 2%
(and is within the limits of the Company's policy parameters of a 10% adverse
impact).
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 a 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. However, 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.
Year 2000 Issue
In accordance with guidelines provided by the Federal Financial Institutions
Examination Council, the Company established a Year 2000 Action Committee to
address the risks related to potential computer problems associated with the
Year 2000 date change, including the development and implementation of a
strategy to minimize the impact of Year 2000 risk relating to the Bank's
information technology systems and non-information technology systems. During
the turn of the millennium, Bank staff was on hand to validate all systems,
including computer, telephone and ATMs, as well as testing for data integrity.
As a result, the Company did not experience any significant problems or
interruptions in service resulting from the Year 2000 date change or adverse
implications to the Bank's borrowers or depositors. The Company will continue to
monitor its computerized and other electronic systems throughout 2000 for any
potential problems that may arise. However, management does not anticipate any
disruptions in its operations resulting from Year 2000 systems problems. The
Company incurred approximately $27,000 in external costs for its Year 2000
programs for the year ended December 31, 1999, which were expensed as incurred.
26
<PAGE>
MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
As of December 31, 1999, the Company had approximately 1,394 holders of record
and 1,325,993 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 the high and low sales prices for the Company's
common stock traded on The Nasdaq SmallCap Market.
<TABLE>
<CAPTION>
High Low
- -------------------------------------------------------------------------------
<S> <C> <C>
1999 First Quarter $10.250 $ 9.313
Second Quarter 10.375 9.000
Third Quarter 10.000 9.125
Fourth Quarter 9.813 8.000
1998 First Quarter $15.500 $13.625
Second Quarter 14.625 12.750
Third Quarter 13.000 10.000
Fourth Quarter 10.625 8.375
</TABLE>
No dividends were declared by the Company during the years 1994 through 1999.
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 "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Liquidity" and "Note 10" to the Company's
Consolidated Financial Statements.
27
<PAGE>
FINANCIAL STATEMENTS.
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors and Stockholders
First Coastal Corporation:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, comprehensive income, stockholders' equity
and cash flows present fairly, in all material respects, the financial position
of First Coastal Corporation and its subsidiary (the "Company") at December 31,
1999 and 1998, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 1999, in conformity with
accounting principles generally accepted in the United States. 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 of these statements in accordance with
auditing standards generally accepted in the United States which 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, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
PricewaterhouseCoopers LLP
Portland, Maine
February 8, 2000
28
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
First Coastal Corporation and Subsidiary December 31, December 31,
--------- ---------
(in thousands, except share and per share amounts) 1999 1998
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Noninterest earning deposits and cash - Note 3 $ 6,631 $ 4,509
Interest earning deposits 5,793 28,118
--------- ---------
Cash and cash equivalents 12,424 32,627
Investment securities - Note 4:
Available for sale (at market value)(amortized cost: 1999
$53,781; 1998 $47,037) 51,823 47,048
Federal Home Loan Bank stock: at cost 1,391 1,315
Loans held for sale - Note 1 83 83
Loans - Note 5 120,533 105,873
Less: Deferred loan fees, net (16) (97)
Allowance for loan losses - Note 6 (2,882) (2,735)
--------- ---------
117,635 103,041
Premises and equipment - Note 7 2,559 2,554
Accrued interest receivable 1,251 1,132
Real estate owned and repossessions -- 15
Deferred tax asset - Note 12 2,950 3,354
Other assets 466 244
--------- ---------
TOTAL ASSETS $ 190,582 $ 191,413
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits - Note 8 $ 140,137 $ 148,545
Advances from Federal Home Loan Bank - Note 9 27,748 22,545
Savings Bank Notes - Note 9 2,268 2,600
Secured borrowings - Note 9 2,980 967
Accrued expenses and other liabilities 535 442
--------- ---------
TOTAL LIABILITIES 173,668 175,099
Commitment and Contingencies - Note 13
STOCKHOLDERS' EQUITY - Note 10
Preferred Stock, $1 par value; Authorized 1,000,000 shares, none issued -- --
Common Stock, $1 par value; Authorized 6,700,000 shares, issued as of
December 31, 1999 and December 31, 1998 - 1,360,527
shares 1,361 1,361
Paid-in capital 31,751 31,751
Retained earnings (deficit) (14,579) (16,805)
Accumulated other comprehensive income (loss) (1,292) 7
Treasury stock, at cost (At December 31, 1999 - 34,534 shares) - Note 20 (327) --
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 16,914 16,314
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 190,582 $ 191,413
========= =========
</TABLE>
See notes to consolidated financial statements.
29
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS
First Coastal Corporation and Subsidiary Year Ended December 31,
-----------------------------------------------
(in thousands, except share and per share amounts) 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest and Dividend Income
Interest and fees on loans $ 10,020 $ 9,919 $ 9,651
Interest and dividends on investment securities:
Investment interest income 3,339 2,042 1,674
Dividends 106 84 94
Interest earning deposits 521 1,014 475
---------- ---------- ----------
Total Interest and Dividend Income 13,986 13,059 11,894
---------- ---------- ----------
Interest Expense
Deposits - Note 8 5,234 5,308 4,459
Borrowings:
Advances from Federal Home Loan Bank 1,273 900 940
Savings Bank Notes 258 332 477
Secured borrowings 99 27 --
---------- ---------- ----------
Total Interest Expense 6,864 6,567 5,876
---------- ---------- ----------
Net Interest Income Before Provision for Loan Losses 7,122 6,492 6,018
Provision for loan losses - Note 6 -- -- --
---------- ---------- ----------
Net Interest Income After Provision for Loan Losses 7,122 6,492 6,018
---------- ---------- ----------
Noninterest Income
Services charges on deposit accounts 503 508 466
Loan servicing fee income -- 34 76
Gain on investment securities transactions 22 104 271
Gain on sales of mortgage loans 558 111 99
Gain on sale of branch 1,110 -- --
Gain on sale of assets -- 539 --
Other 117 85 78
---------- ---------- ----------
2,310 1,381 990
---------- ---------- ----------
Operating Expenses
Salaries and employee benefits - Note 11 2,932 2,632 2,367
Occupancy 608 536 446
Net cost of operations of real estate owned and repossessions 5 7 67
Other 2,511 2,275 2,187
---------- ---------- ----------
6,056 5,450 5,067
---------- ---------- ----------
Income Before Income Taxes 3,376 2,423 1,941
Income Taxes - Note 12 1,150 859 679
---------- ---------- ----------
NET INCOME $ 2,226 $ 1,564 $ 1,262
========== ========== ==========
PER SHARE AMOUNTS - Note 18 Basic earnings per share:
Weighted average shares outstanding 1,356,375 1,359,976 1,358,730
Net income per share $ 1.64 $ 1.15 $ 0.93
========== ========== ==========
Diluted earnings per share:
Weighted average shares outstanding 1,370,152 $1,379,124 1,391,272
Net income per share $ 1.62 $ 1.13 $ 0.91
========== ========== ==========
</TABLE>
See notes to consolidated financial statements.
30
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
First Coastal Corporation and Subsidiary
<TABLE>
<CAPTION>
Accumulated
Retained Other
Common Treasury Paid-In Earnings Comprehensive
(in thousands, except share amounts) Stock Stock Capital (Deficit) Income/(Loss) Total
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1996 $1,358 -- $31,740 $(19,631) $ (79) $13,388
Shares outstanding at December 31,
1997: 1,359,194
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
Shares outstanding at December 31,
1998: 1,360,527
1998 net income 1,564 1,564
Decrease in net unrealized gain on
available for sale securities (65) (65)
Exercise of common stock options 2 -- 5 -- -- 7
------ ------ ------- -------- ------- -------
Balances at December 31, 1998 1,361 -- 31,751 (16,805) 7 16,314
Shares outstanding at December 31,
1999: 1,325,993
1999 net income 2,226 2,226
Decrease in net unrealized gain on
available for sale securities (1,299) (1,299)
Repurchase of common stock $ (327) (327)
------ ------ ------- -------- ------- -------
Balances at December 31, 1999 $1,361 $ (327) $31,751 $(14,579) $(1,292) $16,914
====== ======= ======= ======== ======= =======
</TABLE>
See notes to consolidated financial statements.
31
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
First Coastal Corporation and Subsidiary Year Ended December 31,
---------------------------------------------
(in thousands) 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Activities
Net Income $ 2,226 $ 1,564 $ 1,262
Adjustments to reconcile net income to net cash provided by
operating activities:
Writedowns of REO 5 -- --
(Gain) loss on sales of REO -- (7) 2
Gain on sale of branch (1,110) -- --
Gain on sale of premises and equipment -- (539) --
Depreciation and amortization 444 400 319
Amortization of investment securities premiums (discounts) 456 117 63
Realized investment securities gains (22) (104) (271)
Realized gains on assets held for sale (558) (111) (99)
Loans originated and acquired for resale (5,044) (10,726) (7,366)
Sales of loans originated and acquired for resale 5,602 14,319 5,390
Decrease (increase) in interest receivable (119) (162) 109
Increase in interest payable 20 31 2
Net change in other assets 192 1,449 1,371
Net change in other liabilities 73 104 44
-------- -------- --------
Net cash provided by operating activities 2,165 6,335 826
-------- -------- --------
Investing Activities
Sales of securities available for sale 11,708 6,927 15,831
Maturities of securities held to maturity -- 10,000 3,000
Maturities of securities available for sale 200 -- 1,000
Purchases of investment securities available for sale (18,492) (37,973) (15,469)
Purchases of investment securities held to maturity -- (3,193) (198)
Net change in loans (14,594) (1,541) (5,651)
Net sales (purchases) of premises and equipment (449) 1,139 (445)
-------- -------- --------
Net cash used by investing activities (21,627) (24,641) (1,932)
-------- -------- --------
Financing Activities
Net change in deposits (7,298) 33,554 (94)
Net change in secured borrowings 2,013 967 --
Proceeds from borrowings 11,000 14,000 2,000
Payments on borrowings (6,129) (5,149) (4,706)
Proceeds from exercise of common stock options -- 7 7
Repurchase of common stock (327) -- --
-------- -------- --------
Net cash used by financing activities (741) 43,379 (2,793)
-------- -------- --------
Increase (decrease) in cash and cash equivalents (20,203) 25,073 (3,899)
Cash and cash equivalents at beginning of period 32,627 7,554 11,453
-------- -------- --------
Cash and cash equivalents (interest and non-interest
bearing) at end of period $ 12,424 $ 32,627 $ 7,554
======== ======== ========
Supplemental Disclosure of Information
Interest paid on deposits and borrowings $ 5,817 $ 6,535 $ 5,874
Income tax paid $ 76 $ 85 --
Noncash Investing Activities
Transfer of loans to real estate owned and repossessions -- $ 153 $ 21
</TABLE>
See notes to consolidated financial statements.
32
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
First Coastal Corporation and Subsidiary Year Ended December 31,
--------------------------------------------
(dollars in thousands) 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income $ 2,226 $ 1,564 $ 1,262
Other comprehensive income:
Unrealized holding gains (losses) arising during the period
(net of income taxes): 1999 - $(661); 1998 - $1; 1997 - $37 (1,285) 4 330
Reclassification adjustment for realized gains included in
net income (net of income taxes): 1999 - $(8); 1998 -
$(35); 1997 - $(92) (14) (69) (179)
------- ------- -------
(1,299) (65) 151
------- ------- -------
$ 927 $ 1,499 $ 1,413
======= ======= =======
</TABLE>
See notes to consolidated financial statements.
33
<PAGE>
Notes to Consolidated Financial Statements
First Coastal Corporation and Subsidiary
December 31, 1999
Note 1. ACCOUNTING POLICIES
Business
First Coastal Corporation (the "Company") is a bank holding company whose sole
subsidiary is Coastal Bank, a Maine chartered, stock bank (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 real estate and business loans.
Deposits are federally insured by the Bank Insurance Fund, which is administered
by the Federal Deposit Insurance Corporation ("FDIC").
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
inter-company 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.
While management uses available information to recognize losses on loans and
real estate owned ("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
Effective January 1, 1998, the Company adopted Financial Accounting Standards
Board ("FASB") Statement of Financial Accounting Standard ("SFAS") No. 130,
Reporting Comprehensive Income. SFAS No. 130 requires 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 do not have a material effect on the Company's financial
condition, results of operations and cash flows.
Effective January 1, 1998, the Company adopted FASB SFAS No. 131, Financial
Reporting for Segments of a Business Enterprise. SFAS No. 131 requires that a
public business enterprise report financial and descriptive information about
its reportable operating segments. The Company has determined that it does not
currently have separately reportable operating segments under this
pronouncement.
In February 1998, FASB issued SFAS No. 132, Employers' Disclosures about
Pensions and Other Postretirement Benefits. SFAS No. 132 revises employers'
disclosures about pension and other postretirement benefit plans. The
requirements of this pronouncement were adopted for the Company's financial
statements for the year ending December 31, 1998. The requirements of this
pronouncement did not have a material effect on the Company's financial
condition, results of operations and cash flows.
In June 1998, FASB issued SFAS No. 133, Accounting for Derivative Instruments
and Hedging Activities, which establishes accounting and reporting standards for
derivative instruments, including certain derivatives embedded in other
contracts, and for hedging activities. SFAS No. 133 requires that an entity
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. The requirements
of this pronouncement will be adopted effective January 1, 2001 and are not
expected to have a material effect on the Company's financial condition, results
of operations and cash flows.
34
<PAGE>
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with a maturity of
three months or less (from the date of purchase) to be cash equivalents.
Investment Securities
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, with
unrealized holding gains and losses (net of related taxes) excluded from
earnings and reported as a separate component of stockholders' equity.
Amortization of bond premiums and accretion of bond discounts are amortized over
the expected life of the investment. 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
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 an aggregate loan basis. Changes in the carrying value are
reported in earnings as gains and losses on mortgage loans. It is the Bank's
current intent to sell saleable residential loans on a servicing released basis,
subject to market conditions.
The Company complies with 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.
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 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, net of the corresponding portion of the Allowance allocated
to these loans ("Allocated Reserves"), if any.
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 and/or value of the
loan collateral. Interest to be paid on a deferred or contingent basis is
reported in earnings only as collected.
35
<PAGE>
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 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.
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 income taxes and tax benefits 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. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The Company provides
deferred taxes for the estimated future tax effects attributable to temporary
differences and carryforwards when realization is more likely than not.
Risks and Uncertainties
In the normal course of its business, the Company encounters two significant
types of risk: economic and regulatory. There are four main components of
economic risk: interest rate risk, credit risk, market risk and competitive
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. Competitive risk is the impact on the Company's operations resulting
from competitor's actions with regard to areas such as products offered, loan
and deposit pricing, branch facilities, strategic alliances and promotional
efforts.
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 areas such as capital adequacy,
asset valuations, amounts of required loan 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 2 to the Company's Consolidated Financial Statements.
Computation of Earnings per Share
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. 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.
36
<PAGE>
Note 2. REGULATORY MATTERS
Bank Regulatory Requirements
The Company and the Bank are subject to various regulatory requirements,
including 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 Company and the Bank's
consolidated financial statements. Under capital adequacy guidelines issued by
the Federal Reserve Board for the Company and the regulatory framework for
prompt corrective action administered by the FDIC for the Bank, the Bank must
meet specific capital requirements that involve quantitative measures of the
Company and the Bank's assets, liabilities, and certain off-balance sheet items.
The Company and 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 Company and the Bank to maintain minimum amounts and ratios (set
forth in the tables 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, 1999, the Company and the Bank meet
all capital adequacy requirements to which they are subject.
As of December, 1999, 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 have changed the Bank's category.
Capital - Company
The tables below set forth the actual capital ratios and minimum regulatory
requirements for capital adequacy for the Company at December 31, 1999 and 1998:
<TABLE>
<CAPTION>
Minimum
Requirement
for Capital
1999 Actual Adequacy
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Tier 1 capital (Leverage) to total assets (1) ratio 8.37% 4.00-5.00%
Tier 1 capital to risk-weighted assets 14.56 4.00
Total capital to risk-weighted assets (Tier 1 and Tier 2) 15.82 8.00
</TABLE>
(1) Calculated on an average quarterly basis less disallowed portion of the
deferred tax asset.
<TABLE>
<CAPTION>
Minimum
Requirement
for Capital
1998 Actual Adequacy
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>>
Tier 1 capital (Leverage) to total assets (1) ratio 7.20% 4.00-5.00%
Tier 1 capital to risk-weighted assets 13.05 4.00
Total capital to risk-weighted assets (Tier 1 and Tier 2) 14.32 8.00
</TABLE>
(1) Calculated on an average quarterly basis less disallowed portion of the
deferred tax asset.
37
<PAGE>
Capital - Bank
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, 1999 and 1998:
<TABLE>
<CAPTION>
Minimum
Requirement to
be well
Minimum capitalized
Requirement for under Prompt
Capital Corrective
1999 Actual Adequacy Action
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Tier 1 capital (Leverage) to total assets (1) ratio 9.22% 4.00% 5.00%
Tier 1 capital to risk-weighted assets 15.90 4.00 6.00
Total capital to risk-weighted assets (Tier 1 and Tier 2) 17.17 8.00 10.00
(1) Calculated on an average quarterly basis less disallowed portion of the deferred tax asset.
</TABLE>
<TABLE>
<CAPTION>
Minimum
Requirement to
be well
Minimum capitalized
Requirement for under Prompt
Capital Corrective
1998 Actual Adequacy Action
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Tier 1 capital (Leverage) to total assets (1) ratio 7.90% 4.00% 5.00%
Tier 1 capital to risk-weighted assets 14.33 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 less disallowed portion of the deferred tax asset.
</TABLE>
Note 3. NONINTEREST EARNING DEPOSITS AND CASH
Noninterest bearing deposits and cash balances at December 31, 1999 are subject
to withdrawal and usage restrictions which require $100,000 to be maintained at
the Federal Reserve Bank of Boston to meet the Bank's reserve requirements.
38
<PAGE>
Note 4. INVESTMENT SECURITIES
The following tables set forth the amortized cost, fair market value and gross
unrealized gains and losses of investment securities for each major security
type at December 31, 1999 and 1998:
<TABLE>
<CAPTION>
December 31, 1999
--------------------------------------------------------------
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 $20,025 -- $ (824) $19,201
U.S. government agency notes 1,000 -- (79) 921
Mortgage backed securities 32,284 $ 35 (1,090) 31,229
Other 472 -- -- 472
------- ------- -------- -------
$53,781 $ 35 $ (1,993) $51,823
======= ======= ======== =======
</TABLE>
<TABLE>
<CAPTION>
December 31, 1998
--------------------------------------------------------------
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 $14,269 $ 3 $ (107) $14,165
Mortgage backed securities 32,283 137 (22) 32,398
Other 485 -- -- 485
------- ----- -------- -------
$47,037 $ 140 $ (129) $47,048
======= ===== ======== =======
</TABLE>
The Company's cash flows for the year ended December 31, 1999 includes purchases
and maturities of mortgage backed securities of $7.0 million and $7.5 million,
respectively. The Company's cash flows for the year ended December 31, 1998
includes purchases and maturities of mortgage backed securities of $25.8 million
and $16.9 million, respectively. There were no sales of mortgage backed
securities for the years ended December 31, 1999 and 1998.
The following is a summary of gross realized gains and losses on investment
securities sold for 1999, 1998 and 1997. 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,
---------------------------------------------------------
1999 1998 1997
Gross Realized Gross Realized Gross Realized
----------------- ---------------- ----------------
Gains Losses Gains Losses Gains Losses
----- ------- ----- ------ ----- ------
<S> <C> <C> <C> <C> <C> <C>
Sales of:
U.S. government obligations $ 32 -- -- -- $ 62 --
U.S. government agency notes 11 -- -- -- -- --
Corporate notes 21 -- -- -- -- --
Mortgage-backed securities -- -- -- -- 39 --
Other 1 $ (43) $104 -- 170 --
---- ----- ---- ---- ---- --
$ 65 $ (43) $104 -- $271 --
==== ===== ==== ==== ==== ==
</TABLE>
39
<PAGE>
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, 1999. Expected maturities may differ from contractual maturity
dates due to the ability of certain borrowers to prepay their obligations.
<TABLE>
<CAPTION>
Available for Sale Securities
-----------------------------------
(in thousands) Amortized Cost Fair Value
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Due in one year or less $ 523 $ 523
Due from 1 -5 years 2,089 2,079
Due from 5 - 10 years 16,359 15,663
Due after 10 years 2,054 1,857
------- -------
Subtotal 21,025 20,122
Mortgage backed securities 32,284 31,229
------- -------
Total $53,309 $51,351
======= =======
</TABLE>
At December 31, 1999, the Company's securities pledged as collateral for public
and private deposits totaled $18.3 million.
Note 5. LOANS
The composition of the loan portfolio was as follows:
<TABLE>
<CAPTION>
December 31,
------------------------------------
(in thousands) 1999 1998
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Real estate mortgage loans:
Residential $ 28,460 $ 32,555
Commercial 66,833 52,747
Real estate construction 2,832 1,384
Commercial and industrial 9,446 5,872
Consumer and other 12,962 13,315
-------- --------
Total $120,533 $105,873
======== ========
</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, 1999, 1998 and 1997 of
$133,000, $262,000 and $195,000, respectively.
On January 31, 1999, the Bank completed the settlement of the sale of all of its
residential mortgage servicing portfolio, resulting in a pretax gain in the
amount of $460,000 recorded in 1999. The Bank had no loans serviced for others
at December 31, 1999, as compared to servicing $44.9 million of loans in its
capacity as a subservicer at December 31, 1998.
At December 31, 1999 and 1998, loans included $395,000 and $404,000,
respectively, in loans to a partnership in which a director is a general
partner, which loans were originally made prior to such director's nomination
and election as a director. The loans are current and being paid in accordance
with the terms of the loan agreement.
Impaired Loans
At December 31, 1999, the recorded investment in loans for which impairment has
been recognized in accordance with SFAS No. 114 totaled $373,000, as compared to
$439,000 at December 31, 1998. At December 31, 1999 and 1998, the corresponding
Allocated Reserves totaled $25,000 (relating to two impaired loans with balances
totaling $77,000) and $55,000 (relating to all impaired loans), respectively.
All impaired loans were classified as nonaccrual at December 31, 1999. An amount
equal to $430,000 of the $439,000 total impaired loans was classified as
nonaccrual and the remaining $9,000 was classified as potential problem loans at
December 31, 1998. The income recorded on a cash basis relating to impaired
loans equaled $16,000 and $22,000 at December 31, 1999 and 1998, respectively.
The average balance of outstanding impaired loans was $330,000 and $414,000 for
1999 and 1998, respectively. All of the impaired loans were collateralized by
real estate at December 31, 1999.
40
<PAGE>
Non-Performing Assets
The table below sets forth information with respect to nonperforming assets:
<TABLE>
<CAPTION>
December 31,
-------------------------------
(in thousands) 1999 1998 1997
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Nonaccrual loans $373 $430 $387
Accruing loans past due 90 days or more 167 121 101
Restructured loans -- -- 265
Real estate owned and repossessions -- 15 65
---- ---- ----
Total $540 $566 $818
==== ==== ====
</TABLE>
Interest income recognized on nonaccrual and restructured loans totaled $19,000,
$16,000 and $122,000 in 1999, 1998 and 1997, respectively. Had interest income
on these loans been paid at the contracted rates and due dates, the Company
would have recorded additional interest income in 1999, 1998 and 1997 of $9,000,
$8,000 and $26,000, respectively.
Note 6. ALLOWANCE FOR LOAN LOSSES
Changes in the Allowance were as follows:
December 31,
---------------------------------
(in thousands) 1999 1998 1997
- -------------------------------------------------------------------------------
Balance at beginning of year $ 2,735 $ 2,665 $ 2,666
Charge-offs (12) (77) (339)
Recoveries 159 147 338
------- ------- -------
Net charge-offs 147 70 (1)
Provision for loan losses -- -- --
------- ------- -------
Balance at end of year $ 2,882 $ 2,735 $ 2,665
======= ======= =======
The Allowance represented 2.39% and 2.58% of total loans, and 533.7% and 496.4%
of nonperforming loans at December 31, 1999 and December 31, 1998, respectively.
Note 7. PREMISES AND EQUIPMENT
Premises and equipment consisted of the following:
December 31,
------------------
(in thousands) 1999 1998
- -----------------------------------------------------------------------------
Land $ 408 $ 408
Building and building improvements 1,684 1,579
Leasehold improvements 475 282
Equipment 4,080 4,061
------ ------
6,647 6,330
Less: Accumulated depreciation and amortization 4,088 3,776
------ ------
Total $2,559 $2,554
====== ======
On September 15, 1998, the Bank sold its headquarters branch and operations
center and recognized a pre-tax gain of $539,000. As a result of the sale, the
Bank entered into a lease arrangement with the buyer until March 15, 2000, which
was subsequently extended until July 15, 2000. The Company plans to relocate its
headquarters branch and operations center in May 2000. Additionally, in May 1999
the Bank sold its Kennebunk branch and recognized a gain of $1.1 million.
41
<PAGE>
[PG NUMBER]
Note 8. DEPOSITS
Deposit balances at year end consisted of the following:
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998
---------------------- ----------------------
Weighted Weighted
(dollars in thousands) Balance Average Rate Balance Average Rate
- ------------------------------------------------------- ----------------------
<S> <C> <C> <C> <C>
Noninterest bearing demand
deposits $ 11,962 $ 10,447
Interest bearing demand
deposits 22,280 2.32% 21,680 2.30%
Savings and escrow deposits 58,775 3.67 63,393 3.78
Time deposits 47,120 5.05 53,025 5.36
-------- --------
Total $140,137 3.98% $148,545 4.24%
======== ========
</TABLE>
The sale of the Bank's branch located in Kennebunk, Maine in May 1999, included
deposits totaling $12.5 million. Included in 1999 and 1998 time deposits are
$1,937,000 and $2,984,000, respectively, of deposits of $100,000 or more.
At December 31, 1999, the maturities and weighted average interest rates of time
deposits were as follows:
<TABLE>
<CAPTION>
Balance Weighted Average
Maturities (in thousands) Interest Rate
- ---------------------------------------------------------------------------
<S> <C> <C>
12 months or less $32,045 4.95%
1 - 2 years 7,751 5.29
2 - 3 years 3,479 5.40
3 - 4 years 2,280 5.53
4 -5 years 1,521 5.34
5 years or more 44 5.62
--------
Total $47,120 5.05%
========
</TABLE>
The following is a detail of interest expense on deposits for the three years
ending December 31, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
December 31,
----------------------------------
(in thousands) 1999 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest bearing demand deposits $ 453 $ 422 $ 446
Savings deposits 2,310 1,993 945
Other time deposits 2,367 2,743 2,915
Time deposits of $100,000 or more 104 150 153
------ ------ ------
$5,234 $5,308 $4,459
====== ====== ======
</TABLE>
Note 9. BORROWINGS
Advances From Federal Home Loan Bank ("FHLB") of Boston All advances from the
FHLB of Boston outstanding at December 31, 1999 were fixed rate, with the
maturities as follows:
<TABLE>
<CAPTION>
Weighted
Balance Average
Due Date (in thousands) Rates Interest Rate
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
2000 $8,000 5.74-5.79% 5.76
2001 6,748 6.05-6.25 6.20
2003 3,000 4.99 4.99
2004 3,000 5.79 5.79
2005 4,000 5.06 5.06
2008 3,000 5.16 5.16
-------
$27,748 5.62%
=======
</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 well in excess of its current borrowings (and sufficient to support
the FHLB advances). The Bank estimates that it has approximately $26.8 million
in additional short-term borrowing capacity with the FHLB as of December 31,
1999. This amount fluctuates based on qualified collateral.
42
<PAGE>
Amended Savings Bank Notes
On August 4, 1999, the Company entered into the First Amendment to Loan
Agreement (the "First Amendment to Loan Agreement") amending the terms of the
Loan Agreement, dated as of July 24, 1996 (the "Loan Agreement"), between the
Company and a group of four Maine savings banks (the "Four Savings Banks").
Pursuant to the Loan Agreement, the Company borrowed a total of $4.0 million
evidenced by promissory notes (the "Savings Bank Notes") in the amount of $1.0
million to each of the Four Savings Banks. Prior to the effective date of such
modification to the Loan Agreement, the Savings Bank Notes bore interest,
payable quarterly, at an annual rate of 10.85%, with semi-annual principal
payments of $200,000 beginning in June 1998. The original maturity date was
December 31, 2001. Pursuant to the First Amendment to Loan Agreement and the
amended Savings Bank Notes (the "Amended Savings Bank Notes"), the term loan
(balance $2.4 million at the time of refinance) bears interest at an annual rate
of 8.0% until August 4, 2002, at which time the interest rate will convert to
the Prime Rate as published in THE WALL STREET JOURNAL (the "WSJ"), adjustable
daily, until the new maturity date of August 4, 2004. In addition, the Company
is entitled to draw against a working capital line of credit up to a combined
aggregate limit, including the balance outstanding at any time on the term loan,
of $4.0 million. The interest rate on the line of credit is equal to the Prime
Rate as published in the WSJ, adjusted daily and the maturity date is August 4,
2004.
In addition to reducing the interest rate, extending the maturity date, and
providing the Company with a line of credit, the First Amendment to Loan
Agreement modified or eliminated certain covenants and conditions contained in
the Loan Agreement including, among other things: (i) limitations on borrowings
by the Company and the Bank; (ii) prohibitions on transfers of assets of the
Company or any subsidiary; (iii) prohibition of capital expenditures over
$500,000 in any fiscal year; and (iv) certain provisions providing that it was a
default by the Company should it fail to make certain reports or payments within
specified time frames, which provisions have been made generally less
restrictive as to time or amount. In addition, the First Amendment to Loan
Agreement modified the prohibition on the payment of cash dividends by the
Company contained in the Loan Agreement when the Company's debt-to-equity ratio
on a parent only-basis exceeds 30% to increase the permissible ratio threshold
to 50%.
In connection with the Amended Savings Bank Notes, one of the Four Savings Banks
notes was purchased by one of the remaining three lenders. There is no
prepayment penalty associated with the Amended Savings Bank Notes. Other terms
and conditions, including the pledge of all of the Company's stock in the Bank
as collateral, were affirmed and remain in effect.
Secured Borrowings
In May 1998, the Bank introduced a new cash management program for businesses.
The program represents secured borrowings, which include agreements similar to
repurchase agreements that are not FDIC insured. At December 31, 1999 and 1998
these secured borrowings totaled approximately $3.0 million and $1.0 million,
respectively, and were collateralized by approximately $3.0 million and $1.0
million, respectively, in Bank owned investment securities.
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. At December 31, 1999, the Bank had pledged $10.1 million in 1-4
family residential real estate loans as collateral for future borrowings of up
to $9.1 million from the Federal Reserve. No funds have been obtained from this
source.
Note 10. 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.
43
<PAGE>
The Loan Agreement, as amended by the First Amendment to Loan Agreement,
contains certain terms, restrictions and covenants, including restrictions
regarding the conditions under which cash dividends may be paid by the Company.
For further information see "Note 9 -- Borrowings -- Amended Savings Bank
Notes."
Note 11. 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 eligible
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. For the year ended December 31, 1999 and
1998, the Bank incurred expenses relating to the 401(k) Plan totaling $57,000
and $98,000, respectively.
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. During 1998
the Bank received a determination ruling from the Internal Revenue Service
("IRS") with respect to the termination of the defined benefit plan. The
settlement and distribution of the defined benefit plan assets occurred in
December 1998 and did not have a material effect on the Company's financial
statements. In connection with the defined benefit plan termination the Company
elected to contribute $125,000 of the excess plan assets to the 401(k) Plan to
be utilized as future matching employer contributions.
Stock Option and Equity Incentive Plan
The Company adopted the First Coastal Corporation 1996 Stock Option and Equity
Incentive Plan (the "1996 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. 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. All options granted to directors vest
immediately and all options granted to executive officers and employees have a
three to five year vesting period.
On May 18, 1999, the stockholders of the Company approved amendments to the 1996
Plan, which amendments (i) increased the number of shares of common stock
available for issuance pursuant to incentive awards granted under the 1996 Plan
by 130,000 to 260,000, (ii) increased the number of shares of common stock
subject to options that are granted to each non-employee director as of each
annual meeting date from 500 shares of common stock to 1,000 shares of common
stock, and (iii) extended the term of the 1996 Plan to April 2, 2009.
Options granted under the 1996 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). At December 31, 1999, there were 126,334 shares of common stock
of the Company available for grant under the 1996 Plan.
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 1996 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 1996 Plan.
Accordingly, no compensation cost has been recognized for options granted under
the 1996 Plan. Had compensation cost for the Company's 1996 Plan been determined
based upon the fair value at the grant dates for awards under the 1996 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
on the following table.
44
<PAGE>
<TABLE>
<CAPTION>
1999 1998 1997
--------------------- --------------------- ---------------------
As Pro As Pro As Pro
Reported Forma Reported Forma Reported Forma
-------- ------ -------- ------ -------- ------
<S> <C> <C> <C> <C> <C> <C>
Net income (in thousands) $2,226 $2,140 $1,564 $1,484 $1,262 $,211
Basic earnings per share $ 1.64 $ 1.58 $ 1.15 $ 1.09 $ .93 $ .89
Fully diluted earnings
per share $ 1.62 $ 1.56 $ 1.13 $ 1.08 $ .91 $ .87
</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:
<TABLE>
<CAPTION>
Weighted Averages 1999 1998 1997
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Expected Option Life (years) 7 7 7
Volatility 30.00% 35.00% 35.00%
Annual Dividend Amount $0.00 $0.00 $0.00
Risk-free Rate of Return 6.28% 4.98% 5.96%
</TABLE>
The weighted average fair value of options granted for the years ended December
31, 1999, 1998 and 1997 were $4.09, $5.18 and $7.06, respectively.
A summary of the status of the 1996 Plan as of December 31, 1999, 1998 and 1997,
and changes during the year then ended is presented below:
<TABLE>
<CAPTION>
1999 1998 1997
------------------------- ------------------------ ------------------------
Weighted Weighted Weighted
Average Exercise Average Exercise Average Exercise
Shares Price Per Share Shares Price Per Share Shares Price Per Share
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 91,167 $ 8.64 70,500 $ 7.82 57,000 $ 5.59
Granted 40,500 8.87 22,000 11.04 17,500 14.45
Exercised -- -- (1,333) 5.00 (1,333) 5.00
Forfeited (667) 5.00 -- -- (2,667) 5.00
------- ------ ------
Outstanding at end of year 131,000 $ 8.73 91,167 $ 8.64 70,500 $ 7.82
======= ====== ======
</TABLE>
The following table summarizes information about the 1996 Plan's stock options
at December 31, 1999, 1998 and 1997:
<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>
1999 $5.00-$7.25 51,000 6.5 years $ 5.66 51,000 $ 5.66
$8.50-$9.44 40,500 9.8 years $ 8.87 6,000 $ 9.44
$9.63-$15.25 39,500 8.4 years $12.55 21,833 $13.04
1998 $5.00-$7.25 51,667 7.5 years $ 5.65 34,442 $ 5.65
$9.63-$15.25 39,500 9.4 years $12.55 5,829 $14.45
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
</TABLE>
45
<PAGE>
Note 12. INCOME TAXES
A summary of income tax expense is as follows:
<TABLE>
<CAPTION>
December 31,
----------------------------------------
(in thousands) 1999 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Current $ 124 $ 64 --
Deferred 1,026 795 $ 679
------ ------ ------
$1,150 $ 859 $ 679
====== ====== ======
</TABLE>
A reconciliation of the difference between income tax expense 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) 1999 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal income tax at statutory rate $1,148 $ 824 $ 660
Increase resulting from other items, net 2 35 19
------ ------ ------
Income tax expense $1,150 $ 859 $ 679
====== ====== ======
</TABLE>
Significant components of deferred income tax assets and liabilities at December
31, 1999 and 1998 are presented below:
<TABLE>
<CAPTION>
December 31,
---------------------
(in thousands) 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Loans, principally due to allowance for losses $ 980 $ 930
REO, principally due to writedowns -- 7
Deferred loan fees 5 33
Reserve for mortgage servicing rights -- 45
Federal net operating loss credit and tax
credit carryforward 1,467 2,660
Alternative minimum tax credit carryforward 134 68
Investment tax credit carryforward 30 77
Unrealized loss on investments 666 --
Other -- 22
------- -------
Total gross deferred tax assets before
valuation reserve 3,282 3,842
Valuation reserve (30) (77)
------- -------
Total gross deferred tax asset 3,252 3,765
Deferred tax liabilities:
Unrealized gain on investments -- 4
Difference between tax and book basis of fixed assets 254 184
Capital loss on stock transaction -- 23
Other 48 200
------- -------
Total gross deferred tax liabilities 302 411
------- -------
Net deferred taxes $ 2,950 $ 3,354
======= =======
</TABLE>
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 ("NOL") carryforwards. The Company will only
recognize a deferred tax asset when, based on available evidence, realization is
more likely than not. The Company has recorded a valuation allowance at December
31, 1999 and 1998 of $30,000 and $77,000, respectively, for investment tax
credit carryforwards which are expected to expire.
At December 31, 1999, the Company had a NOL carryforward for federal income
tax return purposes of approximately $4.3 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.
46
<PAGE>
Note 13. COMMITMENTS AND CONTINGENCIES
Unfunded Loan Commitments
Unfunded loan commitments for December 31, 1999 and 1998 were approximately
$20.2 million and $17.5 million, respectively.
<TABLE>
<CAPTION>
The breakdown of such loan commitments is as follows:
(in thousands) 1999 1998
- -------------------------------------------------------------------------------
<S> <C> <C>
Real Estate:
Commitments to originate residential mortgages $ 1,493 $ 502
Commitments to originate commercial loans 1,862 4,748
Unadvanced portions of construction loans 1,860 427
Commercial lines of credit (unused) 6,985 4,154
Commercial letters of credit (unused) 1,279 61
Consumer lines of credit (e.g. home equity
lines) (unused) 6,730 7,630
------- -------
Total $20,209 $17,522
======= =======
</TABLE>
Included in unfunded loan commitments at December 31, 1999 and 1998 are fixed
rate loan commitments totaling $6.6 million and $5.5 million, respectively.
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 have expiration dates and termination clauses.
Lease Obligations
The Company currently leases its headquarters branch and operations center and
two of its remaining six branches (excluding its headquarters branch), and has a
ground lease relating to a third branch, under terms of operating leases which
include renewal options (some with escalating clauses) ranging from one to five
years. On September 15, 1998 the Bank sold its headquarters branch and
operations center and entered into a lease arrangement with the buyer until
March 15, 2000, which was subsequently extended until July 15, 2000 (the lease
payments for this short term lease are reflected in the table below). On October
26, 1999, the Bank entered into a ten-year lease (with options extending beyond
this date) for a new headquarters, branch and operations center currently under
construction at 1200 Congress Street, Portland, Maine. Delivery of the facility
to the Bank is expected to occur during the second quarter of 2000, at which
time the ten-year lease term and payment under the terms of the lease commences.
The lease payments for this lease are also reflected in the table below. Rental
expense totaled approximately $254,000, $151,000 and $91,000 for the three years
ended December 31, 1999, 1998 and 1997, respectively.
Approximate minimum lease payments over the remaining term of the leases at
December 31, 1999 are as follows:
<TABLE>
<CAPTION>
(dollars in thousands) December 31,
- --------------------------------------------------------------------------------
<S> <C>
2000 $ 391
2001 342
2002 337
2003 337
2004 and thereafter 1,226
------
$2,633
======
</TABLE>
Litigation
As of December 31, 1999, 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.
47
<PAGE>
Note 14. SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK
Concentration of Commercial Real Estate Assets
At December 31, 1999, the Bank had approximately $68.4 million of commercial
real estate mortgage loans, representing 56.8% 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 35.9% and
27.6% of total assets at December 31, 1999 and 1998, respectively. At December
31, 1999, the Bank also had approximately $9.4 million of commercial business
loans.
Banks with loans concentrated in commercial real estate may 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 collateralizing 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.
Note 15. 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, 1999 December 31, 1998
-------------------- ------------------
Book Fair Book Fair
(in thousands) Value Value Value Value
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial Assets:
Cash and cash equivalents (1) $ 12,424 $ 12,424 $ 32,627 $ 32,627
Investment securities(2)
Available for sale (at market value) 51,823 51,823 47,048 47,048
Federal Home Loan Bank stock 1,391 1,391 1,315 1,315
Loans held for sale 83 83 83 83
Loans, net of allowance(3) 117,635 116,262 103,041 106,437
Financial Liabilities:
Deposits(4) $140,137 $139,951 $148,545 $149,413
Borrowings(5) 30,016 29,805 25,145 25,270
Secured borrowings(6) 2,980 2,980 967 967
</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 using current interest rates for
similar loans. 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 using current interest rates for similar deposits.
(5) The fair value for FHLB borrowings and the Savings Bank Notes was estimated
using the discounted cash flow analysis using current interest rates for
similar borrowings.
(6) Secured borrowings are variable rate and considered to be at fair value,
since such rates change directly with market rates.
48
<PAGE>
Note 16. OPERATING EXPENSE
Operating expenses for the year ended December 31, 1999, 1998 and 1997 were as
follows:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------
(in thousands) 1999 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Salaries and benefits $2,932 $2,632 $2,367
Occupancy 608 536 446
Net cost of operations of real estate owned 5 7 67
Data processing 384 280 239
Equipment 534 424 374
FDIC insurance 18 15 15
Insurance - general 111 137 141
Office/postage 247 246 296
Legal 73 31 65
Marketing 144 177 255
Other expenses 1,000 965 802
------ ------ ------
Total Operating Expenses $6,056 $5,450 $5,067
====== ====== ======
</TABLE>
Note 17. FIRST COASTAL CORPORATION
CONDENSED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
BALANCE SHEETS December 31,
------------------
(in thousands) 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash $ 811 $ 831
Investment in subsidiaries 15,951 14,716
Deferred tax asset 2,461 3,310
Other assets 45 57
------- -------
Total assets $19,268 $18,914
======= =======
Liabilities
Savings Bank Notes $ 2,268 $ 2,600
Other liabilities 86 --
Stockholders' equity 16,914 16,314
------- -------
Total liabilities and stockholders' equity $19,268 $18,914
======= =======
</TABLE>
49
<PAGE>
<TABLE>
<CAPTION>
STATEMENTS OF OPERATIONS
Year Ended December 31,
-----------------------------
(in thousands) 1999 1998 1997
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest and dividend income
Dividends from subsidiary -- $ 1,680 $ 1,500
Interest income -- 5 12
------- ------- -------
-- 1,685 1,512
------- ------- -------
Interest Expense
Savings Bank Notes $ 258 332 477
------- ------- -------
Total Interest Expense 258 332 477
------- ------- -------
Net Interest Income (loss) (258) 1,353 1,035
------- ------- -------
Operating Expenses:
Salaries benefits 7 13 12
Stockholder relations 69 54 48
Professional fees 74 102 58
Other 61 46 61
------- ------- -------
211 215 179
------- ------- -------
Income (loss) before income tax and equity in
undistributed net income of subsidiaries (469) 1,138 856
Income tax benefit (160) (149) (226)
Equity in undistributed net income of subsidiaries 2,535 277 180
------- ------- -------
Net Income $ 2,226 $ 1,564 $ 1,262
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF CASH FLOWS
Year Ended December 31,
------------------------------
(in thousands) 1999 1998 1997
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Activiites:
Net Income $ 2,226 $ 1,564 $ 1,262
Net change in other assets 862 (185) (168)
Net change in other liabilities 86 (20) (40)
Equity in undistributed earnings of subsidiaries (2,535) (277) (180)
------- ------- -------
Net cash provided by operating activities 639 1,082 874
------- ------- -------
Financing Activities:
Payment on borrowings (332) (400) (1,000)
Net proceeds from sale of common stock -- 7 7
Repurchase of common stock (327)
------- ------- -------
Net cash used by financing activities (659) (393) (993)
------- ------- -------
Increase (decrease) in cash and cash equivalents (20) 689 (119)
Cash and cash equivalents at beginning of year 831 142 261
------- ------- -------
Cash and cash equivalents at end of year $ 811 $ 831 $ 142
======= ======= =======
Supplemental Disclosures of Information
Interest paid on borrowings $ 246 $ 315 $ 477
Income tax paid 76 85 --
Non-Cash Investing and Financing Activities
Change in unrealized holding gains (losses) on
investment securities available for sale $(1,299) $ (65) $ 151
</TABLE>
See Note 9 for discussion on the Savings Bank Notes and Note 10 for restrictions
on the payment of dividends by Subsidiary to the Company.
50
<PAGE>
Note 18. EARNINGS PER SHARE
The following is a reconciliation of the income (numerator) and number of shares
(denominator) of the basic and diluted earnings per share ("EPS") calculations:
<TABLE>
<CAPTION>
For the Years Ended December 31,
------------------------------------------------------------------------------------------------------------
1999 1998 1997
--------------------------------- -------------------------------- -------------------------------------
Number Per Number Per Number Per
of Share of Share of Share
Income Shares Amount Income Shares Amount Income Shares Amount
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Income $2,226,000 $1,564,000 $1,262,000
Basic EPS
Income available
to common
stockholders 2,226,000 1,356,375 $1.64 1,564,000 1,359,976 $1.15 1,262,000 1,358,730 $0.93
Effect of
dilutive stock
options -- 13,777 -- 19,148 -- 32,542
---------- --------- ---------- --------- ---------- ---------
Diluted EPS
Income available
to common
stockholders and
assumed exercises $2,226,000 1,370,152 $1.62 $1,564,000 1,379,124 $1.13 $1,262,000 1,391,272 $0.91
========== ========= ========== ========= ========== =========
</TABLE>
At December 31, 1999, outstanding options to purchase 39,500 shares of common
stock at a price per share ranging from $9.625 to $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. At December
31, 1998, outstanding options to purchase 15,000 and 3,000 shares of common
stock at a price per share of $15.25 and $13.56, respectively, 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. At
December 31, 1997, outstanding options to purchase 15,000 shares of common stock
at $15.25 per share 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 19. STOCKHOLDER RIGHTS PLAN
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, subject to certain terms and conditions, 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." Under certain circumstances, 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.
51
<PAGE>
Note 20. STOCK REPURCHASE PROGRAM
In June 1999,the Company commenced a stock repurchase program, with the intent
to purchase up to 68,000 shares of its common stock, representing approximately
5% of the 1,360,527 shares then outstanding. As of February 1, 2000, the Company
had repurchased 52,619 shares, or 3.9% of its common stock. For the year ended
1999, the Company had acquired 34,534 shares of its common stock at a total cost
of $327,000, or an average price of $9.47 per share.
On February 8, 2000, the Company announced that its Board of Directors had
authorized an extension of the stock repurchase program and the repurchase of up
to an additional 68,000 shares, or a total of 136,000 shares (representing
approximately 10% of the outstanding common stock as of the June 1999
commencement date of the repurchase program). The stock repurchase program is
expected to be in effect for up to an additional twelve months, until
approximately February 2001. Under the program, no shares knowingly will be
purchased from officers or directors of the Company or from persons who hold in
excess of 5% of the Company's outstanding shares of common stock.
Note 21. 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>
1999
Interest income $3,338 $3,502 $3,461 $3,685
Interest expense 1,781 1,691 1,657 1,735
---------- ---------- ---------- ----------
Net interest income 1,557 1,811 1,804 1,950
Provision for loan losses -- -- -- --
Noninterest income 134 146 179 161
Securities and loan sales gains 448 91 32 9
Gain on sale of assets 1,110 -- --
Operating expense 1,452 1,499 1,490 1,615
---------- ---------- ---------- ----------
Income before income taxes 687 1,659 525 505
Income tax expense 232 588 185 145
---------- ---------- ---------- ----------
Net income $455 $1,071 $340 $360
========== ========== ========== ==========
Basic earnings per share:
Weighted average shares outstanding 1,360,527 1,360,527 1,359,159 1,345,438
Earnings per share $.33 $.79 $.25 $.27
========== ========== ========== ==========
Diluted earnings per share:
Weighted average shares outstanding 1,374,838 1,374,426 1,373,093 1,358,282
Earnings per share $.33 $.78 $.25 $.27
========== ========== ========== ==========
1998
Interest income $2,978 $3,149 $3,373 $3,559
Interest expense 1,375 1,547 1,751 1,894
---------- ---------- ---------- ----------
Net interest income 1,603 1,602 1,622 1,665
Provision for loan losses -- -- -- --
Noninterest income 138 162 711 155
Securities and loan sales gains 6 46 119 44
Operating expense 1,302 1,359 1,493 1,296
---------- ---------- ---------- ----------
Income before income taxes 445 451 959 568
Income tax expense 160 159 338 202
---------- ---------- ---------- ----------
Net income $285 $292 $621 $366
========== ========== ========== ==========
Basic earnings per share:
Weighted average shares outstanding 1,359,194 1,359,633 1,360,527 1,360,527
Earnings per share $.21 $.21 $.46 $.27
========== ========== ========== ==========
Diluted earnings per share:
Weighted average shares outstanding 1,381,707 1,380,177 1,378,264 1,375,324
Earnings per share $.21 $.21 $.45 $.27
========== ========== ========== ==========
</TABLE>
52
<PAGE>
- --------------------------------------------------------------------------------
CORPORATE AND STOCKHOLDER INFORMATION
- --------------------------------------------------------------------------------
FIRST COASTAL CORPORATION
DIRECTORS
David B. Hawkes, Sr.
Chairman of the Board
First Coastal Corporation and
Coastal Bank
Business Consultant/Owner
Cloudhawk Management Consultants
Gregory T. Caswell
President and Chief Executive Officer
First Coastal Corporation and
Coastal Bank
Dennis D. Byrd
Vice President and Treasurer
First Coastal Corporation
Executive Vice President, Chief Financial Officer and Treasurer
Coastal Bank
MaryEllen FitzGerald
President/Owner
Critical Insights
Marketing Research
Roger E. Klein
President
Interest Rate Futures Research Corporation
Investment Advisor
Normand E. Simard
President
York County Biscuit Company
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
Vice President and Treasurer
William E. Saufley, Esq.
Vice President and General Counsel
Patricia J. Briand
Corporate Secretary
- --------------------------------------------------------------------------------
COASTAL BANK
CORPORATE OFFICE
Colonel Westbrook Executive Park
36 Thomas Drive
Westbrook, ME 04092
(207) 774-5000
Effective June 1, 2000 (approximate):
1200 Congress Street
Portland, ME 04102
(207) 774-5000
P.O. Box 8550
Portland, ME 04104
DIRECTORS
David B. Hawkes, Sr.,
Chairman of the Board
Dennis D. Byrd
Gregory T. Caswell
MaryEllen FitzGerald
Roger E. Klein
Normand E. Simard
Edward K. Simensky
Charles A. Stewart III
OFFICERS
Gregory T. Caswell
President and Chief Executive Officer
Dennis D. Byrd
Executive Vice President, Chief Financial Officer and Treasurer
Robert S. Blackwood, Jr.
Senior Vice President Commercial Lending
Gordon I. Erikson, Jr.
Senior Vice President Commercial Banking
William E. Saufley
Senior Vice President Human Resources
and General Counsel
Edward M. Williams
Senior Vice President Retail Banking
David C. Cyr
Vice President Credit Administration
William J. Mann
Vice President Commercial Lending
Cynthia J. McDougall
Vice President Residential Lending
Debra J. McPhail
Vice President Operations and Security
Richard A. Morin
Vice President Director of Mortgage Lending
Taloma B. Nickerson
Vice President Retail Operations
Maureen E. Pride
Regional Vice President, Greater Portland
Janet S. Ross
Vice President Commercial Lending
Timothy J. Tower
Vice President Commercial Lending
Daniel P. Walsh
Vice President Commercial Lending
Pamela J. Bowerman
AVP Branch Manager
Patricia J. Briand
AVP Corporate Secretary
Robert H. Crozier
AVP Branch Manager
Teresa L. Dutton
AVP Branch Manager
Thomas V. Manderson
AVP Controller
Laurie L. Mooney
AVP Branch Manager
Carolyn S. Thomas
AVP Credit Administration
53
<PAGE>
- --------------------------------------------------------------------------------
CORPORATE AND STOCKHOLDER INFORMATION
- --------------------------------------------------------------------------------
COASTAL BANK BRANCH OFFICES
120 Exchange Street
Portland, ME 04101
Linda Corey, Assistant Branch Manager
83 Maine Street
Brunswick, ME 04011
Pamela J. Bowerman, AVP/Manager
14 Gurnett Road
Brunswick, ME 04011
Teri L. Dutton, AVP/Manager
47 Topsham Fair Mall Road
Topsham, ME 04086
Dawn Ross, Assistant Branch Manager
8 Mallet Drive
Freeport, ME 04032
Robert Crozier, AVP/Manager
Suite 32, 4 Scammon Drive
Saco Valley Shopping Center
Saco, ME 04072
Laurie L. Mooney, AVP/Manager
Opening June 1, 2000 (approximate):
1200 Congress Street
Portland, ME 04102
Maureen E. Pride, Regional VP
Corporate Headquarters
First Coastal Corporation
Colonel Westbrook Executive Park
36 Thomas Drive
Westbrook, ME 04092
(207) 774-5000
Effective June 1, 2000 (approximate):
1200 Congress Street
Portland, ME 04102
(207) 774-5000
P.O. Box 8550
Portland, ME 04104
Annual Meeting
The 2000 Annual Meeting of the Stockholders of First Coastal Corporation will be
held at 10:00 a.m. on Tuesday, May 16, 1999 at the Double Tree Hotel, 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 Shareholder Services
111 Founders Plaza, Suite 1100r
East Hartford, CT 06108
Independent Accountants
PricewaterhouseCoopers LLP
130 Middle Street
Portland, ME 04104
Legal Counsel
William E. Saufley, Esq.
Vice President and General Counsel
First Coastal Corporation
Hogan & Hartson L.L.P.
Columbia Square
555 Thirteenth Street, N.W.
Washington, D.C. 20004
Bernstein Shur Sawyer & Nelson
100 Middle Street
P.O. Box 9729
Portland, ME 04104-5029
Form 10-K
The Company'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. Requests after June 1, 2000 should be addressed to:
Investor Relations, First Coastal Corporation, 1200 Congress Street, Portland,
ME 04102.
Investors are also directed to view copies of the Company's Annual Report on
Form 10-K and other documents filed with the Securities and Exchange Commission
through the Company's website address listed below:
Internet Address
First Coastal Corporation
www.firstcoastal.com
Coastal Bank
www.coastalbankme.com
54
<PAGE>
Exhibit 21
Subsidiary of the Registrant
Subsidiary State of Incorporation
---------- ----------------------
Coastal Bank Maine
<PAGE>
Exhibit 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference into the Registration
Statements on Form S-8 (File No. 333-08631 and 333-79475) of First Coastal
Corporation and subsidiary, of our report dated February 8, 2000 relating to the
consolidated financial statements which appear in the Annual Report to
Stockholders, which report is incorporated by reference in this Annual Report on
Form 10-K.
PreicewaterhouseCoopers LLP
Portland, Maine
March 29, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1999 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 6,631
<INT-BEARING-DEPOSITS> 5,793
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 53,214
<LOANS> 120,517
<ALLOWANCE> 2,882
<TOTAL-ASSETS> 190,582
<DEPOSITS> 140,137
<SHORT-TERM> 2,980
<LIABILITIES-OTHER> 535
<LONG-TERM> 30,016
0
0
<COMMON> 1,361
<OTHER-SE> 15,553
<TOTAL-LIABILITIES-AND-EQUITY> 190,582
<INTEREST-LOAN> 10,020
<INTEREST-INVEST> 3,445
<INTEREST-OTHER> 521
<INTEREST-TOTAL> 13,986
<INTEREST-DEPOSIT> 5,234
<INTEREST-EXPENSE> 1,630
<INTEREST-INCOME-NET> 7,122
<LOAN-LOSSES> 0
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<EXPENSE-OTHER> 6,056
<INCOME-PRETAX> 3,376
<INCOME-PRE-EXTRAORDINARY> 3,376
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,226
<EPS-BASIC> 1.64
<EPS-DILUTED> 1.62
<YIELD-ACTUAL> 7.85
<LOANS-NON> 373
<LOANS-PAST> 167
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 1,039
<ALLOWANCE-OPEN> 2,735
<CHARGE-OFFS> 12
<RECOVERIES> 159
<ALLOWANCE-CLOSE> 2,882
<ALLOWANCE-DOMESTIC> 2,882
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
