<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, 1998
                                      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
19, 1999, the aggregate market value of the Common Stock held by nonaffiliates
was $13,010,039.

     As of the close of business on March 19, 1999, there were 1,360,527, 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, 1998, are incorporated by reference in Part II.

     Portions of the definitive proxy statement for the annual meeting of
stockholders to be held May 18, 1999, which the registrant intends to file no
later than 120 days after December 31, 1998 are incorporated by reference in
Part III.

                                       1
<PAGE>
 
                                    PART I

ITEM 1. BUSINESS.

GENERAL

First Coastal Corporation

First Coastal Corporation, a Delaware corporation (the "Company"), is a bank
holding company whose sole operating subsidiary is Coastal Bank, a Maine-
chartered stock savings bank ("Coastal" or the "Bank").  The Company was
organized in January 1987 for the purpose of becoming the parent holding company
of Suffield Bank following Suffield Bank's conversion from mutual to stock form.
The Company acquired Coastal Bancorp, a Maine corporation ("Bancorp"), which was
the bank holding company of Coastal, on April 1, 1987. On September 6, 1991,
Suffield Bank was placed in receivership by the Connecticut Department of
Banking, leaving the Bank as the Company's sole operating subsidiary.  On July
26, 1994, Bancorp was dissolved, and the Bank became a direct wholly-owned
subsidiary of the Company.

Coastal Bank

The Bank was formed in 1981 as a Maine-chartered savings bank through the
consolidation of Brunswick Savings Institution and York County Savings Bank,
which were organized in 1858 and 1860, respectively. On July 11, 1984, the Bank
completed its conversion from mutual form to a Maine stock savings bank.

The Bank had total assets of approximately $191 million at December 31, 1998.
The region served by the Bank includes the communities of Portland, Westbrook,
Topsham, Brunswick, Freeport, Kennebunk 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.

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 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

                                       2
<PAGE>
 
statements, such as (i) the impact of changes in market rates of interest on the
Company's deposit products and loan demand; (ii) the possibility that certain
transactions, such as the Kennebunk branch sale, the identification, development
and successful transition to a suitable new headquarters branch /operations
center, the opening of new branches, the introduction of new banking products or
other events, may not occur; (iii) the possibility that operating expenses may
be higher than anticipated; (iv) the effect of general economic and competitive
conditions in markets in which the Company operates; (v) the Company's ability
to continue to control its provision for loan losses and noninterest expense,
interest earning assets and noninterest income, as well as maintain its 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.  For further
information see "Note I --Borrowings" in the Company's 1998 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 7.20%, 13.05%, and 14.32%, respectively, at December 31,
1998 were in compliance with such guidelines.

The FDIC has also adopted minimum capital requirements for state non-member
banks such as the Bank. Under the minimum leverage capital requirement, insured
state non-member banks must maintain a Tier 1 capital to total assets ratio of
at least 3% to 5% depending on the CAMELS rating of the bank.  At December 31,
1998, the Bank had a Tier 1 capital to total assets ratio of 7.90%.  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, 1998, the

                                       3
<PAGE>
 
Bank had a ratio of qualifying total capital to risk-weighted assets of 15.60%
and a ratio of Tier 1 capital to risk-weighted assets of 14.33%.

LENDING ACTIVITIES

Loan Portfolio Composition
 
The following table sets forth the composition of the Company's loan portfolio
at the dates indicated:
 
<TABLE>
<CAPTION>
 
                                                       December 31,
                                   -----------------------------------------------------
(in thousands)                       1998       1997       1996       1995       1994
----------------------------------------------------------------------------------------
<S>                                <C>        <C>        <C>        <C>        <C>
 
Real estate mortgage loans:
  Residential                      $ 32,555   $ 33,251    $30,981   $ 30,966   $ 33,158
  Commercial                         52,747     48,705     48,456     50,797     57,997
Real estate construction loans        1,384      1,955        769          -          -
Commercial and industrial loans       5,872      5,166      3,059      2,524      2,510
Consumer and other loans             13,315     15,227     15,281     16,263     15,991
                                   --------   --------    -------   --------   --------
Total loans                        $105,873   $104,304    $98,546   $100,550   $109,656
                                   ========   ========    =======   ========   ========
 
Ratios of loans to:
  Deposits                               71%        91%        86%        80%        84%
  Assets                                 55%        71%        67%        69%        71%
</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 removed the negative stigma
associated with the Company and allowed the Bank to compete more effectively for
new loans.  Since that time, and in conjunction with the Company's strategic
plan developed during the first half of 1997, 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 two years the attrition previously reflected in the Company's
loan balances has ceased, with modest growth achieved in 1997 and 1998.
Commercial real estate loans showed the largest increase for the year ended
December 31, 1998, $4.0 million (8.3%) as compared to December 31, 1997.  Loan
growth in this category would have been higher had the Bank not experienced
higher than expected loan prepayments as a result of generally lower interest
rates in 1998 and the continued emergence of the commercial real estate conduit
market, both of which contributed to an increase in loan payoffs due to borrower
refinances.  In addition, a relatively low percentage of existing commercial
loans were protected with prepayment penalties in prior years.  As a result of
the Bank's 1998 lending activities, this has been largely reduced as the
majority of the Bank's fixed rate commercial loans at December 31, 1998 are now
protected by various types of prepayment penalties.  The opening of the new
downtown Portland branch, the introduction of commercial cash management
products and 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
(49.8% at December 31, 1998), management believes

                                       4
<PAGE>
 
that the combination of its expertise in this area and its lending practices
reduces somewhat the risk normally inherent in this type of lending.

Though residential mortgage loan originations increased 33.6% for the year ended
December 31, 1998, as compared to December 31, 1997, the combination of the
generally lower interest rate environment and competitive pressures resulted in
a higher percentage of the Bank's 1998 originations being secondary market
saleable, as opposed to residential mortgage portfolio loans, resulting in total
residential loans remaining essentially unchanged.

See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Historical Background" -  and -- "Loans" in the Company's 1998
Annual Report to Stockholders.

The following table sets forth the maturities of the loan portfolio by loan type
as of December 31, 1998:
 
<TABLE>
<CAPTION>
 
                                                 After One
                                       Within    But Within    After
(in thousands)                        One Year   Five Years  Five Years   Total
---------------------------------------------------------------------------------
<S>                                  <C>         <C>         <C>         <C>
Real estate mortgage loans:
 Residential loans                      $    44     $ 1,199    $ 31,312  $ 32,555
 Commercial loans                         3,495      26,564      22,688    52,747
Real estate construction loans            1,384           -           -     1,384
Commercial and industrial loans           2,538       2,361         973     5,872
Consumer and other loans                    310       1,127      11,878    13,315
                                        -------     -------    --------  --------
Total loans                             $ 7,771     $31,251    $ 66,851  $105,873
                                        =======     =======    ========  ========
 
Fixed interest rate                     $ 2,848     $17,531    $ 33,475  $ 53,854
Variable/adjustable interest rate         4,923      13,720      33,376    52,019
                                        -------     -------    --------  --------
                                        $ 7,771     $31,251    $66,851   $105,873
                                        =======     =======    ========  ========
</TABLE>
 
Loan Originations

Residential mortgage loans originated by the Bank are primarily secured by
property located within its existing market area in Maine.  The Bank is an
active residential mortgage lender.  A significant percentage of loans
originated are 1-4 family residential real estate loans, the majority of which
are sold in the secondary market. 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 intends to sell 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 have increased, as set forth below, and
most of these loans were originated through the branch system as opposed to the
Bank's prior origination strategy which relied heavily upon commission based
mortgage originations.  The Bank intends to continue its focus on growth in
residential lending, utilizing a combination of branch originations, which are
less commission oriented, and other loan originators, which are more commission
based.

Commercial loan originations increased in 1998, as is reflected in the increase
in total commercial loan outstandings of $4.7 million at December 31, 1998 as
compared to December 31, 1997.  The Bank currently plans to further increase its
commercial loan originations in 1999.

                                       5
<PAGE>
 
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, 1998,
1997 and 1996.
 
<TABLE>
<CAPTION>
 
                            For the Year Ended December 31,
                            -------------------------------
(in thousands)               1998        1997        1996
-----------------------------------------------------------
<S>                         <C>         <C>         <C>
Originations/ (1)/ :                           
 Residential real estate    $24,343     $18,216     $15,581
 Consumer                     4,322       3,001       4,249
                            -------     -------     -------
   Total                    $28,665     $21,217     $19,830
                            =======     =======     =======
</TABLE>
/(1)/ Includes refinancing of existing portfolio and off balance sheet serviced
     loans.

The commercial real estate mortgage portfolio of approximately $52.7 million at
December 31, 1998, as compared to $48.7 million at December 31, 1997, 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, 1998 and 1997, commercial and industrial loans totaled $5.9
million and $5.2 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.

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, 1998, the Bank had approximately $13.3
million in consumer loans, compared to $15.2 million as of December 31, 1997.
All consumer loans originated are reviewed for creditworthiness, adequacy of
collateral and the borrowers' ability to repay.

For information on Allowance for Loan Losses and Nonperforming Assets, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in the Company's 1998 Annual Report to Stockholders.

Secondary Market Activity

The Bank is active in secondary market transactions primarily through the sale
of long-term, fixed-rate residential mortgage loans that it originates.  The
sale of these loans is intended to improve the interest rate sensitivity of the
Bank's assets (consistent with the Bank's asset liability management policy),
generate fee income and provide additional funds for lending and liquidity.  In
most instances, the Bank seeks to originate longer term fixed-rate mortgages
only when commitments to sell these mortgages can readily be obtained.  Due to
interest rate fluctuations and the timing between the commitment to the borrower
and the closing and subsequent sale of the loan in the secondary market, such
sales will be made at a premium or discount (depending on the current interest
rate environment) and will result in realized gains or losses to the Bank on the
transaction.

                                       6
<PAGE>
 
The Bank is an approved seller and servicer by and for the FNMA.  However, on
November 30, 1998, the Bank sold all of its FNMA residential mortgage servicing
portfolio.  For an interim period until the January 31, 1999 transfer date the
Bank served as a sub-servicer of these loans.  It is the Bank's intent to sell
saleable loans on a servicing released basis in the future.  At December 31,
1998, the Bank was servicing $44.9 million of loans in its capacity as a
subservicer, as compared to its serviced loan portfolio of $42.9 million at
December 31, 1997.

INVESTMENT ACTIVITIES

The Company's investment portfolio is managed in accordance with a written
investment policy adopted by the Board of Directors and reviewed on an annual
basis.  Under this policy, and in accordance with applicable provisions of the
Bank Holding Company Act of 1956, as amended (the "BHCA"), without the prior
approval of the Federal Reserve and the Board of Directors, the Company is
prohibited from directly or indirectly purchasing shares of any company if such
purchase would cause the Company's direct or indirect ownership to equal or
exceed 5% of such company's outstanding shares.  The Company's investment policy
provides that all investment purchases of equity securities initiated by the
Bank must receive the advance approval of the Board of Directors of the Bank.
The Bank generally is prohibited by the Federal Deposit Insurance Act from
acquiring or retaining, directly or indirectly, any equity investment of a type
or in an amount that is not permissible for a national bank.  The Company's
investment portfolio is comprised primarily of U.S. government and agency
obligations and equity securities.  For a summary of investments, see Item 8,
"Financial Statements and Supplementary Data -- Notes A and D."

SOURCES OF FUNDS

General

Deposits 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 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.

                                       7
<PAGE>
 
The following table sets forth the Company's deposit balances at the dates
indicated:
 
<TABLE>
<CAPTION>
 
                                                         December 31,
                                       ------------------------------------------------
(in thousands)                           1998      1997      1996      1995      1994
---------------------------------------------------------------------------------------
<S>                                    <C>       <C>       <C>       <C>       <C>
 
Noninterest bearing demand deposits    $ 10,447  $  7,599  $  5,790  $  5,128  $  5,425
Interest bearing demand deposits         21,680    17,117    15,090    15,741    17,300
Savings and escrow deposits              63,393    34,465    36,445    42,020    48,205
Time deposits                            53,025    55,810    57,760    62,776    59,107
                                       --------  --------  --------  --------  --------
  Total                                $148,545  $114,991  $115,085  $125,665  $130,037
                                       ========  ========  ========  ========  ========
 
</TABLE>

Deposits totaled $148.5 million at December 31, 1998, a $33.6 million increase
(or 29.2%) from the level of $115.0 million at December 31, 1997.  This increase
is primarily attributable to the new High Rise Savings program introduced in
March 1998, which generated $28.9 million in new deposits and commercial deposit
growth totaling $2.9 million resulting from the Company's new cash management
products introduced in May of 1998.  The introductory interest rate paid on High
Rise Savings accounts opened during the initial introductory period (through
July 3, 1998) was guaranteed through December 31, 1998 and was tiered from 4.64%
to 5.59% (depending upon balance levels).  As a result of the discontinuation of
the marketing campaign, and a reduction in the interest rate available to new
High Rise Savings customers following the close of the introductory period,
increases in deposit balances attributable to High Rise Savings are not expected
to continue at the same level.

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.

At December 31, 1998, 1997 and 1996, Coastal's average deposits and average
rates consisted of the following:
 
<TABLE>
<CAPTION>
 
                                                              December 31,
                                       ---------------------------------------------------------
                                             1998                1997                1996
                                       ---------------------------------------------------------
                                       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    $  7,987        -   $  6,483        -   $  5,323     -
Interest bearing demand deposits         18,564     2.30%    18,197     2.45%    14,302  2.22%
Savings deposits                         52,750     3.78     34,831     2.71     39,128  2.76
Time deposits                            54,004     5.36     56,801     5.40     60,428  5.51
                                       --------            --------            --------
     Total                             $133,305            $116,312            $119,181
                                       ========            ========            ========
</TABLE>
 
At December 31, 1998, the maturities and weighted average interest rates of
certificates of deposits over $100,000 were as follows:
 
<TABLE>
<CAPTION>
 
                             Balance      Weighted Average
Maturities (in months)    (in thousands)    Interest Rate
-----------------------------------------------------------
<S>                       <C>             <C>
 
3 months or less                 $1,579               5.45%
over 3 - 6                          201               4.71
over 6 - 12                       1,103               5.03
over 12                             101               5.59
                                 ------
  Total                          $2,984               5.25%
                                 ======
</TABLE>
 

                                       8
<PAGE>
 
As of December 31, 1998, 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, 1998, 1997 and 1996:
 
<TABLE>
<CAPTION>
 
                            December 31,
                      -------------------------
(in thousands)         1998     1997     1996
-----------------------------------------------
<S>                   <C>      <C>      <C>
 
FHLB advances         $22,545  $13,294  $15,000
Savings Bank Notes      2,600    3,000    4,000
Secured borrowings        967        -        -
                      -------  -------  -------
                      $26,112  $16,294  $19,000
                      =======  =======  =======
</TABLE>
 
The following table sets forth information regarding the weighted average
interest expense at December 31 and the highest month end balances of the
Company's total borrowings:
 
<TABLE>
<CAPTION>
 
 
(in thousands)                                          1998      1997      1996
----------------------------------------------------------------------------------
<S>                                                   <C>       <C>       <C>
 
Weighted average interest rate of total borrowings       5.95%     5.99%     6.64%
 
Highest month end balance of total borrowings         $27,266   $20,887   $19,000
 
Average month end balance of total borrowings         $27,150   $16,778   $18,613
</TABLE>
 
The Bank also has been approved by the Federal Reserve Bank of Boston to obtain
liquidity from its discount window.  No funds have been obtained from this
source.

The Bank estimates that it has approximately $57.1 million in additional short-
term borrowing capacity with the FHLB as of December 31, 1998.  This amount
fluctuates based on qualified collateral.

Federal Home Loan Bank

The Bank uses FHLB advances to expand its lending and investment activities and
to enhance the Bank's mix of rate-sensitive assets and liabilities, e.g., to
extend maturities or to improve liquidity.

At December 31, 1998, the Bank had outstanding $22.5 million in borrowings with
a weighted average interest rate of 5.47% from the FHLB of Boston, maturing as
follows:
 
<TABLE>
<CAPTION>
 
                                         Amount Maturing
                               Due Date   (in thousands)   Interest Rate
                               --------  ----------------  --------------
<S>                            <C>       <C>               <C>
 
     February                      1999           $1,000            6.03%
     November                      2001            7,545            6.18
     October                       2003            3,000            4.99
     0ctober                       2005            4,000            5.06
     January                       2008            7,000            5.06
                                                 -------
                                                 $22,545
                                                 =======
</TABLE>

                                       9
<PAGE>
 
Savings Bank Notes

The Savings Bank Notes bear interest at 10.85% annually, payable quarterly, with
semi-annual principal payments of $200,000 which commenced in June 1998.  On
September 30, 1997, the Company made an unscheduled principal payment to the
Savings Banks of $1.0 million, reducing the unpaid principal balance to $3.0
million.  At the time the Savings Bank Notes mature on December 31, 2001, the
unpaid balance of the Savings Bank Notes, based on the scheduled amortization of
$200,000 semi-annually (June and December) and the $1.0 million principal
prepayment, will be $1.4 million.  The Savings Bank Notes are collateralized by
a pledge by the Company of all the shares of common stock of the Bank pursuant
to a stock pledge agreement between the Company and the Savings Banks.

Secured Borrowings

In May 1998, the Bank introduced a new cash management program for businesses.
The program represents secured borrowings, which include repurchase-like
agreements that are not FDIC insured.  At December 31, 1998 these secured
borrowings equaled $967,000 and were collateralized by $967,000 in Bank owned
investment securities.

For additional information on Borrowings, see "Note I -- Borrowings" in the
Company's 1998 Annual Report to Stockholders.

EMPLOYEES

As of December 31, 1998, the Company and its subsidiary had 73 full-time
equivalent employees.

COMPETITION

The Bank is a full service savings bank with eight banking offices in the
southern Maine communities of Portland, Westbrook, Brunswick, Topsham, Freeport,
Kennebunk and Saco.  Competition among financial institutions in the Bank's
market area is intense and the Bank competes in obtaining funds and in making
loans with other state and national banks, savings and loan associations,
consumer financial companies, credit unions and other financial institutions
which have far greater financial resources than those available to the Bank.
The Bank also faces competition for deposits from money market funds and other
securities funds offered by brokerage firms and other similar financial
institutions.  Competition among financial institutions is based upon interest
rates and other credit and service charges, the quality of services rendered,
the convenience of banking facilities and in the case of loans to larger
commercial borrowers, relative lending limits.

REGULATION

Federal Bank Holding Company Regulation

The Company is a bank holding company within the meaning of the BHCA.  The
Company is required to file periodic reports and other information with the
Federal Reserve.  The Federal Reserve may also conduct examinations of the
Company and the Bank.

Federal Reserve approval is required for any action that causes a bank or other
company to become a bank holding company and for any action that causes a bank
to become a subsidiary of a bank holding company. Federal Reserve approval must
be obtained prior to a bank holding company acquiring direct or indirect
ownership or control of any voting shares of any bank if, after such
acquisition, the bank holding company will own or control directly or indirectly
more than 5% of the voting stock of such bank unless it already owns a
 

                                       10
<PAGE>
 
majority of the voting stock of such bank. Federal Reserve approval also must be
obtained before a bank holding company acquires all or substantially all of the
assets of a bank or merges or consolidates with another bank holding company.

A bank holding company generally is prohibited from acquiring direct or indirect
ownership or control of more than 5% of the voting shares of any company that is
not a bank or bank holding company, and from engaging directly or indirectly in
activities other than those of banking, managing or controlling banks, or
furnishing services to its subsidiaries.  A bank holding company may, however,
subject to the approval of the Federal Reserve, engage in, or acquire shares of
companies engaged in, activities that are deemed by the Federal Reserve to be so
closely related to banking or managing or controlling banks as to be a proper
incident thereto.

Legislation enacted in 1996 and the Federal Reserve's 1997 comprehensive
revisions to its bank holding company regulations streamlined certain
applications to the Federal Reserve for approval to acquire a bank or nonbanking
company or to engage in nonbanking activities that are set forth in the rules
and regulations of the Federal Reserve, provided that the holding company is
well-capitalized, well-managed, and meets certain other criteria specified in
the legislation.  In order to qualify as a well-capitalized bank holding
company, its lead depository institution must be well-capitalized under the
standards set forth under the prompt corrective action regulations of the
appropriate federal banking agency and well-capitalized institutions also must
control at least 80% of the total risk-weighted assets held by the bank holding
company.  In order to qualify as well-managed, no institution controlled by the
bank holding company can receive the two lowest composite examination ratings as
of their most recent examination.  Currently, the Company qualifies as well-
capitalized and well-managed.  At this time, however, the Company has no plans
to acquire any bank or nonbanking company or to engage in any new nonbanking
activities.

Under the Change in Bank Control Act, persons who intend to acquire control of a
bank holding company, acting directly or indirectly, or through or in concert
with one or more persons, generally must give 60 days prior written notice to
the Federal Reserve.  "Control" exists when an acquiring party directly or
indirectly has voting control of at least 25% of the bank holding company's
voting securities or the power to direct the management or policies of the
company.  Under Federal Reserve regulations, a rebuttable presumption of control
arises with respect to an acquisition where, after the transaction, the
acquiring party has ownership, control or the power to vote at least 10% (but
less than 25%) of any class of a company's voting securities if (i) the company
has securities registered under Section 12 of the Securities Exchange Act of
1934 or (ii) immediately after the transaction no other person will own a
greater proportion of that class of voting securities.  The Federal Reserve may
disapprove a proposed acquisition of control by a person on certain specified
grounds.

As a bank holding company, the Company is subject to capital adequacy guidelines
of the Federal Reserve. The guidelines apply on a consolidated basis to bank
holding companies with consolidated assets of $150 million or more.  Under
current Federal Reserve capital adequacy guidelines, bank holding companies
generally must maintain a ratio of tier 1 capital to total assets of 4.0% to
5.0%.  The minimum ratio is 3.0% for the most highly rated bank holding
companies.  The Federal Reserve's capital adequacy guidelines also require bank
holding companies to maintain a minimum ratio of qualifying total capital to
risk-weighted assets of 8.0%, including a minimum ratio of tier 1 capital to
risk-weighted assets of 4.0%.  The Company's ratios of tier 1 capital to total
assets, tier 1 capital to risk-weighted assets, and qualifying total capital to
risk-weighted assets of 7.20%, 13.05%, and 14.32%, respectively, at December 31,
1998 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.

                                       11
<PAGE>
 
The Federal Reserve is empowered to initiate cease and desist proceedings and
other supervisory actions for violations of the BHCA, or its regulations, orders
or notices issued thereunder.  Under Federal Reserve regulations, banks and bank
holding companies which do not meet minimum capital adequacy guidelines are
considered to be undercapitalized and are required to submit an acceptable plan
for achieving capital adequacy.

Maine Bank Holding Company Regulation

Maine state law also regulates bank holding companies.  The state law is
designed to conform with the registration, application and reporting
requirements of the Federal Reserve to the maximum extent feasible. As a holding
company, the Company must register with the Maine Superintendent of Banking (the
"Superintendent"), and must notify the Superintendent whenever any person or
company directly or indirectly acquires control of 5% or more of the Company's
stock or whenever there is a "material" change in the ownership of the Company.
If 5% or more of the stock in the Company or the Bank is to be acquired by a
financial institution or by a financial institution holding company, the
transaction would be subject to the prior approval of the Superintendent.
Similarly, other transactions require advance approval by the Superintendent
including, among other things, the acquisition of control of the Company or the
Bank, the acquisition by the Company or the Bank of 5% or more of the stock of
another financial institution and the engagement of the Company, Bank or a
subsidiary thereof in an activity closely related to banking.

Maine law permits interstate branching in accordance with the provisions of
federal law.  Maine law also permits the establishment of de novo branches in
Maine by out-of-state financial institutions on a reciprocal basis.  Such
provisions create enhanced competition for the Bank.

Bank Regulation

As a BIF-insured savings bank, the Bank is subject to regulation, supervision
and examination by the FDIC. The Bank also is subject to regulation, supervision
and examination by the Maine Bureau of Banking.

The Maine Bureau of Banking, under the Superintendent, administers the Maine
statutes which regulate the Bank's internal organization as well as its deposit,
lending and investment activities.  The Maine Bureau of Banking must approve any
changes in the Bank's articles of incorporation, branch offices and major
transactions, and must receive prior notice of any changes to the Bank's bylaws.
Maine law also governs the Bank's ability to engage in real estate investments
and investments in securities, subject to compliance with applicable provisions
of federal law.  The Maine Bureau of Banking conducts periodic examinations of
the Bank as part of its supervision.  Maine law requires the Bank to maintain
capital levels in accordance with rules adopted by the Superintendent.  Such
capital requirements can be no less stringent than the capital requirements
imposed by federal banking regulators on federally chartered institutions.  If
the Bank's capital becomes impaired, the Superintendent may order the Bank's
Board of Directors to take the necessary steps to restore the deficiency.

As a BIF-insured savings bank, the Bank is subject to certain FDIC requirements
designed to maintain the safety and soundness of individual banks and the
banking system.  The FDIC has prescribed safety and soundness guidelines
relating to (i) internal controls, information systems and internal audit
systems; (ii) loan documentation; (iii) credit underwriting; (iv) interest rate
exposure; (v) asset growth; and (vi) compensation and benefit standards for
officers, directors, employees and principal stockholders.  Such guidelines
impose standards based upon an institution's asset quality and earnings.  The
guidelines are intended to set out standards that the agencies will use to
identify and address problems at institutions before capital becomes impaired.
Institutions are required to establish and maintain a system to identify problem
assets and prevent deterioration of those assets in a manner commensurate with
its size and the nature and scope of its operations. Furthermore, institutions
must establish and maintain a system to evaluate and monitor earnings and ensure
 

                                       12
<PAGE>
 
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, 1998.

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, 1998, the Bank had a ratio of qualifying total capital to risk-weighted
assets of 15.60% and a ratio of Tier 1 capital to risk-weighted assets of
14.33%.

Capital requirements higher than the generally applicable minimum requirements
may be established for a particular bank if the FDIC determines that the bank's
capital is, or may become, inadequate in view of its particular circumstances.
Individual minimum capital requirements may be appropriate if a bank is
receiving special supervisory attention, has a high degree of exposure to
interest rate risk or poses other safety and soundness concerns.  The Bank
currently is not subject to any imposed minimum capital requirements.

Under FDIC prompt corrective action regulations, insured institutions will be
considered (i) "well capitalized" if the institution has a total risk-based
capital ratio of 10% or greater, a Tier 1 risk-based capital ratio of 6% or
greater, and a leverage ratio of 5% or greater (provided that the institution is
not subject to an order, written agreement, capital directive or prompt
corrective action directive to meet and maintain a specified capital level for
any capital measure), (ii) "adequately capitalized" if the institution has a
total risk-based capital ratio of 8% or greater, a Tier 1 risk-based capital
ratio of 4% or greater and a leverage ratio of 4% or greater (3% or greater if
the institution is rated composite CAMELS 1 in its most recent report of
examination and is not experiencing or anticipating significant growth), (iii)
"undercapitalized" if the institution has a total risk-based capital ratio that
is less than 8%, or a Tier 1 risk-based ratio of less than 4% and has a leverage
ratio that is less than 4% (3% if the institution is rated composite CAMELS 1 in
its most recent report of examination and is not experiencing or anticipating
significant growth), (iv) "significantly undercapitalized" if the institution
has a total risk-based capital ratio that is less than 6%, a Tier 1 capital
risk-based capital to total adjusted assets that is less than 3% or a leverage
ratio to adjusted total assets that is less than 3% and (v) "critically
undercapitalized" if the institution has a ratio of tangible equity to total
assets that is less than or equal to 2%. At December 31, 1998, 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.

                                       13
<PAGE>
 
An insured state bank, such as the Bank, may not engage as principal in any
activity that is not permissible for a national bank, unless the FDIC determines
that the activity would pose no significant risk to the BIF and the state bank
is in compliance with applicable capital standards.  Activities of subsidiaries
of insured state banks are similarly restricted to those activities permissible
for subsidiaries of national banks, unless the FDIC determines that the activity
would pose no significant risk to the BIF and the state bank is in compliance
with applicable capital standards.  An insured state bank may not, directly or
indirectly, acquire or retain any equity investment of a type that is not
permissible for a national bank except for a majority-owned subsidiary and
certain investments in qualified housing projects.

Transactions between the Bank and its affiliates are subject to certain
quantitative and qualitative limitations as set forth in Sections 23A and 23B of
the Federal Reserve Act, which is administered by the FDIC.  For purposes of
these sections, the term "affiliate" with respect to the Bank refers to the
Company.  A transaction is deemed to be one with an affiliate if the proceeds of
the transaction are transferred to, or used for the benefit of, an affiliate.
Under sections 23A and 23B, transactions between banks and their affiliates are
generally limited in the following ways:  First, the aggregate amount of all
"covered transactions" (which include, among other things, loans or other
extensions of credit to or on behalf of an affiliate, purchases of assets from
an affiliate or investments in the securities of an affiliate) between a bank
(and its subsidiaries) and any one affiliate may not exceed 10% of the capital
stock and surplus of the bank, and the aggregate amount of covered transactions
between a bank (and its subsidiaries) and all affiliates may not exceed 20% of
the capital stock and surplus of the bank.  Second, any loan or extension of
credit to, or guarantee, acceptance or letter of credit issued on behalf of an
affiliate by a  bank or any of its subsidiaries must at all times be secured by
collateral having a market value equal to from 100% to 130% of the outstanding
balance of the extension of credit, depending upon the nature of the collateral.
Third, neither low quality assets or securities issued by an affiliate may be
accepted by a bank as collateral for an extension of credit issued to or on
behalf of any affiliate. Fourth, a bank and its subsidiaries are prohibited from
purchasing a low-quality asset from an affiliate unless the bank or any such
subsidiary, pursuant to an independent credit evaluation, committed itself to
purchase the asset prior to the time the asset was acquired by the affiliate.

Transactions between the Bank and its subsidiaries or affiliates, including the
Company, generally must be on terms and conditions, including credit standards,
that are substantially the same or at least as favorable to the Bank as those
prevailing at the time for comparable transactions with or involving
unaffiliated parties or, in the absence of comparable transactions, on terms or
under circumstances, including credit standards, that in good faith would be
offered or would apply to unaffiliated parties.  Section 23B imposes additional
restrictions on the ability of a bank and its subsidiaries (i) when acting in a
fiduciary capacity, to purchase securities or assets from an affiliate, and (ii)
whether acting as principal or fiduciary, to purchase or acquire, during the
existence of any underwriting or selling syndicate, any security if a principal
underwriter of the security is an affiliate of the bank.

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
 

                                       14
<PAGE>
 
establishing assessment rate ranges. Accordingly, the deposit insurance premiums
imposed by the FDIC are subject to change.

FDIC insurance of deposits may be terminated by the FDIC, after notice and
hearing, upon a finding by the FDIC that the insured bank has engaged or is
engaging in unsafe or unsound practices, or is in an unsafe or unsound condition
to continue operations as an insured bank, or has violated any applicable law,
regulation, rule or order of, or condition imposed by the FDIC.  Additionally,
if insurance termination proceedings are initiated against a bank, the FDIC may
temporarily suspend insurance on new deposits received by the institution under
certain circumstances.

Legislation enacted in 1996 contemplates the merger of the BIF, which generally
insures deposits in national and  state-chartered banks, such as the Bank, with
the Savings Association Insurance Fund (the "SAIF"), which insures deposits at
savings associations.  The combined deposit insurance fund would insure deposits
at all FDIC insured depository institutions.  As a condition to the combined
insurance fund, however, no insured depository institution can be chartered as a
savings association.  Several proposals for combining the BIF and the SAIF were
introduced in Congress during 1997 in bills addressing financial services
modernization, including a proposal from the Treasury Department developed
pursuant to requirements of the 1996 legislation. While no legislation was
passed in 1997, a financial services modernization bill was passed by the House
of Representatives in May 1998.  The bill passed by the House preserved the
savings association charter, but required the FDIC to review and study issues
relating to the planned merger of the BIF and the SAIF.  The bill was not passed
by the Senate before Congress adjourned in 1998, but financial services
modernization bills were introduced again in Congress in 1999 and are currently
moving through the legislative process.  The Company and the Bank can give no
assurances as to whether legislation to merge the insurance funds will be
enacted or when the insurance funds will be merged.

Federal Home Loan Bank System

The Bank is a member of the FHLB of Boston, one of the 12 regional banks of the
FHLB System.  The FHLB System provides a central credit facility for member
institutions.  The Bank has the ability to borrow funds from the FHLB of Boston
in order to maintain its liquidity.  As a member of the FHLB of Boston, the Bank
is required to own shares of capital stock in the FHLB of Boston in an amount at
least equal to the greater of 1% of the aggregate principal amount of unpaid
residential mortgage loans, home purchase contracts and similar obligations at
the beginning of each year, or 5% of its advances (borrowings) from the FHLB of
Boston, whichever is greater.  The Bank was in compliance with this requirement
with an investment at December 31, 1998 of $1.3 million.

Under applicable regulations, member banks are required to maintain at all times
an amount of qualified collateral that is at least sufficient to satisfy the
collateral maintenance level established by the FHLB.  See "Business -- Sources
of Funds -- Borrowings."

Federal Reserve System

The Federal Reserve has adopted regulations that require, among other things,
that insured depository institutions maintain nonearning reserves against their
transaction accounts (primarily NOW and regular checking accounts) and
nonpersonal time deposits (those which are transferable or held by a person
other than a natural person) with an original maturity of less than 18 months.
At December 31, 1998, 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
 

                                       15
<PAGE>
 
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.

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 ("FASB")
Statement of Financial Accounting Standard ("SFAS") No. 109, the valuation
allowance against the deferred tax asset was reduced by $4,811,000 in the fourth
quarter of 1996.

In order to 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 expires June 11, 1999.  For additional information relating to income
taxes, refer to Note L to the Company's Consolidated Financial Statements.

                                       16
<PAGE>
 
The federal income tax returns of the Company have been examined and audited or
closed without audit by the IRS for tax years through 1991 and such years are
not subject to further IRS audit except with respect to carrybacks to those
years.

State

The State of Maine imposes a franchise tax on financial institutions such as the
Bank equal to 1% of Maine net income and $0.08 per $1,000 of the Bank's year-end
assets.  Maine net income equals the Bank's net income or loss as reported on
its federal income tax return and apportioned to Maine.  The Maine franchise tax
may be reduced by a credit in the event of a book net operating loss for a
particular taxable year.  The credit equals the book net operating loss
multiplied by the 1% franchise tax rate.  Any unused credit may be carried
forward for up to five years.  The Maine franchise tax is deductible in
determining federal taxable income.

ITEM 2.  PROPERTIES.

The Company primarily utilizes the premises, equipment and furniture of the Bank
without direct payment of any rental or other fees to the Bank.  The Bank's
executive offices and operations center are located at 36 Thomas Drive,
Westbrook, Maine.  The Bank currently maintains eight branches as listed below.
 
<TABLE>
<CAPTION>
 
Location     Address                       Leased/Owned    Lease Expiration
--------     -------                       ------------    ----------------
<S>          <C>                           <C>             <C>
Brunswick    83 Maine Street               Owned           n/a
             Brunswick, ME
 
Brunswick    14 Gurnet Road                Owned           n/a
             Brunswick, ME
 
Freeport     165 Main Street               Owned           n/a
             Freeport, ME
 
Kennebunk    45 Portland Road              Leased          December 2000
             Kennebunk, ME
 
Portland     120 Exchange Street           Leased          December 2002
             Portland, ME
 
Saco         Suite 32, 4 Scammon Drive     Leased          January 2001
             Saco, ME
 
Topsham      47 Topsham Fair Mall Road     Building Owned  n/a
             Topsham, ME                   Land Leased     June 2000
 
Westbrook    36 Thomas Drive               Leased          March 2000
             Westbrook, ME
</TABLE>

ITEM 3.  LEGAL PROCEEDINGS.

As of December 31, 1998, 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.

                                       17
<PAGE>
 
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, 1998.

                                    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 26 of the
Annual Report to Stockholders for the year ended December 31, 1998, which
information is hereby incorporated herein by reference and specifically made a
part hereof.

ITEM 6.  SELECTED FINANCIAL DATA.

Information required by this Item is set forth under the caption "Selected
Financial Data" on pages 4 to 5 of the Annual Report to Stockholders for the
year ended December 31, 1998, 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 6 to 26 of the Annual Report to Stockholders for the year ended December
31, 1998, 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 A to the
Company's Consolidated Financial Statements of the Annual Report to Stockholders
for the year ended December 31, 1998, which information is hereby incorporated
herein by reference and specifically made a part hereof.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.

Information required by this Item is set forth under the caption "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Asset Liability Management and Market Risk" on pages 22 to 24 of the Annual
Report to Stockholders for the year ended December 31, 1998, which information
is hereby incorporated herein by reference and specifically made a part hereof.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

Information required by this Item and the auditor's report thereon are set forth
on pages 27 to 52 of the Annual Report to Stockholders for the year ended
December 31, 1998, 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.

                                       18
<PAGE>
 
                                   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 1999 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 1999
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 1999 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 1999 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, 1998, 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, 1998 and 1997

Consolidated Statements of Operations for each of the three years in the period
ended December 31, 1998

Consolidated Statements of Stockholders' Equity for each of the three years in
the period ended December 31, 1998

Consolidated Statements of Cash Flows for each of the three years in the period
ended December 31, 1998

Consolidated Statements of Comprehensive Income for each of the three years in
the period ended December 31, 1998

                                       19
<PAGE>
 
Notes to Consolidated Financial Statements--December 31, 1998

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

     (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).

   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).

                                       20
<PAGE>
 
   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 herewith).

Exhibit No. 13 Annual Report to Security Holders

First Coastal Corporation 1998 Annual Report (filed herewith).  Portions of the
First Coastal Corporation 1998 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 17, 1999 into the Company's Registration Statement on Form
S-8 (No. 333-08631) filed with the Securities and Exchange Commission on July
23, 1996.

Exhibit No. 27 Financial Data Schedule

   27.1   Financial Data Schedule for the year ended December 31, 1998 (filed
herewith).

                                       21
<PAGE>
 
14(b)     The Company filed a Current Report on Form 8-K on October 22, 1998
with respect to the Company's adoption of amendments to its Stockholder Rights
Plan.

14(c)     Exhibits to this Annual Report on Form 10-K are attached or
incorporated herein by reference as stated above.

14(d)     Not applicable.

                                       22
<PAGE>
 
                                  SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

                              FIRST COASTAL CORPORATION

March 30, 1999                By:   /s/ Gregory T. Caswell
                                    --------------------------------------------
                                    Gregory T. Caswell
                                    President and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.

March 30, 1999                By:   /s/ Gregory T. Caswell
                                    --------------------------------------------
                                    Gregory T. Caswell
                                    President and Chief Executive Officer
                                    (Principal Executive Officer)
 
March 30, 1999                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 30, 1999                By:   /s/ David B. Hawkes, Sr.
                                    --------------------------------------------
                                    David B. Hawkes, Sr.
                                    Chairman of the Board and Director
                                  
March 30, 1999                By:   /s/ Gregory T. Caswell
                                    --------------------------------------------
                                    Gregory T. Caswell, Director
                                  
March 30, 1999                By:   /s/ Dennis D. Byrd
                                    --------------------------------------------
                                    Dennis D. Byrd, Director
                                  
March 30, 1999                By:   /s/ MaryEllen FitzGerald
                                    --------------------------------------------
                                    MaryEllen FitzGerald, Director
 
March 30, 1999                By:   /s/ Roger E. Klein
                                    --------------------------------------------
                                    Roger E. Klein, Director
                                 
March 30, 1999                By:   /s/ Normand E. Simard
                                    --------------------------------------------
                                    Normand E. Simard
                                 
March 30, 1999                By:   /s/ Edward K. Simensky
                                    --------------------------------------------
                                    Edward K. Simensky, Director
                                 
March 30, 1999                By:   /s/ Charles A. Stewart III
                                    --------------------------------------------
                                    Charles A. Stewart III, Director

                                       23
<PAGE>
 
                                 EXHIBIT INDEX

Exhibit No.  Description
-----------  -----------

3.1(i)    Restated Certificate of Incorporation (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).

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).

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).
<PAGE>
 
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 herewith).

13        First Coastal Corporation 1998 Annual Report (filed herewith).

21        Subsidiary of the Company (filed herewith).

23        Consent of PricewaterhouseCoopers L.L.P. to incorporation by reference
          of its report dated February 17, 1999 into the Company's Registration
          Statement on Form S-8 (No. 333-08631) filed with the Securities and
          Exchange Commission on July 23, 1996.