<PAGE>
 
                                                                      Exhibit 13

First Coastal Corporation
 

1998


ANNUAL


REPORT



including its subsidiary
Coastal Bank
<PAGE>
 
 Letter to Stockholders                                                  1
 
 Selected Consolidated Financial Data                                    4
 
 Management's Discussion and Analysis of Financial Condition and 
 Results of Operations                                                   6
 
 Market for Registrant's Common Equity and Related 
 Stockholder Matters                                                    26
 
 Report of Independent Accountants                                      27
 
 Consolidated Financial Statements                                      28
 
 Notes to Consolidated Financial Statements                             33
 
 Corporate and Stockholder Information                                  51
<PAGE>
 
PRESIDENT'S LETTER
     [Photo]

 
TO OUR STOCKHOLDERS:

     Significant progress was made on a number of fronts at First Coastal
Corporation ("First Coastal" or the "Company") in 1998.  The most noteworthy
achievements were continued stable earnings, strong asset quality, significant
deposit and balance sheet growth and, most importantly, the continued
implementation and refinement of our strategic plan which management and the
Board of Directors believes will have a favorable long term impact on the
Company.  We are pleased to have the opportunity to bring our stockholders up to
date on the transformation that is currently underway at First Coastal
Corporation.

The Challenge, circa early 1997...

     While the 1996 recapitalization brought to an end a period of financial
risk that for years had threatened the Company's solvency, entering 1997 First
Coastal was still a company with significant issues.  Even while the Company's
financial health was improving during the period leading up to the
recapitalization, the market presence of Coastal Bank  (the "Bank"), the
Company's operating subsidiary, had declined considerably because of the
extended period of financial distress it had endured, as well as management's
long running need to focus on the major crises of this period: the Bank's
financial condition, the Federal Deposit Insurance Corporation's cross guaranty
claim against the Bank (which resulted from the Suffield Bank failure), and the
1996 recapitalization related to the settlement of the cross guaranty claim.
Although the Company's fiscal soundness had been largely restored, the years
of severe difficulties, controlled downsizing, limited ability to develop and
promote new or existing products, and the negative publicity attendant to the
Company's problems (until the recapitalization was completed), all contributed
significantly to the Bank's smaller size and reduced market presence.

     An additional key issue facing the Company was the lack of a synergistic
branching network.  The Company's seven branch network was spread along the
Southern coast of Maine over a distance of approximately fifty miles.  While
Brunswick, Topsham and Freeport were well supported by four branches, the area
between Freeport and Kennebunk, representing the State's most heavily populated
and strongest economic area, was serviced by only three branches. These were the
Saco and Kennebunk branches, and our Westbrook operations center and branch.
During the first half of 1997 management conducted an extensive strategic
planning process with the goal of identifying a long term plan that would
enhance First Coastal's prospects for future growth and profitability.  We
believe that we have been successful in developing such a plan.

Interim Plan Progress, 1998...

     The Bank's new downtown Portland branch, with a primary focus on providing
commercial banking services to the Portland market, opened in March 1998, under
the name Coastal Business Bank. Although small in size, the facility is well
located near the center of the city's financial and legal services district, and
offers a drive through and pedestrian walk-up service.  Staffed with two
experienced commercial lenders, we have been pleased with the commercial loan
volume and deposit growth achieved from this location.  The opening of the
Portland office also marked the introduction of Coastal Business Bank, a
division of Coastal Bank.  The signage on the Portland location, and all
business cards and letterhead utilized by all of the Bank's commercial lenders,
commercial loan staff, commercial deposit professionals and myself, as well as
all commercial product offering and promotional materials, carry the name
Coastal Business Bank.  It has proven to be an effective means for us to
differentiate Coastal (Business) Bank from other financial institutions.

     In May 1998 the Bank launched its new Internet banking product for
businesses, Coastal Business PC, along with our newly developed business cash
management program.  Utilizing state-of-the-art web browser technology, this on-
line, real-time system offers businesses more convenience and the ability to
more effectively utilize their cash by allowing them to instantly transfer funds
among their Coastal Bank accounts, and between Coastal and other banks; have
instant access to key information; and retrieve images of cleared checks prior
to receiving their statement.  The same system is well-suited for a retail
Internet product, which the Bank  expects to implement sometime in 2000.  Also
during 1998 the web sites for both First Coastal (www.firstcoastal.com) and
Coastal Bank (www.coastalbankme.com) were improved and now contain current and
useful information on a continuous basis.

     During the course of 1998 three other events either took place, or were set
in motion, that are expected to have a substantial impact on the future and
strategic direction of the Company.  The first was the September sale of the
Bank's combination main office, branch and operations center, located at 36

                                       1
<PAGE>
 
Thomas Drive, Westbrook.  Although the price received was favorable, and the
Company recorded a pre-tax gain of $539,000 in the third quarter related to this
sale, the significance of this transaction lies much more in the opportunity it
provides for the Company to accelerate improvements to its branching network and
overall market presence.  We are presently searching for a new combination main
office, branch and operations center.  Our goal is for this facility to be
located in a much more visible and accessible Portland location than our
Westbrook facility was.  Though the operating expenses associated with the new
facility will be higher, we anticipate that the improved visibility gained from
being better located should result in enhanced customer awareness of Coastal
Bank in the Greater Portland market.

     The prospect of selling the Westbrook facility on favorable terms caused
management to consider a more pro-active, accelerated approach to the branching
issue.  This evaluation led to the second event, the pending sale of our
Kennebunk branch.  Though the branch has served the Bank well for a number of
years, its location is not synergistic to the rest of our branch network and
does not offer the long term growth opportunities we believe are available
elsewhere.  The plan to sell the branch was announced in December 1998 and a
definitive purchase and assumption agreement was executed in February 1999.  The
sale, which remains subject to regulatory approvals, is expected to close in May
1999, at which time an estimated pre-tax gain of $1.1 million to $1.2 million is
anticipated to be recorded.

     The third event was the Company's sale of its residential mortgage
servicing portfolio.  The decision to sell the approximately $44 million
portfolio was based upon management's evaluation of the profitability associated
with the origination, sale and servicing of secondary market residential
mortgage loans.  The evaluation led to the conclusion that the Bank did not have
the economies of scale necessary to compete effectively on the servicing side of
the business.  As a result, the portfolio was sold effective November 30, 1998,
with a pre-tax gain in the amount of $460,000 recorded in the first quarter of
1999 following the final settlement on January 31, 1999.  The Company intends to
continue to be an active residential lender (including secondary market loans),
with saleable residential loans going forward expected to be sold on a servicing
released basis.

Financial Results, 1998...

     The Company's 1998 net income, which included the pre-tax gain of $539,000
associated with the sale of the Westbrook facility, equaled $1.6 million, or
$1.13 per share fully diluted.  This reflected a modest $97,000 increase in pre-
tax income (excluding the gain on the Westbrook facility and loan and securities
sales gains), as compared to 1997.  Asset quality reflected further improvement,
with the level of nonperforming assets declining 30.8% to $566,000, a level
considered so low as to be non-sustainable.

     Total assets increased $45.0 million (30.7%), to $191.4 million in 1998.
The asset growth was largely fueled by a $33.6 million increase in total deposit
balances, as well as a $9.3 million increase in borrowings from the Federal Home
Loan Bank.  The 29.2% increase in total deposits was largely due to the success
of the Bank's new High Rise Savings product, which generated $28.9 million (86%
of total deposit growth) in net new deposits.

     The Bank's asset growth was almost totally represented by increases in cash
and cash equivalents, equaling $25.0 million, and investment securities,
equaling $24.2 million.  The large increase in the level of these lower yielding
assets (as a percentage of total assets) contributed significantly to declines
in the yield on average earning assets, net interest rate spread and net
interest margin.  However, the Company's net interest income increased $474,000
(7.9%) in 1998 as compared to 1997, and it is anticipated that the
aforementioned ratios relating to the return on earning assets will improve to
the extent that the Company reduces the percentage of assets allocated to these
lower yielding categories and increases loan balances as a percentage of total
assets.

     While total loans increased only $1.6 million in 1998, the level of
originations was encouraging. Although residential mortgage loan balances
remained essentially unchanged, residential originations increased $6.1 million,
to $24.3 million (33.6%) as compared to 1997.  It should be noted, however, that
a reduction in the level of refinances going forward could have an adverse
impact on the level of residential mortgage loans generated, even though it is
the Bank's intention to become less reliant on refinances as a source of
residential mortgage loan business.  The progress made in 1998 in the commercial
lending area was particularly encouraging.  While balances increased a modest
$4.0 million, this was largely due to higher-than-typical loan prepayments
resulting from a combination of the generally lower 1998 interest rate
environment (which resulted in many borrowers seeking refinances at lower
rates), increased competition from the commercial real estate conduit market and
a low percentage of the Bank's commercial real estate

                                       2
<PAGE>
 
loans protected by prepayment penalties at that time. Commercial loan volume
(new loans and lines of credit closed) actually increased approximately 50% in
1998, as compared to 1997, and the Bank was successful in significantly
increasing the percentage of commercial loans protected by prepayment penalties.

The Opportunity, circa early 1999...

     In light of the progress made developing and implementing the Company's
long term strategic plan over the past two years, it is becoming easier to
envision what the future may hold for First Coastal.  From a branching
standpoint, our current objective is to move by the end of 2000, and hopefully
no later than the end of 2001, from a total of seven branches (as was the case
in early 1998), with a large gap in our "network," to ten branches, five of
which would be located in the Greater Portland market.  One of the five branches
was put in place in March 1998, downtown Portland.  Another will represent a
replacement for our current Westbrook facility and will, ideally, provide the
Bank with a visible, well located combination main office, branch and operations
center, most likely located in Portland.  Of the other three remaining branches
contemplated one, in essence, offsets the sale of our Kennebunk branch, while
the other two will be net new additions to our branching system.  While this
expansion and restructuring of our branching network would represent significant
growth and change within a relatively short period of time for a banking company
the size of First Coastal, we believe this initiative makes a lot of sense.
Three large, multi-state holding companies, against whom we believe we compete
very effectively, have a substantial presence in the Greater Portland market,
holding in excess of 80% of area deposits.  This substantial presence is largely
the result of past bank consolidations and the extensive branching networks
these banks enjoy.  By way of example, each of these banks has a minimum of six
branches in Portland and two in South Portland, as well as branches in smaller,
outlying communities.  By contrast, no other bank has more than one branch in
Portland.  In our view, this situation presents an excellent opportunity for a
community bank to increase its presence in the valuable Greater Portland market
by doing the things that we do well, providing excellent, responsive customer
service and providing the banking products people need.  Of course, while we
believe that our branching strategy can be realized, there is no assurance that
we will be successful in accomplishing all of our objectives.

     We continue to believe that commercial lending represents an area in which
we can excel and develop a sustainable strategic advantage over much of our
competition.  We believe that our combination of expertise, size and other
factors provides us with the ability to consistently deliver better and more
reliable service to a customer base that routinely demands this as a critical
business need.  Over the past two years we have made significant strides in
developing an exceptionally capable commercial lending and deposit team, along
with the products businesses require.  We expect the continued growth of this
area to be a critical component of First Coastal's future.

     The combination of the branching initiative currently underway, the
expansion of the Bank's retail banking programs, increased residential lending
activity and the implementation of the Bank's commercial banking business plan,
are anticipated to lead to enhanced growth opportunities for First Coastal over
the next five years.  Most of this growth is expected to occur in years
subsequent to 1999, as the Kennebunk sale is expected to occur in 1999 and the
initial new branches planned are not anticipated to come into operation until
late 1999 or early 2000, and the later branches contemplated would not be
complete until the end of 2000 or 2001.  During the period the branches are
becoming operational, and until they meet and exceed their breakeven points,
this initiative is expected to have a dampening effect on earnings.  However, to
the extent critical mass is achieved within the branches, particularly in the
areas of deposit balances and retail loan volume, and the Bank's overall loan
and deposit balances grow, we expect that the Company's operating results should
begin to improve over the last-half of this five year period.  We are confident
the steps we are taking will ultimately enhance shareholder value.

     While any number of factors could have an adverse effect on the success of
our plan, including a downturn in the economy, changes in consumer or business
banking trends, or various  competitive factors, and there is risk in a more
aggressive plan such as the one outlined here as opposed to a more conservative
alternative, we firmly believe this is the correct course of action for the
Company.  It will take a tremendous amount of work on the part of management,
staff and the Board of Directors to successfully implement the plan.  However,
this is a commitment we are willing to make, and our history over the past
several years reflects an ability on our part to successfully meet significant
challenges.  We look forward to your continued support.


Gregory T. Caswell
President and Chief Executive Officer

                                       3
<PAGE>
 
SELECTED CONSOLIDATED FINANCIAL DATA

Selected Consolidated Financial Data of First Coastal Corporation

The following table sets forth, in summary form, certain selected financial data
of First Coastal Corporation (the "Company") as of and for each of the five
years in the period ended December 31, 1998.
<TABLE>
<CAPTION>
 
 
                                                                            Year Ended December 31,
                                                           ------------------------------------------------------- 
(dollars in thousands, except share and per share data)       1998        1997       1996       1995       1994
---------------------------------------------------------  ----------  ----------  ---------  ---------  ---------
<S>                                                        <C>         <C>         <C>        <C>        <C>
Statement of Operations Data:
Interest income                                            $   13,059  $   11,894  $ 11,331   $ 11,707   $ 11,780
Interest expense /(1)/                                          6,567       5,876     5,653      5,850      5,726
                                                           ----------  ----------  --------   --------   --------
Net interest income before provision for loan losses            6,492       6,018     5,678      5,857      6,054
Provision for loan losses                                           -           -         -       (425)       107
                                                           ----------  ----------  --------   --------   --------
Net interest income after provision for loan losses             6,492       6,018     5,678      6,282      5,947
Investment securities/loan gains                                  215         370        45         13         30
Noninterest income /(2)(3)/                                     1,166         620       945        559        399
Operating expenses /(4)/                                        5,450       5,067     5,142      5,194      6,278
Income tax expense (benefit) /(5)/                                859         679    (4,859)         -          -
                                                           ----------  ----------  --------   --------   --------
Income before Extraordinary Item                                1,564       1,262     6,385      1,660         98
Extraordinary Item -
 Charge to earnings as a result of the
 settlement of the cross guaranty claim /(6)/                       -           -         -          -      9,000
                                                           ----------  ----------  --------   --------   --------
Net income (loss)                                          $    1,564  $    1,262  $  6,385   $  1,660   $ (8,902)
                                                           ==========  ==========  ========   ========   ========
 
Earnings Per Share Before Extraordinary Item:
Basic earnings per share data:
 Weighted average shares outstanding                        1,359,976   1,358,730   933,578    600,361    600,361
 Net income                                                $     1.15  $      .93  $   6.84   $   2.77   $    .16
Diluted earnings per share data:
 Weighted average shares outstanding                        1,379,124   1,391,272   940,480    600,361    600,361
 Net income                                                $     1.13  $      .91  $   6.79   $   2.77   $    .16
 
Earnings Per Share After Extraordinary Item:
Basic earnings per share data:
 Weighted average shares outstanding                        1,359,976   1,358,730   933,578    600,361    600,361
 Net income (loss)                                         $     1.15  $      .93  $   6.84   $   2.77   $ (14.83)
Diluted earnings per share data:
 Weighted average shares outstanding                        1,379,124   1,391,272   940,480    600,361    600,361
 Net income (loss)                                         $     1.13  $      .91  $   6.79   $   2.77   $ (14.83)
</TABLE>

There were no cash dividends declared during the years ended December 31, 1994
through 1998.

/(1)/ The 1998, 1997, 1996 and 1995 interest expense includes $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 aggregate principal amount of $4.0 million issued to a group of four
      Maine savings banks in connection with the recapitalization of the Company
      in July 1996.
/(2)/ In 1996, Coastal Bank sold its branch in Kezar Falls, Maine and recognized
      a pre-tax gain of $366,000.
/(3)/ In 1998, Coastal Bank sold its combination headquarters branch/operations
      center located in Westbrook, Maine, resulting in a pre-tax gain of
      $539,000.
/(4)/ In 1995 and 1994, the Company incurred approximately $0.3 million and $0.8
      million, respectively, of legal and other professional fees associated 
      with the settlement of the FDIC's cross guaranty claim against Coastal 
      Bank.
/(5)/ 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 L to the Company's Consolidated Financial Statements.
/(6)/ The 1994 results reflect a $9.0 million extraordinary charge to earnings
      as a result of the settlement of the FDIC's cross guaranty claim against
      Coastal Bank.

                                       4
<PAGE>
 
<TABLE>
<CAPTION>
 
                                                       December 31,
                                   -----------------------------------------------------
(dollars in thousands)               1998       1997       1996       1995       1994
---------------------------------  ---------  ---------  ---------  ---------  ---------
<S>                                <C>        <C>        <C>        <C>        <C>
 
Balance Sheet Data:
Total assets                       $191,413   $146,400   $147,734   $145,453   $154,212
Investment securities                47,048     22,887     26,692     19,712     16,746
Assets held for sale                     83      3,565      1,490        281        185
Loans, net of fees                  105,776    104,165     98,515    100,528    109,625
Allowance for loan losses             2,735      2,665      2,666      2,659      4,042
Nonperforming assets                    566        818      2,623      7,517      9,006
Deposits /(1)/                      148,545    114,991    115,085    125,665    130,037
Borrowings                           22,545     13,294     15,000      6,000     12,612
Notes payable /(2)/                   2,600      3,000      4,000      9,000      9,000
Secured borrowings                      967          -          -          -          -
Stockholders' equity                 16,314     14,808     13,388      3,997      2,014
 
Financial Ratios:
Net interest rate spread               3.68%      3.98%      4.12%      4.13%      3.79%
Net interest rate margin               4.09       4.32       4.28       4.19       3.97
Return on average assets before
  extraordinary item                    .93        .84       4.57       1.14        .06
Return on average  assets               .93        .84       4.57       1.14      (5.48)
Return on average equity before
  extraordinary item                   9.81       8.72     102.60      58.20        .92
Return on average equity               9.81       8.72     102.60      58.20     (83.78)
Equity to assets                       8.52      10.11       9.06       2.75       1.31
Tier 1 leverage capital                7.20       7.71       6.62       2.74       1.41
Total risk-based capital              14.32      13.29      11.54       5.54       3.46
</TABLE>
/(1)/ The sale of the Bank's Kezar Falls, Maine branch in April 1996 included
      deposits totaling $9.9 million.
/(2)/ Notes payable consists of the FDIC Note in 1994 and 1995 and the Savings
      Bank Notes in 1996, 1997 and 1998.


The 1996 financial results reflect the completion of the Company's
recapitalization plan, as a result of which 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") which mature on December
31,2001.

                                       5
<PAGE>
 
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

BUSINESS

First Coastal Corporation (the "Company"), a Delaware corporation, is a bank
holding company whose sole operating subsidiary is Coastal Bank (the "Bank"), a
Maine chartered savings bank headquartered in Westbrook, Maine.  The Company has
no separate operations and its business consists of the business of the Bank.
The principal business of the Bank consists of retail and commercial banking,
including attracting deposits from the general public and originating
residential mortgage, consumer, commercial real estate and small business loans.
The Bank conducts its business from eight offices in the counties of Cumberland,
Sagadahoc and York.  The Bank's deposits are insured by the Federal Deposit
Insurance Corporation ("FDIC") up to the limits provided by law.

This Annual Report, including statements made in this Management's Discussion
and Analysis of Financial Condition and Results of Operations, 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 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.  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, 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 (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 a result 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".

                                       6
<PAGE>
 
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 1998.  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 High Rise Savings, the new tiered savings product which was
largely responsible for the Bank's 29.2% increase in total deposits in 1998.
The strategic plan was subsequently amended during the last half of 1998 as
additional opportunities were identified.  The most significant new initiative
involves the reorganization of the Bank's branching network, evidenced by the
1998 sale of the Bank's combination headquarters branch/operations center in
Westbrook; the pending sale of the Kennebunk branch (planned for May 1999); and
the contemplated opening of a new headquarters branch/operations center and
additional branches in the Greater Portland market.

SIGNIFICANT EVENTS

Sale of Headquarters Branch/Operations Center

On September 15, 1998, the Bank sold its combination headquarters
branch/operations center located in Westbrook, Maine and recorded a pretax gain
of $539,000 on  the sale.  In connection with the sale, the Bank entered into a
short term lease which expires in March 2000.  The Bank intends to move to a new
headquarters branch/operations center facility in the Greater Portland area, a
search for which is currently underway.
 
Sale of $44 Million Residential Mortgage Servicing Portfolio

On January 31, 1999 the Bank completed the settlement of 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.  The Bank acted as a
subservicer of this approximately $44 million loan portfolio during the period
from the date of the sale, November 30, 1998, through January 31, 1999.  On a
going forward basis, it is the Bank's intent to sell saleable residential loans
on a servicing released basis, subject to market conditions.

Sale of the Bank's Kennebunk Branch

On February 22, 1999, the Bank entered into a definitive purchase and assumption
agreement to sell its branch located in Kennebunk, Maine.  Under the terms of
the purchase and assumption agreement (subject to receipt of regulatory
approvals), the purchaser will acquire all of the branch's deposits and certain
branch assets, as well as assume responsibility for the Bank's lease
obligations.  Should the sale of the branch take place in the second quarter of
1999 as anticipated, a pretax gain in the amount of approximately $1.1 million
to $1.2 million is anticipated to be recorded at that time.  The actual amount
of the gain to be recorded at closing will be subject to actual deposit levels,
the mix of deposits and other factors, and could be higher or lower than the
amount currently anticipated.

RESULTS OF OPERATIONS

Comparison of Year Ended December 31, 1998 to Year Ended December 31, 1997

Overview

The Company reported net income of $1.6 million (basic earnings per share of
$1.15) for the year ended December 31, 1998, compared to net income of $1.3
million (basic earnings per share of $.93) for the year ended December 31, 1997.
The results for 1998 include a pre-tax gain of $539,000 resulting from the sale
of the Bank's headquarters branch/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.

                                       7
<PAGE>
 
The following table sets forth, for the periods indicated, information regarding
(i) the total dollar amount of interest income of the Company from interest-
earning assets and the resultant average yields; (ii) the total dollar amount of
interest expense on interest-bearing liabilities and the resultant average cost;
(iii) net interest income; (iv) interest rate spread; and (v) net interest
margin.
<TABLE>
<CAPTION>
 
                                                                    Year Ended December 31,
                                 -----------------------------------------------------------------------------------------
                                             1998                          1997                           1996
                                 ----------------------------  ----------------------------  ----------------------------
                                 Average             Yield/    Average              Yield/    Average              Yield/
(in thousands)                   Balance   Interest   Rate     Balance   Interest    Rate     Balance   Interest    Rate
-------------------------------  --------  --------  -------  ---------  ---------  -------  ---------  ---------  -------
<S>                              <C>       <C>       <C>      <C>        <C>        <C>      <C>        <C>        <C>
Assets:
Loans /(1)(2)/                   $106,115  $  9,919    9.35%  $103,678    $ 9,651     9.31%  $ 98,223    $ 9,226     9.39%
Investments
 Available for sale /(3)/          30,548     1,942    6.36     19,305      1,256     6.51     13,350        834     6.25
 Held to maturity                   2,860       184    6.44      7,774        512     6.58     11,470        759     6.62
Interest earning deposits          19,097     1,014    5.24      8,550        475     5.56      9,559        512     5.36
                                 --------  --------           --------    -------            --------    -------
Total interest earning assets     158,620    13,059    8.23    139,307     11,894     8.54    132,602     11,331     8.55
                                           --------                       -------                        -------
Noninterest earning assets          9,906                       10,799                          7,077           
                                 --------                     --------                       --------
Total assets                     $168,526                     $150,106                       $139,679
                                 ========                     ========                       ========
 
Liabilities:
Savings and checking             $ 71,314     2,415    3.39%  $ 53,028      1,391     2.62%  $ 53,430      1,396     2.61%
Other time deposits                54,004     2,893    5.36     56,801      3,068     5.40     60,428      3,328     5.51
Secured borrowings                    646        27    4.21          -          -        -          -          -        -
FHLB advances                      15,593       900    5.77     15,497        940     6.07      7,226        404     5.59
Notes payable /(4)/                 2,898       332   11.46      3,641        477    13.09      6,757        525     7.77
                                 --------  --------           --------    -------            --------    -------
Total interest bearing
 liabilities                      144,455     6,567    4.55    128,967      5,876     4.56    127,841      5,653     4.42
                                           --------                       -------                        -------
Noninterest bearing deposits        7,987                        6,483                          5,323                   
Noninterest bearing liabilities       149                          189                            292                   
Stockholders' equity               15,935                       14,467                          6,223
                                 --------                     --------                       --------
Total liabilities and
 stockholders' equity                      $168,526           $150,106                       $139,679           
                                           ========           ========                       ========
Net interest income                        $  6,492                       $ 6,018                        $ 5,678
                                           ========                       =======                        =======
Net interest rate spread /(5)/                         3.68%                          3.98%                          4.12%
Net interest margin /(6)/                              4.09%                          4.32%                          4.28%
</TABLE>

______________________________
/(1)/ For purposes of these computations, loans held for sale and nonaccrual
      loans are included in the average loan amounts outstanding.
/(2)/ Included in interest income on loans are loan fees of $262,000, $195,000
      and $152,000 for the years ended December 31, 1998, 1997 and 1996,
      respectively.
/(3)/ Yields on available for sale securities are calculated based on historical
      cost.
/(4)/ Notes payable consists of the FDIC Note and the Savings Bank Notes.
/(5)/ Return on interest earning assets less cost of interest bearing
      liabilities.
/(6)/ Net interest income divided by average earning assets.

                                       8
<PAGE>
 
The table below sets forth certain information regarding changes in interest
income and expense of the Company for the periods indicated.  For each category
of interest earning assets and interest bearing liabilities, information is
provided on changes attributable to (i) changes in rates (change in rate
multiplied by old volume), (ii) changes in volume (change in volume multiplied
by old rate), and (iii) changes in rate/volume (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, 1998     Year Ended December 31, 1997
                                                Compared to                      Compared to
                                       Year Ended December 31, 1997     Year Ended December 31, 1996
                                     -------------------------------  ------------------------------- 
                                         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)/                                $  41    $  227   $  268         $ (87)    $ 512   $ 425
 Investments available for sale              (46)      732      686            50       372     422
 Investments held to maturity                 (5)     (323)    (328)           (2)     (245)   (247)
 Interest earning deposits                   (47)      586      539            17       (54)    (37)
                                           -----    ------   ------         -----     -----   -----
 Total interest income                       (57)    1,222    1,165           (22)      585     563
                                           -----    ------   ------         -----     -----   -----
                                                                                     
Interest expense:                                                                    
 Savings and checking                        551       473    1,024             7       (11)     (4)
 Other time deposits                         (24)     (151)    (175)          (61)     (200)   (261)
 Secured borrowings                            -        27       27             -         -       -
 FHLB advances                               (46)        6      (40)           74       462     536
 Notes payable                               (48)      (97)    (145)          194      (242)    (48)
                                           -----    ------   ------         -----     -----   -----
 Total interest expense                      433       258      691           214         9     223
                                           -----    ------   ------         -----     -----   -----
Net change in net interest income                                                    
 before provision for loan losses          $(490)   $  964   $  474         $(236)    $ 576   $ 340
                                           =====    ======   ======         =====     =====   =====
</TABLE>
/(1)/ For purposes of these computations, loans held for sale and nonaccrual
      loans are included in loans.

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 0.31% 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, with the primary factor behind the growth the new High Rise Savings
deposit program.

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 a 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.  It
is management's intent to reduce the percentage of earning assets comprising
these two asset categories in 1999, and to increase loans as a percentage of
earning assets, thereby improving the Company's net interest rate spread and net
interest rate margin.

                                       9
<PAGE>
 
Competition with regard to loan originations has continued to be intense.  As a
result, the yields on new loan originations, and in particular commercial real
estate and commercial and industrial loans, may decline relative to interest
rates in general.  Competitive factors resulted in increased loan prepayments in
1998 as compared to that which might ordinarily have been expected, as well as
some reductions in contract interest rates for existing customers.  It is
unknown how the competitive and interest rate environment may impact loan
prepayments in 1999.
 
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 on the Savings Bank Notes.  The decline in
interest expense on the Savings Bank 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.

On March 23, 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. The interest rate paid on the introductory
High Rise Savings accounts was reduced in January and March of 1999, by 0.50%
and 0.25%, respectively.

Additionally, the Bank introduced its new cash management program for businesses
in May 1998.  The program represents secured borrowings, which include
repurchase-like 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 for loan losses (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/operations center. The increase in noninterest
income was offset by a $155,000 decline in loan and security 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 new residential mortgage lending
program, the Bank 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.

                                       10
<PAGE>
 
Operating Expenses

Operating expenses increased $383,000, or 7.6%, 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.  Management anticipates operating expenses for 1999 and 2000
to further increase as a result of several additional business initiatives that
are currently either underway or contemplated, including (i) the Bank's lease or
purchase of a new headquarters branch/operations center, and related furniture,
fixtures, equipment and relocation expenses, (ii) the opening of additional
branches over the next two to three years in the Greater Portland market, (iii)
the introduction of a number of new retail banking products which will expand
the Bank's retail product array, and (iv) the Bank's continued expansion of its
commercial lending activities.

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 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.

                                       11
<PAGE>
 
Comparison of Year Ended December 31, 1997 to Year Ended December 31, 1996

Overview

The Company reported net income of $1.3 million (basic earnings per share of
$.93) for the year ended December 31, 1997, compared to net income of $6.4
million (basic earnings per share of $6.84) for the year ended December 31,
1996.  The results for 1997 include securities and loan sales gains of $370,000
as compared to $45,000 for 1996. Income tax expense for the year ended December
31, 1997 equaled $679,000 versus an income tax benefit of $4,859,000 for the
year ended December 31, 1996.  Additionally, the earnings for 1996 included a
$366,000 gain in the second quarter as a result of the sale of the Bank's branch
in Kezar Falls, Maine and $170,000 in expenses related to the Company's July
1996 recapitalization.  The Company incurred no provision for loan losses
expense for the years ended December 31, 1997 and 1996.

Net Interest Income

Net interest income equaled $6.0 million and $5.7 million for the years ended
December 31, 1997 and 1996, respectively.  Changes in net interest income are
caused by interest rate movements, changes in the amount and the mix of
interest-earning assets and interest-bearing liabilities, and changes in the
level of noninterest-earning assets and noninterest-bearing liabilities.

Overall, net interest income increased by $340,000 for the year ended December
31, 1997 compared to the year ended December 31, 1996.  This increase is
primarily attributable to an increase in the level of loan outstandings in 1997
as compared to 1996.  The Company's net interest rate spread for December 31,
1997 decreased to 3.98% as compared to 4.12% for the year ended December 31,
1996.  The net interest margin increased from 4.28% at December 31, 1996 to
4.32% at December 31, 1997.  The decrease in the net interest rate spread is
primarily the result of an increase in the Company's cost of funds, from 4.42%
in 1996 to 4.56% in 1997, with this increase primarily attributable to increased
borrowing from the FHLB of Boston and the higher rate of interest associated
with the Savings Bank Notes.

Interest and dividend income for the year ended December 31, 1997 increased
$563,000 as compared to the year ended December 31, 1996.  The increase is
primarily attributable to an increase in the level of average loan outstandings
in 1997 compared to 1996, partially offset by a decrease in the yield on loans
from 9.39% at December 31, 1996 to 9.31% at December 31, 1997.

Interest expense for the year ended December 31, 1997 increased $223,000 as
compared to the year ended December 31, 1996.  The increase is primarily
attributable to an increase of $536,000 in FHLB borrowing expense as a result of
$9.0 million in advances taken in November of 1996.  This increase was offset in
part by a decline in deposit expense of $265,000, primarily the result of a
decrease in both the balances outstanding and rates paid for certificates of
deposits.

Provision for Loan Losses

There was no provision for loan losses for the years ended December 31, 1997 and
1996.  The absence of a provision for loan losses in 1997 and 1996 is primarily
attributable to the decline in nonperforming loans and potential problem loans
and management's review of the portfolio and its determination of the adequacy
of the Allowance at December 31, 1997.  Despite the absence of provision
expense, the level of the Allowance remained essentially unchanged as charged-
off loans of $339,000 and $289,000 for the years ended December 31, 1997 and
1996, respectively, were offset by recoveries totaling $338,000 and $296,000,
for the same respective periods.

Noninterest Income

Noninterest income remained relatively unchanged, at $990,000 for the years
ended December 31, 1997 and 1996. Noninterest income for 1996 includes a
$366,000 gain on the sale of the Bank's branch in Kezar Falls, Maine, while 1997
noninterest income reflects a $325,000 increase in gains on securities and loan
sales, as compared to 1996.  In addition, deposit fee income increased $104,000
from 1996 to 1997, primarily attributable to a new deposit program which was
implemented in April 1996 (and has since been discontinued).  The increase in
deposit fee income was partially offset by reduced fee income on loans serviced
for others totaling $51,000 resulting from a reduction in the amount of off
balance sheet loans serviced for others.  This reduction in loans serviced for
others is primarily attributable to the sale of $7.9 million of Maine State
Housing Authority loans in the second quarter of 1997.

                                       12
<PAGE>
 
Operating Expenses

Operating expenses decreased $75,000, or 1.5%, for the year ended December 31,
1997 as compared to the year ended December 31, 1996, as described in more
detail below:

                                           Year Ended December 31,
                                           ----------------------- 
(in thousands)                                   1997     1996
------------------------------------------------------------------ 
Salaries and benefits                           $2,367   $2,142
Occupancy                                          446      428
Net cost of operations of real estate owned         67       81
Data processing                                    239      421
Equipment                                          374      295
FDIC insurance                                      15       37
Insurance - general                                141      180
Office/postage                                     296      315
Legal                                               65      182
Marketing                                          255      291
Other expenses                                     802      770
                                                ------   ------
  Total Operating Expenses                      $5,067   $5,142
                                                ======   ======

The variances in operating expenses for the year ended December 31, 1997 as
compared to the year ended December 31, 1996 are attributable to several
factors.  The increase in salaries and benefits expense during 1997 was
primarily due to changes in staffing levels, annual salary increases and an
increase in pension expense of $75,000 resulting from the implementation of the
Bank's 401(k) plan in August 1997 and costs incurred in connection with the
termination of the Bank's defined benefit plan.  Data processing expense
decreased as a result of the conversion of the Bank's computer system from an
out-sourced service bureau relationship to an in-house system.  However,
equipment expense increased in 1997 as a result of additional depreciation
expense incurred as a result of the purchase of approximately $500,000 of
hardware and software for the new in-house system in June 1996.  Legal costs
were lower in 1997 as compared to 1996, with 1996 legal expense higher primarily
as a result of the 1996 recapitalization.

Income Tax Expense (Benefit)

The Company recognized an income tax benefit in 1996 of $4,859,000.  Of this
amount, $4,811,000 was attributable to a fourth quarter reduction in the amount
of the valuation allowance previously established against the Company's deferred
tax asset (established utilizing an effective tax rate of 34%).  In addition,
the Company received $48,000 in interest applicable to a 1992 carryback tax
refund.  The Company incurred income tax expense of $679,000 for the year ended
December 31, 1997.

FINANCIAL CONDITION

Set forth below is a discussion of the material changes in the financial
condition of the Company.

General

At December 31, 1998, the Company's total assets equaled $191.4 million,
representing an increase of $45.0 million (30.7%) as compared to total assets of
$146.4 million at December 31, 1997.  The increase in total assets was largely
reflected in increases in cash and cash equivalents ($25.0 million) and
investment securities ($24.2 million), modestly offset by a reduction in loans
held for sale ($3.5 million).  The Bank's asset growth was primarily the result
of a $33.6 million increase in deposit balances, largely attributable to the
introduction of the High Rise Savings program on March 23, 1998, and a $9.3
million increase in borrowings from the FHLB.  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).  The program generated net
new deposits of $28.9 million as of December 31, 1998.   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 addition, total
commercial deposits increased $2.9 million at December 31, 1998 as compared to
December 31, 1997.  The $9.3 million increase in FHLB borrowings was largely the
result of $10.0 million in advances obtained in October 1998, with maturities of
5, 7 and 10 years and a weighted average interest rate of 5.07%.

                                       13
<PAGE>
 
Investment Securities

The Company's investment portfolio is comprised primarily of U.S. government and
agency obligations and also contains miscellaneous equity securities.  Total
investment securities at December 31, 1998 were $47.0 million compared to $22.9
million at December 31, 1997.  This increase is attributable to the purchase of
$23.8 million in mortgage backed securities, $3.0 million in U.S. government
agency callable notes, $14.4 million in U.S. government obligations (all of
which are Treasury Inflation Indexed Securities) and $0.4 million in equity
securities, partially offset by $10.0 million in U.S. government agency callable
notes which were called during 1998 and $7.3 million in prepayments and
amortization on mortgage backed securities.  Investment securities classified as
available for sale are reported at fair value, with unrealized gains and losses
excluded from earnings and reported in a separate component of stockholders'
equity.  Investment securities held to maturity are stated at cost, adjusted for
amortization of bond premiums and accretion of bond discounts.

The following table sets forth the carrying amounts and maturities of investment
securities and weighted average rates at December 31, 1998, 1997 and 1996.
<TABLE>
<CAPTION>
 
                                December 31, 1998    December 31, 1997    December 31, 1996
                                ------------------  -------------------  --------------------
                                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 1-5 years         $ 2,227        5.6%        -               $ 4,948     5.9%
  maturing in 5-10 years          9,972        5.9         -           -         -       -   
  maturing in over 10 years       1,967        5.6         -           -         -       -
 
 Mortgage backed securities
  maturing in 5-10 years            904        6.8         -           -         -       -
  maturing in over 10 years      31,493        7.2   $15,798         6.9%   10,848     7.1
 Equity (mutual fund)                 -          -         -           -       995     6.0
 Other equity                       485        n/a        89         n/a        99     n/a
                                -------              -------               -------
                                $47,048        6.7%  $15,887         6.9%  $16,890     6.6%
                                =======              =======               ======= 
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   $ 7,000     6.4%
  5-10 years (final
   maturity)                          -          -     2,800         6.9     2,802     6.9
                                -------              -------               -------
                                      -          -     6,800         6.6     9,802     6.6
                                -------              -------               -------
                                      -          -   $ 7,000         6.5%  $ 9,802     6.6%
                                =======              =======               ======= 
</TABLE>
/(1)/  Yields on available for sale securities are calculated based on
       historical cost.

                                       14
<PAGE>
 
Loans Held for Sale

Loans held for sale at December 31, 1998 equaled $83,000 as compared to
$3,565,000 at December 31, 1997, a decrease of $3,482,000.  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 $1.6 million (or 1.5%), from $104.3 million at December 31, 1997
to $105.9 million at December 31, 1998.  The increase was attributable to an
increase of $4.0 million in commercial real estate loans and a $0.7 million
increase in commercial and industrial loans, partially offset by decreases in
residential, real estate construction and consumer and other loans of $0.7
million, $0.6 million and $1.9 million, respectively.

The following table sets forth the composition of the Company's loan portfolio
at the dates indicated:
<TABLE>
<CAPTION>
 
                                                       December 31,
                                   -----------------------------------------------------
(in thousands)                        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 (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
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.  As a result of the Bank's 1998
lending activities, this problem 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 that the combination
of its expertise in this area and its lending practices reduces somewhat the 
risk normally inherent in this type of lending.

                                       15
<PAGE>
 
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.

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, who 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.

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.
 
                             For the Year Ended December 31,
                            -------------------------------- 
(in thousands)                 1998       1997       1996
--------------------------    -------    -------    -------
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
                              =======    =======    =======
/(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.

                                       16
<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. Servicing fee income related to these loans is reported as
other income in the consolidated statements of operations, and for the three
years ended December 31, 1998, 1997 and 1996, equaled $34,000, $75,000 and
$126,000, respectively.
 
Allowance For Loan Losses

The Bank's policy is to fund the Allowance by charging operations in the form of
provision for loan losses based on periodic evaluations of the loan portfolio
and current economic trends.  Deterioration in the local economy or real estate
market, or upward movement in interest rates, could have an adverse impact on
the loan portfolio that could result in the need for increased provision for
loan losses.  The Bank continues to hold 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.

The following table represents the manner in which the Allowance is allocated
among the various loan categories at December 31, 1998, 1997, 1996, 1995 and
1994.  The percentages represent the percent of loans in each category to total
loans.
<TABLE>
<CAPTION>
 
                                                                          December 31,
                                      -------------------------------------------------------------------------------------
                                            1998               1997              1996            1995            1994
                                      -----------------  -----------------  ---------------  -------------  ---------------
                                           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                         $   165     30.8%  $   157     31.9%  $   61    31.4%  $   82   30.8%  $   66   30.2%
  Commercial                            1,453     49.8     1,303     46.7    1,811    49.2    2,216   50.5    3,322   54.6
Real estate construction loans             14      1.3        12      1.9        7      .8        -      -        -      -
Commercial and industrial loans           133      5.5        67      4.9       40     3.1       13    2.5       46     .6
Consumer and other loans                  124     12.6       174     14.6      151    15.5      120   16.2      141   14.6
Unallocated                               846        -       952        -      596       -      228      -      467      -
                                      -------   ------   -------   ------   ------   -----   ------  -----   ------  -----
Total                                 $ 2,735    100.0%  $ 2,665    100.0%  $2,666   100.0%  $2,659  100.0%  $4,042  100.0%
                                      =======   ======   =======   ======   ======   =====   ======  =====   ======  =====
 
Allowance as a percentage of loans                2.58%              2.56%            2.71%           2.65%           3.67%
Allowance as a percentage of
  nonperforming loans                           496.37%            353.92%          124.29%          47.96%          66.47%
Allowance as a percentage of
  nonperforming loans
  (excluding restructured loans)                496.37%            546.11%          124.29%         125.60%          87.90%
</TABLE>

                                       17
<PAGE>
 
The balance of the Allowance increased by $70,000 at December 31, 1998 as
compared to December 31, 1997 as a result of recoveries exceeding charge offs
for the year ended 1998.  The Allowance as a percentage of total loans remained
essentially unchanged at December 31, 1998 (2.58%) as compared to December 31,
1997 (2.56%).

The following table sets forth the changes in the Allowance, including charge-
offs and recoveries, by loan category, for the past six years:
<TABLE>
<CAPTION>
 
                                                          December 31,
                                    --------------------------------------------------------
(dollars in thousands)               1998     1997      1996      1995      1994      1993
----------------------------------  -------  -------  --------  --------  --------  --------
<S>                                 <C>      <C>      <C>       <C>       <C>       <C>
 
Balance at beginning
 of period                          $2,665   $2,666    $2,659   $ 4,042    $3,642   $ 4,280
Charge-offs:
 Real estate mortgage loans            (35)    (298)      (93)   (1,113)     (178)   (1,197)
 Real estate construction loans          -        -         -         -         -       (28)
 Commercial and industrial loans         -        -         -      (142)        -       (55)
 Consumer and other loans              (42)     (41)     (196)      (78)     (112)      (89)
                                    ------   ------    ------   -------    ------   -------
Total charge-offs                      (77)    (339)     (289)   (1,333)     (290)   (1,369)
Recoveries:
 Real estate mortgage loans            114      304       163       172       127       179
 Commercial and industrial loans         -        3        55       170       410       543
 Consumer and other loans               33       31        78        33        46        39
                                    ------   ------    ------   -------    ------   -------
Total recoveries                       147      338       296       375       583       761
                                    ------   ------    ------   -------    ------   -------
Net (charge-offs) recoveries            70       (1)        7      (958)      293      (608)
Provision for loan losses                -        -         -      (425)      107       (30)
                                    ------   ------    ------   -------    ------   -------
Balance at end of period            $2,735   $2,665    $2,666   $ 2,659    $4,042   $ 3,642
                                    ======   ======    ======   =======    ======   =======
 
Net charge-offs as a percentage
 of average loans                    (.07)%     .00%    (.01)%      .91%    (.25)%      .46%
</TABLE>

There has been no provision for loan losses in the last three years, with the
Allowance remaining relatively unchanged during this period.  In addition, the
years ended December 31, 1995, 1994 and 1993 reflected cumulative provision
expense of a negative $348,000 as a result of provision for loan losses
reversals in 1995 and 1993.  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, 1998.  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, problems borrowers may
experience with regard to Year 2000 computer related issues, 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.

                                       18
<PAGE>
 
Impaired Loans

Information with respect to the carrying amount of impaired loans is set forth
below:
<TABLE>
<CAPTION>
 
                                                                                        December 31,
                                                                        ------------------------------------------
                                                                                1998                    1997
                                                                        ------------------       -----------------
                                                                                 Allowance               Allowance
                                                                                 for Loan                for Loan
(in thousands)                                                          Amount     Loss          Amount    Loss
----------------------------------------------------------------------  ------   ---------       ------  ---------
<S>                                                                     <C>     <C>             <C>      <C>
 
Real estate mortgage loans:
  Residential                                                                -          -         $  114        -
  Commercial                                                             $ 430      $  53            566   $   72
Real estate construction loans                                               -          -              -        -
Commercial and industrial loans                                              9          2              -        -
Consumer and other loans                                                     -          -             37       19
                                                                         -----      -----         ------   ------
Total                                                                    $ 439      $  55         $  717   $   91
                                                                         =====      =====         ======   ======
</TABLE> 
 
Nonperforming Assets
 
Information with respect to nonperforming assets is set forth below:
<TABLE> 
<CAPTION> 
 
                                                                                       December 31,
                                                                         -----------------------------------------
(in thousands)                                                            1998   1997    1996     1995      1994
----------------------------------------------------------------------   -----  -----   ------   ------    ------
<S>                                                                     <C>     <C>     <C>     <C>        <C>

Nonaccrual loans                                                         $ 430  $ 387   $1,944   $1,948    $4,340
Accruing loans past due
  90 days or more                                                          121    101      201      169       258
Restructured loans                                                           -    265        -    3,427     1,483
Real estate owned and repossessions                                         15     65      478    1,973     2,222
In-substance repossessions                                                 n/a    n/a      n/a      n/a       703
                                                                         -----  -----   ------   ------    ------
                                                                         $ 566  $ 818   $2,623   $7,517    $9,006
                                                                         =====  =====   ======   ======    ======
</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)                     1998   1997    1996    1995    1994
---------------------------------  -----  -----  ------  ------  -------
<S>                                <C>    <C>    <C>     <C>     <C>
 
Real estate mortgage loans:
 Residential                       $  86  $ 114       -  $  386   $  115
 Commercial                          430    501  $1,944   5,007    5,667
Commercial and industrial loans        -      -       -       -      156
Consumer and other loans              35    138     201     151      143
                                   -----  -----  ------  ------   ------
Total loans                        $ 551  $ 753  $2,145  $5,544   $6,081
                                   =====  =====  ======  ======   ======
</TABLE>
The following table sets forth certain information regarding nonperforming
commercial loans (dollars in thousands):
<TABLE>
<CAPTION>
 
                                         December 31, 1998                  December 31, 1997              December 31, 1996
                                -----------------  -----------------  ---------------  -------------   -------------  ------------
                                     Number of        Outstanding        Number of      Outstanding      Number of    Outstanding
Type of Property Security             Loans             Balance            Loans          Balance         Loans         Balance
------------------------------  -----------------  -----------------  ---------------  -------------   -------------  ------------
<S>                             <C>                <C>                <C>             <C>             <C>            <C>
 
1-4 family residential                   1               $ 58                3             $107              4          $  211
5 or more family residential             1                 69                1              129              4             869
Non-residential real estate              1                303                1              265              3             864
                                         -               ----                -             ----             --          ------
                                         3               $430                5             $501             11          $1,944
                                        ==               ====               ==             ====             ==          ====== 
</TABLE>

                                       19
<PAGE>
 
The level of nonperforming assets declined 30.8%, from $818,000 at December 31,
1997 to $566,000 at December 31, 1998.  This was primarily attributable to a
$265,000 decline in restructured loans during 1998.

While the downward trend in nonperforming assets that has developed since 1994
is significant, the Bank continues to hold a large concentration of commercial
real estate loans.  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 downward 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
E 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, 1998, the Bank had identified approximately $173,000 of
currently performing but potential problem loans, representing just 0.1% of
total assets, ranging in size from $9,000 to $60,000.  This compares to $3.7
million of potential problem loans at December 31, 1997, a 95.3% decrease.
While encouraging, the current level of potential problem loans is 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, 1998:
 
                                 Number of         Balance
Type of Security Property    Outstanding Loans  (in thousands)
---------------------------  -----------------  --------------
 
Single family                        1               $ 53
Other                                5                120
                                    --               ----
                                     6               $173
                                    ==               ====

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, 1998, 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.  At December 31, 1998, REO totaled $15,000,
consisting of a single mobile home.  This represents a $50,000 decline as
compared to the December 31, 1997 level of $65,000.

Liquidity

Bank
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.

                                       20
<PAGE>
 
At December 31, 1998 and 1997, unfunded loan commitments equaled $17.5 million
and $14.2 million, respectively. Loan commitments include unfunded portions of
real estate, construction and other loans and unused lines of credit, including
commercial loans and home equity loans.  Loan commitments are subject to the
same credit policies as loans and generally have expiration dates and
termination clauses.  Unused home equity line of credit commitments totaled $7.4
million at December 31, 1998 (as compared to home equity outstanding balances of
$5.8 million), representing 55.9% of total home equity loan commitments.

The Bank has the capability of borrowing additional funds from the FHLB of
Boston.  The Bank is also approved by the Federal Reserve Bank of Boston to
obtain liquidity from its "Discount Window"; however, no funds have been
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.

There is an increasingly widely publicized risk that the public's concerns with
regard to the Year 2000 issue may result in large amounts of cash being
withdrawn from the banking system prior to December 31, 1999.  Though management
intends to take reasonable and prudent steps to ensure the Bank is prepared for
this potentially extraordinary demand for cash, in particular because of its
one-of-a-kind nature, there can be no assurances that this issue will not create
material problems for the Bank.

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 $2.6 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 J and Q to the Company's Consolidated Financial
Statements.

On December 22, 1998, September 23, 1998 and March 25, 1998, the Bank paid the
Company cash dividends of $680,000, $500,000 and $500,000, respectively.  At
December 31, 1998, the Company had $831,000 in cash and cash equivalents.

Capital
Bank

The table below sets forth the regulatory capital requirements and capital
ratios for the Bank at December 31, 1998 and 1997:
<TABLE>
<CAPTION>
 
(dollars in thousands)                                    1998       1997
------------------------------------------------------  ---------  ---------
<S>                                                     <C>        <C>
 
Tier 1 capital (Leverage) to total assets /(1)/ratio
------------------------------------------------------
 Qualifying capital                                     $ 14,709   $ 13,877
 Actual %                                                   7.90%      9.63%
 Minimum requirement for capital adequacy %                 4.00%      4.00%
 Average assets for fourth quarter                      $186,077   $144,138
 
Tier 1 capital to risk-weighted assets
------------------------------------------------------
 Qualifying capital                                     $ 14,709   $ 13,877
 Actual %                                                  14.33%     15.03%
 Minimum requirement for capital adequacy %                 4.00%      4.00%
 
Total capital to risk-weighted assets
             (Tier 1 and Tier 2)
------------------------------------------------------
 Qualifying capital                                     $ 16,010   $ 15,050
 Actual %                                                  15.60%     16.30%
 Minimum requirement for capital adequacy %                 8.00%      8.00%
 Risk-weighted assets                                   $102,612   $ 92,335
</TABLE>
/(1)/ Calculated on an average quarterly basis.
See Note B to the Company's Consolidated Financial Statements for certain
capital restrictions.

                                       21
<PAGE>
 
Company
The table below sets forth the regulatory capital requirements and capital
ratios for the Company at December 31, 1998 and 1997:
<TABLE>
<CAPTION>
 
(dollars in thousands)                                     1998         1997
------------------------------------------------------  -----------  -----------
<S>                                                     <C>          <C>
Tier 1 capital (Leverage) to total assets /(1)/ratio
------------------------------------------------------
 Qualifying capital                                     $   13,453   $   11,106
 Actual %                                                     7.20%        7.71%
 Minimum requirement for capital adequacy %              4.00-5.00%   4.00-5.00%
 Average assets for fourth quarter                      $  186,757   $  144,004

Tier 1 capital to risk-weighted assets
------------------------------------------------------
 Qualifying capital                                     $   13,453   $   11,106
 Actual %                                                    13.05%       12.02%
 Minimum requirement for capital adequacy %                   4.00%        4.00%

Total capital to risk-weighted assets
             (Tier 1 and Tier 2)
------------------------------------------------------
 Qualifying capital                                     $   14,759   $   12,279
 Actual %                                                    14.32%       13.29%
 Minimum requirement for capital adequacy %                   8.00%        8.00%
 Risk-weighted assets                                   $  103,071   $   92,378
</TABLE>
/(1)/ Calculated on an average quarterly basis.

The Company suspended the payment of cash dividends to its stockholders in the
fourth quarter of 1989 and has not paid any cash dividends to its stockholders
since that time.  See Note J to the Company's Consolidated Financial Statements
for dividend restrictions.

Asset Liability Management and Market Risk

     The Company's actions with regard to interest rate risk, market risk and
asset and liability management are the responsibility of the Asset and Liability
Committee ("ALCO") which is, in part, comprised of members of the Bank's senior
management.  ALCO is responsible for directing asset liability management
("ALM") activities, including the development of specific ALM strategies to
achieve the Bank's objectives, 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 maturity of loans, which tends to increase when
current market loan rates are substantially higher than rates on existing loans
and, conversely, decrease when rates on existing loans are substantially higher
than current market loan rates (due to refinancings of loans at lower rates),
and (iv) the carrying value of investment securities classified as available for
sale and resultant adjustments to stockholders' equity.

     The principal objective of the Company is to maintain an appropriate
balance between income enhancement and the risks associated with maximizing
income through the mismatch of the timing of interest rate changes between
assets and liabilities.  Matching asset and liability maturities and interest
rate changes can reduce interest rate risk; however, net interest income may not
necessarily be enhanced as a result of such a strategy.  The Company seeks to
reduce the volatility of its net interest income by managing the relationship of
interest-rate sensitive assets to interest-rate sensitive liabilities.

     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 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 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.

                                       22
<PAGE>
 
The following table shows the estimated maturity/repricing structure of the
interest sensitive assets and interest sensitive liabilities of the Company at
December 31, 1998.
<TABLE>
<CAPTION>
 
                                                                           Maturing/Repricing
                                          ------------------------------------------------------------------------------------
                                                        After Three   After One   After Three
                                                             Months    Year but     Years but     After
                                                Within   but within      within        within      Five     Non-Rate
(dollars in thousands)                    Three Months     One Year Three Years    Five Years     Years    Sensitive    Total
----------------------------------------  ------------  ----------- -----------   -----------     -----    --------  --------
<S>                                       <C>            <C>         <C>           <C>          <C>       <C>         <C>
 
Interest-Sensitive Assets
Interest earning deposits                     $ 28,118           -             -            -         -           -   $ 28,118
Securities:
  Available for sale/ (1)/                         194           -             -     $  2,033   $44,336    $  1,800     48,363
  Held to maturity                                   -           -             -            -         -           -          -
Mortgage loans held for sale                        83           -             -            -         -           -         83
Loans/ (2)/                                      7,562    $ 43,258      $  5,529       15,833    33,551      (2,692)   103,041
Other assets                                         -           -             -            -         -      11,808     11,808
                                              --------    --------      --------     --------   -------    --------   --------
  Total Interest-Sensitive Assets             $ 35,957    $ 43,258      $  5,529     $ 17,866   $77,887    $ 10,916   $191,413
                                              ========    ========      ========     ========   =======    ========   ========
 
Interest-Sensitive Liabilities
Savings and money market accounts             $ 45,252    $  3,480             -            -         -    $ 36,341   $ 85,073
Certificate of deposit accounts                 16,202      22,219      $ 10,557     $  4,047         -           -     53,025
Other deposits                                       -           -             -            -         -      10,447     10,447
FHLB advances                                    5,000           -         7,545        3,000   $ 7,000           -     22,545
Secured borrowings                                 967           -             -            -         -           -        967
Savings Bank Notes                                   -           -         2,600            -         -           -      2,600
Other liabilities                                    -           -             -            -         -         442        442
Equity                                               -           -             -            -         -      16,314     16,314
                                              --------    --------      --------     --------   -------    --------   --------
  Total Interest-Sensitive Liabilities        $ 67,421    $ 25,699      $ 20,702     $  7,047   $ 7,000    $ 63,544   $191,413
                                              ========    ========      ========     ========   =======    ========   ========
 
Periodic repricing difference
  (Periodic gap)                              $(31,464)   $ 17,559      $(15,173)    $ 10,819   $70,887    $(52,628)
Cumulative repricing difference
  (Cumulative gap)                            $(31,464)   $(13,905)     $(29,078)    $(18,259)  $52,628
Cumulative gap to total assets                  (16.44)%     (7.26)%      (15.19)%      (9.54)%   27.49%
</TABLE>
/(1)/ FHLB stock is classified as available for sale and included in the non-
      rate sensitive column.  Additionally, included in available for sale
      securities are mortgage backed securities based on contractual maturities.
/(2)/ The allowance for loan losses, deferred origination fees and nonaccrual
      loans are included in the non-rate sensitive column.

At December 31, 1998, the Company's one-year cumulative gap was a negative 7.26%
and within the limits set forth under the Company's ALM Policy.

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 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
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.

                                       23
<PAGE>
 
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.
<TABLE> 
<CAPTION> 
                           Change in Rates(a)    % Change in net Interest Income
--------------------------------------------------------------------------------
<S>                                              <C> 
                           +200 basis points                               -7.3%
                           -200 basis points                               -1.5%
</TABLE> 

(a) 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, 1998 the average interest rates paid on NOWs,
    Savings and Money Market accounts were 1.85%, 2.58% and 2.63%, respectively.
    
Based on the information and assumptions in effect at December 31, 1998,
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 8%
(and is within the limits of the Company's policy parameters).

Regardless of the methodologies utilized to attempt to predict the impact that
changes in interest rates could have on the behavior of the Bank's assets and
liabilities, and ultimately earnings, there is no way of estimating this with
any degree of certainty.  As discussed above the assumptions utilized are very
subjective and economic conditions and market forces, such as competition and
market product offerings are in constant state of change.

Impact of Inflation and Changing Prices

The Company's financial statements have been prepared in terms of historical
dollars, without considering changes in the relative purchasing power of money
over time due to inflation.  Unlike most industrial companies, virtually all of
the assets and liabilities of a financial institution are monetary in nature.
As a result, interest rates have a more significant impact on a financial
institution's performance than the effect of general levels of inflation.
Interest rates do not necessarily move in the same direction or in the same
magnitude as the prices of goods and services.

Inflation can directly affect the value of loan collateral, in particular real
estate.  Sharp decreases in real estate prices, as discussed previously, have in
the past resulted in significant loan losses and losses on real estate acquired.
Inflation, or deflation, could significantly affect the Company's earnings in
future periods.

Year 2000 Issue

The Company is aware of potential problems that may be experienced with
computerized and other electronic systems at the turn of the millennium,
beginning January 1, 2000.  These problems exist because many systems rely on
two digit fields instead of four digit fields to store the year of date
sensitive information. An example of the type of problem that may arise is that
some systems will interpret the 00 in its year field to mean 1900 instead of
2000.  This problem will not only affect software programs but hardware as well,
and could result in a system failure or miscalculations causing disruptions of
operations including, among other things, a temporary inability to process
transactions or engage in normal business activities.

The Company's State of Readiness.  The Federal Financial Institutions
Examination Council (FFIEC) has issued several statements providing guidance on
the Year 2000 issue.  The statements address key phases of the Year 2000 project
management process, outline specific responsibilities of senior management and
the Board of Directors to address these risks, assist financial institutions in
developing prudent risk controls to manage risks related to the Year 2000 and
outline the due diligence process that financial institutions should adopt to
manage these risks.  In response, the Company has formed a Year 2000 Action
Committee which is comprised of various members of the Bank's senior and middle
management.  The Committee has developed a detailed plan for mitigating Year
2000 risk as it relates to the Bank's Information Technology systems and Non-
Information Technology systems.  In accordance with FFIEC guidelines, the Year
2000 project management process has five phases, which include Awareness,
Assessment, Renovation, Validation and Implementation of all systems.

Awareness Phase.  During the Awareness phase, the Company is required to (i)
define the Year 2000 problem as it relates to specific circumstances and gain
executive support for the resources necessary to perform compliance work, (ii)
establish a Year 2000 Committee, and (iii) develop an overall strategy that
encompasses in-house systems, service bureaus for systems that are outsourced,
vendors, auditors, customers and suppliers (including correspondents).

                                       24
<PAGE>
 
The Company has completed activities related to the Awareness Phase.  As stated
previously, the Company has formed a Year 2000 Committee which has developed and
implemented a strategy to minimize the impact of Year 2000 technology problems.
The Committee provides regular updates to the Company's Board of Directors and
Executive management.

Assessment Phase.  As part of the Assessment phase, the Company is required to
(i) assess the size and complexity of issues related to the Year 2000 issue,
(ii) detail the magnitude of effort and resources necessary to address Year 2000
issues, (iii) identify all hardware, software, networks, automated teller
machines, other various processing platforms, and customer and vendor
dependencies affected by the Year 2000 date change, and (iv) develop a
contingency plan for the items addressed in the action plan.   The assessment
phase must go beyond information systems and include facilities and
environmental systems that are dependent on embedded microchips, such as
security systems, elevators, and vaults.

The Company has already completed the Assessment phase, which included assessing
all Information Technology (i.e. computer software, hardware, third party
vendors and other electronic devices) and non-Information Technology systems
(i.e. vaults, security and environmental systems) for compliance with the year
2000.  The Committee prioritized each item to determine if non-compliance with
the Year 2000 date change would adversely impact customers, shareholders or
employees.  During this assessment, 19% of the Bank's IT system applications and
services met this criteria and were classified as mission critical.

Renovation Phase.  As part of the Renovation Phase, the Company is required to
prioritize work based on information gathered during the Assessment phase, and
includes code enhancements, hardware and software upgrades, system replacements,
vendor certification and other associated changes.  For institutions relying on
outside services or third-party software providers, ongoing discussions and
monitoring of vendor progress is necessary.

The Company has already completed a significant portion of activities related to
the renovation phase of mission critical applications (approximately 97%), with
the remainder targeted for completion by June of 1999.  All non-mission critical
applications are anticipated to be completed by September 1999.  A majority of
the Company's systems are supplied by third-party vendors and are being
renovated by the vendors.  The Company has been provided with a Year 2000 ready
release by its primary data processing vendor.  This release has already been
installed and has been validated by the Year 2000 Action Committee for future
date processing accuracy.

Validation Phase.  The Validation Phase includes actual testing of incremental
changes to hardware and software components.  In addition to testing upgraded
components, connections with other systems must be verified, and all changes
should be accepted by internal and external users.  The Company should also
establish controls to assure the effective and timely completion of all hardware
and software testing prior to final implementation.

The Company's Year 2000 Action Committee is responsible for testing the primary
data processing systems and all mission critical server-based applications for
Year 2000 readiness.  Validation and testing of updates supplied by the
Company's third-party vendors is almost complete.  Primary functional
transaction types such as deposits, withdrawals, payments, maturities, interest
postings, inquiries on deposit and loan accounts, and other typical business
processes, continue to be tested for key date validity and accuracy.  Key dates
include dates before, during and after the century change and the century leap
year.  The Company has completed validation testing on approximately 95% of
mission critical applications and anticipates that all non-mission critical
applications will be completed by September 1999.

Implementation Phase.  During the Implementation Phase, systems should be
certified as Year 2000 compliant and be accepted by the business users.  For any
system failing certification, the business effect must be assessed clearly and
the Company's contingency plans should be implemented.  In addition, this phase
must ensure that any new systems or subsequent changes to verified systems are
compliant with Year 2000 requirements.

A significant number of the Company's mission critical applications are supplied
by third party vendors.  The vendor is responsible for making revisions to its
software, performing testing and providing the updates to the Company. Software
updates have been provided and installed by a majority of the Company's third-
party vendors and the Company is currently in the process of validating the
software for Year 2000 readiness on its systems.  At this time, the
implementation phase has not yet been completed, however the Company expects to
have completed the implementation phase for all mission critical applications by
June of 1999 and all non-mission critical applications by September of 1999.

                                       25
<PAGE>
 
Costs Related to the Year 2000 Issue

Management does not expect the costs associated with the Year 2000 issues to
have a material effect on the Company's financial statements.  To date, the
Company has incurred approximately $21,000 in external costs for its Year 2000
program.  The Company currently estimates that it will incur additional expenses
between now and December 31, 1999 to complete its Year 2000 compliance work,
however, these costs are not anticipated to exceed $50,000 for both mission
critical and non-critical systems.  These costs, which may vary from the
estimates, have been, and will continue to be, expensed as incurred.

Risks Related to the Year 2000 Issue

Though the Company is diligently working to ensure that there is no disruption
in its operations due to Year 2000 systems problems, and believes it will be
successful in this regard, there can be no guarantee that all of the systems
critical to the operational performance of the Bank will be Year 2000 compliant
and fully functional at the turn of the millennium. While management is working
diligently to protect the Company against such an occurrence, it is possible
that a vendor upon whom the Bank is reliant could, despite possible assurances
to the contrary, ultimately fail to provide Year 2000 compliant services to the
Company, or said services could prove incompatible with the Company's systems. A
significant systems failure could have a material adverse impact on the
financial condition of the Company.

Contingency Plan

A Year 2000 contingency plan is being drafted and incorporated into the
Company's overall contingency plan to address potential worst case scenarios
relating to the Year 2000 issue.  The Company is developing alternative
solutions for business resumption and approaches to minimize the impact of
different scenarios.  Possible alternatives to address these scenarios include
increasing cash reserves, designating existing branch locations as emergency
regional offices, (with alternative power sources and alternative communication
methods), increasing customer and community awareness, and having staff
available on site during the turn of the millennium.

MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

As of December 31, 1998, the Company had approximately 1,444 holders of record
and 1,360,527 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. 
 
                        High      Low
                       -------  -------
1997
     First Quarter     $10.125  $  7.25
     Second Quarter      10.00    8.875
     Third Quarter      13.188     9.25
     Fourth Quarter      15.75    12.50
 
1998
     First Quarter     $ 15.50  $13.625
     Second Quarter     14.625    12.75
     Third Quarter       13.00    10.00
     Fourth Quarter     10.625    8.375
 

No dividends were declared by the Company during the years 1993 through 1998.
There are certain restrictions on the ability of the Company to pay dividends
and on the ability of the Bank to transfer funds to the Company in the form of
cash dividends.  See Note J to the Company's Consolidated Financial Statements.

                                       26
<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,
1998 and 1997, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 1998, in conformity with
generally accepted accounting principles.  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 generally accepted auditing
standards 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 17, 1999

                                       27
<PAGE>
 
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
First Coastal Corporation and Subsidiary
                                                                                         December 31,
                                                                                     --------------------
(in thousands, except share and per share amounts)                                      1998      1997
-----------------------------------------------------------------------------------  ---------  ---------
<S>                                                                                  <C>        <C>
 
ASSETS
Noninterest earning deposits and cash - Note C                                       $  4,509   $  3,615
Interest earning deposits                                                              28,118      3,939
                                                                                     --------   --------
 Cash and Cash Equivalents                                                             32,627      7,554
 
Investment securities - Note D:
 Available for sale (at market value)(amortized cost: 1998 $47,037; 1997 $15,778)      47,048     15,887
 Held to maturity (at amortized cost) (fair value: 1997 $6,973)                             -      7,000
                                                                                     --------   --------
                                                                                       47,048     22,887
 
Federal Home Loan Bank stock-at cost                                                    1,315      1,315
Loans held for sale - Note A                                                               83      3,565
 
Loans - Note E                                                                        105,873    104,304
   Deferred loan fees, net                                                                (97)      (139)
   Allowance for loan losses - Note F                                                  (2,735)    (2,665)
                                                                                     --------   --------
                                                                                      103,041    101,500
 
Premises and equipment - Note G                                                         2,554      3,554
Accrued income receivable                                                               1,132        970
Real estate owned and repossessions                                                        15         65
Deferred tax asset - Note L                                                             3,354      4,095
Other assets                                                                              244        895
                                                                                     --------   --------
  TOTAL ASSETS                                                                       $191,413   $146,400
                                                                                     ========   ========
 
LIABILITIES AND STOCKHOLDERS' EQUITY
 
LIABILITIES
Deposits - Note H                                                                    $148,545   $114,991
Advances from Federal Home Loan Bank - Note I                                          22,545     13,294
Savings Bank Notes - Note I                                                             2,600      3,000
Secured borrowings                                                                        967          -
Accrued expenses and other liabilities                                                    442        307
                                                                                     --------   --------
  TOTAL LIABILITIES                                                                   175,099    131,592
 
Commitment and Contigencies - Note M
 
STOCKHOLDERS' EQUITY - Note J
Preferred stock, $1 par value; Authorized 1,000,000 shares; none outstanding
Common Stock, $1 par value: Authorized 6,700,000 shares;
 issued and outstanding as of 1998 and 1997 -
1,360,527 and 1,359,194 shares, respectively                                            1,361      1,359
Paid-in capital                                                                        31,751     31,746
Retained earnings (deficit)                                                           (16,805)   (18,369)
Accumulated other comprehensive income                                                      7         72
                                                                                     --------   --------
TOTAL STOCKHOLDERS' EQUITY                                                             16,314     14,808
                                                                                     --------   --------
  TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                         $191,413   $146,400
                                                                                     ========   ========
</TABLE>
See notes to consolidated financial statements.

                                       28
<PAGE>
 
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS
First Coastal Corporation and Subsidiary
                                                                     Year Ended December 31,
                                                                --------------------------------- 
(in thousands, except share and per share amounts)                 1998        1997       1996
--------------------------------------------------------------  ----------  ----------  ---------
<S>                                                             <C>         <C>         <C>
 
Interest and Dividend Income
 Interest and fees on loans                                     $    9,919  $    9,651  $  9,226
 Interest and dividends on investment securities:
  Investment interest income                                         2,042       1,674     1,414
  Dividends                                                             84          94       179
 Interest earning deposits                                           1,014         475       512
                                                                ----------  ----------  --------
Total Interest and Dividend Income                                  13,059      11,894    11,331
 
Interest Expense
Deposits - Note H                                                    5,308       4,459     4,724
Borrowings:
  Advances from Federal Home Loan Bank                                 900         940       404
  Savings Bank Notes                                                   332         477       190
  FDIC Note                                                              -           -       335
  Secured borrowings                                                    27           -         -
                                                                ----------  ----------  --------
Total Interest Expense                                               6,567       5,876     5,653
                                                                ----------  ----------  --------
Net Interest Income Before Provision for Loan Losses                 6,492       6,018     5,678
 
Provision for loan losses - Note F                                       -           -         -
                                                                ----------  ----------  --------
Net Interest Income After Provision for Loan Losses                  6,492       6,018     5,678
 
Noninterest Income
Service charges on deposit accounts                                    508         466       362
Other service charges and fees                                          34          76        84
Gain on investment securities transactions                             104         271        38
Gain on sales of mortgage loans                                        111          99         7
Gain on sale of branch                                                   -           -       366
Gain on sale of real estate                                            539           -         -
Other                                                                   85          78       133
                                                                ----------  ----------  --------
                                                                     1,381         990       990
                                                                ----------  ----------  --------
Operating Expenses
Salaries and employee benefits - Note K                              2,632       2,367     2,142
Occupancy                                                              536         446       428
Net cost of operation of real estate owned and repossessions             7          67        81
Other                                                                2,275       2,187     2,491
                                                                ----------  ----------  --------
                                                                     5,450       5,067     5,142
                                                                ----------  ----------  --------
 
Income Before Income Taxes                                           2,423       1,941     1,526
Income tax expense (benefit) - Note L                                  859         679    (4,859)
                                                                ----------  ----------  --------
NET INCOME                                                      $    1,564  $    1,262  $  6,385
                                                                ==========  ==========  ========
 
PER SHARE AMOUNTS - Note P
Basic earnings per share:
  Weighted average shares outstanding                            1,359,976   1,358,730   933,578
  Net Income per share                                          $     1.15  $      .93  $   6.84
                                                                ==========  ==========  ========
 
Diluted earnings per share:
  Weighted average shares outstanding                            1,379,124   1,391,272   940,480
  Net Income per share                                          $     1.13  $      .91  $   6.79
                                                                ==========  ==========  ========
</TABLE>
See notes to consolidated financial statements

                                       29
<PAGE>
 
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
First Coastal Corporation and Subsidiary
<TABLE>
<CAPTION>
 
                                                                                  Accumulated
                                                                     Retained           Other
                                             Common   Paid-In        Earnings   Comprehensive
(in thousands, except share amounts)          Stock   Capital        (Deficit)         Income    Total
------------------------------------------  -------  --------  --------------   -------------    -------  
<S>                                         <C>      <C>       <C>             <C>              <C>
 
Balances at December 31, 1995                $  600   $29,375       $(26,016)          $   38    $ 3,997
  Shares outstanding for 1996: 1,357,861
  1996 net income                                                      6,385                       6,385
  Increase in net unrealized loss on
     available for sale securities                                                       (117)      (117)
  Isssuance of restricted stock                   8        30                                         38
  Issuance of common stock                      750     2,335              -                -      3,085
                                            -------  --------  --------------   -------------    -------  
Balances at December 31, 1996                 1,358    31,740        (19,631)             (79)    13,388
  Shares outstanding for 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 for 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
                                            =======  ========  =============    =============    =======
 </TABLE>

See notes to consolidated financial statements.

                                       30
<PAGE>
 
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
First Coastal Corporation and Subsidiary
                                                                                                Year Ended December 31,
                                                                                            -------------------------------
(in thousands)                                                                                1998       1997       1996
------------------------------------------------------------------------------------------  ---------  ---------  ---------
<S>                                                                                         <C>        <C>        <C>
Operating Activities
Net income                                                                                  $  1,564   $  1,262   $  6,385
Adjustments to reconcile net income to net cash provided by operating activities:
 (Gains) and losses on REO                                                                        (7)         2         11
 Gain on sale of premises and equipment                                                         (539)         -          -
 Depreciation and amortization                                                                   400        319        270
 Amortization of investment security premium (discounts)                                         117         63        (27)
 Realized investment securities gains                                                           (104)      (271)       (38)
 Realized gains on assets held for sale                                                         (111)       (99)        (7)
 Loans originated and acquired for resale                                                    (10,726)    (7,366)    (6,147)
 Sales of loans originated and acquired for resale                                            14,319      5,390      4,945
 Decrease (increase) in interest receivable                                                     (162)       109        (75)
 Increase (decrease) in interest payable                                                          31          2       (466)
 Net change in other assets                                                                    1,449      1,371     (3,499)
 Net change in other liabilities                                                                 104         44        (64)
                                                                                            --------   --------   --------
Net cash provided by operating activities                                                      6,335        826      1,288
 
Investing Activities
 Decrease in federal funds sold                                                                    -          -     10,000
 Maturities of securities held to maturity                                                    10,000      3,000      7,000
 Maturities of securities available for sale                                                       -      1,000      4,000
 Sales of securities available for sale                                                        6,927     15,831      3,506
 Purchases of investment securities available for sale                                       (37,973)   (15,469)   (16,535)
 Purchases of investment securities held to maturity                                          (3,193)      (198)    (5,003)
 Net change in loans                                                                          (1,541)    (5,651)     2,592
 Net sales (purchases) of premises and equipment                                               1,139       (445)      (625)
                                                                                            --------   --------   --------
Net cash provided (used) by investing activities                                             (24,641)    (1,932)     4,935
 
Financing Activities
 Net change in deposits                                                                       33,554        (94)   (10,580)
 Net change in secured borrowings                                                                967          -          -
 Proceeds from borrowings                                                                     14,000      2,000     13,000
 Payments on borrowings                                                                       (5,149)    (4,706)    (9,000)
 Proceeds from sale of common stock                                                                -          -      3,085
 Proceeds from exercise of common stock options                                                    7          7          -
 Finance cost associated with Savings Bank Notes                                                   -          -       (116)
                                                                                            --------   --------   --------
Net cash provided (used) by financing activities                                              43,379     (2,793)    (3,611)
                                                                                            --------   --------   --------
 
Increase (decrease) in cash and cash equivalents                                              25,073     (3,899)     2,612
Cash and cash equivalents at beginning of period                                               7,554     11,453      8,841
                                                                                            --------   --------   --------
Cash and cash equivalents (interest and noninterest bearing) at end of period               $ 32,627   $  7,554   $ 11,453
                                                                                            ========   ========   ========
 
Supplemental Disclosures of Information
 Interest paid on deposits and borrowings                                                   $  6,535   $  5,874   $  6,107
 Income tax paid (refund)                                                                         85          -        (48)
 
Noncash Investing and Financing Activities
 Change in unrealized holding gains (losses) on investment securities available for sale    $    (65)  $    151   $   (117)
 Transfer of loans to real estate owned and repossessions                                        153         21        572
 Issuance of restricted stock                                                                      -          -         38
</TABLE>
See notes to consolidated financial statements.

                                       31
<PAGE>
 
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
First Coastal Corporation and Subsidiary
<TABLE>
<CAPTION>
  
                                                                For the Year Ended December 31,
                                                                ------------------------------- 
(dollars in thousands)                                              1998     1997     1996
--------------------------------------------------------------     -------  -------  -------
<S>                                                                <C>      <C>      <C>
 
Net income                                                         $1,564   $1,262   $6,385
 
Other comprehensive income:
 Unrealized holding gains arising during the period (net of
   income taxes: 1998 - $1; 1997 - $37; 1996 - $0)                      4      330      (92)
 Reclassification adjustment for realized gains included in net
   income (net of income taxes: 1998 - $(35); 1997 - $(92);
   $1996 - $(13))                                                     (69)    (179)     (25)
                                                                   ------   ------   ------
                                                                      (65)     151     (117)
                                                                   ------   ------   ------
     Comprehensive income                                          $1,499   $1,413   $6,268
                                                                   ======   ======   ======
</TABLE>

See notes to consolidated financial statements.

                                       32
<PAGE>
 
Notes to Consolidated Financial Statements
First Coastal Corporation and Subsidiary
December 31, 1998

Note A.  ACCOUNTING POLICIES

Business

First Coastal Corporation (the "Company") is a bank holding company whose sole
subsidiary is Coastal Bank, a Maine chartered, stock savings 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 small 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
intercompany transactions and balances have been eliminated in consolidation.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.

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
and results of operations.

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 will revise 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 do not have a material effect on the Company's financial condition
and results of operations.

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, 2000 and
are not expected to have a material effect on the Company's financial conditions
and results of operations.

                                       33
<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.
Securities that  the Company has the ability and positive intent to hold to
maturity are classified as held-to-maturity and carried at cost adjusted for
amortization of bond premiums and accretion of bond discounts.  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.  Realized gains and
losses on sales of mortgage loans are reported in earnings when the proceeds are
received from investors.

Loans

Loans are reported at their principal outstanding balance net of charge-offs,
unearned income and deferred loan origination fees and costs.  Interest is
generally recognized when income is earned using the accrual method.  Loan
origination and commitment fees and certain direct origination costs are
deferred and recognized over the life of the related loan as an adjustment of
yield, or taken into income when the related loan is sold.

The accrual of interest on loans is generally discontinued when principal or
interest is past due by ninety days or more, or earlier when, in the opinion of
management, full collection of principal or interest is unlikely, unless such
loans are well collateralized and in the process of collection.  When a loan is
placed on nonaccrual status, unpaid interest credited to income in the current
year is reversed and interest accrued in prior years is charged to the
Allowance. Income on such loans is then recognized only to the extent that cash
is received and future collection of principal is probable.

Loans are restored to accrual status when principal and interest payments are
brought current and future payments are reasonably assured, following a
sustained period of repayment performance by the borrower in accordance with the
loan's contractual terms.

The Company follows SFAS No. 114, Accounting by Creditors for Impairment of a
Loan.  Under this standard, a loan is considered impaired, based on current
information and events, if it is probable that the Company will be unable to
collect the scheduled payments of principal or interest when due according to
the contractual terms of the loan agreement.  Management identifies impaired
loans on a loan-by-loan basis.  Though the measurement of impaired loans is
generally based on the present value of expected future cash flows discounted at
the historical effective interest rate, all of the Company's impaired loans were
collateral-dependent, which are measured for impairment based on the fair value
of the collateral.

Troubled debt restructurings are renegotiated loans for which concessions, such
as the reduction of interest rates, deferral of interest or principal payments,
or partial forgiveness of principal and interest, have been granted, generally
due to a deterioration in a borrower's financial condition.  Interest to be paid
on a deferred or contingent basis is reported in earnings only as collected.

Effective January 1, 1997, the Company adopted SFAS 125, Accounting for
Transfers of Financial Assets and Liabilities.  Under the financial-components
approach of SFAS 125, after a transfer of financial assets, an entity recognizes
all financial and servicing assets it controls and liabilities it has incurred
and derecognizes all financial and servicing assets it no longer controls and
liabilities that have been extinguished.  If a transfer does not meet the
criteria for a sale, the transfer is accounted for as a secured borrowing with a
pledge of collateral.  The adoption of SFAS 125 did not have a material impact
on the Company's financial statements.

                                       34
<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 of Operations.

Premises and Equipment

Bank premises, furniture and equipment are carried at cost, less accumulated
depreciation and amortization computed using the straight-line method over the
estimated useful lives of the assets.  Leasehold improvements are amortized on
the straight-line basis over the shorter of the estimated useful lives of the
improvements or the term of the related leases.

Income Taxes

Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases.

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 asset valuations, amounts of
required loss allowances and operating restrictions resulting from the
regulators' judgments based on information available to them at the time of
their examination.  For further information, see Note B.

Computation of Earnings per Share

In February 1997, FASB issued SFAS No. 128, Earnings Per Share.  SFAS No. 128
provides reporting standards for basic and diluted earnings per share and is
effective for financial statement periods ending after December 15, 1997. Basic
earnings per share is computed by dividing income available to common
stockholders by the weighted-average number of common shares outstanding for the
period.  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.  All prior period earnings per share
data has been restated to conform to the provisions of this statement.

                                       35
<PAGE>
 
Note B. REGULATORY MATTERS

Satisfaction of Cross Guaranty Settlement Obligation to FDIC; Recapitalization
and Issuance of Common Stock

On July 24, 1996, the Company completed its recapitalization plan, whereby the
Company repaid in full its promissory note obligation (the "FDIC Note") to the
FDIC incurred as a result of the settlement of the cross guaranty claim against
the Bank.  The cross guaranty claim was the result of the September 1991 failure
of Suffield Bank.

Bank Regulatory Requirements

The Bank is subject to various regulatory capital requirements administered by
federal and state banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on the
Bank's consolidated financial statements.  Under capital adequacy guidelines
issued by the Federal Reserve Board and the regulatory framework for prompt
corrective action administered by the FDIC, the Bank must meet specific capital
requirements that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance sheet items.  The Bank's capital amounts
and classifications are also subject to qualitative judgments by the regulators
about components, risk weightings and other factors.

Quantitative measures established by regulation to ensure capital compliance
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of Tier 1 capital (leverage) to total assets, Tier 1 capital to risk-
weighted assets, and Total capital to risk-weighted assets.  Management believes
that, as of December 31, 1998, the Bank meets all capital adequacy requirements
to which it is subject.

As of December, 1998, the most recent notification from the FDIC categorized the
Bank as well capitalized under the regulatory framework for prompt corrective
action.  There are no conditions or events since that notification that
management believes has changed the Bank's category.

The tables below set forth the actual capital ratios and minimum regulatory
requirements for capital adequacy and under prompt corrective action for the
Bank at December 31, 1998 and 1997:
<TABLE>
<CAPTION>     
                                                                                                Minimum
                                                                                      Requirement to be
                                                                            Minimum    well capitalized
                                                                    Requirement for        under Prompt
1998                                                      Actual   Capital Adequacy   Corrective 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
</TABLE>
/(1)/ Calculated on an average quarterly basis

<TABLE>
<CAPTION>     
                                                                                                Minimum
                                                                                      Requirement to be
                                                                            Minimum    well capitalized
                                                                    Requirement for        under Prompt
1998                                                      Actual   Capital Adequacy   Corrective Action
-------------------------------------------------------  -------  -----------------  ------------------
<S>                                                      <C>      <C>                <C>
 
Tier 1 capital (Leverage) to total assets /(1)/ ratio      9.63%              4.00%               5.00%
 
Tier 1 capital to risk-weighted assets                    15.03               4.00                6.00
 
Total capital to risk-weighted assets
  (Tier 1 and Tier 2)                                     16.30               8.00               10.00
</TABLE>
/(1)/ Calculated on an average quarterly basis

                                       36
<PAGE>
 
Note C. NONINTEREST EARNING DEPOSITS AND CASH

Noninterest bearing deposits and cash balances at December 31, 1998 are subject
to withdrawal and usage restrictions of $100,000 to be maintained at the Federal
Reserve Bank of Boston to meet the Bank's reserve requirements.

Note D. INVESTMENT SECURITIES

The following table sets forth the amortized cost, fair market value and gross
unrealized gains and losses of investment securities for each major security
type at December 31, 1998 and 1997:
<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
                                          =======        ====       =====   ======= 
<CAPTION>  
                                                      December 31, 1997
                                        -------------------------------------------- 
                                                        Gross        Gross     Fair
                                        Amortized  Unrealized   Unrealized   Market
(in thousands)                               Cost       Gains       Losses    Value
-------------------------------------   ---------  ----------  -----------  -------

Available for Sale:
 Mortgage backed securities               $15,689        $112       $  (3)  $15,798
 Other                                         89           -           -        89
                                          -------        ----       -----   -------
                                          $15,778        $112       $  (3)  $15,887
                                          =======        ====       =====   =======
 
Held to Maturity:
 U.S. government obligations              $   200           -           -   $   200
 U.S. government agency callable notes      6,800        $  1       $ (28)    6,773
                                          -------        ----       -----   -------
                                          $ 7,000        $  1       $ (28)  $ 6,973
                                          =======        ====       =====   ======= 
</TABLE>

The following is a summary of gross realized gains and losses on investment
securities sold for 1998, 1997 and 1996. 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,
                                -----------------------------------------------
                                     1998            1997           1996
                                Gross Realized  Gross Realized  Gross Realized
                                --------------  --------------  ---------------
(in thousands)                  Gains   Losses  Gains   Losses  Gains   Losses
------------------------------  ------  ------  ------  ------  ------  -------
<S>                             <C>     <C>     <C>     <C>     <C>     <C>
Sales of:
 U.S. government obligations         -       -   $  62       -     $17       -
 Mortgage-backed securities          -       -      39       -       -       -
 Equity securities                $104       -     170       -      24     $(3)
                                ------  ------   -----  ------     ---  ------
                                  $104       -   $ 271       -     $41     $(3)
                                ======  ======   =====  ======     ===  ======
</TABLE>

                                       37
<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, 1998:
 
                              Available for Sale Securities
                              ----------------------------- 
                                  Amortized
(in thousands)                         Cost     Fair Value
-------------------------         ---------     ----------
Due in one year or less             $   194        $   194
Due from 1 - 5 years                  2,030          2,033
Due from 5 - 10 years                10,931         10,876
Due after ten years                  33,397         33,460
                                    -------        -------
                                    $46,552        $46,563
                                    =======        =======

At December 31, 1998, the Company's securities pledged as collateral for public
and private deposits totaled $6.3 million.

Note E. LOANS

The composition of the loan portfolio was as follows:

                                      December 31,
                                   ------------------
(in thousands)                       1998      1997
---------------------------------  --------  --------
 
Real estate mortgage loans:
 Residential                       $ 32,555  $ 33,251
 Commercial                          52,747    48,705
Real estate construction loans        1,384     1,955
Commercial and industrial loans       5,872     5,166
Consumer and other loans             13,315    15,227
                                   --------  --------
                                   $105,873  $104,304
                                   ========  ========

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, 1998, 1997 and 1996 of
$262,000, $195,000 and $152,000, respectively.

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.

At December 31, 1998 and 1997, the Bank had binding commitments for the sale of
mortgage loans held for sale totaling $83,000 and $2.0 million, respectively.

Included in loans are $404,000 in related party loans to directors which were
made in the ordinary course of business on substantially the same terms,
including interest rates and collateral, as those prevailing at the time for
comparable transactions with other persons.  The loans are current and being
paid in accordance with the terms of the loan agreement.

Impaired Loans

At December 31, 1998, the recorded investment in loans for which impairment has
been recognized in accordance with SFAS No. 114 totaled $439,000, as compared to
$717,000 at December 31, 1997.  The corresponding portion of the Allowance
allocated against the total recorded investment in loans ("Allocated Reserves")
was $55,000 as of December 31, 1998 and $91,000 as of December 31, 1997.  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. At December 31, 1997, an amount equal to $652,000 of the
$717,000 total impaired loans was classified as nonaccrual or troubled debt
restructures and the remaining $65,000 was classified as potential problem
loans.  The income recorded on a cash basis relating to impaired loans equaled
$22,000 and $21,000 at December 31, 1998 and 1997, respectively.  The average
balance of outstanding impaired loans was $414,000 and $2.3 million for 1998 and
1997, respectively, and an effective yield of 7.07% and 3.92%, respectively.
All of the impaired loans were collateralized by real estate at December 31,
1998 and accounted for by the lower of the fair value of the collateral (net of
the $55,000 Allocated Reserves) or amortized loan value.

                                       38
<PAGE>
 
Non-Performing Assets

The table below sets forth information with respect to nonperforming assets:
 
                                               December 31,
                                           --------------------
(in thousands)                             1998   1997    1996
-----------------------------------------  -----  -----  ------
 
Nonaccrual loans                           $ 430  $ 387  $1,944
Accruing loans past due 90 days or more      121    101     201
Restructured loans                             -    265       -
Real estate owned and repossessions           15     65     478
                                           -----  -----  ------
                                           $ 566  $ 818  $2,623
                                           =====  =====  ======

Interest income recognized on nonaccrual and restructured loans totaled $16,000,
$122,000 and $41,000 in 1998, 1997 and 1996, respectively.  Had interest income
on these year-end loans been paid at the contracted rates and due dates, the
Company would have recorded additional interest income in 1998, 1997 and 1996 of
$8,000, $26,000 and $148,000, respectively.

Note F. ALLOWANCE FOR LOAN LOSSES
 
Changes in the Allowance were as follows:

                                      Year Ended December 31,
                                     ------------------------ 
(in thousands)                         1998     1997     1996
---------------------------------    ------   ------   ------
 
Balance at beginning of year         $2,665   $2,666   $2,659
Charge-offs                             (77)    (339)    (289)
Recoveries                              147      338      296
                                     ------   ------   ------
 Net charge-offs                         70       (1)       7
Provision for loan losses                 -        -        -
                                     ------   ------   ------
Balance at end of year               $2,735   $2,665   $2,666
                                     ======   ======   ======

The Allowance represented 2.58% and 2.56% of total loans, and 496.4% and 353.9%
of nonperforming loans at December 31, 1998 and December 31, 1997, respectively.

Note G. PREMISES AND EQUIPMENT

Premises and equipment consisted of the following:

                                        December 31,
                                       --------------
(in thousands)                          1998    1997
-------------------------------------  ------  ------
 
Land                                   $  408  $  408
Buildings and building improvements     1,579   2,708
Leasehold improvements                    282     443
Equipment                               4,061   3,630
                                       ------  ------
                                        6,330   7,189
Less:  Accumulated depreciation
   and amortization                     3,776   3,635
                                       ------  ------
                                       $2,554  $3,554
                                       ======  ======

On September 15, 1998, the Bank sold its headquarters branch/operations center
and recognized a gain of $539,000. As a result of the sale, the Bank entered
into an eighteen month lease arrangement with the buyer until such time as the
Bank can secure a new facility.

                                       39
<PAGE>
 
Note H. DEPOSITS

Deposit balances at year end consisted of the following:

                                                      December 31,
                                           --------------------------------- 
(in thousands)                                   1998                1997
---------------------------------------    -------------          ----------
                                            
Noninterest bearing demand deposits          $    10,447           $  7,599
Interest bearing demand deposits                  21,680             17,117
Savings and escrow deposits                       63,393             34,465
Time deposits                                     53,025             55,810
                                             -----------           --------
                                             $   148,545           $114,991
                                             ===========           ========
 
Included in 1998 and 1997 time deposits are $2,984,000 and $2,328,000, 
respectively, of deposits of $100,000 or more.
 
At December 31, 1998, the maturities and weighted average interest rates of time
deposits were as follows:

                                Balance   Weighted Average
Maturities                (in thousands)     Interest Rate
------------------------    -----------   ----------------   
                         
12 months or less           $    38,421               5.16%
1 - 2 years                       7,627               5.53
2 - 3 years                       2,930               5.51
3 - 4 years                       1,814               5.73
4 -5 years                        2,227               5.55
5 years or more                       6               5.48
                            -----------
  Total                     $    53,025               5.27%
                            ===========
 
The following is a detail of interest expense on deposits for the three years
ending December 31, 1998, 1997 and 1996:
                                                       December 31,
                                             ------------------------------- 
(in thousands)                                  1998        1997        1996
----------------------------------------     -------    --------    --------
                                                                
Interest bearing demand deposits             $   422    $    446    $    318
Savings deposits                               1,993         945       1,079
Other time deposits                            2,743       2,915       3,196
Time deposits of $100,000 or more                150         153         131
                                             -------    --------    --------
                                             $ 5,308    $  4,459    $  4,724
                                             =======    ========    ========
 
Note I. BORROWINGS
 
Advances From Federal Home Loan Bank ("FHLB") of Boston
 
Maturities of advances from the FHLB of Boston outstanding at December 31, 1998
are as follows:
 
                                                                Weighted Average
(in thousands)                                         Rates       Interest Rate
--------------------------------------------     -----------    ----------------
                        
          1999                       $ 1,000           6.03%              6.03%
          2001                         7,545     6.05%-6.25%              6.18%
          2003                         3,000           4.99%              4.99%
          2005                         4,000           5.06%              5.06%
          2008                         7,000     4.99%-5.16%              5.06%
                                     -------
                                     $22,545                              5.47%
                                     =======

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).

                                       40
<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.

The loan agreement between the Company and the Savings Banks with respect to the
$4.0 million loan (the "Savings Bank Loan Agreement") contains certain terms,
restrictions and covenants related to, among other things, dividends, certain
borrowings, minimum capital ratios, capital expenditures and minimum net worth
requirements.

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.

Federal Reserve Bank of Boston

The Bank also has been approved by the Federal Reserve Bank of Boston to obtain
funds from its discount window for the purpose of maintaining the Bank's
liquidity.  No funds have been obtained from this source.

Note J. RESTRICTIONS ON SUBSIDIARY DIVIDENDS, LOANS OR ADVANCES

Payment of dividends by the Company on its stock is subject to various
restrictions.  Among these restrictions is a requirement under Delaware
corporate law that dividends may be paid by the Company out of its surplus or,
in the event there is no surplus, out of its net profits for the fiscal year in
which the dividend is declared and/or the preceding fiscal year.

The principal source of cash for the Company would normally be a dividend from
the Bank; however, certain restrictions also exist regarding the ability of the
Bank to transfer funds to the Company in the form of cash dividends, loans or
advances.  Maine corporate law generally provides that dividends may only be
paid out of unreserved and unrestricted earned surplus or unreserved and
unrestricted net earnings of the current fiscal year and the next preceding
fiscal year taken as a single period.  Maine banking law also imposes certain
restrictions, including the requirement that the Bank establish and maintain
adequate levels of capital as set forth in rules adopted by the Maine Bureau of
Banking.

The Savings Bank Loan Agreement contains certain terms, restrictions and
covenants, including covenants restricting the amount of borrowings that may be
incurred by the Company and the Bank, and restrictions regarding the conditions
under which cash dividends may be paid by the Company.  For further information
see "Note I -- Borrowings --Savings Bank Notes."

On December 22, 1998, September 23, 1998 and March 25, 1998, the Bank paid the
Company cash dividends of $680,000, $500,000, and $500,000, respectively.

Note K. 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.  The Bank incurred expenses relating to
the 401(k) Plan totaling $98,000 for the year ended December 31, 1998.

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.

                                       41
<PAGE>
 
At December 31, 1997 plan assets in excess of projected benefit obligations and
prepaid pension expense were $491,000 and $463,000, respectively.  Pension
expense for the defined benefit plan was $1,000 and $3,000 for the years ended
December 31, 1997 and 1996, respectively.

Stock Option and Equity Incentive Plan

The Company adopted the First Coastal Corporation 1996 Stock Option and Equity
Incentive Plan (the "Plan") to provide for the grant of options to purchase
shares of common stock of the Company to directors and employees of the Company
and to employees of any subsidiary of the Company and to permit the award to
employees of the Company and of any subsidiary of the Company of shares of
common stock as a bonus, which shares may be subject to restrictions based on
continued service or performance.  The Plan was adopted by the Company's
stockholders at its June 1996 annual meeting.  During 1997, 2,500 options were
granted to directors which vested immediately and 15,000 options were granted to
executive officers which vest over a three year period.  In 1998, 3,000 options
were granted to directors which vested immediately and 19,000 options were
granted to executive officers and other key employees which vest over a three
year period.  Options granted under the Plan must have an exercise price not
less than the fair market value of a share of common stock on the date of grant
of the option (or 110% in the case of an incentive stock option granted to an
optionee beneficially owning more than 10% of the outstanding common stock).
The option's maximum term is 10 years (or five years in the case of an incentive
stock option granted to an optionee beneficially owning more than 10% of the
outstanding common stock).  Upon adoption of the Plan, there were 130,000 shares
of common stock of the Company reserved for issuance in connection with option
grants and restricted stock awards.  At December 31, 1998, there were 31,333
shares of common stock of the Company reserved for issuance in connection with
options available for grant and restricted stock awards.

On January 1, 1996 the Company adopted SFAS No. 123, Accounting for Stock-Based
Compensation, to be effective May 2, 1996, the date on which the Company's Board
of Directors adopted the Plan.  As permitted by SFAS No. 123, the Company has
chosen to apply APB Opinion No. 25, Accounting for Stock Issued to Employees
(APB 25) and related interpretations in accounting for its Plan.  Accordingly,
no compensation cost has been recognized for options granted under the Plan.
Had compensation cost for the Company's Plan been determined based upon the fair
value at the grant dates for awards under the Plan consistent with the method of
SFAS No. 123, the Company's net income and earnings per share would have been
reduced to the pro forma amounts indicated below.
<TABLE>
<CAPTION>
                                       1998                   1997                    1996
                             ----------------------  ----------------------  ----------------------
                             As reported  Pro Forma  As Reported  Pro Forma  As Reported  Pro Forma
                             -----------  ---------  -----------  ---------  -----------  ---------
<S>                          <C>          <C>        <C>          <C>        <C>          <C>
Net income (in thousands)         $1,564     $1,553       $1,262     $1,243       $6,385     $6,337
 
Basic earnings per share          $ 1.15     $ 1.14       $  .93     $  .91       $ 6.84     $ 6.80
</TABLE>

The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions used for grants during 1998 and 1997, respectively: dividend yield
of 0.0%, expected volatility of 35%, risk free interest rate of 4.98% and 5.96%,
respectively, and expected term of options equal to 7 years.  The weighted
average fair value of options granted for the years ended December 31, 1998,
1997 and 1996 were $5.18, $7.06 and $3.78, respectively.

A summary of the status of the Plan as of December 31, 1998, 1997 and 1996, and
changes during the year then ended is presented below:
<TABLE>
<CAPTION>
                                                       1998                          1997                        1996
                                           ---------------------------  --------------------------  -------------------------
                                                              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              70,500            $ 7.82    57,000            $ 5.59         -                -
   Granted                                    22,000            $11.04    17,500            $14.45    57,000            $5.59
   Exercised                                  (1,333)           $ 5.00    (1,333)           $ 5.00         -                -
   Forfeited                                       -                 -    (2,667)           $ 5.00         -                -
                                              ------                      ------                      ------
Outstanding at end of year                    91,167            $ 8.64    70,500            $ 7.82    57,000            $5.59
                                              ======                      ======                      ======
</TABLE>

                                       42
<PAGE>
 
The following table summarizes information about the Plan's stock options at
December 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
 
                                      Options Outstanding                       Options Exercisable
                      ------------------------------------------------  -----------------------------------
          Range of            Number   Weighed-average        Weighted               Number        Weighted
          Exercise       Outstanding         Remaining         Average          Exercisable         Average
           Prices     at December 31  Contractual life  Exercise Price       at December 31  Exercise Price
        ------------  --------------  ----------------  --------------  -------------------  --------------
<S>     <C>           <C>             <C>               <C>             <C>                  <C>
 
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
 
1996    $ 5.00-$7.25          57,000         9.5 years          $ 5.59                6,000          $ 5.00
</TABLE>

In addition, during 1996 the Company made restricted stock awards in the
aggregate amount of 7,500 shares of stock to certain executive officers.  The
stock vests ratably over a three year period beginning May 2, 1996, subject to
acceleration upon the occurrence of certain events described within the
individual restricted stock agreements.  At December 31, 1998, 835 shares of
stock have not yet vested and the related compensation expense of approximately
$4,500 has not been recognized.

Note L.  INCOME TAXES

A summary of income tax expense (benefit) is as follows:

                            December 31,
                      -----------------------
(in thousands)         1998    1997     1996
----------------      ------  ------  -------
 
Current               $   64       -  $   (48)
Deferred                 795  $  679   (4,811)
                      ------  ------  -------
                      $  859  $  679  $(4,859)
                      ======  ======  =======

A reconciliation of the difference between income tax expense (benefit) and the
amount computed by applying the statutory federal income tax rate to income
before income taxes is as follows:

                                                        December 31,
                                                   -----------------------
(in thousands)                                      1998    1997     1996
----------------                                   ------  ------  -------
 
Federal income tax at statutory rate               $ 824   $ 660   $   519
Increase (decrease) resulting from:
 Expiration of net operating loss carryforwards        -       -     1,180
 Change in valuation allowance                         -       -    (6,773)
 Other items, net                                     35      19       215
                                                   -----   -----   -------
Income tax expense (benefit)                       $ 859   $ 679   $(4,859)
                                                   =====   =====   =======

                                       43
<PAGE>
 
Significant components of deferred income tax assets and liabilities at December
31, 1998 and 1997 are presented below:

                                                         December 31,
                                                      ----------------- 
(in thousands)                                          1998      1997
-------------------------------------------------     -------  --------
                                                   
Deferred tax assets:                               
 Loans, principally due to allowance for losses       $  930    $  906
 REO, principally due to writedowns                        7         7
 Deferred loan fees                                       33        47
 Reserve for mortgage servicing rights                    45        45
 Federal net operating loss credit and tax credit  
   carryforward                                        2,728     3,604
 Investment tax credit carryforward                       77        77
 Other                                                    22        (6)
                                                      ------    ------
Total gross deferred tax assets before valuation   
   reserve                                             3,842     4,680
 Valuation reserve                                       (77)      (77)
                                                      ------    ------
Total gross deferred tax asset                         3,765     4,603
                                                      ------    ------
                                                   
Deferred tax liabilities:                          
 Unrealized gain on investments                            4        24
 Difference between tax and book basis of fixed    
   assets                                                184       210      
 Capital loss on stock transaction                        23        74
 Other                                                   200       200
                                                      ------    ------
Total gross deferred tax liabilities                     411       508
                                                      ------    ------
 Net deferred taxes                                   $3,354    $4,095
                                                      ======    ======

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.  Prior to 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 NOL carryforwards through sustained, profitable operations.
Management believes that the completion of the July 1996 recapitalization, the
payoff of the $9.0 million FDIC Note and the improved financial condition of the
Company have reduced the uncertainties relating to the Company's ability to
realize the benefits of the deferred tax asset.  During 1996 the valuation
allowance against the deferred tax asset (in accordance with SFAS No. 109) was
reduced by $4,811,000.  The remaining valuation reserve of $77,000 represents
the belief of the Company that the current investment tax credit carryforwards
of $77,000 will expire unutilized.

At December 31, 1998, the Company had a NOL carryforward for federal income tax
return purposes of approximately $7.6 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.

Note M.  COMMITMENTS AND CONTINGENCIES

Unfunded Loan Commitments

Unfunded loan commitments for December 31, 1998 and 1997 were approximately
$17.5 million and $14.2 million, respectively.  There were no standby letters of
credit for the years ended December 31, 1998 and 1997.

The breakdown of such loan commitments is as follows:
 
(in thousands)                                                  1998    1997
------------------------------------------------------------  -------  -------
 
Real estate:
 Commitments to originate residential mortgages               $   502  $ 1,903
 Commitments to originate commercial mortgages                  4,748    1,700
Unadvanced portions of construction loans                         427      620
Commercial lines of credit (unused)                             4,154    2,651
Consumer lines of credit (e.g. home equity lines) (unused)      7,630    7,288
                                                              -------  -------
Total                                                         $17,461  $14,162
                                                              =======  =======

                                       44
<PAGE>
 
Included in unfunded loan commitments at December 31, 1998 and 1997 are fixed
rate loan commitments totaling $5.5 million and $3.9 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/operations center and three
of its eight branches, and has a ground lease relating to a fourth branch
(rental expense for this ground lease is zero until June 17, 2000), under terms
of operations leases which include renewal options ranging from one to five
years.  On September 15, 1998 the Bank sold its headquarters branch/operations
center and entered into an eighteen month lease arrangement with the buyer until
such time as the Bank can secure a new headquarters branch/operations center
facility (the lease payments for this short term lease are reflected in the
table below).  Rental expense totaled approximately $151,000, $91,000 and
$77,000 for the three years ended December 31, 1998, 1997 and 1996,
respectively.

Approximate minimum lease payments over the remaining term of the leases at
December 31, 1998 are as follows:
 
(in thousands)                                             December 31,
-----------------------------------------------------------------------
                                          1999                     $248
                                          2000                      171
                                          2001                       64
                                          2002                       59
                                          2003                       62
                                                                   ----
                                                                   $604
                                                                   ====

Litigation

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.

Note N. SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK

Concentration of Commercial Real Estate Assets

At December 31, 1998, the Bank had approximately $52.7 million of commercial
real estate mortgage loans, representing 49.8% 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 27.6% and
33.5% of total assets at December 31, 1998 and 1997, respectively.  At December
31, 1998, the Bank also had approximately $5.9 million of commercial business
loans.

Banks with loans concentrated in commercial real estate are likely to be
adversely affected by problems in the real estate market or the economy in
general.  Commercial real estate lending involves significant additional risks
as compared to one-to-four family residential mortgage lending, and typically
accounts for a disproportionate share of charge-offs, delinquent loans and real
estate owned through foreclosure or by deed in lieu of foreclosure.  Such
lending generally involves larger loan balances (to a single borrower or groups
of related borrowers) than is involved with residential and other types of
consumer lending, and is more susceptible to adverse future developments.  If
the cash flow from income producing property 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.  Management does
not expect either a significant increase or decrease in the foreseeable future
in the level of commercial real estate assets as a percentage of total assets.

                                       45
<PAGE>
 
Note O.  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, 1998   December 31, 1997
                                            ------------------  ------------------
                                              Book      Fair      Book      Fair
(in thousands)                               Value     Value     Value     Value
------------------------------------------  --------  --------  --------  --------
<S>                                         <C>       <C>       <C>       <C>
Financial Assets:
  Cash and cash equivalents /(1)/           $ 32,627  $ 32,627  $  7,554  $  7,554
  Investment securities /(2)/
    Available for sale (at market value)      47,048    47,048    15,887    15,887
    Held-to-maturity (at amortized cost)           -         -     7,000     6,973
  Federal Home Loan Bank stock                 1,315     1,315     1,315     1,315
 Loans held for sale                              83        83     3,565     3,565
 Loans, net of allowance /(3)/               103,041   106,437   101,500   104,951
 
Financial Liabilities:
  Deposits /(4)/                            $148,545  $149,413  $114,991  $115,330
  Borrowings /(5)/                            25,145    25,270    16,294    18,039
  Secured borrowings /(6)/                       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.

                                       46
<PAGE>
 
Note P. EARNINGS PER SHARE

The following is a reconciliation of the numerators and denominators of the
basic and diluted earnings per share ("EPS") calculations:
<TABLE>
<CAPTION>
                                                        For the years ended December 31,
                        -------------------------------------------------------------------------------------------------
                                       1998                             1997                            1996
                        -------------------------------  -------------------------------  -------------------------------
                                         Number     Per                   Number     Per                   Number     Per
                            Income    of Shares   Share      Income    of Shares   Share      Income    of Shares   Share
                         Numerator  Denominator  Amount   Numerator  Denominator  Amount   Numerator  Denominator  Amount
                        ----------  -----------  ------  ----------  -----------  ------  ----------  -----------  ------
<S>                     <C>         <C>          <C>     <C>         <C>          <C>     <C>         <C>          <C>
 
Net Income              $1,564,000                                   $ 1,262,000          $6,385,000
 
Basic EPS
Income available to
 common stockholders     1,564,000    1,359,976   $1.15   1,262,000    1,358,730   $0.93   6,385,000      933,578  $ 6.84
 
Effect of dilutive
 securities options              -       19,148                   -       32,542                   -        6,902
                         ---------    ---------           ---------    ---------           ---------      -------
 
Diluted EPS
Income available to
 common stockholders
 and assumed
 conversions            $1,564,000    1,379,124   $1.13  $1,262,000    1,391,272   $0.91  $6,385,000      940,480  $ 6.79
                        ==========    =========          ==========   ==========          ==========   ==========
</TABLE>

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 Q. FIRST COASTAL CORPORATION
      CONDENSED FINANCIAL INFORMATION
 
BALANCE SHEETS

                                                  December 31,
                                               ---------------- 
(in thousands)                                    1998     1997
---------------------------------------------  -------  -------
 
Assets
Cash                                           $   831  $   142
Investment in subsidiaries                      14,716   14,504
Deferred tax asset                               3,310    3,076
Other assets                                        57      106
                                               -------  -------
 Total assets                                  $18,914  $17,828
                                               =======  =======
 
Liabilities
Savings Bank Notes                             $ 2,600  $ 3,000
Other liabilities                                    -       20
Stockholders' equity                            16,314   14,808
                                               -------  -------
 Total liabilities and stockholders' equity    $18,914  $17,828
                                               =======  =======

                                       47
<PAGE>
 
STATEMENTS OF OPERATIONS

<TABLE> 
<CAPTION> 
                                                          Year Ended December 31,
                                                       ----------------------------
(in thousands)                                           1998      1997      1996
-----------------------------------------------------  --------  --------  --------
<S>                                                    <C>       <C>       <C>
 
Dividends                                               $1,680   $ 1,500   $ 3,400
Interest Income                                              5        12         7
                                                        ------   -------   -------
                                                         1,685     1,512     3,407
Interest Expense:
 FDIC Note                                                   -         -       335
 Savings Bank Notes                                        332       477       190
                                                        ------   -------   -------
                                                           332       477       525
                                                        ------   -------   -------
Net Interest Income                                      1,353     1,035     2,882
 
Operating Expenses:
 Salary and benefits                                        13        12         5
 Stockholder relations                                      54        48       117
 Professional fees                                         102        58       177
 Other                                                      46        61         3
                                                        ------   -------   -------
                                                           215       179       302
Income before income tax and equity in
 undistributed net income of subsidiaries                1,138       856     2,580
Income tax benefit                                        (149)     (226)   (2,850)
Equity in undistributed net income of  subsidiaries        277       180       955
                                                        ------   -------   -------
Net Income                                              $1,564   $ 1,262   $ 6,385
                                                        ======   =======   =======

STATEMENT OF CASH FLOWS 
<CAPTION> 
                                                          Year Ended December 31,
                                                       ----------------------------
(in thousands)                                           1998      1997      1996
-----------------------------------------------------  --------  --------  --------
 
Operating Activities:
Net income                                              $1,564   $ 1,262   $ 6,385
  Decrease in interest payable                               -         -      (419)
  Net change in other assets                              (185)     (168)   (2,853)
  Net change in other liabilities                          (20)      (40)       35
  Equity in undistributed earnings of subsidiaries        (277)     (180)     (955)
                                                        ------   -------   -------
Net cash provided by operating activities                1,082       874     2,193
 
Financing Activities:
  Proceeds from issuance of Savings Bank Note                -         -     4,000
  Payment on borrowings                                   (400)   (1,000)   (9,000)
  Finance cost associated with Savings Bank Note             -         -      (116)
  Net proceeds from sale of common stock                     7         7     3,085
                                                        ------   -------   -------
Net cash used by financing activities                     (393)     (993)   (2,031)
                                                        ------   -------   -------
 
Increase (decrease) in cash and cash equivalents           689      (119)      162
Cash and cash equivalents at beginning of year             142       261        99
                                                        ------   -------   -------
Cash and cash equivalents at end of year                $  831   $   142   $   261
                                                        ======   =======   =======
 
Supplemental Disclosures of Information
  Interest paid on borrowings                           $  315   $   477   $   944
 
Non-Cash Investing and Financing Activities
  Change in unrealized holding gains (losses) on
   investment securities available for sale             $  (65)  $   151   $  (117)
  Issuance of restricted stock                               -         -        38
</TABLE>

See Note J for restrictions on the payment of dividends by Subsidiary to the
Company.

                                       48
<PAGE>
 
Note R.  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 only if a person or group in the future becomes the beneficial
owner of 10% or more of the Common Stock or announces a tender or exchange offer
which would result in its ownership of 10% or more of the Common Stock.

Each Right, when exercisable at $50.00 per Right, would entitle the holder
thereof to purchase 1/10th of a share of a newly created series of preferred
stock of the Company designated as "Series A Junior Participating Preferred
Stock." Each holder of a Right, other than the acquiring person, would be
entitled to purchase a certain number of shares of Common Stock of the Company
for each right at one-half of the then-current market price.  If the Company is
acquired in a merger, or 50% or more of the Company's assets are sold in one or
more related transactions, each Right would entitle the holder thereof to
purchase common stock of the acquiring company at half of the then-current
market price of such common stock.

When exercisable, the Board of Directors may exchange one share of Common Stock
for each Right, other than Rights held by the acquiring person.  The Rights are
redeemable for $.001 per Right until becoming exercisable and will expire on
February 24, 2008.

Note S.  SUBSEQUENT EVENTS (UNAUDITED)

On January 31, 1999, the Bank completed the settlement of the sale of its
residential mortgage servicing portfolio and as a result a pretax gain in the
amount of $460,000 will be recorded in the first quarter of 1999.

On February 22, 1999, the Bank entered into a definitive purchase and assumption
agreement with regard to its previously announced intention to sell its branch
located in Kennebunk, Maine.  Under the terms of the purchase and assumption
agreement (subject to receipt of regulatory approvals), the purchaser will
acquire all of the branch's deposits and certain branch assets, as well as
assume responsibility for the Bank's lease obligation.  Should the sale of the
branch take place in the second quarter of 1999 as anticipated, a pretax gain in
the amount of $1.1 to $1.2 million is anticipated to be recorded at that time.
The actual amount of the gain to be recorded at closing will be subject to
actual deposit levels, the mix of deposits and other factors, and could be
higher or lower than the amount currently anticipated.

                                       49
<PAGE>
 
Note T. 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> 
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                      1,381,130   1,380,177   1,378,264   1,375,324
  Earnings per share                                      $      .21  $      .21  $      .45  $      .27
                                                          ==========  ==========  ==========  ==========
 
1997
----                                                        
Interest income                                           $    2,844  $    3,011  $    3,002  $    3,037
Interest expense                                               1,455       1,491       1,521       1,409
                                                          ----------  ----------  ----------  ----------
Net interest income                                            1,389       1,520       1,481       1,628
Provision for loan losses                                          -           -           -           -
Noninterest income                                               135         143         174         168
Securities and loan sales gains                                  126         114         109          21
Operating expense                                              1,244       1,231       1,252       1,340
                                                          ----------  ----------  ----------  ----------
Income before income taxes                                       406         546         512         477
Income tax expense                                               139         195         178         167
                                                          ----------  ----------  ----------  ----------
Net income                                                $      267  $      351  $      334  $      310
                                                          ==========  ==========  ==========  ==========
 
Basic earnings per share:
  Weighted average shares outstanding                      1,357,861   1,358,652   1,359,194   1,359,194
  Earnings per share                                      $      .20  $      .26  $      .25  $      .23
                                                          ==========  ==========  ==========  ==========
Diluted earnings per share:
  Weighted average shares outstanding                      1,370,414   1,373,571   1,377,562   1,391,736
  Earnings per share                                      $      .19  $      .26  $      .24  $      .22
                                                          ==========  ==========  ==========  ==========
</TABLE>

                                       50
<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, Inc.

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
Patricia J. Briand
Secretary

 
-------------------------------------------------------------------------------
COASTAL BANK

CORPORATE OFFICE
Colonel Westbrook Executive Park
36 Thomas Drive
Westbrook, ME 04092
(207) 774-5000

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
William E. Saufley
Senior Vice President Human Resources
and Legal Affairs
Edward M. Williams
Senior Vice President Retail Banking
David C. Cyr
Vice President Credit Administration
Cynthia M. McDougall
Vice President Residential Lending
John T. McDonald
Vice President Commercial Lending
Debra J. McPhail
Vice President Deposit Operations and Security
Janet S. Ross
Vice President Commercial Lending
Timothy J. Tower
Vice President Commercial Lending
Daniel P. Walsh
Vice President Commercial Lending
Patricia J. Briand
AVP Corporate Secretary
Stephen D. Lovejoy
AVP Branch Manager
Thomas V. Manderson
AVP Controller
Laurie L. Mooney
AVP Branch Manager
Maureen E. Pride
AVP Business Banking Marketing Mgr.
Lisa A. St. Lawrence
AVP Branch Manager

BRANCH OFFICES

120 Exchange Street
Portland, ME 04101
  Robert S. Blackwood, Jr. SVP
  Commercial Lending

83 Maine Street
Brunswick, ME 04011
  Stephen D. Lovejoy, AVP/Manager

14 Gurnett Road
Brunswick, ME 04011
  Teri L. Dutton, Manager

47 Topsham Fair Mall Road
Topsham, ME 04086
  Kevin Concaugh, Manager

8 Mallet Drive
Freeport, ME 04032
  Lisa M. Esposito, Manager

36 Thomas Drive
Westbrook, ME 04092
  Laurie L. Mooney, AVP/Manager

Suite 32, 4 Scammon Drive
Saco Valley Shopping Center
Saco, ME 04072
  Laurie L. Mooney, AVP/Manager

45 Portland Road
Kennebunk, ME 04043
  Lisa A. St. Lawrence, AVP/Manager

                                       51
<PAGE>
 
-------------------------------------------------------------------------------
CORPORATE AND STOCKHOLDER INFORMATION
-------------------------------------------------------------------------------

Corporate Headquarters
First Coastal Corporation
Colonel Westbrook Executive Park
36 Thomas Drive
Westbrook, ME 04092
(207) 774-5000

Annual Meeting
The 1999 Annual Meeting of the Stockholders of First Coastal Corporation will be
held at 10:00 a.m. on Tuesday, May 18, 1999 at the Portland Marriott, South
Portland, Maine.

Stock Listing
First Coastal Corporation stock is listed on The Nasdaq SmallCap Market tier of
The Nasdaq Stock Market under the symbol "FCME".

Transfer Agent/Registrar
ChaseMellon Financial Services
111 Founders Plaza, Suite 1100r
East Hartford, CT 06108

Independent Accountants
PricewaterhouseCoopers LLP
130 Middle Street
Portland, ME 04104

Legal Counsel
Bernstein Shur Sawyer & Nelson
100 Middle Street
P.O. Box 9729
Portland, ME 04104-5029

Hogan & Hartson L.L.P.
Columbia Square
555 Thirteenth Street, N.W.
Washington,  D.C. 20004

Form 10-K

The Corporation's Annual Report on Form 10-K filed with the Securities and
Exchange Commission will be provided to stockholders upon written request.
Requests should be addressed to: Investor Relations, First Coastal Corporation,
36 Thomas Drive, Westbrook, ME 04092

Internet Address
First Coastal Corporation
  www.firstcoastal.com
Coastal Bank
  www.coastalbankme.com

                                       52