U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-KSB
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Twelve Months Ended: March 31, 1997
Commission File No.: 0-18096
MID-COAST BANCORP, INC.
(Exact name of small business issuer as specified in its charter)
Delaware 01-0454232
State of Incorporation IRS Employer No.
1768 Atlantic Highway
P. O. Box 589
Waldoboro, Maine 04572
(Address of Principal Executive Offices)
Registrant's telephone number, including area code: (207) 832-7521
Securities registered pursuant to Section 12(g) of the Act:
Common Stock ($1.00 par value)
------------------------------
(Title of Class)
Indicate by check mark whether the issuer (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the issuer
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if there is no disclosure of delinquent filers
pursuant to Item 405 of Regulation S-B contained herein, and no disclosure will
be contained, to the best of issuer's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. [X]
The Net Income for the issuer's fiscal year ended March 31, 1997 are
$242,775.
The number of shares outstanding as of March 31, 1997 is 231,439.
Aggregate market value of common stock held by non-affiliates, based on
the last reported sale price on May 16, 1997: $3,414,820.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement pursuant to Regulation 14A,
which was delivered to the Commission for filing on June 6, 1997, and the
Annual Report for the fiscal year ended March 31, 1997, which was delivered to
the Commission on June 27, 1997, are incorporated by reference into Part II and
III of this report.
TABLE OF CONTENTS
<TABLE>
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Page
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<S> <C> <C>
PART I
Item 1. Description of Business...................................... 1
Item 2. Description of Property...................................... 25
Item 3. Legal Proceedings............................................ 26
Item 4. Submission of Matters to a Vote of Security Holders.......... 26
PART II
Item 5. Market for Common Equity and Related Stockholder
Matters..................................................... 27
Item 6. Management's Discussion and Analysis......................... 28
Item 7. Financial Statements......................................... 28
Item 8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure......................... 28
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act........... 28
Item 10. Executive Compensation....................................... 28
Item 11. Security Ownership of Certain Beneficial Owners and
Management.................................................. 28
Item 12. Certain Relationships and Related Transactions............... 28
Item 13. Exhibits..................................................... 29
SIGNATURES................................................................ 31
</TABLE>
PART I
Item 1. Description of Business
Business of Mid-Coast Bancorp, Inc.
Mid-Coast Bancorp, Inc. ("Bancorp" or the "Holding Company") was
organized in 1989 for the purpose of becoming a holding company and owning all
of the outstanding capital stock of The Waldoboro Bank, F.S.B. ("Waldoboro" or
the "Bank"). The Holding Company is engaged primarily in the business of
directing, planning and coordinating the business activities of the Bank. In
the future, Bancorp may acquire or organize other operating subsidiaries,
including other financial institutions, although it presently has no definitive
plans for any specific acquisitions or new subsidiaries. Bancorp does not
currently own any real estate. Instead, Bancorp uses the premises, equipment
and furniture of the Bank without the payment of any rental fees. At the
present time, Bancorp does not employ any persons other than its officers, but
utilizes the support staff of the Bank from time to time without the payment of
any fees. Additional employees may be hired as appropriate to the extent
Bancorp expands its business.
Business of The Waldoboro Bank, F.S.B.
General
The Bank was formed as a Maine building and loan association, the
Waldoboro Building and Loan Association, on March 18, 1891 and received a
federal charter on August 9, 1983. The Bank's operations are headquartered in
Waldoboro, Maine. The deposits of the Bank are insured by the Savings
Association Insurance Fund (the "SAIF"), which is administered by the Federal
Deposit Insurance Corporation ("FDIC"). The Bank has a strong community
orientation, with most of its customers located in Waldoboro, Rockland and
surrounding communities in Knox and Lincoln counties, Maine. As of March 31,
1997, the Bank had total assets of $58,925,368, total deposits of $42,180,698,
total borrowings of $11,440,000 and stockholders' equity of $5,075,545. The
Bank has never been involved in any mergers or acquisitions. In 1995 the Bank
opened a new, full-service branch facility in Rockland, Maine, and currently
has two full-service offices.
The Bank's executive offices are located at 1768 Atlantic Highway,
Waldoboro, Maine and its telephone number is (207) 832-7521.
The principal business of the Bank is to attract deposits from the
general public and to make loans secured by residential and commercial real
estate, enabling borrowers to purchase, refinance, construct or improve
property. In addition, the Bank makes various types of secured and unsecured
consumer and passbook loans, such as home equity, commercial and automobile
loans, and holds investment securities. See "Lending Activities" and
"Investments."
Market Area
The Bank's market area is Knox and Lincoln counties, Maine, and includes
the towns of Waldoboro, Damariscotta, Friendship, Warren, Nobleboro, Thomaston
and Rockland, as well as other communities in Maine's mid-coast region. The
Bank's market area is located on the coast of Maine, approximately 60 miles
northeast of Portland and 78 miles southwest of Bangor.
The economic base of the Bank's market area is diverse, with
manufacturing, services and commercial fishing as the most significant
categories of business activity. The mid-coast region of Maine has also long
been popular as a summer resort area, thus leading to a substantial amount of
seasonal business activity.
Lending Activities
The Bank's loan portfolio totaled $49,394,455 at March 31, 1997,
representing approximately 83.8% of its total assets. At that date,
approximately 71.5% of the Bank's loan portfolio consisted of permanent
mortgage loans secured by residential properties. In addition, approximately
12.8% of the Bank's loan portfolio consisted of permanent mortgage loans
secured by commercial real estate, while secured and unsecured consumer and
passbook loans represented 13.1% of the Bank's loan portfolio. Finally,
construction loans represented 2.6% of the Bank's loan portfolio. Substantially
all of the residential and commercial properties securing the Bank's loans are
located within its market area as discussed above.
The following tables set forth detailed information concerning the
composition of the Bank's loan portfolio by type of loan at the dates
indicated.
<TABLE>
<CAPTION>
At March 31,
----------------------------------------------
1997 1996
--------------------- ---------------------
Amount % Amount %
----------- ------ ----------- ------
<S> <C> <C> <C> <C>
Mortgage loans:
Residential $35,300,010 71.5% $33,125,498 77.3%
Commercial 6,314,688 12.8 4,509,243 10.6
Construction, net of undisbursed funds 1,262,210 2.6 12,049 --
---------------------------------------------
Total mortgage loans $42,876,908 86.9% $37,646,790 87.9%
Other loans:
Home equity 1,300,254 2.6 1,372,391 3.2
Other commercial 1,406,317 2.8 838,425 2.0
Passbook loans 281,967 0.6 309,842 0.7
Installment and other 3,529,009 7.1 2,670,721 6.2
---------------------------------------------
Total other loans 6,517,547 13.1 5,191,379 12.1%
---------------------------------------------
Total loans $49,394,455 100.0% $42,838,169 100.0%
=============================================
</TABLE>
Residential Mortgage Loans. A substantial portion of the Bank's lending
activity is comprised of residential mortgage loans, which, at March 31, 1997,
represented 71.5% of the Bank's loan portfolio. Residential mortgage loan
originations are derived from a number of sources, including the existing
customers of the Bank, realtors, referrals and "walk-in" customers. The Bank's
active solicitation of residential mortgage loans through real estate brokers
has historically been its primary source of residential mortgage loan
originations.
The main focus of the Bank's residential lending activity is the
origination of conventional mortgage loans on one- to four-family dwellings.
Generally, these loans are conventional first mortgage loans of 80% of value or
less that are neither insured nor partially guaranteed by government agencies.
The Bank also makes residential loans up to 95% of the appraised value if the
top 15% of the loan is covered by private mortgage insurance.
Currently, the Bank offers a variety of adjustable-rate mortgage loans
with terms of up to 30 years. These mortgages have rates which are generally
3.0% above the U. S. Treasury Index and have adjustment periods of up to 7
years based on changes in the interest rate on U.S. Treasury obligations.
Typically, such loans have a 2% maximum rate change in any one adjustment
period and a maximum possible rate change of 6% during the term of the loan.
Most of the adjustable-rate mortgage loans originated by the Bank are held in
the Bank's portfolio. The primary reason for the Bank to retain these loans is
to manage the interest rate sensitivity of the Bank's loan portfolio. See
"Asset/Liability Management" located in the Management's Discussion and
Analysis portion of the Annual Report, commencing on page 3.
In addition to adjustable-rate residential mortgage loans, the Bank also
offers fixed-rate residential mortgage loans with terms typically ranging from
15 to 30 years. During the fiscal year ended March 31, 1997, the Bank
originated $5,188,420 in fixed-rate loans, representing 48.12% of the total
mortgage loans originated during that period. These loans are typically sold to
the secondary mortgage market.
Borrowers may prepay loans at their option or refinance their loans with
the Bank on terms agreeable to the Bank. The terms of conventional residential
mortgage loans granted by the Bank contain a "due-on-sale" clause, which
permits the Bank to accelerate the indebtedness of a loan upon the sale or
other disposition of the mortgaged property. Due-on-sale clauses are an
important means of increasing the turnover of real estate loans in the Bank's
portfolio. Waldoboro's management believes that due to prepayments in
connection with refinancings and sales of property, the average length of the
Bank's long-term residential loans is substantially shorter than the weighted
average contractual maturity.
The Bank also makes construction loans to fund the construction of new
buildings or the renovation of existing buildings and finances the construction
of individual, owner-occupied houses by professional contractors and by
individual owners only on the basis of stringent underwriting and construction
loan management guidelines. Net construction loans comprised $1,262,210, or
2.6% of the Bank's loan portfolio at March 31, 1997.
Commercial Real Estate and Other Commercial Loans. In addition to
residential real estate loans, the Bank also originates loans secured by
commercial real estate. At March 31, 1997, $6,314,688 or 12.8% of the Bank's
loan portfolio was secured by commercial properties. Many of Waldoboro's
commercial real estate loans are secured by improved property such as retail
outlets and service establishments. Substantially all of the Bank's commercial
real estate loan portfolio is secured by properties located in the Bank's
primary market area.
For a variety of reasons, loans secured by commercial properties
generally involve greater credit risks than one- to four-family residential
real estate loans. Repayment of such loans generally depends on the cash flow
generated by the security property. Because the payment experience on loans
secured by such property is often dependent on successful operation or
management of the security property, repayment of the loan may be more subject
to adverse conditions in the real estate market or the economy generally than
is the case with one- to four-family residential real estate loans. The
commercial real estate business is cyclical and subject to downturns,
overbuilding and local economic conditions. Although commercial real estate
loans generally involve a higher risk of credit loss than loans secured by
residential real estate, Waldoboro has not experienced any significant problems
with its commercial mortgage loans.
In addition, the Bank has begun to increase its commercial business loan
portfolio. At March 31, 1997, such loans amounted to $1,406,317 or 2.8% of the
Bank's loan portfolio. Commercial business loans are generally secured by
equipment, machinery or other corporate assets. The Bank either requires
principals of corporate borrowers to become co-borrowers or the Bank obtains
personal guarantees from the principals of the borrower with respect to all
commercial business loans.
Commercial business lending generally entails significantly greater
credit risk than residential real estate lending. The repayment of commercial
business loans typically is dependent on the successful operation and income of
the borrower. Such risks can be significantly affected by economic conditions.
In addition, commercial business lending generally requires substantially
greater oversight efforts by the Bank than does residential real estate
lending.
Consumer Loans. At March 31, 1997, Waldoboro had secured and unsecured
consumer loans, including loans on deposit accounts, of approximately $3.8
million or 7.7% of the Banks's loan portfolio. Waldoboro's consumer loans have
interest rates which are generally higher than residential mortgage rates. The
average life of the Bank's consumer loans is typically less than five years. By
maintaining its consumer lending, Waldoboro enhances its ability to maintain a
profitable spread between its average loan yield and its cost of funds while at
the same time managing its sensitivity to interest rates.
Loans to One Borrower. Regulations promulgated by the Office of Thrift
Supervision (the "OTS") generally limit the permissible amount of loans to one
borrower to the greater of 15% of unimpaired capital and surplus or $500,000.
The maximum amount which Waldoboro could have loaned to one borrower and the
borrower's related entities at March 31, 1997, was $761,332. At March 31, 1997,
the three largest outstanding balances of loans by Waldoboro to any one
borrower and related entities approximated $610,580, $440,182 and $387,154.
Scheduled Loan Repayments
The following table presents information regarding contractual maturities
of Waldoboro's loan portfolio at March 31, 1997. Demand loans are reported as
due in one year or less. No prepayment assumptions are utilized for purposes of
this table.
<TABLE>
<CAPTION>
Payment Due in Year Ended March 31,
Balance at -----------------------------------
March 31, 2000-
1997 1998 1999 2003+
---------- ---------- -------- --------
<S> <C> <C> <C> <C>
Mortgages - construction $1,262,211 $ 171,983 $385,716 $704,512
Commercial loans - non real estate 1,406,317 1,006,522 346,810 52,985
</TABLE>
The following table shows information concerning the type and amount of
fixed-rate and adjustable-rate loans in Waldoboro's portfolio that come due
after one year.
<TABLE>
<CAPTION>
Loans Due After March 31, 1998
------------------------------------
With With
Fixed Adjustable
Rates Rates Total
-------- ---------- ----------
<S> <C> <C> <C>
Mortgages - construction $204,197 $886,031 $1,090,228
Commercial loans - non real estate 148,513 251,282 399,795
</TABLE>
Origination, Purchase and Sale of Loans
The primary lending activity of Waldoboro is the origination of
conventional loans (i.e., loans that are neither insured nor guaranteed in
whole or in part by governmental agencies) secured by first mortgage liens on
residential properties, principally single family residences, substantially all
of which are located in Lincoln and Knox counties, Maine. During the year ended
March 31, 1997, substantially all of the real estate loans originated by
Waldoboro were secured by properties in Lincoln and Knox counties.
Waldoboro appraises the security for each new loan. Such appraisals are
performed for the Bank by qualified appraisers in accordance with standards set
by the OTS. The appraisal of the real property upon which Waldoboro makes a
real estate loan is of particular significance to the Bank in the event that
the loan must be foreclosed. An improper appraisal may contribute to a loss or
other financial detriment to the Bank upon the disposition of foreclosed
property.
The Bank's underwriting standards are guided by a formal written loan
policy which is reviewed and approved annually by the board of directors of the
Bank (the "Board"). This policy provides that, following the submission of a
loan application by a borrower, the Loan Committee, which determines whether a
borrower has met the required underwriting conditions, and the Security
Committee, which ensures that the value of the real estate securing the loan is
adequate, must approve the loan. Once approved, the loan must then be ratified
by the Board. In the case of a loan made to an officer of the Bank or the
Holding Company, the loan must be approved by the Board as well as the Loan
Committee and the Security Committee. Waldoboro requires title certification on
all first mortgage liens, and the borrower is required to maintain hazard
insurance on the security property.
Waldoboro has purchased loans and will continue to consider
participations from third parties provided the terms are favorable and the
loans meet Waldoboro's underwriting standards. The Bank routinely sells
fixed-rate real estate loans in the secondary market as a means to better match
its interest-sensitive assets and liabilities. For the year ended March 31,
1997, the Bank received $2,248,585 in proceeds from the sale of loans.
Waldoboro will continue to consider additional sales of its loans in the
future, depending on its needs, and the terms available in the market for such
transactions.
Fee Income. In addition to interest earned on loans, Waldoboro realizes
fee income from its lending activities, including origination and collection
fees for residential loans. Waldoboro also receives loan fees and charges
related to existing loans, which include late charges and servicing fees. Net
origination fees originally deferred that were recognized as additional
interest on loans during fiscal 1997 totaled $42,042. At March 31, 1997, net
origination fees deferred to future periods approximated $119,966.
Classified Assets and Delinquencies
If a borrower fails to make a required payment on a loan, the loan is
classified as delinquent. In this event, Waldoboro will make contact with the
borrower at prescribed intervals in an effort to bring the loan current. In
most cases, delinquencies are cured promptly, but if a mortgage loan
delinquency is not cured within 60 days, Waldoboro will generally initiate
foreclosure proceedings under applicable state law. If the loan remains
delinquent, the mortgaged property typically will be sold through a foreclosure
sale.
The remedies available to a lender in the event of a default or
delinquency, and the procedures by which such remedies may be exercised, are
generally subject to laws and regulations of the jurisdiction where the
property is located in the case of mortgage loans, or of the jurisdiction where
the lender and/or borrower is situated in the case of unsecured loans. Federal
and Maine law generally require notice of default and right to cure and notice
of the availability of credit counseling and potential state-provided financial
assistance prior to the time a lender commences a legal action or takes
possession of Maine residential real estate securing a loan. Management
attempts to secure payment with regard to consumer and commercial business
loans which become delinquent. Ultimately, if such efforts are unsuccessful,
foreclosure and sale of collateral are considered. In the case of unsecured
installment and commercial business loans, rather than proceeding to collect by
legal action, Waldoboro will often attempt to negotiate a "workout" payment
schedule with the borrower over a period which may exceed the original term of
the loan.
Under the OTS classification system, problem assets of insured
institutions are classified as "special mention," "substandard," "doubtful" or
"loss," depending on the presence of certain characteristics discussed below.
An asset is considered "special mention" if the asset displays potential
weaknesses that deserve close attention by a bank's management and that if
uncorrected might result in a deterioration either of the asset's repayment
prospects or in the future credit condition of the bank. Special mention assets
do not expose a bank to sufficient risk to warrant adverse classification under
the classifications discussed below.
An asset is considered "substandard" if inadequately protected by the
current net worth and paying capacity of the obligor or of the collateral
pledged, if any. "Substandard" assets include those characterized by the
"distinct possibility" that the insured institution will sustain "some loss" if
the deficiencies are not corrected. Assets classified "doubtful" possess the
added characteristic that the weaknesses present make "collection or
liquidation in full," on the basis of currently existing facts, conditions and
values, "highly questionable and improbable." Assets classified "loss" are
those considered "uncollectible" and of such little value that their
continuance as assets without the establishment of a specific loss reserve is
not warranted. When an insured institution classifies problem assets as "loss",
it is required either to establish a specific allowance for losses equal to
100% of the amount of the asset so classified or to charge off such amount.
The Bank places loans on non-accrual status at 91 days from due date. The
following table sets forth information regarding nonaccrual loans and real
estate owned by the Bank. The Bank had no loans which are 90 days or more
delinquent but on which Waldoboro is accruing interest at the dates indicated.
Additional interest income that would have been recorded on non-accrual loans
had they been on accrual status at March 31, 1997 and March 31, 1996 was
$12,923 and $30,901 respectively. The following table summarizes the Bank's
non-performing assets at the dates indicated.
<TABLE>
<CAPTION>
At March 31,
--------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Nonaccrual loans:
Mortgage loans in process of foreclosure......... $ -- $160,919 $ 93,859
Loans more than 90 days past due................. 145,466 214,419 213,633
--------------------------------
Total nonaccrual loans............................. 145,466 375,338 307,492
Real estate owned, net............................. 91,823 224,137 246,079
Loans to facilitate................................ -- -- 44,246
--------------------------------
Total nonperforming assets......................... $237,289 $599,475 $597,817
================================
Ratio of nonaccrual loans to total loans........... .29% 0.88% 0.70%
Ratio of nonperforming assets to total assets...... .40% 1.10% 1.13%
</TABLE>
The Bank adopted the provisions of Statement of Financial Accounting
Standards (SFAS) No. 114, Accounting by Creditors for Impairment of a Loan, as
amended by SFAS No. 118, Accounting by Creditors for Impairment of a
Loan--Income Recognition and Disclosure, on April 1, 1995. Adoption of these
statements did not have a significant impact on the financial position or
results of operations, and prior periods have not been restated.
Allowance for Loan Losses. The allowance for loan losses is maintained by
a provision charged against income at a level that management considers
adequate to provide for potential losses. The amount of the provision is based
upon management's evaluation of individual loans, past loss experience, current
economic conditions, the inherent risk in the loan portfolio and other relevant
factors. No portion of the allowance for loan losses balance at March 31, 1997
related to specific loans for which charge offs are expected in fiscal 1998.
An analysis of activity in the allowance for loan losses for the years
ended March 31, 1997 and 1996 is provided below.
<TABLE>
<S> <C>
Balance, March 31, 1995 $ 183,683
Charge-offs - Mortgages (21,627)
Charge-offs - Consumer (6,538)
Recoveries - Consumer 3,828
---------
Net charge offs (24,337)
Provision for loan losses 62,010
---------
Balance, March 31, 1996 $ 221,356
Charge-offs - Mortgages (12,000)
Charge-offs - Consumer (8,810)
Recoveries - Mortgages --
Recoveries - Consumer 7,911
---------
Net charge offs (12,899)
Provision for loan losses 87,000
---------
Balance, March 31, 1997 $ 295,457
=========
Net charge offs to average loans outstanding
Year ended March 31, 1996 0.06%
Year ended March 31, 1997 0.03%
</TABLE>
A breakdown of the allowance for loan losses is shown below.
<TABLE>
<CAPTION>
1997 1996
----------------------- -----------------------
Percent of Percent of
Loans to Loans to
Amount Total Loans Amount Total Loans
-------- ----------- -------- -----------
<S> <C> <C> <C> <C>
Mortgage loans-Residential $ 45,000 74.1% $ 45,000 77.3%
Commercial-Mortgage loans 130,000 12.8 80,000 10.6
Consumer and other loans 43,500 13.1 38,000 12.1
General allocation 76,957 -- 58,356 --
----------------------------------------------
$295,457 100.0% $221,356 100.0%
==============================================
</TABLE>
Investments
Federally chartered thrift institutions have authority to invest in
various types of liquid assets, including U.S. Treasury obligations, securities
of various federal agencies, certain certificates of deposit of insured banks
and thrift institutions, certain bankers' acceptances and federal funds.
Subject to various restrictions, federally chartered thrift institutions may
also invest a portion of their assets in commercial paper and corporate debt
securities and in mutual funds whose assets conform to the investments that a
federally chartered thrift institution is otherwise authorized to make
directly. At March 31, 1997, 5.8% of the total assets of the Holding Company
were investment securities. See Notes 3 and 4 to the Holding Company's
Consolidated Financial Statements included herein by reference.
Currently, the Bank's debt securities are classified as
"held-to-maturity" or "available for sale" in accordance with Financial
Accounting Standards No. 115, "Accounting For Certain Investments in Debt and
Equity Securities." The investment securities classified as "held-to-maturity"
are reported in the Bank's financial statements at amortized cost. Investments
in a mutual fund of $564,702 and debt securities classified as "available for
sale" are carried at market value. The following table sets forth the
composition of the Bank's portfolio of investment securities and mortgage
backed securities at the dates indicated.
<TABLE>
<CAPTION>
At March 31,
----------------------------------------------------
1997 1996
------------------------ ------------------------
Book Market Book Market
Value Value Value Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Held to maturity:
Investment securities:
Federal Home Loan Bank Bonds $ 400,000 $ 372,000 $ 500,000 $ 464,326
U.S. Treasury Obligations 299,109 292,875 2,246,562 2,243,354
Federal National Mortgage Association Bonds 250,000 246,250 250,000 245,585
Student Loan Marketing Application Notes -- -- 250,000 249,992
Federal Farm Credit Bank Notes -- -- 100,000 100,019
----------------------------------------------------
Total investment securities 3,346,562 3,303,276
Mortgage backed securities -- -- 218,323 219,775
----------------------------------------------------
$ 949,109 $ 911,125 $3,564,885 $3,523,051
====================================================
Available for sale:
Investment securities:
U.S. Treasury Obligations $ 497,578 $ 496,960 $ -- $ --
U.S. Agency Obligations 750,000 747,000 -- --
----------------------------------------------------
1,247,578 1,243,960 -- --
Mutual Fund 561,084 564,702 528,673 528,673
Required investment in Federal Home Loan
Bank Stock 622,000 622,000 548,300 548,300
Other 10,000 10,000 10,000 10,000
----------------------------------------------------
$2,440,662 $2,440,662 $1,086,973 $1,086,973
====================================================
</TABLE>
The following table shows the maturities, including scheduled principal
reductions, of the Bank's bonds and mortgage backed securities at March 31,
1997 and the weighted average yield on such securities.
<TABLE>
<CAPTION>
After 1 After 5
Year but Years but
Within Within Within After
1 Year 5 Years 10 Years 10 Years Total
------ ---------- --------- -------- ----------
<S> <C> <C> <C> <C> <C>
Held to maturity:
U.S. Treasury Obligations:
Book Value $ -- $ 299,109 $ -- $ -- $ 299,109
Yield -- 4.75% -- -- 4.75%
Federal Home Loan Bank
Bonds:
Book Value -- 200,000 200,000 -- 400,000
Yield -- 3.5% 4.00% -- 3.75%
Federal National Mortgage Association Bonds:
Book Value -- 250,000 -- -- 250,000
Yield -- 4.75% -- -- 4.75%
-----------------------------------------------------------
Held to Maturity Total -- 749,109 200,000 -- 949,109
-----------------------------------------------------------
Available for Sale:
U.S. Treasury Obligations:
Book Value $ -- $ 497,578 $ -- $ -- $ 497,578
Yield -- 5.75% -- -- 5.75%
Federal National Mortgage Association Bonds
Book Value -- 750,000 -- -- 750,000
Yield -- 6.23% -- -- 6.23%
-----------------------------------------------------------
Available for Sale Total -- 1,247,578 -- -- 1,247,578
-----------------------------------------------------------
Total $ -- $1,996,687 $200,000 $ -- $2,196,687
===========================================================
</TABLE>
Sources of Funds
General. The Bank's primary sources of funds are deposits, borrowings and
regular payments of loan principal and interest and prepayments of loan
principal. Deposit inflows and outflows are influenced by general interest rate
conditions. The Bank has been able to respond to market rate changes by
borrowing from the Federal Home Loan Bank (the "FHLB") of Boston in the form of
fixed- rate loans with a variety of maturities.
Deposits. The Bank offers a variety of deposit products ranging in
maturity from deposits withdrawable upon demand to certificates with maturities
of up to 5 years. Deposits are attracted principally from within the Bank's
market area. Waldoboro relies primarily upon customer service, advertising and
competitive pricing policies to attract and retain deposits.
Regular savings deposits increased $1,048,510 or 22.6% during the year
ended March 31, 1997. Balances in money market deposit accounts increased
$379,190 or 8.0% during the year ended March 31, 1997. NOW accounts and demand
deposits increased $893,418 or 18.2% and certificates of deposit decreased
$1,957,322 or 7.1% during the year ended March 31, 1997.
As a member of the FHLB System, the Bank is required to maintain liquid
assets at minimum levels which vary from time to time. The Bank's investment
portfolio, cash and deposits in other institutions provide not only a source of
income but also a source of liquidity to meet lending demands, fluctuations in
deposit flows and required liquidity levels. The Bank has periodically used
excess liquidity to meet heavy loan demand. The relative mix of investments and
loans in the Bank's portfolio is dependent upon the Bank's judgment, from time
to time, as to the attractiveness of yields available on loans as compared to
available investment yield. The Bank also considers the relative safety of the
investment and loans and the liquidity needs of Waldoboro. The Bank's
investment portfolio is managed in compliance with the investment policy
established by the Board.
The Bank offers short-term certificates of deposit and other deposit
alternatives that are more responsive to market conditions than the Bank's
passbook deposits and the longer maturity fixed-rate certificates that have
traditionally served as the Bank's primary sources of deposits. Waldoboro's
overall variety of deposits has enabled the Bank to be competitive in obtaining
funds when necessary and has enabled it to respond with more flexibility to the
threat of disintermediation.
Historically, the Bank has obtained deposits primarily from the areas in
Maine immediately surrounding its offices. Management expects to continue
obtaining substantially all of its deposits from its Lincoln and Knox County
market areas. It is the Bank's policy not to accept brokered deposits.
The distribution of a financial institution's deposits in terms of
interest rate paid is a major determinant of its average cost of funds, while
the distribution of an institution's deposits in terms of maturity has in the
past been an important indicator of the relative stability of its supply of
lendable funds. Management of the Bank believes that because of improved
pricing flexibility, and the relatively low cost of borrowings from the FHLB,
the distribution of deposit maturity is of less importance as an indicator of
stability of its deposits as a source of lendable funds.
The following table sets forth the average balances of deposits of the
Bank in dollar amounts and as a percent of total deposits, the interest expense
and the weighted average rate for each type of deposit account for the periods
indicated.
<TABLE>
<CAPTION>
Year Ended March 31, 1997
-------------------------------------------------
% of
Average Average Interest Average
Balance Deposits Expense Rate
----------- -------- ---------- --------
<S> <C> <C> <C> <C>
Demand deposits $ 2,113,328 5.08% $ -- --%
NOW Accounts 3,482,742 8.37 70,486 2.02
Savings 4,850,950 11.66 135,482 2.79
Money Market deposit accounts 4,884,566 11.74 188,740 3.86
Certificates of deposit 26,255,429 63.15 1,514,948 5.77%
-----------------------------------------------
$41,587,015 100.00% $1,909,656 4.59%
===============================================
<CAPTION>
Year Ended March 31, 1996
-------------------------------------------------
% of
Average Average Interest Average
Balance Deposits Expense Rate
----------- -------- ---------- --------
<S> <C> <C> <C> <C>
Demand deposits $ 1,149,086 2.88% $ -- --%
NOW Accounts 3,137,280 7.87 72,855 2.32
Savings 4,649,322 11.67 128,570 2.77
Money Market deposit accounts 4,579,405 11.49 209,556 4.58
Certificates of deposit 26,334,638 66.09 1,561,752 5.93
-----------------------------------------------
$39,849,731 100.00% $1,972,733 4.95%
===============================================
</TABLE>
The maturities of certificates of deposit in amounts greater than
$100,000 at March 31, 1997 are set forth in the following table.
<TABLE>
<CAPTION>
Maturity Amount
--------------- ----------
<S> <C>
0 - 3 months $ --
3 - 6 months 320,779
6 - 12 months 939,326
After 12 months 400,000
----------
$1,660,105
==========
</TABLE>
The Bank offers a number of investment alternatives to depositors.
Interest rates paid and minimum balance requirements for deposits may vary from
time to time as determined by the Bank's management, based on prevailing market
conditions. Waldoboro's deposit accounts are obtained primarily from the areas
immediately surrounding its offices.
The Bank has offered IRA accounts and intends to continue to do so in the
future. At March 31, 1997, $3,201,123 of IRA accounts were on deposit with the
Bank.
Borrowings. Deposits are Waldoboro's primary source of funds for lending
activities and other general business purposes. During periods when the supply
of lendable funds cannot meet the demand for such activities and purposes, the
FHLB system seeks to provide a portion of the funds necessary through advances
to its members. Historically, Waldoboro has relied on advances from the FHLB of
Boston rather than other sources. Waldoboro has used such advances from the
FHLB of Boston as an alternative to deposits when rates are favorable as a
means to enhance the Bank's interest rate spread and as a source of lendable
funds. Such advances have also been primarily used to fund a portion of the
Bank's Adjustable Rate Mortgage portfolio which, by shortening the average
maturity of its loan portfolio, makes the Bank less sensitive to future
interest rate fluctuations. At March 31, 1997, Waldoboro had $11,440,000 in
outstanding advances from the FHLB at a weighted average stated rate of 5.79%.
Waldoboro also has access to a line of credit approximating $1,050,000 at
March 31, 1997, with the FHLB of Boston for short-term borrowing purposes. The
Bank did not have any outstanding borrowings under this line of credit at March
31, 1997.
The Bank intends to continue to fund its mortgage loan commitments with
borrowed funds from the FHLB of Boston when the supply of other lendable funds
is insufficient or more costly and/or when such borrowings would enhance the
Bank's ability to manage its mix of assets and liabilities.
Asset/Liability Management
The following table sets forth the scheduled repricing or maturity of the
Bank's financial assets and liabilities at March 31, 1997.
For purposes of this table no portfolio loans are assumed to prepay
before their scheduled maturity date. Also, all NOW, Savings, and Money Market
deposit accounts are assumed to reprice or mature in one year. Neither of these
assumptions may be indicative of actual future events.
<TABLE>
<CAPTION>
1 Year >1 to 2 >2 to 3 >3 to 5 >5 to 10 Over
or Less Years Years Years Years 10 Years Total
------------ ------------ ------------ ------------ ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Financial Assets (1):
Mortgage loans & mortgage
backed securities:
Balloon & adjustable-rate
(all property types) $ 15,223,039 $ 5,426,289 $ 5,128,655 $ 521,767 $ 3,137,614 $ 87,013 $29,524,377
Fixed-rate 1-4 family 51,467 123,339 7,291 263,889 714,044 5,381,903 6,541,933
Fixed-rate - other -- -- -- -- -- -- --
Consumer & other loans 5,657,495 1,068,466 1,570,839 1,584,804 1,609,822 1,836,719 13,328,145
Investments & other interest-
earning assets 3,431,767 1,444,396 -- 750,291 200,000 -- 5,826,454
--------------------------------------------------------------------------------------------------
Total financial assets $ 24,363,768 $ 8,062,490 $ 6,706,785 $ 3,120,751 $ 5,661,480 $7,305,635 $55,220,909
==================================================================================================
Financial Liabilities (1):
Deposits:
NOW accounts, Savings and
Money Market Accounts $ 16,620,866 $ -- $ -- $ -- -- $ -- $16,620,866
Certificates of deposit 19,333,540 2,734,896 2,717,624 761,527 12,245 -- 25,559,832
FHLB borrowings 6,750,000 3,475,000 1,000,000 -- -- 215,000 11,440,000
--------------------------------------------------------------------------------------------------
Total financial liabilities $ 42,704,406 $ 6,209,896 $ 3,717,624 $ 761,527 $ 12,245 $ 215,000 $53,620,698
==================================================================================================
GAP $(18,340,638) $ 1,852,594 $ 2,989,161 $ 2,359,224 $ 5,649,235 $7,090,635
GAP to total assets (31.13)% 3.14% 5.07% 4.00% 9.59% 12.03%
Cumulative GAP $(18,340,638) $(16,488,044) $(13,498,883) $(11,139,659) $(5,490,424) $1,600,211
Cumulative GAP to total assets (31.13)% (27.98)% (22.91)% (18.90)% (9.32)% 2.72%
<FN>
- -------------------
<F1> For purposes of this table, financial assets are defined as all interest
earning assets other than FHLB and other stock. Financial liabilities
consist of all interest- bearing liabilities.
</FN>
</TABLE>
Employees
At March 31, 1997, the Bank had a total of 22 full-time employees and two
part-time employees, none of whom were represented by collective bargaining
units. The Bank offers its employees a variety of training programs designed to
enhance their skills. The Bank also provides its full-time employees with a
benefits package which includes life, long-term disability and medical
insurance, a 401(k) plan and a pension plan. Management of Waldoboro believes
that good relations are maintained with its employees.
Service Corporation
The Bank has one service corporation, First Waldoboro Corporation ("First
Waldoboro"). First Waldoboro was originally formed for the purpose of offering
certain securities brokerage services. However, management of the Bank
subsequently determined not to use First Waldoboro for that purpose, and the
service corporation is presently inactive.
Federal regulations permit the Bank to invest an amount up to 2% of its
assets in the capital stock, obligations and other securities of its service
corporations. This amount is increased to 3% if the additional 1% is used
primarily for community, inner city or community development purposes. At March
31, 1997, the Bank's direct investment in First Waldoboro was $10,000.
Competition
Waldoboro faces strong price-oriented competition in the attraction of
deposits. Its most direct competition for deposits comes from the other thrifts
and commercial banks located in its primary market area of Knox and Lincoln
Counties. The Bank also faces additional significant competition for investors'
funds from short-term money market funds and other corporate and government
securities. The Bank is the sixth in asset size of the 11 SAIF-insured
institutions in the state.
The Bank competes for deposits principally by offering depositors a high
level of customer service, combined with a wide variety of savings programs, a
market rate of return, tax-deferred retirement program and other related
services. The Bank does not rely upon any individual, group or entity for a
material portion of its deposits.
The Bank's competition for real estate loans comes from mortgage banking
companies, other thrift institutions and commercial banks. The Bank competes
for loan originations primarily through the interest rates and loan fees it
charges and the efficiency and quality of services it provides borrowers, real
estate brokers and builders. The Bank's competition for loans varies from time
to time depending upon the general availability of lendable funds and credit,
general and local economic conditions, current interest rate levels, volatility
in the mortgage markets and other factors which are not readily predictable.
Regulation
General
As a federal savings bank chartered by the OTS, the Bank is subject to
extensive regulation, examination and supervision by the OTS. The Bank is also
a member of the FHLB System, and its deposit accounts are insured by the SAIF,
which is administered by the FDIC. By virtue of federal insurance of its
deposits, the Bank is also subject to regulation and supervision by the FDIC,
which supervision and regulation is intended primarily to protect depositors
and the SAIF. Certain of these regulatory requirements are described below or
elsewhere herein.
The Home Owners' Loan Act
The Bank's lending and investment powers are governed by the Home Owner's
Loan Act, as amended ("HOLA") and the regulations thereunder. Under these laws
and regulations, the Bank may invest in mortgage loans secured by residential
and commercial real estate, commercial and consumer loans, certain types of
debt securities, and certain other assets. The Bank may also establish service
corporations that may engage in activities not otherwise permissible for the
Bank, including certain real estate equity investments and securities and
insurance brokerage. These investment powers are subject to various
limitations, including (a) a prohibition against the acquisition of any
corporate debt security that is not rated in one of the four highest rating
categories, (b) a limit of 400% of an association's capital on the aggregate
amount of loans secured by non-residential real estate property, (c) a limit of
20% of an association's assets on commercial loans, (d) a limit of 35% of an
association's assets on the aggregate amount of consumer loans and acquisitions
of certain debt instruments, (e) a limit of 5.0% of total assets on
non-conforming loans (loans in excess of the specific limitations of the HOLA)
and (f) a limit of 5% of the greater of 5% of assets or an association's
capital on certain construction loans made for the purpose of financing what is
or is expected to become residential property.
Insurance of Deposits. The Bank's deposits are insured up to applicable
limits under the SAIF as administered by the FDIC under the Federal Deposit
Insurance Act ("FDIA"). The assessments paid by depository institutions for the
insurance of deposits are determined on a risk-based assessment system pursuant
to which each institution is assigned to one of nine categories. For the first
three quarters of 1996, SAIF-insured institutions paid deposit insurance
assessments at annual rates that ranged from 0.23% of deposits for the least
risky institutions to 0.31% of deposits for the most risky institutions. In
contrast, the least risky institutions insured under the Bank Insurance Fund
("BIF") paid deposit insurance assessments at the annual minimum of $2,000, and
the other BIF-insured institutions paid assessments at rates that ranged from
0.03% to 0.27% of deposits.
On September 30, 1996, the Deposit Insurance Funds Act of 1996 (the
"Funds Act") was enacted into law to address, among other things, the disparity
in the deposit insurance assessment rates imposed on BIF-insured and on
SAIF-insured institutions. The Funds Act amended the FDIA in several ways to
recapitalize the SAIF and to reduce the disparity in the assessment rates for
the BIF and the SAIF. To recapitalize the SAIF, the Funds Act authorized the
FDIC to impose a special assessment on all institutions with SAIF-assessable
deposits in the amount necessary to recapitalize the SAIF. As implemented by
the FDIC, the special assessment was fixed, subject to adjustment, at 0.657% of
an institution's SAIF-assessable deposits, and the special assessment was paid
on November 27, 1996. The special assessment was based on the amount of
SAIF-assessable deposits held at March 31, 1995, as adjusted under the Funds
Act. For the Bank, the special assessment on the deposits held on March 31,
1995, was $241,299 (before giving effect to any tax benefits).
The Funds Act also provides that the FDIC cannot assess regular insurance
assessments for an insurance fund unless required to maintain or to achieve the
designated reserve ratio of 1.25%, except on those of its member institutions
that are not classified as "well capitalized" or that have been found to have
"moderately severe" or "unsatisfactory" financial, operational or compliance
weaknesses. The Bank has not been so classified by the FDIC or the OTS. In view
of the recapitalization of the SAIF, the FDIC reduced the annual assessment
rates for SAIF-assessable deposits for periods beginning on October 1, 1996.
For the last quarter of 1996, the reduced annual assessment rates ranged from
0.18% to 0.27% of deposits. Beginning with January 1, 1997, the annual
assessment rates are the same for both BIF-insured and SAIF-insured
institutions, with the annual assessment rates ranging from 0.0% to 0.27% of
deposits.
In addition, the Funds Act expanded the assessment base for the payments
on the bonds ("FICO bonds") issued in the late 1980s by the Financing
Corporation to recapitalize the now defunct Federal Savings and Loan Insurance
Corporation. Beginning January 1, 1997, the deposits of both BIF- and
SAIF-insured institutions will be assessed for the payments on the FICO bonds.
Until December 31, 1999, or such earlier date on which the last savings
association ceases to exist, the rate of assessment for BIF-assessable deposits
will be one-fifth of the rate imposed on SAIF-assessable deposits. The FDIC has
reported that, for the semiannual period beginning on January 1, 1997, the rate
of assessments for the payments on the FICO bonds will be 0.013% for
BIF-assessable deposits and 0.0648% for SAIF- assessable deposits.
The Funds Act also provides for the merger of the BIF and SAIF on January
1, 1999, with such merger being conditioned upon the prior elimination of the
thrift charter. The Funds Act required the Secretary of the Treasury to conduct
a study of relevant factors with respect to the development of a common charter
for all insured depository institutions and the abolition of separate charters
for banks and thrifts and to report the Secretary's conclusions and the
findings to the Congress. The Secretary of the Treasury has recommended that
the separate charter for thrifts be eliminated only if other legislation is
adopted that permits bank holding companies to engage in certain non-financial
activities. Absent legislation permitting such non-financial activity, the
Secretary of the Treasury recommended retention of the thrift charter. The
Secretary of the Treasury also recommended the merger of the BIF and the SAIF
irrespective of whether the thrift charter is eliminated. Other proposed
legislation has been introduced in Congress that would require thrift
institutions to convert to bank charters.
An insured institution is subject to periodic examination, and regulators
may revalue the assets of an institution, based upon appraisals, and require
establishment of specific reserves in amounts equal to the difference between
such revaluation and the book value of the assets. SAIF insurance of deposits
may be terminated by the FDIC, after notice and hearing, upon a finding by the
FDIC that a savings institution has engaged in an unsafe or unsound practice,
or is in an unsafe or unsound condition to continue operations, or has violated
any applicable law, regulation, rule, order or condition imposed by the OTS or
the FDIC. Management of the Bank is not aware of any practice, condition or
violation that might lead to termination of its deposit insurance.
Loan Limitations. Under HOLA, savings associations are subject to the
same limitations on the permissible amount of loans to one borrower that apply
to national banks. These limitations generally do not permit loans to one
borrower or related parties in excess of 15% of the institution's unimpaired
capital and surplus. Loans in an amount equal to an additional 10% of
unimpaired capital and surplus may be made to a borrower or related parties if
the loans are fully secured by, among other things, readily marketable
securities. The Bank believes that these provisions do not materially adversely
affect its lending activities.
The Qualified Thrift Lender Test. A savings institution is required to
maintain at least 65 percent of its portfolio assets in Qualified Thrift
Investments in at least 9 of the most recent 12 months. Upon failing to
maintain compliance with the QTL test, a savings institution is required either
to convert to a commercial bank charter or to operate subject to certain
restrictions imposed on the operations of national banks. Qualified Thrift
Investments include loans to purchase, construct or improve residential
housing; home equity loans; mortgage-backed securities; and subject to
restrictions, consumer loans, loans to finance hospitals, churches and other
public facilities, as well as certain other obligations. As of March 31, 1997,
the Bank had met the Qualified Thrift Lender test in the requisite months and
expects to continue to operate as a Qualified Thrift Lender in the future.
Enforcement. The OTS, as the primary regulator of savings institutions,
is primarily responsible for the initiation and prosecution of any enforcement
action it may deem to be required, but the FDIC also has authority to impose
enforcement action independently after following certain procedures. Under
FIRREA, civil penalties are classified into three levels, with amounts
increasing with the severity of the violation.
The OTS has the authority to impose enforcement action on a savings
institution that fails to comply with its regulatory requirements, particularly
with respect to its capital requirements. Possible enforcement actions include
the imposition of a capital plan and termination of deposit insurance. The FDIC
also may recommend that the Director of OTS take enforcement action. If action
is not taken by the Director, the FDIC would have authority to compel such
action under certain circumstances.
Capital Requirements. Each of the three capital standards applicable to
savings institutions is discussed separately below.
Tangible Capital Requirement. Each savings institution is required to
maintain tangible capital equal to at least 1.5% of its adjusted total assets.
Tangible capital includes common stockholders' equity (including retained
earnings), certain noncumulative perpetual preferred stock and related surplus,
and minority interests in the equity accounts of fully consolidated
subsidiaries. In computing tangible capital, intangible assets must, in
general, be deducted from an institution's assets and capital, and mortgage
servicing rights may be included within certain limitation on amount if the
rights satisfy certain requirements. In determining compliance with capital
requirements, equity and debt investments in subsidiaries that are not
"includable subsidiaries," which term includes subsidiaries engaged solely in
activities permissible for a national bank, in activities only as an agent for
its customers, or in mortgage- banking activities, are excluded from an
institution's assets and capital. At March 31, 1997, the Bank had no
investments in or extensions of credit to nonincludable subsidiaries, and its
tangible capital amounted to approximately $5,025,000 or 8.9% of its adjusted
total assets.
Core Capital Requirements. Capital requirements also require core capital
equal to at least 3% of an institution's adjusted total assets. Core capital is
defined similarity to tangible capital, but core capital also includes certain
qualifying supervisory goodwill and certain purchased credit card
relationships. At March 31, 1997, the Bank had no supervisory goodwill and the
Bank's core capital amounted to approximately $5,025,000 or 8.9% of its
adjusted total assets.
Risk-Based Capital Requirement. Each savings institution is also required
to maintain total capital equal to at least 8% of its risk-weighted assets.
Total capital consists of the sum of core capital and supplementary capital,
provided that supplementary capital cannot exceed core capital, as previously
defined.
Supplementary capital includes (i) permanent capital instruments such as
cumulative perpetual preferred stock, perpetual subordinated debt, and
mandatory convertible subordinated debt, (ii) maturing capital instruments such
as subordinated debt, intermediate-term preferred stock and mandatory
redeemable preferred stock, subject to an amortization schedule, and (iii)
general valuation loan and lease loss allowances up to 1.25% of risk-weighted
assets.
In computing both assets and total capital for purposes of the risk-based
capital ratio, the portion of land loans and nonresidential construction loans
in excess of an 80% loan-to-value ratio and non-qualifying equity investments
are each deducted. At March 31, 1997, the Bank had no non-qualifying equity
investments, excess land loans or nonresidential construction loans.
The risk-based capital regulation assigns each balance sheet asset held
by a savings institution to one of four risk categories, which are based on the
amount of credit risk associated with that particular class of assets. Assets
excluded for purposes of calculating capital are excluded in calculating
risk-weighted assets. The risk categories range from 0% for assets such as cash
and securities issued by, or backed by the full faith and credit of, the U.S.
Government to 100% for assets such as consumer loans, repossessed assets or
assets more than 90 days past due, and certain equity investments that have the
same risk characteristics as foreclosed as determined by the OTS. Qualifying
residential mortgage loans and qualifying residential construction loans are
assigned a 50% risk weight, while nonqualifying residential mortgage loans and
that portion of land loans and nonresidential construction loans which do not
exceed an 80% loan-to-value ratio are assigned 100% risk weight.
The book value of assets in each risk category is multiplied by the
weighing factor (from 0% to 100%) assigned to that category. These products are
then totaled to arrive at total risk-weighted assets. Off-balance sheet items
are included in risk-weighted assets by converting them to an approximate
balance sheet "credit equivalent amount" based on a conversion schedule. The
credit equivalent amounts are then assigned to risk categories in the same
manner as balance sheet assets and included in risk- weighted assets.
At March 31, 1997, the Bank's total capital amounted to approximately
$5,320,000 or 15.1% of its total risk-weighted assets.
When determining its compliance with the risk-based capital requirement,
a savings institution with "above normal" interest rate risk is required to
deduct a portion of its total capital to account for any "above normal"
interest rate risk. An institution's interest rate risk is a measure of the
potential percentage decline in the economic value of its portfolio equity
resulting from a hypothetical 200 basis point increase or decrease in interest
rates (whichever change results in the greater decline). A savings association
whose measured interest rate risk exceeds 2% would be considered to have "above
normal" risk. The amount to be deducted from capital is an amount equal to 50%
of its "excess" interest-rate risk exposure (the percentage in excess of 2%)
multiplied by the estimated economic value of its total assets. While the
effective date of the interest rate risk requirement was January 1, 1994, the
OTS has indefinitely deferred implementation of the interest rate risk
deduction. The OTS continues to monitor the interest rate risk of individual
institutions and retains the right to impose additional capital requirements on
individual institutions. The Bank remains in compliance with its risk-based
capital requirements as would be adjusted by the interest-rate risk component.
The following table sets forth the various components of the regulatory
capital for the Bank at March 31, 1997.
<TABLE>
<CAPTION>
Minimum
Required Actual Excess
-------------- --------------- ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Tangible 1.5% $ 888 8.9% $5,025 $4,137
Core Leverage 3.0% $1,776 8.9% $5,025 $3,249
Risk Based 8.0% $2,822 15.1% $5,320 $2,498
</TABLE>
Dividends. OTS regulations impose limitations on the ability of savings
institutions to engage in various distributions of capital such as dividends,
stock repurchases and cash-out mergers. The regulation utilizes a three-tiered
approach which permits various levels of distributions based primarily upon a
savings institution's capital level.
A savings institution that has capital in excess of all applicable
regulatory capital requirements is considered to be a Tier 1 savings
institution, and it may make capital distributions during a calendar year
without applying for regulatory approval in an aggregate amount up to (a) 100%
of its net income to date during the calendar year plus the amount that would
reduce by one-half its surplus capital ratio at the beginning of the calendar
year or (b) 75% of its net earnings for the previous four quarters. Capital
distributions in excess of such amount require advance approval from the OTS.
Other law prohibits insured depository institutions, such as the Bank, from
making any capital distribution if, after such distribution, the institution
would fail to meets its minimum capital requirements.
TAXATION
Federal Taxation
General. The Holding Company and the Bank will report their income on the
basis of a taxable year ending March 31 using the accrual method of accounting
and will be subject to federal income taxation in the same manner as other
corporations with some exceptions. The following discussion of tax matters is
intended only as a summary and does not purport to be a comprehensive
description of the tax rules applicable to the Bank or the Holding Company.
Recent Tax Legislation Regarding Tax Bad Debt Reserves. Prior to the
enactment, on August 20, 1996, of the Small Business Job Protection Act of 1996
(the "Small Business Act"), for federal income tax purposes, thrift
institutions such as the Bank, which met certain definitional tests primarily
relating to their assets and the nature of their business, were permitted to
establish tax reserves for bad debts and to make annual additions thereto,
which additions could, within specified limitations, be deducted in arriving at
their taxable income. The Bank's deduction with respect to "qualifying loans,"
which are generally loans secured by certain interests in real property, could
be computed using an amount based on a six-year moving average of the Bank's
actual loss experience (the "Experience Method"), or a percentage equal to 8.0%
of the Bank's taxable income (the "PTI Method"), computed without regard to
this deduction and with additional modifications and reduced by the amount of
any permitted addition to the non-qualifying reserve.
Under the Small Business Act, the PTI Method was repealed and the Bank,
as a "small bank" (one with assets having an adjusted basis of $500 million or
less), is required to use the Experience Method of computing additions to its
bad debt reserve for taxable years beginning with the Bank's taxable year
beginning April 1, 1996. In addition, the Bank will be required to recapture
(i.e., take into taxable income) over a six-year period, beginning with the
Bank's taxable year beginning April 1, 1996, the excess of the balance of its
bad debt reserves (other than the supplemental reserve) as of March 31, 1996
over the greater of (a) the balance of its "base year reserve," i.e., its
reserves as of March 31, 1988 or (b) an amount that would have been the balance
of such reserves as of March 31, 1996 had the Bank always computed the
additions to its reserves using the Experience Method. However, such recapture
requirements were suspended for each of the two successive taxable years
beginning April 1, 1996 in which the Bank originates a minimum amount of
certain residential loans during such years that is not less than the average
of the principal amounts of such loans made by the Bank during its six taxable
years preceding April 1, 1996. Since the Bank has already provided a deferred
income tax liability related to this for financial reporting purposes, there
will be no adverse impact to the Bank's financial condition or results of
operations from the enactment of this legislation.
Distributions. To the extent that the Bank makes "nondividend
distributions" to shareholders, such distributions will be considered to result
in distributions from the Bank's base year reserve and then from its
supplemental reserve for losses on loans, and an amount based on the amount
distributed will be included in the Bank's taxable income. Nondividend
distributions include distributions in excess of the Bank's current and
accumulated earnings and profits, distributions in redemption of stock and
distributions in partial or complete liquidation. However, dividends paid out
of the Bank's current or accumulated earnings and profits, as calculated for
federal income tax purposes, will not constitute nondividend distributions and,
therefore, will not be included in the Bank's income.
The amount of additional taxable income created from a nondividend
distribution is an amount that, when reduced by the tax attributable to the
income, is equal to the amount of the distribution. Thus, approximately one and
one-half times the nondividend distribution would be includable in gross income
for federal income tax purposes, assuming a 34% federal corporate income tax
rate. The Bank does not intend to pay dividends that would result in a
recapture of any portion of its tax bad debt reserve.
Corporate Alternative Maximum Tax. The Internal Revenue Code (the "Code")
imposes a tax on alternative minimum taxable income ("AMTI") at a rate of 20%.
Only 90% of AMTI can be offset by net operating losses. AMTI is also adjusted
by determining the tax treatment of certain items in a manner that negates the
deferral of income resulting from the regular tax treatment of those items.
Thus, the Bank's AMTI is increased by an amount equal to 75% of the amount by
which the Bank's adjusted current earnings exceeds its AMTI (determined without
regard to this adjustment and prior to reduction for net operating losses). In
addition, for taxable years beginning after December 31, 1986, and before
January 1, 1996, an environmental tax of .12% of the excess of AMTI (with
certain modifications) over $2.0 million is imposed on corporations, including
the Bank, whether or not an Alternative Maximum Tax ("AMT") is paid. The Bank
does not expect to be subject to the AMT. Under President Clinton's fiscal year
1998 budget proposal, as submitted to Congress on February 6, 1997 ("President
Clinton's Proposal"), the corporate environmental income tax would be
reinstated for taxable years beginning after December 31, 1996 and before
January 1, 2008. Under Congressional legislative proposals, the AMT would be
repealed for "small corporations," effective for taxable years beginning after
December 31, 1997.
Dividends-Received Deduction and Other Matters. The Holding Company may
exclude from its income 100% of dividends received from the Bank as a member of
the same affiliated group of corporations. The corporate dividends-received
deduction is generally 70% in the case of dividends received from unaffiliated
corporations with which the Holding Company and the Bank will not file a
consolidated tax return, except that if the Holding Company or the Bank owns
more than 20% of the stock of a corporation distributing a dividend, then 80%
of any dividends received may be deducted. Under President Clinton's Proposal,
the 70% dividends-received deduction would be reduced to 50% with respect to
dividends paid after enactment of any such legislation.
The Bank's federal income tax returns were audited by the IRS for the
years ended March 31, 1992 and 1993.
Maine State Taxation
The State of Maine imposes a franchise tax on banks, such as Waldoboro,
doing business in Maine. The tax is comprised of two components. The first
component is a 1% tax on Maine net income as reported on such bank's federal
income tax return. The amount represents net book income after reduction for
federal and state income and franchise taxes. The second component is a tax of
$.08 per $1,000 of assets at the end of the year as reported on Schedule L of
the Bank's federal income tax return.
Item 2. Description of Property
The Holding Company neither owns nor leases any real property. It
presently uses the premises, equipment and furniture of Waldoboro without
direct payment of any rental fees to the Bank. The Bank conducts its business
out of its offices in Waldoboro and Rockland. The office building in Waldoboro
is owned by the Bank and is a modern, full-service facility with ample parking
and a convenient location on U.S. Route 1. The Rockland office is a newly
constructed facility, offering full-service and ample parking. The facility is
located in a high traffic area on U.S. Route 1.
The following table sets forth certain information with respect to the
Bank's principle executive offices in Waldoboro and its new branch in Rockland
as of March 31, 1997:
<TABLE>
<CAPTION>
Year
Location Occupied/Opened Owned(1)
--------------------------- --------------- --------
<S> <C> <C>
Principal Executive Offices 1988 $736,135
1768 Atlantic Highway
P. O. Box 589
Waldoboro, Maine
Rockland Branch Office 1995 $363,312
73 Camden Street
P. O. Box 669
Rockland, Maine
<FN>
- -------------------
<F1> Net of depreciation.
</FN>
</TABLE>
Item 3. Legal Proceedings
From time to time, the Holding Company and the Bank are involved in
routine litigation stemming from the operations of the Bank. During the fiscal
year ended March 31, 1997, however, there was no material litigation pending to
which the Holding Company or the Bank was a party or of which the property of
the Holding Company or the Bank was the subject.
Item 4. Submission of Matters to a Vote of Security Holders
During the fourth quarter of fiscal year ended March 31, 1997, there was
no matter that was submitted to a vote of the stockholders.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
On March 31, 1997 there were 231,439 shares of the Holding Company's
Common Stock outstanding held by approximately 320 holders of record. Also at
such date, the Holding Company had granted options to purchase 9,963 shares of
the Holding Company's Common Stock.
The following table shows market price information for the Holding
Company's Common Stock. The prices set forth below represent the high and low
bid prices of the Holding Company's stock during the periods indicated. Such
over the counter market quotations reflect inter-dealer prices without retail
markups, mark-down or commission and may not necessarily represent actual
transactions. The Holding Company's common stock is traded on the National
Association of Securities Dealers Automated Quotation System (NASDAQ) under the
symbol "MCBN."
<TABLE>
<CAPTION>
Cash
Dividends
Paid per
Quarter Ended High Low share
------------------ ------ ------ ---------
<S> <C> <C> <C>
March 31, 1995 $14.75 $14.50 $ --
June 30, 1995 17.25 14.50 0.23
September 30, 1995 18.75 15.00 --
December 31, 1995 20.25 15.50 0.25(1)
March 31, 1996 20.00 17.50 --
June 30, 1996 20.00 18.00 0.25
September 30, 1996 20.00 18.00 --
December 31, 1996 19.00 18.75 0.26
March 31, 1997 19.00 18.75
<FN>
- -------------------
<F1> During the quarter ended December 31, 1995 the Holding Company declared a
5% stock dividend in addition to the $0.25 per share cash dividend.
</FN>
</TABLE>
On April 15, 1997 the Holding Company declared a dividend of $0.26 per
share to stockholders of record on June 2, 1997 and payable June 30, 1997. See
"Regulation - Dividends" for information about the Holding Company's ability to
pay dividends.
Item 6. Management's Discussion and Analysis.
Management's Discussion and Analysis, on Pages 1 through 10 of the Annual
Report for the year ended March 31, 1997, is incorporated herein by reference.
Item 7. Financial Statements.
See Item 13 for index to Financial Statements which are incorporated by
reference.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Not applicable.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act.
Information regarding Directors, Executive Officers and control persons
and compliance with Section 16(a) of the Exchange Act on Page 9 of the Proxy
Statement dated June 6, 1997 is incorporated herein by reference.
Item 10. Executive Compensation.
Information regarding Executive Compensation on Page 8 of the Proxy
Statement dated June 6, 1997 is incorporated herein by reference.
Item 11. Security Ownership of Certain Beneficial Owners and Management.
Information regarding security ownership of certain beneficial owners and
management on Pages 2 through 4 of the Proxy Statement dated June 6, 1997 is
incorporated herein by reference.
Item 12. Certain Relationships and Related Transactions.
Information regarding certain relationships and related transactions on
Page 10 of the Proxy Statement dated June 6, 1997 is incorporated herein by
reference.
Item 13. Exhibits.
A) 1) The following financial statements, the report thereon and notes
thereto, which follow, are incorporated by reference in Item 7 and
are incorporated by reference herein from the Holding Company's
1997 Annual Report:
<TABLE>
<CAPTION>
Pages in
Annual Report
-------------
<S> <C>
Report of Independent Auditors F-1
Consolidated Balance Sheets, March 31, 1997 and 1996 F-2 - F-3
Consolidated Statements of Income, Years Ended March 31,
1997, 1996 and 1995 F-4
Consolidated Statements of Changes in Stockholders'
Equity, Years Ended March 31, 1997, 1996 and 1995 F-5
Consolidated Statements of Cash Flows, Years Ended
March 31, 1997, 1996 and 1995 F-6 - F-7
Notes to Consolidated Financial Statements F-8 - F-29
</TABLE>
2) The Holding Company did not file any reports on Form 8-K during the
last quarter of the period covered by this report.
Exhibit No.
B) 3(i) Certificate of Incorporation (previously filed on June 26, 1996 as
an exhibit to the Holding Company's Form 10-KSB for the year ended
March 31, 1996, and incorporated herein by reference).
3(ii) Bylaws (previously filed on June 26, 1996 as an exhibit to the
Holding Company's Form 10-KSB for the year ended March 31, 1996,
and incorporated herein by reference).
10.1 Employment Agreement dated May 18, 1993 between Wesley E.
Richardson, the Holding Company and the Bank (previously filed on
June 26, 1996 as an exhibit to the Holding Company's Form 10-KSB
for the year ended March 31, 1996, and incorporated herein by
reference).
10.2 Recognition and Retention Plan of Mid-Coast Bancorp, Inc.
(previously filed on June 6, 1997 as Appendix A to the Holding
Company's Proxy Statement and incorporated herein by reference).
13 Annual Report to the Shareholders for the year ended March 31, 1997
(filed on June 27, 1997 and incorporated herein).
21 Subsidiaries of Issuer (previously filed on June 26, 1996 as an
exhibit to the Holding Company's Form 10-KSB for the year ended
March 31, 1996, and incorporated herein by reference).
23 Consent of Baker Newman & Noyes.
27 Financial Data Schedule.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereto duly authorized.
MID-COAST BANCORP, INC.
June 18, 1997 By: /s/ WESLEY E. RICHARDSON
-----------------------------------------
Wesley E. Richardson, President,
Chief Executive Officer and Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signatures Title Date
- ---------------------------- ----------------------------------- --------------
<S> <C> <C>
By: /s/ WESLEY E. RICHARDSON President, Chief Executive Officer, June 18, 1997
Wesley E. Richardson Treasurer and Director
By: /s/ WAITE W. WESTON Director and Chairman June 19, 1997
Waite W. Weston
By: /s/ ROBERT W. SPEAR Director and Vice Chairman June 19, 1997
Robert W. Spear
By: /s/ MAYNARD A. PROCK Director June 18, 1997
Maynard A. Prock
By: /s/ SHARON CROWE Director June 21, 1997
Sharon Crowe
By: /s/ LINCOLN DAVIS, III Director June 18, 1997
Lincoln Davis, III
By: /s/ RONALD DOLLOFF Director June 18, 1997
Ronald Dolloff
By: /s/ SAMUEL COHEN Director June 18, 1997
Samuel Cohen
By: /s/ LINCOLN ORFF Director June 19, 1997
Lincoln Orff
</TABLE>
To Our Shareholders:
Fiscal year 1997 was one of overall improvement for the Company. Over the
course of the year, our new Rockland branch reached $6.5 million in deposits
and contributed heavily to our loan growth. We believe such enhancements
increase our franchise value and will translate into future profits, ultimately
providing added value for our shareholders. Although we are pleased with these
accomplishments, we intend to strive for even greater success over the next
year.
Results of operations show net income was $242,775 at the March 31, 1997
year end, as compared to $303,447 at the previous year end. This decrease
reflects a one-time charge of $241,299 paid by the Bank to recapitalize the
Savings Association Insurance Fund ("SAIF"). Had the Bank not been required to
pay the one-time SAIF assessment, net income would have reached $394,388, or an
increase of 30% from the previous fiscal year. As a result of this payment,
future FDIC assessments will likely be reduced from 23 cents per $100 in
deposits to roughly 6.5 cents per $100 in deposits. At March 31, 1997, assets
had grown to $58,925,368, or an increase of 8.39% from the same period one year
earlier. Shareholder equity increased to $5,075,545, or 8.61% of assets,
resulting in a book value of $21.93 per share.
Total loans increased just over 15% during the past fiscal year. Despite
increased loan balances, non-accrual loan balances improved as did unrecognized
accrued interest. We believe our loan quality is excellent and remain committed
to maintain quality underwriting standards enhanced by in-depth loan review
procedures.
During the past year one of the Bank's goals was to position itself as a
leader in technology. Through commitment and hard work, our staff has
substantially completed the Bank's conversion to what may be regarded as a
state-of-the-art banking operation. We are convinced that the newly implemented
advanced hardware and software system is imperative in providing competitive
banking products and services to our present and future customers. The market
for such products and services has become highly competitive as non-bank
entities such as insurance companies, brokerage houses, mortgage lending
companies, and retail outlets are vying for the same customer base. It is our
belief that our enhanced ability to provide better information to management
with greater efficiency gives us a competitive edge to continue to market our
products and services to our present and future customers, providing a major
step toward growth and continued profitability.
Looking ahead we see the local economy growing at the current rate during
most of the upcoming fiscal year. We therefore expect continued strong loan
demand while gains in deposits are expected to be slow. Deposit growth in banks
on a national basis has been slow for the past several years mostly due to
competitive pressure from other investment vehicles for consumers.
On behalf of the Board of Directors, I would like to express my sincere
thanks to all our management and staff for their continued dedication
throughout the past fiscal year. To our shareholders, I remain greatly
appreciative of your commitment and support of Mid-Coast Bancorp, Inc.
Sincerely,
MID-COAST BANCORP, INC.
/s/ WESLEY E. RICHARDSON
Wesley E. Richardson
President and Chief Executive Officer
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
Management is pleased to present the following discussion and analysis of
the financial condition and results of operations of Mid-Coast Bancorp, Inc.
(the "Holding Company").
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The following tables set forth selected consolidated financial and other
data of the Holding Company at the dates and for the periods indicated and
should be read in conjunction with the Holding Company's Consolidated Financial
Statements and accompanying notes thereto and other financial information
included elsewhere herein.
<TABLE>
<CAPTION>
At March 31,
-------------------------------------------------------------------
1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Financial condition data:
Loans, net $48,979,032 $42,465,559 $43,358,622 $42,746,098 $39,588,746
Other interest-earning assets 6,523,454 9,422,891 7,125,838 5,381,549 5,840,037
Total assets 58,925,368 54,362,066 52,749,000 49,685,023 47,013,510
Deposits 42,180,698 41,816,902 37,121,110 35,023,932 36,564,259
Borrowings 11,440,000 7,465,000 10,715,000 10,215,000 6,475,000
Stockholders' equity $ 5,075,545 $ 4,926,077 $ 4,722,596 $ 4,297,094 $ 3,831,657
<CAPTION>
For the Years Ended March 31,
-------------------------------------------------------------------
1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Operating data:
Interest income $ 4,588,646 $ 4,389,689 $ 3,939,940 $ 3,728,547 $ 3,774,885
Interest expense 2,436,580 2,485,256 2,007,051 1,904,185 2,083,137
-------------------------------------------------------------------
Net interest income 2,152,066 1,904,433 1,932,889 1,824,362 1,691,748
Provision for loan losses 87,000 62,010 81,000 140,000 91,707
Other income 235,021 183,277 157,268 181,717 131,886
Other expense 1,913,379 1,565,259 1,293,308 1,167,565 1,118,995
-------------------------------------------------------------------
Income before income taxes 386,708 460,441 715,849 698,514 612,932
Income tax expense 143,933 156,994 248,474 232,462 241,781
-------------------------------------------------------------------
Income before accounting change 242,775 303,447 467,375 466,052 371,151
Change in accounting (1) -- -- -- 47,000 --
-------------------------------------------------------------------
Net income $ 242,775 $ 303,447 $ 467,375 $ 513,052 $ 371,151
-------------------------------------------------------------------
Earnings per share (2)
Income before accounting change $ 1.06 $ 1.33 $ 2.07 $ 2.11 $ 1.69
Change in accounting (1) -- -- -- .21 --
-------------------------------------------------------------------
Net income per share $ 1.06 $ 1.33 $ 2.07 $ 2.32 $ 1.69
-------------------------------------------------------------------
<CAPTION>
For the Years Ended March 31,
-------------------------------------------------------------------
1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Statistical data (3):
Interest rate spread 3.67% 3.30% 3.56% 3.53% 3.63%
Net yield on average earning
assets 4.07% 3.68% 3.88% 3.83% 3.98%
Return on average assets 0.43% 0.56% 0.90% 1.04% 0.84%
Return on average equity 4.74% 6.28% 10.38% 12.54% 10.15%
Average equity to average assets 9.12% 8.92% 8.67% 8.27% 8.24%
Dividend payout ratio 48.27% 35.30% 18.50% 11.92% 8.24%
<FN>
- --------------------
<F1> Represents cumulative effect of adoption of FASB Statement No. 109-"
Accounting For Income Taxes."
<F2> All years restated to reflect 3% stock dividend in 1993 and 5% stock
dividend in 1996.
<F3> Average balances were computed using month end amounts.
</FN>
</TABLE>
GENERAL
The following discussion should be read in conjunction with the
consolidated financial statements and related notes included in this report.
The financial condition and results of operations of the Holding Company
reflect the operations of its subsidiary, The Waldoboro Bank, F.S.B. (the
"Bank").
The Holding Company's net income depends largely upon net interest income
of the Bank, which is the difference between interest income from loans and
investments (interest-earning assets) and interest expense on deposits and
borrowed funds (interest-bearing liabilities). Net interest income is
significantly affected by general economic conditions, policies established by
regulatory authorities and competition. Other factors having a major impact on
net income include the provision for possible loan losses, gains and losses on
sales of loans, and operating expenses. The Bank seeks to reduce the
vulnerability of its operations to changes in interest rates, its interest rate
exposure, by managing the nature and composition of the Bank's interest-earning
assets and interest-bearing liabilities.
On September 30, 1996, the Deposit Insurance Funds Act of 1996 (the
"Funds Act") was enacted into law to recapitalize the Savings Association
Insurance Fund ("SAIF") and to reduce the disparity in the deposit insurance
assessment rates imposed on Bank Insurance Fund ("BIF") insured and
SAIF-insured institutions. To recapitalize SAIF, the Funds Act authorized the
FDIC to impose a special assessment on all institutions with SAIF-assessable
deposits. As implemented by the FDIC, the special assessment was fixed at
0.657% of an institution's SAIF-assessable deposits. For the Bank, a one-time
special assessment of $241,299 was charged to operations during the year ended
March 31, 1997 (before giving effect to any tax benefits).
In view of the recapitalization of the SAIF, the FDIC reduced the annual
assessment rates for SAIF-assessable deposits for periods beginning on October
1, 1996. For the last quarter of 1996, the reduced annual assessment rates
ranged from 0.18% to 0.27% of deposits. Beginning with January 1, 1997, the
annual assessment rates are the same for both BIF-insured and SAIF-insured
institutions, and the annual assessment rates range from 0.0% to 0.27% of
deposits. The Bank expects its assessment rate for the upcoming fiscal year to
be 0.065%.
The Funds Act also provides for the merger of the BIF and SAIF on January
1, 1999, with such merger being conditioned upon the prior elimination of the
thrift charter. The Funds Act required the Secretary of the Treasury to conduct
a study of relevant factors with respect to the development of a common charter
for all insured depository institutions and the abolition of separate charters
for banks and thrifts and to report the Secretary's conclusions and the
findings to the Congress. The Secretary of the Treasury has recommended that
the separate charter for thrifts be eliminated only if other legislation is
adopted that permits bank holding companies to engage in certain non-financial
activities. Absent legislation permitting such non-financial activity, the
Secretary of the Treasury recommended retention of the thrift charter. Other
proposed legislation has been introduced in Congress that would require thrift
institutions to convert to bank charters.
FINANCIAL CONDITION
Total assets at March 31, 1997 were $58,925,368, an increase of
$4,563,302 from March 31, 1996. Asset increases include $408,859 in cash and
cash equivalents, $1,353,689 in investments available for sale and $6,513,473
in net loans. These increases were partially offset by decreases of $692,101 in
time deposits, $2,397,453 in investment securities held to maturity, $218,323
in mortgage-backed securities held to maturity and $494,079 in loans held for
sale. Changes in levels of investments from those held to maturity to those
available for sale reflect the reinvestment of maturing securities into
investments classified as available for sale. During the year the Bank utilized
Federal Home Loan Bank ("FHLB") borrowings to fund the Bank's loan growth, due
in part to the more favorable rates paid on these borrowings relative to the
Bank's deposits.
The Bank had, as of March 31, 1997, a net loan portfolio of $48,979,032,
representing 83% of total assets. Stockholders' equity at year end was
$5,075,545, an increase of $149,468 from March 31, 1996, primarily as a result
of 1997 net income after dividends. As discussed under "Liquidity and Capital
Resources," the Bank's capital is substantially in excess of all applicable
regulatory requirements.
ASSET/LIABILITY MANAGEMENT
The goal of the Bank's asset/liability policy is to manage its exposure
to interest rate risk. The principal focus of the Bank's strategy has been to
reduce its exposure to interest rate fluctuations by matching more closely the
effective maturities and repricing dates of its assets and liabilities. In the
current interest rate environment the Bank's assets are more rate sensitive
than its liabilities. To that end, the Bank has focused its asset liability
strategy toward maintaining a high percentage of adjustable rate loans in its
residential and commercial mortgage portfolios. At March 31, 1997, the
adjustable rate loans in the residential mortgage loan portfolio amounted to
$28.5 million or 78.93% and adjustable rate loans in the commercial mortgage
portfolio amounted to $4.8 million or 75.87%. The Bank's strategy regarding
liabilities is to attempt to restructure its deposits by increasing NOW and
savings accounts and decreasing certificates of deposit. Currently,
certificates of deposit represent $25.6 million or 60.60% of the Bank's
deposits.
NONPERFORMING ASSETS
A summary of nonperforming assets for the last three years is shown
below.
<TABLE>
<CAPTION>
At March 31,
-----------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Nonaccrual loans:
Mortgage loans in process of foreclosure $ -- $ 160,919 $ 93,859
Loans more than 90 days past due 145,466 214,419 213,633
-----------------------------------
Total nonaccrual loans 145,466 375,338 307,492
Real estate owned, net 91,823 224,137 246,079
Loans to facilitate -- -- 44,246
-----------------------------------
Total nonperforming assets $ 237,289 $ 599,475 $ 597,817
===================================
Ratio of nonaccrual loans to total loans 0.29% 0.88% 0.70%
Ratio of nonperforming assets to total assets 0.40% 1.10% 1.13%
</TABLE>
The accrual of interest income is discontinued when a loan becomes
delinquent and in management's opinion is deemed uncollectible in whole or in
part as to principal or interest. In these cases, interest on such loans is
recognized only when received. No interest is accrued on loans delinquent by
more than ninety days and all previously accrued but unpaid interest is
reversed for such loans.
There were no loans delinquent more than ninety days but still accruing
interest at March 31, 1997, 1996 or 1995. Unrecognized interest income on loans
on non-accrual status at March 31, 1997 totaled $9,852. Had such loans been
accruing throughout the year, they would have accrued interest income of
$12,923.
Management does not believe that any loans other than those represented
in the table above are potential problem loans at present.
AVERAGE BALANCE, INTEREST AND YIELD/RATES
The following table presents average balances, yields and rates for major
classes of interest-earning assets and interest-bearing liabilities for the
periods indicated. Additionally, the table presents interest rate spreads and
ratios of net interest income to average interest-earning assets. All average
balances have been computed using month-end amounts. Non-performing loan
amounts have been included in average balances. Since the Holding Company has
had no significant investments or loans for which interest was exempt from
income taxes, no tax equivalent adjustments have been reflected.
<TABLE>
<CAPTION>
Year Ended March 31, 1997 Year Ended March 31, 1996
----------------------------------- -----------------------------------
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
------------ ----------- ------ ------------ ----------- ------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans $ 45,541,246 $ 4,155,451 9.12% $ 43,936,151 $ 3,965,600 9.03%
Interest bearing & time deposits 1,753,805 98,718 5.63% 1,635,091 83,859 5.13%
Federal funds sold 1,461,338 76,435 5.23% 2,151,923 130,152 6.05%
Investments & mortgage-backed securities 4,146,908 258,042 6.22% 4,055,173 210,078 5.18%
-------------------------------------------------------------------------
Total interest-earning assets 52,903,297 4,588,646 8.67% 51,778,338 4,389,689 8.48%
Other assets:
Cash and due from banks 870,617 318,099
Fixed assets 1,451,401 1,392,605
Other assets 893,917 675,812
------------ ------------
Total assets $ 56,119,232 $ 54,164,854
============ ============
Interest-bearing liabilities:
NOW, savings & money market accounts 13,218,258 394,708 2.99% 12,366,007 410,981 3.32%
Certificates of deposit 26,255,429 1,514,948 5.77% 26,334,638 1,561,752 5.93%
Borrowings 9,226,284 526,924 5.71% 9,253,462 512,523 5.54%
-------------------------------------------------------------------------------
Total interest-bearing liabilities 48,699,971 2,436,580 5.00% 47,954,107 2,485,256 5.18%
Other liabilities:
Demand deposits 2,113,328 1,149,086
Other liabilities 187,113 231,598
------------ ------------
Total liabilities 51,000,412 49,334,791
Stockholders' equity 5,118,820 4,830,063
------------ ------------
Total liabilities and stockholders' equity $ 56,119,232 $ 54,164,854
============ ============
----------- -----------
Net interest income $ 2,152,066 $ 1,904,433
=========== ===========
Interest rate spread 3.67% 3.30%
Net interest income as a percentage of
average interest-earning assets 4.07% 3.68%
</TABLE>
RATE/VOLUME ANALYSIS
A significant contributor to the Holding Company's level of profitability
over the long term is its net interest income, which is a function of both the
interest rates it earns or pays and of the amount, or volume, of its
interest-earning assets and interest-bearing liabilities. The relative
significance that rate and volume have had in various periods on the Holding
Company's results of operations can be observed by measuring the extent to
which the change in each has been responsible for increases or decreases in net
interest income.
The table below sets forth certain information regarding the changes in
the components of net interest income for the periods indicated. For each
category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (1) changes in rate (change
in rate multiplied by old volume) and (2) changes in volume (change in volume
multiplied by old rate). The net change attributable to both volume and rate
has been allocated proportionately.
<TABLE>
<CAPTION>
Year Ended March 31, 1997 Year Ended March 31, 1996
--------------------------------- ---------------------------------
Compared to 1996 Compared to 1995
Increase (Decrease) Increase (Decrease)
--------------------------------- ---------------------------------
Volume Rate Net Volume Rate Net
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Interest on interest-earning assets:
Loans $ 146,093 $ 43,758 $ 189,851 $ 31,244 $ 345,759 $ 377,003
Interest-bearing & time deposits 6,342 8,517 14,859 15,994 6,714 22,708
Federal funds sold (37,395) (15,922) (53,717) 33,975 17,256 51,231
Investments & mortgage-backed securities 4,849 43,115 47,964 34,158 (35,351) (1,193)
----------------------------------------------------------------------
Total Interest Income $ 119,489 $ 79,468 $ 198,957 $ 115,371 $ 334,378 $ 449,749
----------------------------------------------------------------------
Interest on interest-bearing liabilities:
Savings, NOW, & money market deposit
accounts 34,403 (50,676) (16,273) 20,978 60,556 81,534
Certificates of deposit (4,685) (42,119) (46,804) 95,954 285,961 381,915
Borrowings (1,500) 15,901 14,401 (45,688) 60,444 14,756
----------------------------------------------------------------------
Total Interest Expense 28,218 (76,894) (48,676) 71,244 406,961 478,205
----------------------------------------------------------------------
NET INTEREST INCOME $ 91,271 $ 156,362 $ 247,633 $ 44,127 $ (72,583) $ (28,456)
======================================================================
</TABLE>
RESULTS OF OPERATIONS
COMPARISON OF YEARS ENDED MARCH 31, 1997 AND 1996
NET INCOME
Net income for the year ended March 31, 1997 amounted to $242,775, a
decrease of $60,672 or 20% as compared with $303,447 for the year ended March
31, 1996, primarily as a result of the one-time assessment of $241,299 paid to
recapitalize SAIF.
Details of changes from the year ended March 31, 1997, from March 31,
1996, include an increase in total interest income of $198,957 or 4.53%, a
decrease in total interest expense of $48,676 or 1.96%, an increase in the
provision for loan losses of $24,990 or 40.30%, an increase in other income of
$51,744 or 28.23%, an increase in other expenses of $348,120 or 22.24%, due in
part to the one-time assessment of $241,299 paid to recapitalize SAIF,
mentioned previously, and an income tax expense decrease of $13,061 or 8.32%.
INTEREST INCOME
Total interest income for the year ended March 31, 1997, increased
$198,957 or 4.53% to $4,588,646 from $4,389,689 for the year ended March 31,
1996. This increase is partially the result of increases in the yield on
adjustable rate mortgages due to periodic rate adjustments, increases in the
yield of secured consumer loans and an increased volume of commercial mortgage
loans. Additionally, other interest income, which is comprised of interest on
other interest-earning assets increased due to an increase in the yield on
those assets.
INTEREST EXPENSE
Total interest expense for the year ended March 31, 1997, decreased
$48,676 or 1.96% to $2,436,580 from $2,485,256 for the year ended March 31,
1996. This decrease is caused primarily by decreased rates paid on deposits,
partially offset by an increase in the average balance of total
interest-bearing deposits and an increase on the rates on borrowings.
LOAN LOSS PROVISION
The Bank has increased its provision for loan losses to $87,000 for the
year ended March 31, 1997, from $62,010 for the year ended March 31, 1996,
resulting in an allowance for loan losses of $295,457 at March 31, 1997, an
increase of $74,101 from the previous year. This increase is primarily due to
the increased origination of commercial mortgage loans by the Bank. Management
believes that the Bank's total allowance for losses on loans is adequate and
commensurate with the risks associated with the loan portfolio.
OTHER INCOME
Other income consists primarily of fee income and gains on sales of
loans. Other income increased $51,744 or 28.23% to $235,021 for the year ended
March 31, 1997, from $183,277 for the year ended March 31, 1996. The increase
is attributable to the imposition of a new fee structure and an increase in the
number of checking accounts, both of which result in an increase in fee income
specifically relating to the collection of overdraft fees.
OTHER EXPENSES
Other expenses consist primarily of the Bank's general and administrative
expenses. Other expenses increased $348,120 or 22.24% for the year ended March
31, 1997, from $1,565,259 for the year ended March 31, 1996, due primarily to
the one-time charge of $241,299 to recapitalize SAIF. The remaining portion of
the increase was comprised mainly of one-time costs totaling $88,947 in data
processing charges related to the Bank's computer conversion process.
INCOME TAXES EXPENSE
The provision for income tax for the year ended March 31, 1997, was
$143,933, a decrease of 8.32% from the previous year. The effective tax rate
for the year was 37.2%. See note 11 to the consolidated financial statements
for further information regarding income taxes.
COMPARISON OF YEARS ENDED MARCH 31, 1996 AND 1995
NET INCOME
Net income for the year ended March 31, 1996 amounted to $303,447, a
decrease of $163,928 or 35.07% as compared with $467,375 for the year ended
March 31, 1995, primarily as a result of two factors. First, the interest rate
on liabilities increased more rapidly than did the yield on assets.
Additionally, the Holding Company's operating expenses increased as a result of
the opening of the new Rockland branch.
Details of changes from the year ended March 31, 1996, from March 31,
1995, include an increase in total interest income of $449,749 or 11.42%, an
increase in total interest expense of $478,205 or 23.83%, an decrease in the
provision for loan losses of $18,990 or 23.44%, an increase in other income of
$26,009 or 16.54%, an increase in other expenses of $271,951 or 21.03%, and an
income tax expense decrease of $91,480 or 36.82%.
INTEREST INCOME
Total interest income for the year ended March 31, 1996, increased
$449,749 or 11.42% to $4,389,689 from $3,939,940 for the year ended March 31,
1995. This increase is partially the result of increases in the yield on
adjustable rate mortgages due to periodic rate adjustments, increases in the
yield of secured consumer loans and an increased volume of commercial mortgage
loans. Additionally, other interest income, which is comprised of interest on
Federal funds sold and interest-bearing and time deposits, increased due to an
increase in the volume of and yield on those assets.
INTEREST EXPENSE
Total interest expense for the year ended March 31, 1996, increased
$478,205 or 23.83% to $2,485,256 from $2,007,051 for the year ended March 31,
1995. This increase is caused primarily by increased rates paid on both
deposits and borrowings, and an increase of $2,590,610 in the average balance
of total interest-bearing deposits, which is partially offset by a decrease of
$884,615 or 8.73% in the average balance of borrowings.
LOAN LOSS PROVISION
The Bank decreased its provision for loan losses to $62,010 for the year
ended March 31, 1996, from $81,000 for the year ended March 31, 1995, resulting
in an allowance for loan losses of $221,356 at March 31, 1996, an increase of
$37,673 from the previous year. Management believes that the Bank's total
allowance for losses on loans is adequate and commensurate with the risks
associated with the loan portfolio.
OTHER INCOME
Other income consists primarily of fee income and gains on sales of
loans. Other income increased $26,009 or 16.54% to $183,277 for the year ended
March 31, 1996, from $157,268 for the year ended March 31, 1995. The increase
is attributable to an increase in volume of loans sold on the secondary market
and an increase in the size of the secondary market portfolio serviced by the
Bank.
OTHER EXPENSES
Other expenses consist primarily of the Bank's general and administrative
expenses. Other expenses increased $271,951 or 21.03% for the year ended March
31, 1996, from $1,293,308 for the year ended March 31, 1995, due primarily to
an increase in compensation of directors, officers and staff of $100,951 and
increases in other expenses related to the opening of the branch office. Such
other expenses include data processing, advertising and taxes (other than
income taxes). Stockholder expenses, including printing, legal and transfer
agent costs also increased significantly.
INCOME TAXES EXPENSE
The provision for income tax for the year ended March 31, 1996, was
$156,994 a decrease of 36.82% from the previous year. See note 11 to the
consolidated financial statements for further information regarding income
taxes.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity is a measure of the Bank's ability to fund loans, provide a
source for withdrawal of deposits and allow for the payment of normal cash
expenses. The Bank's primary sources of funds are deposits, borrowings, regular
payments of loan principal and interest and prepayments of loan principal. To a
lesser extent, the Bank obtains funds from maturities of investment securities,
and funds provided by operations.
During the past several years, the Bank has used funds primarily to meet
its ongoing commitments to fund maturing time deposits and savings withdrawals,
to fund existing and continuing loan commitments and to maintain liquidity. The
Bank has periodically supplemented its liquidity needs with advances from the
FHLB. The Bank has also utilized FHLB borrowings to fund the Bank's loan
growth, due in part to the more favorable rates paid on these borrowings. The
Bank's current borrowing capacity exceeds $29,000,000. At March 31, 1997 the
Bank's borrowings from the FHLB were $11,440,000.
At year end March 31, 1997, stockholders' equity was $5,075,545 or 8.61%
of assets compared to $4,926,077 or 9.06% at March 31, 1996. The Bank is
required to maintain specified amounts of capital pursuant to federal
regulations. At year end March 31, 1997 the Bank's capital substantially
exceeded core capital, tangible capital and risk based capital regulatory
requirements. See Note 2 of the consolidated financial statements for further
information.
IMPACT OF INFLATION AND CHANGING INTEREST RATES
The Holding Company's consolidated financial statements and related notes
presented elsewhere herein have been prepared in accordance with generally
accepted accounting principles ("GAAP"), which require the measurement of
financial position and operating results in terms of historical dollars without
considering changes in the relative purchasing power of money over time due to
inflation. Unlike many industrial companies, substantially all of the assets
and virtually all of the liabilities of the Holding Company are monetary in
nature. As a result, interest rates have a more significant impact on the
Holding Company's performance than the general level of inflation. Over short
periods of time, interest rates may not necessarily move in the same direction
or in the same magnitude as the prices of goods and services. Management
believes that, through the implementation of its strategic plan, it has taken
important steps to maintain positive interest rate spreads, and to control the
potential effects of interest rate fluctuations on the Holding Company's
earnings.
PART II
MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
On March 31, 1997, there were 231,439 shares of the Holding Company's
Common Stock outstanding held by approximately 320 holders of record. Also at
such date, the Holding Company had granted options to purchase 9,963 shares of
the Holding Company's Common Stock.
The following table shows market price information for the Holding
Company's Common Stock. The prices set forth below represent the high and low
bid prices of the Holding Company's stock during the periods indicated. Such
over the counter market quotations reflect inter-dealer prices, without retail
markup, mark-down or commission and may not necessarily represent actual
transactions. The Holding Company's common stock is traded on the National
Association of Securities Dealers Automated Quotation system (NASDAQ) under the
symbol "MCBN."
<TABLE>
<CAPTION>
Cash
Dividends
Paid per
Quarter Ended High Low Share
------------- ------- ------- -----------
<S> <C> <C> <C>
March 31, 1995 $ 14.75 $ 14.25 $ --
June 30, 1995 17.25 14.50 0.23
September 30, 1995 18.75 15.00 --
December 31, 1995 20.25 15.50 0.25(1)
March 31, 1996 20.00 17.50 --
June 30, 1996 20.00 18.00 0.25
September 30, 1996 20.00 18.00 --
December 31, 1996 19.00 18.75 0.26
March 31, 1997 19.00 18.75
<FN>
- --------------------
<F1> During the quarter ended December 31, 1995 the Holding Company also
declared a 5% stock dividend in addition to the $0.25 per share cash
dividend.
</FN>
</TABLE>
On April 15, 1997 the Holding Company declared a dividend of $0.26 per
share to Stockholders of record on June 2, 1997 and payable June 30, 1997.
Mid-Coast Bancorp, Inc.
Audited Financial Statements
Years Ended March 31, 1997, 1996 and 1995
With Independent Auditors' Report
MID-COAST BANCORP, INC.
INDEX TO FINANCIAL STATEMENTS
Page
----
Independent Auditors' Report F-1
Consolidated Balance Sheets as of March 31, 1997 and 1996 F-2
Consolidated Statements of Income for the Three Years Ended
March 31, 1997 F-4
Consolidated Statements of Changes in Stockholders' Equity for
the Three Years Ended March 31, 1997 F-5
Consolidated Statements of Cash Flows for the Three Years Ended
March 31, 1997 F-6
Notes to Consolidated Financial Statements F-8
BAKER NEWMAN & NOYES
LIMITED LIABILITY COMPANY
CERTIFIED PUBLIC ACCOUNTANTS
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Mid-Coast Bancorp, Inc.
We have audited the accompanying consolidated balance sheets of Mid-Coast
Bancorp, Inc. and subsidiary as of March 31, 1997 and 1996, and the related
consolidated statements of income, changes in stockholders' equity and cash
flows for each of the three years ended March 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Mid-Coast
Bancorp, Inc. and subsidiary at March 31, 1996 and 1995, and the consolidated
results of their operations and their cash flows for each of the three years
ended March 31, 1997, in conformity with generally accepted accounting
principles.
/s/ BAKER NEWMAN NOYES
May 2, 1997 Limited Liability Company
ONE HUNDRED MIDDLE STREET, P.O. BOX 507, PORTLAND, MAINE 04112
TELEPHONE 207-879-2100 * TELEFAX 207-774-1793
INTERNET: HTTP://WWW.BNNCPA.COM [email protected]
MID-COAST BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
March 31, 1997 and 1996
ASSETS
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Cash and due from banks $ 1,156,227 $ 296,198
Interest bearing deposits 104,683 805,853
Federal funds sold 1,875,000 1,625,000
----------------------------
Cash and cash equivalents 3,135,910 2,727,051
Time deposits 1,089,000 1,781,101
Investment securities available for sale, at market (note 3) 2,440,662 1,086,973
Held to maturity investment securities (market value of
$911,125 in 1997 and $3,303,276 in 1996) (note 3) 949,109 3,346,562
Held to maturity mortgage-backed securities (market value
of $219,775 in 1996) (note 4) -- 218,323
Loans held for sale 65,000 559,079
Loans (note 5): 49,394,455 42,838,169
Less: Allowance for loan losses (note 6) 295,457 221,356
Deferred loan fees 119,966 151,254
----------------------------
48,979,032 42,465,559
Bank premises and equipment, net (note 8) 1,580,290 1,386,589
Other assets:
Income taxes receivable -- 60,220
Accrued interest receivable - loans 244,474 244,963
Accrued interest receivable - time deposits 9,162 10,400
Accrued interest receivable - investment securities 50,268 58,047
Accrued interest receivable - mortgage-backed securities -- 1,181
Deferred income taxes (note 11) 98,000 94,000
Prepaid expenses and other assets 192,638 97,881
Real estate owned (note 7) 91,823 224,137
----------------------------
Total other assets 686,365 790,829
----------------------------
Total assets $ 58,925,368 $ 54,362,066
============================
LIABILITIES AND STOCKHOLDERS' EQUITY
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Liabilities:
Deposits (note 9):
Demand deposits $ 2,346,730 $ 1,802,239
NOW accounts 3,460,858 3,111,931
Savings 5,693,545 4,645,035
Money market deposit accounts 5,119,733 4,740,543
Certificates of deposit 25,559,832 27,517,154
----------------------------
Total deposits 42,180,698 41,816,902
Advances from the Federal Home Loan Bank (note 10) 11,440,000 7,465,000
Accrued expenses and other liabilities 229,125 154,087
----------------------------
Total liabilities 53,849,823 49,435,989
Commitments and contingencies (note 14)
Stockholders' equity (notes 2 and 15):
Common stock, $1 par value, 1,500,000 shares authorized;
231,439 shares issued and outstanding (229,031 shares
in 1996) 231,439 229,031
Paid-in capital 1,469,769 1,448,282
Retained earnings (note 11) 3,374,337 3,248,764
----------------------------
Total stockholders' equity 5,075,545 4,926,077
----------------------------
Total liabilities and stockholders' equity $ 58,925,368 $ 54,362,066
============================
</TABLE>
See accompanying notes.
MID-COAST BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
Years Ended March 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Interest income:
Interest on loans $ 4,155,451 $ 3,965,600 $ 3,588,597
Interest on investment securities 225,015 194,284 192,489
Interest on mortgage-backed securities 33,027 15,794 18,782
Other 175,153 214,011 140,072
------------------------------------------
Total interest income 4,588,646 4,389,689 3,939,940
Interest expense:
Interest on deposits (note 9) 1,909,656 1,972,733 1,509,284
Interest on borrowings 526,924 512,523 497,767
------------------------------------------
Total interest expense 2,436,580 2,485,256 2,007,051
------------------------------------------
Net interest income 2,152,066 1,904,433 1,932,889
Provision for loan losses (note 6) 87,000 62,010 81,000
------------------------------------------
2,065,066 1,842,423 1,851,889
Other income:
Loan servicing and other loan fees 46,335 42,273 26,798
Gain on sales of loans 31,436 36,935 15,400
Deposit account fees 140,654 98,268 88,154
Gain on sale of investment securities available for sale (note 3) 6,748 -- --
Miscellaneous 9,848 5,801 26,916
------------------------------------------
235,021 183,277 157,268
Other expenses:
Compensation of directors, officers, and staff 652,237 631,779 530,828
Employee benefits (note 13) 91,430 67,670 39,440
Occupancy and equipment expense 137,900 133,864 109,724
Insurance expense 360,328 137,163 127,624
Real estate owned (note 7) 11,678 46,831 48,973
Other (note 12) 659,806 547,952 436,719
------------------------------------------
1,913,379 1,565,259 1,293,308
------------------------------------------
Income before income taxes 386,708 460,441 715,849
Income tax expense (note 11) 143,933 156,994 248,474
------------------------------------------
Net income $ 242,775 $ 303,447 $ 467,375
==========================================
Earnings per share (note 1) $ 1.06 $ 1.33 $ 2.07
==========================================
</TABLE>
See accompanying notes.
MID-COAST BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended March 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
Total
Common Paid-in Retained Stockholders'
Stock Capital Earnings Equity
--------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
Balance at April 1, 1994 $ 211,417 $ 1,219,276 $ 2,866,401 $ 4,297,094
Issuance of 6,049 shares of common stock upon
exercise of options 6,049 43,720 -- 49,769
Reversal of 382 shares incorrectly issued in 1994 (382) (4,818) -- (5,200)
Net income -- -- 467,375 467,375
Dividends declared ($.40 per share) -- -- (86,442) (86,442)
-------------------------------------------------------
Balance at March 31, 1995 217,084 1,258,178 3,247,334 4,722,596
Issuance of 1,172 shares of common stock upon
exercise of options 1,172 8,223 -- 9,395
Issuance of 10,775 shares of common stock as a
5% stock dividend (note 2) 10,775 181,881 (194,893) (2,237)
Net income -- -- 303,447 303,447
Dividends declared ($.48 per share) -- -- (107,124) (107,124)
-------------------------------------------------------
Balance at March 31, 1996 229,031 1,448,282 3,248,764 4,926,077
Issuance of 2,408 shares of common stock upon
exercise of options 2,408 21,487 -- 23,895
Net income -- -- 242,775 242,775
Dividends declared ($.51 per share) -- -- (117,202) (117,202)
-------------------------------------------------------
Balance at March 31, 1997 $ 231,439 $ 1,469,769 $ 3,374,337 $ 5,075,545
=======================================================
</TABLE>
See accompanying notes.
MID-COAST BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended March 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------ ----------- -----------
<S> <C> <C> <C>
Operating activities:
Net income $ 242,775 $ 303,447 $ 467,375
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation 62,268 66,906 48,716
Net accretion on investment securities (6,250) (11,416) (14,201)
Gain on sale of investment securities available for sale (6,748) -- --
Provision for losses on real estate owned -- 38,789 20,000
Provision for loan losses 87,000 62,010 81,000
Net change in deferred loan fees (31,288) (18,562) 3,889
Proceeds from sales of loans 2,248,585 2,688,085 2,060,555
Loans originated for sale (1,723,070) (3,142,729) (1,952,655)
Gain on sales of loans (31,436) (36,935) (15,400)
Deferred income taxes (4,000) 2,000 26,000
Change in accrued interest receivable 10,687 (39,341) (52,812)
Change in prepaid expenses and other assets (94,757) (13,607) (32,601)
Change in income taxes receivable 60,220 (48,809) (27,480)
Change in accrued expenses and other liabilities 75,038 (36,207) 57,366
------------------------------------------
Net cash flows from operating activities 889,024 (186,369) 669,752
Investing activities:
Net change in time deposits 692,101 (1,381,694) 382,691
Investment securities available for sale:
Proceeds from sale of investment securities 508,942 -- --
Proceeds from maturities, calls and principal paydowns 552,805 -- --
Purchases (2,405,881) (528,673) --
Held to maturity investment and mortgage-backed securities:
Purchases -- (1,204,212) (1,407,688)
Proceeds from maturities, calls and principal paydowns 2,619,219 948,982 567,997
Net change in loans (6,566,937) 877,655 (933,057)
Additions to real estate owned -- (641) --
Proceeds from sale of real estate owned 130,066 -- --
Proceeds from sale of bank premises and equipment 1,500 -- --
Purchases of bank premises and equipment (257,469) (158,855) (457,600)
------------------------------------------
Net cash flows from investing activities (4,725,654) (1,447,438) (1,847,657)
Financing activities:
Net change in certificates of deposit $ (1,957,322) $ 2,062,511 $ 2,473,475
Net change in other deposits 2,321,118 2,633,281 (376,297)
Maturities of advances from Federal Home Loan Bank (4,525,000) (6,975,000) (3,500,000)
Advances from Federal Home Loan Bank 8,500,000 3,725,000 4,000,000
Issuance of stock 23,895 9,395 44,569
Dividends paid (117,202) (109,361) (86,442)
------------------------------------------
Net cash flows from financing activities 4,245,489 1,345,826 2,555,305
------------------------------------------
Net (decrease) increase in cash and cash equivalents 408,859 (287,981) 1,377,400
Cash and cash equivalents at beginning of year 2,727,051 3,015,032 1,637,632
------------------------------------------
Cash and cash equivalents at end of year $ 3,135,910 $ 2,727,051 $ 3,015,032
==========================================
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest (including $1,655,818, $1,674,077, and $1,272,518,
credited to deposit accounts in 1997, 1996 and 1995,
respectively) $ 2,411,059 $ 2,505,789 $ 1,996,927
Income taxes 55,174 203,802 249,420
Net transfer of real estate owned and similar assets to
(from) loans 2,248 (28,040) (196,025)
</TABLE>
See accompanying notes.
MID-COAST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1997, 1996 and 1995
1. Accounting Policies
-------------------
Consolidation
-------------
The accompanying consolidated financial statements include the accounts
of Mid-Coast Bancorp, Inc. ("the Company"), its wholly-owned subsidiary,
The Waldoboro Bank, F.S.B. (the "Bank") and the Bank's wholly-owned
subsidiary, First Waldoboro Corporation; this subsidiary has no
significant activity. All significant intercompany balances and
transactions have been eliminated.
Business
--------
The Company, through the Bank, provides a full range of banking services
to individuals and corporate customers located in the mid-coast area of
Maine. The Bank is subject to competition from other financial
institutions. The Company and the Bank also are subject to the
regulations of certain regulatory agencies and undergo periodic
examinations by those regulatory authorities.
Financial Statement Presentation
--------------------------------
The accompanying consolidated financial statements have been prepared in
conformity with generally accepted accounting principles. In preparing
the financial statements, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities at
the balance sheet dates and income and expenses for the periods
presented. Actual results could differ significantly from these
estimates. The principal areas requiring use of estimates are
establishment of allowances for losses on loans and real estate owned,
which are further discussed below.
Restrictions on Cash Availability
---------------------------------
The Company is required to comply with various laws and regulations which
require that the Company maintain certain amounts of cash on deposit and
is restricted from investing these amounts.
Investments
-----------
The Company's investments in securities are classified in two categories
and accounted for as follows:
Held to Maturity Investment and Mortgage-Backed Securities
----------------------------------------------------------
Debt securities for which management has the positive intent and
ability to hold to maturity are reported at cost, adjusted for
amortization of premiums and accretion of discounts which are
recognized in interest income using the interest method over the
period of maturity.
Investment Securities Available for Sale
----------------------------------------
Investment securities available for sale consist of investments to
be held for indefinite periods of time and are carried at market
value. Any material unrealized gain or loss (net of tax effect) is
reflected as a separate component of stockholders' equity.
It is not management's policy to acquire securities for purposes of
trading. For this reason, the Company has not classified any of its
securities as trading.
Realized gains and losses on the sale of securities are determined using
the specific-identification method and are shown separately in the
consolidated statement of income. If a decline in market value is
considered other than temporary, the loss is charged to net securities
gains (losses).
Allowance for Loan Losses
-------------------------
The allowance for loan losses is established by management to absorb
future charge-offs of loans deemed uncollectible. This allowance is
increased by provisions charged to operating expense and by recoveries on
loans previously charged off. The Company adopted the provisions of
Statement of Financial Accounting Standards (SFAS) No. 114, Accounting by
Creditors for Impairment of a Loan, as amended by SFAS No. 118,
Accounting by Creditors for Impairment of a Loan - Income Recognition and
Disclosure, on April 1, 1995. Adoption of these statements did not have a
significant impact on the financial position or results of operations,
and prior periods have not been restated. Management, considering current
information and events regarding the borrowers' ability to repay their
obligations, considers residential mortgage and commercial loans to be
impaired when it is probable that the Company will be unable to collect
all amounts due according to the contractual terms of the note agreement;
other loans (primarily installment loans) are evaluated collectively for
valuation. When a loan is considered to be impaired, the amount of the
impairment is measured based on the fair value of the underlying
collateral, where applicable, or on the present value of expected future
cash flows discounted at the note's effective interest rate. Impairment
losses are included in the allowance for loan losses through a charge to
provision for loan losses. Loans are charged off when a loss is
determined.
Management believes that the allowance for loan losses is adequate.
Arriving at an appropriate level of allowance for loan loss involves
judgment; the primary considerations are the level of delinquencies, the
nature of the loan portfolio, prior loan loss experience, the local
economic conditions, and current real estate market trends. While
management uses available information to recognize losses on loans,
future additions to the allowance may be necessary. In addition, various
regulatory agencies, as an integral part of their examination process,
periodically review the Company's allowance for loan losses. Such
agencies may require the Company to recognize additions to the allowance
based on judgments different from those of management.
A substantial portion (89% and 91% at March 31, 1997 and 1996,
respectively) of the Company's loans are collateralized by real estate
(primarily residential) in Maine. Accordingly, the ultimate
collectibility of a substantial portion of the Company's loan portfolio
is particularly susceptible to changes in market conditions for
residential real estate in the Company's market area.
Loans Held for Sale
-------------------
Loans held for sale are carried at the lower of aggregate cost or fair
value.
Interest Income on Loans
------------------------
Interest on loans is accrued and credited to income based on the
principal amount outstanding. The accrual of interest income is
discontinued when a loan becomes impaired and in management's opinion is
deemed uncollectible in whole or in part as to principal or interest. In
these cases, interest is recognized only when received. No interest is
accrued on loans delinquent by more than ninety days and all previously
accrued interest is reversed for such loans. Loan origination fees and
certain direct loan origination costs are deferred and the net amount
amortized as an adjustment to the related loan yield, generally over the
contractual life of the loan, or until the loan is sold or repaid.
Bank Premises and Equipment
---------------------------
Bank premises and equipment are stated at cost, less accumulated
provisions for depreciation computed on the straight-line method over the
estimated lives of the related assets.
Income Taxes
------------
Deferred income taxes are provided for the effect of items recognized in
different periods for financial statement and income tax reporting
purposes using the asset and liability method.
Real Estate Owned
-----------------
Real estate owned (REO), other than bank premises, consists of properties
acquired through mortgage loan foreclosure proceedings. REO is initially
recorded at the lower of cost or fair value, less estimated selling
costs, at the date of foreclosure and any losses recognized at that time
are charged to the allowance for loan losses. Subsequent to this date,
additional losses incurred resulting from further decreases in the fair
value (net of estimated selling costs) of the property are recognized by
a charge to operations and establishment of a valuation allowance. Costs
relating to the development and improvement of property are capitalized;
holding costs are charged to expense.
Statement of Cash Flows
-----------------------
The Company considers cash and due from banks, interest-bearing deposits
and federal funds sold as cash and cash equivalents on the consolidated
statements of cash flows.
Earnings Per Share
------------------
Earnings per share are computed by dividing net income by the weighted
average number of shares outstanding. The following table shows the
weighted average number of shares outstanding for each of the last three
years. Amounts for fiscal year 1995 have been restated to reflect the 5%
stock dividend declared in fiscal year 1996.
1997 229,975
1996 227,662
1995 225,463
Shares issuable relative to stock options granted have not been reflected
since their impact would not be significantly dilutive.
Reclassification
----------------
Certain amounts in the 1995 and 1996 financial statements have been
reclassified to conform to the manner of presentation used in 1997.
2. Capital and Other Regulatory Limitations
----------------------------------------
The Bank is subject to various regulatory capital requirements
administered by the federal banking agencies. The Bank's failure to meet
minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could
have a direct material effect on the Company's financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Bank must meet specific capital guidelines that
involve quantitative measures of the Bank's assets, liabilities, and
certain off-balance sheet items as calculated under regulatory accounting
practices. The Bank's capital amounts and classification are also subject
to qualitative judgments by the regulators about components, risk
weightings, and other factors.
As of March 31, 1997, the most recent notification from the Office of
Thrift Supervision (OTS) categorized the Bank as "well capitalized" under
the regulatory framework for prompt corrective action. To be categorized
as "well capitalized" the Bank must maintain minimum total risk-based,
Tier 1 risk-based and Tier 1 leverage tangible capital as set forth in
the table below. There are no conditions or events since that
notification that management believes have changed the institution's
category.
Quantitative measures established by regulation to ensure capital
adequacy require the Bank to maintain minimum amounts and ratios as set
forth in the table below. Management believes that the Bank meets all
capital adequacy requirements to which it is subject as of March 31,
1997.
The Bank's actual capital amounts and ratios are also presented in the
table. Since the Company is a one-bank holding company, its ratios are
not materially different from the Bank's.
<TABLE>
<CAPTION>
To Be "Well
Capitalized" Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
---------------- --------------------- ----------------------
Amount Ratio Amount Ratio Amount Ratio
------- ----- ---------- ------- ---------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
As of March 31, 1997:
Total capital (to risk weighted assets) $ 5,320 15.1% >= $ 2,822 >= 8.0% >= $ 3,528 >= 10.0%
Tier 1 Capital (to risk weighted assets) 5,025 14.2% >= 1,411 >= 4.0% >= 2,117 >= 6.0%
Tier 1 Capital (to average assets) 5,025 8.9% >= 2,266 >= 4.0% >= 2,832 >= 5.0%
As of March 31, 1996:
Total capital (to risk weighted assets) $ 5,151 16.9% >= $ 2,445 >= 8.0% >= $ 3,057 >= 10.0%
Tier 1 Capital (to risk weighted assets) 4,922 16.1% >= 1,223 >= 4.0% >= 1,834 >= 6.0%
Tier 1 Capital (to average assets) 4,922 9.1% >= 2,167 >= 4.0% >= 2,708 >= 5.0%
</TABLE>
In connection with the conversion of the Bank from a mutual to a stock
institution in 1989, the Company was required by OTS regulations to
establish a liquidation account in the amount of the Bank's retained
earnings at the date of conversion, which totalled approximately
$1,918,000. In the event of liquidation of the Company (and only in such
event), an eligible account holder, as defined, would be entitled to
receive a proportionate share of this account. The total amount of this
liquidation account will be decreased as the balances of eligible account
holders are reduced. Such account will never be increased despite any
increase in balances of eligible account holders. The Company has not
computed the amount of decrease in the liquidation account since the
conversion date.
In addition to the dividend restriction caused by the liquidation account
discussed above, the Bank may not, without prior approval of OTS, declare
or pay a dividend on or repurchase any of its common stock in excess of
OTS-stipulated amounts (generally current year net income plus 50% of the
Bank's excess of capital over required amounts as of the beginning of the
year). At March 31, 1997, unrestricted retained earnings of the Bank
under such OTS limitations approximated $1,595,000.
The following table reconciles core capital per the Waldoboro Bank's
reports to OTS at March 31, 1997 to the total of stockholders' equity
shown on the accompanying consolidated financial statements.
<TABLE>
<CAPTION>
In Thousands
<S> <C>
Capital per the OTS Report $ 5,025
Impact of Mid-Coast Bancorp 50
-------
Stockholders' equity per consolidated financial statements $ 5,075
=======
</TABLE>
The Company's Board of Directors declared a 5% stock dividend payable on
December 31, 1995 to stockholders of record on December 1, 1995. Cash
totalling $2,237 was paid in lieu of fractional shares on the basis of a
per share value of $17.88 (the average of the bid and asked price on
December 1, 1995). Earnings per share data for all prior periods have
been restated to reflect this stock dividend.
3. Investment Securities
---------------------
Held to Maturity Investment Securities
--------------------------------------
The amortized cost and market values of held to maturity investment
securities at March 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
March 3l, 1997
-------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Debt Securities:
U.S. Treasury Obligations $ 299,109 $ -- $ 6,234 $ 292,875
U.S. Agency Obligations 650,000 -- 31,750 618,250
-------------------------------------------------------
$ 949,109 $ -- $ 37,984 $ 911,125
=======================================================
<CAPTION>
March 3l, 1996
-------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Debt Securities:
U.S. Treasury Obligations $ 2,246,562 $ 5,701 $ (8,909) $ 2,243,354
Student Loan Marketing Association Notes 250,000 -- (8) 249,992
Federal Home Loan Bank Bonds 500,000 -- (35,674) 464,326
Federal National Mortgage Association Bonds 250,000 -- (4,415) 245,585
Federal Farm Credit Bank Notes 100,000 19 -- 100,019
-------------------------------------------------------
$ 3,346,562 $ 5,720 $ (49,006) $ 3,303,276
=======================================================
</TABLE>
The March 31, 1997 amortized cost and estimated market value of debt
securities by contractual maturity (without giving effect to earlier
"call" dates in certain instances) are as follows:
<TABLE>
<CAPTION>
Amortized Market
Cost Value
--------- ---------
<S> <C> <C>
Due in one year or less $ 200,000 $ 194,000
Due after one year through five years 549,109 539,125
Due after five years through ten years 200,000 178,000
-----------------------
$ 949,109 $ 911,125
=======================
</TABLE>
Included in U.S. Agency Obligations at March 31, 1997 are two inverse
floater structured notes maturing in 1998 and 2003, with amortized costs
totalling $400,000 and market values totalling $372,000.
Investment Securities Available for Sale
----------------------------------------
The amortized cost and market values of available for sale investment
securities at March 31, 1997 is presented below:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Debt securities:
U.S. Treasury Obligations $ 497,578 $ -- $ 618 $ 496,960
U.S. Agency Obligations 750,000 -- 3,000 747,000
------------------------------------------------------
1,247,578 -- 3,618 1,243,960
Mutual fund 561,084 3,618 -- 564,702
Required investment in Federal Home Loan Bank stock 622,000 -- -- 622,000
Other 10,000 -- -- 10,000
------------------------------------------------------
$ 2,440,662 $ 3,618 $ 3,618 $ 2,440,662
======================================================
</TABLE>
During 1996 investment securities were sold for proceeds of $508,942 and
gross realized gains of $6,748.
Investment securities available for sale at March 31, 1996 consisted of a
mutual fund for which cost of $528,673 approximated market, the required
investment in Federal Home Loan Bank stock, carried at cost, of $548,300,
and other investments of $10,000.
The March 31, 1997 amortized cost and estimated market value of debt
securities by contractual maturity (without giving effect to earlier
"call" dates in certain instances) are as follows:
<TABLE>
<CAPTION>
Amortized Market
Cost Value
----------- -----------
<S> <C> <C>
Due in one year or less $ 497,578 $ 496,960
Due after one year through five years 750,000 747,000
Due after five years through ten years -- --
--------------------------
$ 1,247,578 $ 1,243,960
==========================
</TABLE>
Federal Home Loan Bank stock is pledged as described in note 10. At March
31, 1997, another investment security with carrying value of $250,000 was
pledged to secure deposits.
4. Mortgage-Backed Securities
--------------------------
Mortgage-backed securities classified as held to maturity, at March 31,
1997 and 1996, consisted of the following:
<TABLE>
<CAPTION>
March 31,
---------------------------------------------
1997 1996
----------------- -----------------------
Book Market Book Market
Value Value Value Value
----- ------ --------- ---------
<S> <C> <C> <C> <C>
Federal Home Loan Mortgage Corporation $ -- $ -- $ 218,323 $ 219,775
=============================================
</TABLE>
Estimated market values for such securities consisted of gross unrealized
gains $1,452 at March 31, 1996.
5. Loans
-----
Loans at March 31, 1997 and 1996 consisted of the following:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Real estate mortgage - residential $ 36,066,310 $ 33,125,498
Real estate mortgage - commercial 6,314,688 4,509,243
Construction 1,404,668 226,048
Other commercial 1,406,317 838,425
Home equity 1,300,254 1,372,391
Passbook loans 281,967 309,842
Installment and other 3,529,009 2,670,721
-----------------------------
50,303,213 43,052,168
Less undisbursed amounts on construction loans (908,758) (213,999)
-----------------------------
$ 49,394,455 $ 42,838,169
=============================
</TABLE>
Loans serviced for others at March 31, 1997, 1996 and 1995 totalled
$7,269,828, $7,030,478, and $5,242,665, respectively. On April 1, 1996,
Statement of Financial Accounting Standards (SFAS) No. 122, Accounting
for Mortgage Servicing Rights (an Amendment to Statement No. 65) became
effective for the Company. The impact of adoption was not material to the
financial position or results of operations of the Company.
Nonperforming loans (contractually past due and nonaccruing as to
interest income) totalled $145,466 and $375,338 at March 31, 1997 and
1996, respectively. Unrecognized accrued interest on such loans totalled
$9,852 and $42,901 at March 31, 1997 and 1996, respectively.
The Company adopted the provisions of SFAS No. 114, Accounting by
Creditors for Impairment of Loan, as amended by SFAS No. 118, Accounting
by Creditors for Impairment of a Loan - Income Recognition and
Disclosures, effective April 1, 1995. Prior periods have not been
restated. All loans have been evaluated for collectibility under the
provisions of these statements.
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Year-end approximate recorded investment in impaired
loans with no valuation allowance $ 117,000 $ 360,000
Year-end approximate total recorded investment in
impaired loans 117,000 360,000
Approximate average investment in impaired loans for
the year 151,000 317,000
</TABLE>
No interest income was recognized on impaired loans during 1997 or 1996.
Interest is generally recognized on impaired loans using the cash basis.
Activity in loans to directors and officers who had outstanding balances
greater than $60,000 during the year ended March 31, 1997 is shown below.
<TABLE>
<CAPTION>
Balance Balance
April 1, 1996 Additions Reductions March 31, 1997
------------- --------- ---------- --------------
<S> <C> <C> <C>
$ 558,598 $ 66,064 $ 30,160 $ 594,502
==================================================================
</TABLE>
6. Allowance for Loan Losses
-------------------------
Changes in the allowance for loan losses are provided below.
<TABLE>
<CAPTION>
Years Ended March 31,
-----------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Balance, beginning of year $ 221,356 $ 183,683 $ 278,998
Charge-offs (20,810) (28,165) (184,608)
Recoveries 7,911 3,828 8,293
Provisions for losses 87,000 62,010 81,000
-----------------------------------
Balance, end of year $ 295,457 $ 221,356 $ 183,683
===================================
</TABLE>
7. Real Estate Owned
-----------------
Real estate owned consisted of real estate acquired by foreclosure at
March 31, 1997 and 1996:
Activity in the allowance for losses on real estate owned and similar
assets for the years ended March 31, 1997, 1996 and 1995 is shown below.
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Balance, beginning of year $ 23,000 $ 20,000 $ 18,664
Provision for losses, included in real estate owned expense -- 38,789 20,000
Charge-downs (23,000) (35,789) (18,664)
----------------------------------
Balance, end of year $ -- $ 23,000 $ 20,000
==================================
</TABLE>
In addition to the provision for losses reflected above, amounts shown as
"real estate owned" expense on the consolidated statements of income
include taxes, insurance and other holding costs incurred by the Bank.
8. Bank Premises and Equipment
---------------------------
Bank premises and equipment at March 31, 1997 and 1996 consisted of the
following:
<TABLE>
<CAPTION>
1997 1996
----------- ------------
<S> <C> <C>
Building and improvements $ 1,288,397 $ 1,284,371
Land and land improvements 194,860 189,612
Furniture, fixtures and equipment 635,998 389,303
---------------------------
2,119,255 1,863,286
Less accumulated depreciation 538,965 476,697
---------------------------
Net bank premises and equipment $ 1,580,290 $ 1,386,589
===========================
</TABLE>
9. Deposits
--------
Demand deposits include $429,273 and $578,289 of official and other
outstanding checks drawn on the Bank at March 31, 1997 and 1996,
respectively.
Certificates of deposit in excess of $100,000 totalled approximately
$2,636,052 at March 31, 1997 and $2,005,023 at March 31, 1996.
Scheduled maturities for certificates of deposit at March 31, 1997 are as
follows:
<TABLE>
<CAPTION>
Year Ending
--------------
<S> <C>
March 31, 1998 $ 19,333,540
March 31, 1999 2,734,896
March 31, 2000 2,717,624
March 31, 2001 634,409
March 31, 2002 127,118
Thereafter 12,245
</TABLE>
Interest expense by type of deposit is shown below.
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
NOW accounts $ 70,486 $ 72,855 $ 66,917
Savings 135,482 128,570 139,157
Money market deposit accounts 188,740 209,556 123,373
Certificates of deposit 1,514,948 1,561,752 1,179,837
-----------------------------------------
$ 1,909,656 $ 1,972,733 $ 1,509,284
=========================================
</TABLE>
The weighted average interest rates at March 31, 1997 are as follows: NOW
accounts - 2.22%; savings - 2.79%; money market deposit accounts - 4.12%
and certificates of deposit - 5.95%.
10. Advances From Federal Home Loan Bank
------------------------------------
Advances from the Federal Home Loan Bank (FHLB) at March 31, 1997 and
1996 consisted of the following:
<TABLE>
<CAPTION>
1997 1996
----------------------------- --------------------------
Interest Interest
Rates Balance Rates Balance
------------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
Advances maturing within:
One year 5.42% - 5.99% $ 6,750,000 4.5% - 6.0% $ 4,525,000
Two years 5.56% - 7.12% 3,475,000 7.1% 500,000
Three years -- -- 5.6% - 6.0% 2,225,000
After three years 2.00% - 6.15% 1,215,000 2.0% 215,000
------------ -----------
$ 11,440,000 $ 7,465,000
============ ===========
</TABLE>
The FHLB advances are generally secured by a blanket lien and not by any
specific collateral. However, the Company is required to maintain an
amount of qualified collateral at least sufficient to satisfy the
regulatory collateral maintenance level. At March 31, 1997, the Bank's
limitation on advances from the FHLB approximated $29,000,000.
Additionally, the Bank has available a line of credit for short-term
borrowings under the FHLB "Ideal Way" program totalling approximately
$1,050,000. Federal Home Loan Bank stock is pledged to secure borrowings
under this line. There were no borrowings under this line at March 31,
1997 or 1996.
11. Income Taxes
------------
Income tax expense (benefit) for the years ended March 31, 1997, 1996 and
1995 consisted of the following:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Currently payable:
Federal $ 140,933 $ 146,300 $ 211,668
State 7,000 8,694 10,806
-----------------------------------
147,933 154,994 222,474
Deferred (4,000) 2,000 26,000
-----------------------------------
$ 143,933 $ 156,994 $ 248,474
===================================
</TABLE>
Income taxes were computed as follows:
<TABLE>
<CAPTION>
Year Ended March 31,
-----------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
At federal statutory rates $ 131,481 $ 156,550 $ 243,389
State taxes, net of federal tax effect 4,620 5,738 7,132
Other, net 7,832 (5,294) (2,047)
-----------------------------------
$ 143,933 $ 156,994 $ 248,474
===================================
</TABLE>
At March 31, 1997 and 1996, the net deferred tax asset consisted of:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Deferred tax assets, primarily related to loan loss reserves
and deferred loan fees $ 128,100 $ 121,300
Deferred tax liabilities, primarily related to depreciation (30,100) (27,300)
----------------------
$ 98,000 $ 94,000
======================
</TABLE>
Retained earnings at March 31, 1997 included approximately $590,000
representing bad debt deductions allowed for tax purposes, for which no
provision for income taxes has been made. If this portion of retained
earnings is reduced for any purpose other than to absorb losses, income
taxes would be imposed at the then applicable rates.
12. Other Expenses
--------------
Included in other expenses for the years ended March 31, 1997, 1996 and
1995 are:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Advertising $ 25,678 $ 30,524 $ 24,217
Taxes (other than income taxes) 61,191 50,553 39,393
Data processing 200,351 111,404 87,319
Stockholder expenses 58,456 53,017 33,163
Audit and examination 41,225 43,250 35,355
Legal expense 17,912 14,528 17,947
Other 254,993 244,676 199,325
-----------------------------------
$ 659,806 $ 547,952 $ 436,719
===================================
</TABLE>
13. Retirement Plans
----------------
Pension Plan
------------
The Company participates in an industry-sponsored defined benefit pension
plan. This noncontributory plan includes all employees who meet age and
years of service requirements. Pension expense totalled $34,968, $27,631
and $19,140 for the years ended March 31, 1997, 1996 and 1995,
respectively.
The plan's assets are invested in fixed income securities and common
stocks. Information relative to the Company's portion of accumulated plan
benefits and assets available for benefits is not available. However, the
latest annual report for the entire plan indicates that, as of June 30,
1996, net assets available for benefits (approximately $1,474 million)
exceeded the actuarial present value of accumulated plan benefits by
approximately $385 million. The actuarial present value of accumulated
plan benefits is based upon a discount rate of 7.5%.
401(k) Plan
-----------
The Company offers a 401(k) plan to its employees and contributes a
matching amount to participants; this matching amount is a portion of the
employees' contribution. The Company's contributions in 1997 and 1996
were $11,106 and $-0-, respectively.
14. Commitments and Contingencies
-----------------------------
Unfunded loan commitments expose the Company to credit risk in excess of
amounts recognized in the accompanying consolidated balance sheets. Total
credit exposure related to these items is summarized below.
<TABLE>
<CAPTION>
March 31,
--------------------------
1997 1996
----------- -----------
<S> <C> <C>
Commitments for new loans $ 428,500 $ 462,000
Unused home equity and other lines of credit 1,504,325 1,419,329
Unfunded construction loans 908,758 213,999
--------------------------
$ 2,841,583 $ 2,095,328
==========================
</TABLE>
Loan commitments include unfunded portions of real estate construction
and other loans, and unused lines of credit. Loan commitments are subject
to the same credit policies as loans and generally have expiration dates
and termination clauses. The Company obtains collateral to secure loans
based upon management's credit assessment of the counterparty. Collateral
is usually in the form of real estate.
The Bank is contingently liable for reimbursement of a governmental grant
to a not-for-profit agency should that agency fail to comply with the
provisions of that grant. The amount of the grant is $118,000 and the
Bank has obtained a mortgage on the property owned by the agency to
secure its contingent liability.
15. Stock Option Plan
-----------------
The Company has a stock option plan under which an amount equal to 10% of
the common stock of the Company is reserved for future issuance upon
exercise of stock options granted to certain members of the Board of
Directors, senior management and employees. The plan was initiated in
November 1989 and became effective in July 1990 upon ratification by a
vote of the stockholders. A summary of options granted (all of which were
granted at market price on the date of grant), exercised and expired
during 1997, 1996 and 1995 appears below.
<TABLE>
<CAPTION>
Per Share Option Price
(Adjusted for 1994 and 1996 Stock Dividends)
------------------------------------------------------------ Total
Exercise Price: $7.40 $9.48 $9.94 $11.21 $12.21 $14.05 Options
------ ----- ----- ------ ------ ------ -------
<S> <C> <C> <C> <C> <C> <C> <C>
Outstanding option shares, April 1, 1994 9,587 2,135 618 5,272 836 -- 18,448
Issued - 1995 -- -- -- -- -- 1,852 1,852
Exercised - 1995 (5,122) (515) -- (412) -- -- (6,049)
Cancelled - 1995 (36) -- -- (416) (836) -- (1,288)
------------------------------------------------------------------------
Outstanding option, shares March 31, 1995
(all exercisable) 4,429 1,620 618 4,444 -- 1,852 12,963
Exercised - 1996 (1,072) -- -- (100) -- -- (1,172)
Adjustment for stock dividend 169 78 30 212 -- 91 580
------------------------------------------------------------------------
Outstanding option shares, March 31, 1996
(all exercisable) 3,526 1,698 648 4,556 -- 1,943 12,371
Exercised - 1997 (435) (398) (648) (877) -- (50) (2,408)
------------------------------------------------------------------------
Outstanding option shares, March 31, 1997
(all exercisable) 3,091 1,300 -- 3,679 -- 1,893 9,963
========================================================================
Options expire in 1999 2002 2002 2003 2005
</TABLE>
The Company has adopted the provisions of SFAS No. 123, Accounting for
Stock-Based Compensation for all awards of stock options made after April
1, 1996. There were no such awards in fiscal year 1997. In accordance
with this Statement, the Company will be required to disclose pro forma
effects of stock-based compensation on net income if any awards are
granted in the future; as permitted by the Statement, the Company will
continue to account for these options under the provisions of Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees.
16. Fair Value of Financial Instruments
-----------------------------------
As required by Statement of Financial Accounting Standards No. 107, fair
value estimates, methods, and assumptions are set forth below for the
Company's estimated fair values of its financial instruments. Fair values
have been calculated based on the value of one unit without regard to any
premium or discount that may result from concentrations of ownership of a
financial instrument, possible tax ramifications, or estimated
transaction costs. If these considerations had been incorporated into the
fair value estimates, the aggregate fair value amount could have changed.
Management has made estimates of fair value discount rates that it
believes to be reasonable. However, because there is no market for many
of these financial instruments, management has no basis to determine
whether the fair value presented above would be indicative of the value
negotiated in the actual sale.
Cash, Due from Banks and Federal Funds Sold
-------------------------------------------
The fair value of cash, due from banks and federal funds sold
approximates their relative book values at March 31, 1997 and 1996, as
these financial instruments have short maturities.
Time Deposits
-------------
The fair value of time deposits is based on the discounted cash flows of
the deposits using estimated market discount rates that reflect the
interest rate risk inherent in the time deposit.
Investment Securities and Mortgage-Backed Securities
----------------------------------------------------
The fair value of investment securities and mortgage-backed securities is
estimated based on bid prices published in financial newspapers or bid
quotations received from securities dealers at or near March 31, 1997 and
1996, except for FHLB stock which is valued at its cost since there is no
market.
Loans
-----
Fair values are estimated for portfolios of loans with similar financial
characteristics. The fair values of performing loans are calculated by
discounting scheduled cash flows through the estimated maturity using
estimated market discount rates that reflect the credit and interest rate
risk inherent in the loan. The estimates of maturity are based on the
Company's historical experience with repayments for each loan
classification, modified, as required, by an estimate of the effect of
current economic, lending conditions and the effects of estimated
prepayments.
Fair values of any significant nonperforming loans are based on estimated
cash flows discounted using a rate commensurate with the risk associated
with the estimated cash flows. Assumptions regarding credit risk, cash
flows, and discount rates are judgmentally determined using available
market information and historical information.
Accrued Interest Receivable
---------------------------
The fair market value of this financial instrument approximates the book
value as this financial instrument has a short maturity.
Deposit Liabilities
-------------------
The fair value of deposits with no stated maturity, such as
non-interest-bearing demand deposits, savings, and NOW accounts, and
money market and checking accounts, is equal to the amount payable on
demand as of March 31, 1997 and 1996. The fair values of certificates of
deposit are based on the discounted value of contractual cash flows. The
discount rate is estimated using the rates currently offered for deposits
of similar remaining maturities.
The fair value estimates do not include the benefit that results from the
low-cost funding provided by the deposit liabilities compared to the cost
of borrowing funds in the market. If that value was considered at March
31, 1997 and 1996, the fair value of the Bank's net assets would
increase.
Advances from the Federal Home Loan Bank
----------------------------------------
The fair value of advances from the Federal Home Loan Bank is based upon
the discounted value of contractual cash flows, with a discount rate
based upon rates currently offered for similar remaining maturities.
Commitments to Extend Credit
----------------------------
The fair value of commitments to extend credit cannot be reasonably
estimated without incurring excessive costs as the Company does not
charge fees for such commitments and there is no ready market for this
financial instrument.
Limitations
-----------
Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial
instrument. These values do not reflect any premium or discount that
could result from offering for sale at one time the Company's entire
holdings of a particular financial instrument. Because no market exists
for a significant portion of the Company's financial instruments, fair
value estimates are based on judgments regarding future expected loss
experience, current economic conditions, risk characteristics of various
financial instruments, and other factors. These estimates are subjective
in nature and involve uncertainties and matters of significant judgment
and therefore cannot be determined with precision. Changes in assumptions
could significantly affect the estimates.
Fair value estimates are based on existing on and off balance sheet
financial instruments without attempting to estimate the value of
anticipated future business and the value of assets and liabilities that
are not considered financial instruments. Other significant assets and
liabilities that are not considered financial instruments include the
deferred tax assets, Company premises and equipment, and other real
estate owned. In addition, the tax ramifications related to the
realization of the unrealized gains and losses can have a significant
effect on fair value estimates and have not been considered in any of the
estimates.
The carrying and estimated fair values of financial instruments at March
31, 1997 and 1996 are summarized below, in thousands of dollars:
<TABLE>
<CAPTION>
1997 1996
-------------------- --------------------
Carrying Fair Carrying Fair
Value Value Value Value
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Assets:
Cash and cash equivalents $ 3,136 $ 3,136 $ 2,727 $ 2,727
Time deposits 1,089 1,093 1,781 1,787
Investments and mortgage-backed securities 3,390 3,352 4,652 4,610
Loans and loans held for sale 49,044 49,663 43,025 43,034
Accrued interest receivable 304 304 315 315
Liabilities:
Deposit liabilities 42,181 42,301 41,817 41,865
Borrowed funds 11,440 11,280 7,465 7,354
</TABLE>
17. Mid-Coast Bancorp, Inc.
-----------------------
Condensed financial statements for Mid-Coast Bancorp, Inc. at March 31,
1997 and 1996 and for the years ended March 31, 1997, 1996 and 1995 are
presented below.
Balance Sheets
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Assets:
Due from the Bank $ 51,568 $ 3,124
Investment in the Bank 5,025,628 4,922,953
--------------------------
Total assets $ 5,077,196 $ 4,926,077
==========================
Liabilities and stockholders' equity:
Accounts payable $ 1,651 $ --
Stockholders' equity 5,075,545 4,926,077
--------------------------
Total liabilities and stockholders' equity $ 5,077,196 $ 4,926,077
==========================
</TABLE>
Statements of Operations
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Operating expenses $ 9,900 $ 15,125 $ 8,510
-----------------------------------
Loss before equity in earnings of subsidiary (9,900) (15,125) (8,510)
Equity in earnings of subsidiary:
Remitted 150,000 -- 100,000
Unremitted 102,675 318,572 375,885
-----------------------------------
252,675 318,572 475,885
-----------------------------------
Net income $ 242,775 $ 303,447 $ 467,375
===================================
</TABLE>
Statements of Cash Flows
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 242,775 $ 303,447 $ 467,375
Adjustments to reconcile net income to net cash
used by operating activities:
Equity in unremitted earnings of subsidiary (102,675) (318,572) (375,885)
-----------------------------------
Net cash provided (used) by operating activities 140,100 (15,125) 91,490
Cash flows from financing activities:
Issuance of common stock 23,895 9,395 44,569
Increase in due to the Bank 1,651 -- --
Dividends paid (117,202) (109,362) (86,442)
-----------------------------------
Net cash used by financing activities (91,656) (99,967) (41,873)
-----------------------------------
Net increase in cash and due from banks 48,444 (115,092) 49,617
Cash and due from banks at beginning of year 3,124 118,216 68,599
-----------------------------------
Cash and due from banks at end of year $ 51,568 $ 3,124 $ 118,216
===================================
</TABLE>
Stockholders' Information
Directors
Waite W. Weston
Chairman of the Board
Owner, Weston's Hardware
Robert W. Spear
Vice Chairman of the Board
Owner, Spear Farm, Inc.
Wesley E. Richardson
President, Chief Executive Officer and
Treasurer of the Bank
Samuel Cohen
Attorney at Law
Lincoln Davis, III
Owner, Stetson & Pinkham Mercury
Ronald E. Dolloff
Retired Principal
Maynard Prock
Owner, Prock Marine
Sharon E. Crowe
Public Relations, Sebasticook County Hospital
Lincoln O. Orff
Real Estate Broker
Executive Officers
Wesley E. Richardson
President, Chief Executive Officer and
Treasurer
Robert E. Carter, Jr.
Vice President
Transfer Agent and Registrar
Inquiries regarding stockholder administration and services should be directed
to:
American Stock Transfer and Trust Company
40 Wall Street
New York, New York 10005
(800) 937-5449
Independent Auditors
Baker Newman & Noyes,
Limited Liability Company
100 Middle Street
Portland, Maine 04101
(207) 879-2100
Legal Counsel
Thacher Proffitt & Wood
1500 K Street, N.W., Suite 200
Washington, D.C. 20005
(202) 347-8400
Stock Information
The Bank's Common Stock trades on
the NASDAQ Smallcap System under
the symbol "MCBN."
Investor Relations
Inquiries regarding Mid-Coast
Bancorp Inc. should be directed to:
Robert E. Carter, Jr.
Mid-Coast Bancorp, Inc.
c/o The Waldoboro Bank, F.S.B.
1768 Atlantic Highway
P.O. Box 589
Waldoboro, Maine 04752
Annual Meeting of Stockholders
The Bank's Annual Meeting of Stockholders will be held at 3:00 p.m. Eastern
Standard time on Wednesday, July 16, 1997, at the Samoset Resort, Rockport,
Maine. Holders of common stock as of the close of business on June 2, 1997 will
be eligible to vote.
The Board of Directors
Mid-Coast Bancorp, Inc.
We consent to the incorporation by reference in this Annual Report
(Form 10-KSB) of Mid-Coast Bancorp, Inc. of our report dated May 2, 1997,
included in the 1997 Annual Report to Shareholders of Mid-Coast Bancorp, Inc.
We also consent to the incorporation by reference in the Registration
Statement Form S-8 (No. 33-69194) pertaining to the 1989 Stock Option Plan of
Mid-Coast Bancorp, Inc. of our report dated May 2, 1997, with respect to the
consolidated financial statements of Mid-Coast Bancorp, Inc. incorporated
by reference in this Annual Report (Form-10KSB) for the year ended
March 31, 1997.
Portland, Maine /s/ BAKER NEWMAN & NOYES
June 26, 1997 Limited Liability Company
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONSOLIDATED BALANCE SHEETS AND THE CONSOLIDATED STATEMENTS
OF INCOME AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 1,156,227
<INT-BEARING-DEPOSITS> 104,683
<FED-FUNDS-SOLD> 1,875,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 2,440,662
<INVESTMENTS-CARRYING> 949,109
<INVESTMENTS-MARKET> 911,125
<LOANS> 49,394,455
<ALLOWANCE> 295,457
<TOTAL-ASSETS> 58,925,368
<DEPOSITS> 42,180,698
<SHORT-TERM> 0
<LIABILITIES-OTHER> 229,125
<LONG-TERM> 11,440,000
0
0
<COMMON> 231,439
<OTHER-SE> 4,844,106
<TOTAL-LIABILITIES-AND-EQUITY> 58,925,368
<INTEREST-LOAN> 4,155,451
<INTEREST-INVEST> 258,042
<INTEREST-OTHER> 175,153
<INTEREST-TOTAL> 4,588,646
<INTEREST-DEPOSIT> 1,909,686
<INTEREST-EXPENSE> 2,436,580
<INTEREST-INCOME-NET> 2,152,066
<LOAN-LOSSES> 87,000
<SECURITIES-GAINS> 6,748
<EXPENSE-OTHER> 1,913,379
<INCOME-PRETAX> 386,708
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 242,775
<EPS-PRIMARY> 1.06
<EPS-DILUTED> 1.06
<YIELD-ACTUAL> 4.07
<LOANS-NON> 145,466
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 221,356
<CHARGE-OFFS> 20,810
<RECOVERIES> 7,911
<ALLOWANCE-CLOSE> 295,457
<ALLOWANCE-DOMESTIC> 295,457
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
