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 Fiscal Year Ended: March 31, 1998
Commission File No.: 0-18096
MID-COAST BANCORP, INC.
- -------------------------------------------------------------------------------
(Exact name of small business issuer 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 Exchange Act 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. [ ]
The Net Income for the issuer's fiscal year ended March 31, 1998 are
$475,616.
The number of shares outstanding as of March 31, 1998 is 711,960.
Aggregate market value of common stock held by non-affiliates, based on
the last reported sale price on May 18, 1998: $7,006,571.
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement pursuant to Regulation 14A,
which was delivered to the Commission for filing on June 5, 1998, and the
Annual Report for the fiscal year ended March 31, 1998, are incorporated by
reference into Part II and III of this report.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I
Item 1. Description of Business 1
Item 2. Description of Property 27
Item 3. Legal Proceedings 28
Item 4. Submission of Matters to a Vote of Security Holders 28
PART II
Item 5. Market for Common Equity and Related Stockholder Matters 29
Item 6. Management's Discussion and Analysis 30
Item 7. Financial Statements 30
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 30
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act 30
Item 10. Executive Compensation 30
Item 11. Security Ownership of Certain Beneficial Owners and Management 30
Item 12. Certain Relationships and Related Transactions 30
Item 13. Exhibits 31
SIGNATURES 33
</TABLE>
<PAGE>
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 owner of
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,
1998, the Bank had total assets of $62,929,870, total deposits of $45,299,724,
total borrowings of $12,190,000 and stockholders' equity of $5,127,134. As of
March 31, 1998 the Bank had full service branch facilities in Waldoboro and
Rockland, and an ATM in Jefferson, Maine. The Bank's executive offices are
located at 1768 Atlantic Highway, Waldoboro, Maine and its telephone number is
(207) 832-7521.
The Bank's expansion during fiscal year 1999 includes offices in Belfast
and Jefferson. The Belfast branch opened May 20, 1998, and moves the Bank into
an entirely new market area. We are confident that our people and products will
make this move successful. The Jefferson branch is scheduled to open in August
at the location of our ATM, and we should quickly establish a solid customer
base, as this will be the only bank in town. While we anticipate these branches
will increase operating costs and as a result impact earning in fiscal 1999, we
feel that expansion into these market areas is an important step in maintaining
the growth and long term profitability of the bank.
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
<PAGE> 1
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, and parts of Waldo
county, Maine, which includes the towns of Waldoboro, Damariscotta, Friendship,
Warren, Nobleboro, Thomaston, Rockland, Belfast, Camden and Lincolnville, 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 $50,624,539 at March 31, 1998,
representing approximately 80.3% of its total assets. At that date,
approximately 67.1% of the Bank's loan portfolio consisted of permanent
mortgage loans secured by residential properties. In addition, approximately
14.7% of the Bank's loan portfolio consisted of permanent mortgage loans
secured by commercial real estate, while secured and unsecured consumer,
commercial and passbook loans represented 13.9 % of the Bank's loan portfolio.
Finally, construction loans represented 4.3% 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,
---------------------------------------------
1998 1997
-------------------- ---------------------
Amount % Amount %
----------- ------ ----------- -------
<S> <C> <C> <C> <C>
Mortgage loans:
Residential $33,971,535 67.1% $35,300,010 71.5%
Commercial 7,464,541 14.7 6,314,688 12.8
Construction, net of undisbursed funds 2,189,613 4.3 1,262,210 2.6
---------------------------------------------
Total mortgage loans $43,625,689 86.1 $42,876,908 86.9%
Other loans:
Home equity 1,092,794 2.2 1,300,254 2.6
Commercial 2,071,625 4.1 1,406,317 2.8
Passbook loans 261,888 0.5 281,967 0.6
Installment and other 3,572,543 7.1 3,529,009 7.1
---------------------------------------------
Total other loans 6,998,850 13.9 6,517,547 13.1
---------------------------------------------
Total loans $50,624,539 100.0% $49,394,455 100.0%
=============================================
</TABLE>
<PAGE> 2
Residential Mortgage Loans. A substantial portion of the Bank's lending
activity is comprised of residential mortgage loans, which, at March 31, 1998,
represented 67.1% 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,
typically 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 4.
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 and are generally written to secondary market standards. During
the fiscal year ended March 31, 1998, the Bank originated $5,496,175 in
fixed-rate loans, of which 54% was sold to the secondary market. The remaining
46% of fixed rate loans were added to the Bank's portfolio. These loans were
underwritten using secondary market guidelines and were created to address
competitive market conditions.
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 $2,189,613, or
4.3% of the Bank's loan portfolio at March 31, 1998.
<PAGE> 3
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, 1998, $7,464,541 or 14.7% of the Bank's
loan portfolio was secured by commercial properties. The majority of the Bank's
commercial real estate loans are secured by improved commercial property such
as retail outlets and service establishments. Substantially the Bank's entire
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, 1998, such loans amounted to $2,071,625 or 4.1% 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, 1998, Waldoboro had secured and unsecured
consumer loans, which includes loans on deposit accounts, and home equity loans
of approximately $4.9 million or 9.7% of the Bank's loan portfolio. The Bank's
consumer loans have interest rates that 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 the Bank could have loaned to one borrower and the
borrower's related entities at March 31, 1998, was $769,001. At March 31, 1998,
the three largest outstanding balances of loans to any one borrower and related
entities were $604,951, $567,055 and $410,675.
<PAGE> 4
Scheduled Loan Maturities
The following table presents information regarding contractual maturities
of Waldoboro's loan portfolio at March 31, 1998. 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-
1998 1999 2003 2004+
---------- -------- -------- ----------
<S> <C> <C> <C> <C>
Mortgages - construction $2,189,613 $454,687 $ ---- $1,734,926
Commercial loans - non real estate 2,071,625 930,022 885,382 256,221
</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, 1999
----------------------------------
With With
Fixed Adjustable
Rates Rates Total
-------- ---------- ----------
<S> <C> <C> <C>
Mortgages - construction $ 12,578 $1,722,348 $1,734,926
Commercial loans - non real estate 148,642 992,961 1,141,603
</TABLE>
Origination, Purchase and Sale of Loans
The primary lending activity of Waldoboro is the origination of
conventional loans secured by first mortgage liens on residential properties,
principally single family residences, substantially all of which are located in
Lincoln and Knox counties, Maine. At fiscal year end, substantially all of the
real estate loans originated were secured by properties in Lincoln and Knox
counties. It is anticipated that the recent expansion to Belfast will expand
the Bank's lending area to include Waldo County.
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 that is reviewed and approved annually by the board of directors of the
Bank (the "Board"). This policy provides that the Loan Committee, which
determines whether a borrower has met the required underwriting conditions,
approves the loan and the Security Committee, which ensures that the value of
the real estate securing the loan is adequate, approves the appraisal. Once
approved, the loan must
<PAGE> 5
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 in previous years 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
certain 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, 1998, the Bank received $3,447,347 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 1998 totaled $47,324. At March 31, 1998, net
origination fees deferred to future periods were $64,112.
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.
<PAGE> 6
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 that 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 that 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 borrower. 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 sound 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 there
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 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 and/ or interest. In these cases, interest on such loans
is recognized only when received. It is the policy of the company to generally
place all loans that are 90 days or more past due on nonaccrual status, unless
in management's judgement the loan is well secured and in the process of
collection.
At March 31, 1998, the holding company had $69,570 of accruing loans that
were 90 days or more delinquent as compared to no such loans at March 31, 1997
or 1996. Unrecognized interest income on all loans on non-accrual status at
March 31, 1998 totaled $17,089.
<PAGE> 7
Nonperforming Assets
<TABLE>
<CAPTION>
At March 31,
------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Nonperforming loans:
Mortgage loans in process of foreclosure $ ---- $ ---- $160,919
Loans more than 90 days past due and still accruing 69,570 ---- ----
Nonaccrual loans 225,056 145,466 214,419
------------------------------
Total nonperforming loans 294,626 145,466 375,338
Real estate owned, net 70,383 91,823 224,137
------------------------------
Total nonperforming assets $365,009 $237,289 $599,475
==============================
Ratio of nonperforming loans to total loans 0.58% 0.29% 0.88%
Ratio of nonperforming assets to total assets 0.58% 0.40% 1.10%
</TABLE>
Allowance for Loan Losses. The allowance for loan losses (ALL) 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. While management believes the current
level is adequate, there can be no assurance that the Bank will not have to
increase its provision for loans losses in the future as a result of changing
conditions, such as a deterioration in the local economy or an increase in
problem loans. In addition, the Bank's primary regulator, The Office of Thrift
Supervision, reviews the ALL as part of their routine examinations. The OTS can
require additions to the ALL based on their examination findings. At the last
OTS examination on November 12, 1997 the examiners deemed the ALL to be
adequate.
<PAGE> 8
An analysis of activity in the allowance for loan losses for the years
ended March 31, 1998 and 1997 is provided below.
<TABLE>
<S> <C>
Balance, March 31, 1996 $221,356
--------
Charge-offs - Mortgages (12,000)
Charge-offs - Consumer (8,810)
Recoveries - Mortgage ----
Recoveries - Consumer 7,911
--------
Net charge offs (12,899)
Provision for loan losses 87,000
--------
Balance, March 31, 1997 $295,457
--------
Charge-offs - Mortgages ----
Charge-offs - Consumer (22,429)
Recoveries - Mortgage 334
Recoveries - Consumer 534
--------
Net charge offs (21,561)
Provision for loan losses 73,000
--------
Balance, March 31, 1998 $346,896
========
</TABLE>
Net charge offs to average loans outstanding
Year ended March 31, 1997 0.03%
Year ended March 31, 1998 0.04%
A breakdown of the allowance for loan losses is shown below.
<TABLE>
<CAPTION>
1998 1997
---------------------- ----------------------
Percent of Percent of
Loans to Loans to
Amount Total Loans Amount Total Loans
-------- ----------- -------- -----------
<S> <C> <C> <C> <C>
Mortgage loans - residential + const. $ 65,560 71.4% $ 45,000 74.1%
Mortgage loans - commercial 127,810 14.7 109,190 12.8
Other commercial 30,718 4.1 20,810 2.8
Consumer & other loans 45,912 9.8 43,500 10.3
General allocation 76,896 ---- 76,957 ----
--------------------------------------------
$346,896 100.0% $295,457 100.0%
============================================
</TABLE>
<PAGE> 9
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, 1998, 5.9% of the total assets of the Holding Company
were investment securities. See Note 2 of 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 $593,894 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 at the dates
indicated.
<PAGE> 10
<TABLE>
<CAPTION>
At March 31,
-----------------------------------------------------
1998 1997
------------------------- -------------------------
Book Value Market Value Book Value Market Value
---------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
Held to maturity:
Investment securities
Federal Home Loan Bank Bonds $ 400,000 $ 373,734 $ 400,000 $ 372,000
U.S. Treasury Obligations 299,672 298,617 299,109 292,875
Federal National Mortgage Association
Bonds 250,000 250,000 250,000 246,250
----------------------------------------------------
Total Investment securities $ 949,672 $ 922,351 $ 949,109 $ 911,125
====================================================
Available for sale:
Investment securities:
U.S.Treasury Obligations $ 499,329 $ 500,467 $ 497,578 $ 496,960
U.S. Agency Obligations 1,048,980 1,049,680 750,000 747,000
----------------------------------------------------
1,548,309 1,550,147 1,247,578 1,243,960
Mutual Fund 595,732 593,894 561,084 564,702
Required investment in Federal Home Loan
Bank Stock 622,000 622,000 622,000 622,000
Other ---- ---- 10,000 10,000
----------------------------------------------------
$2,766,041 $2,766,041 $2,440,662 $2,440,662
====================================================
</TABLE>
<PAGE> 11
The following table shows the maturities of the Bank's bonds at March 31,
1998 and the weighted average yield on such securities.
<TABLE>
<CAPTION>
After 1 After 5
Year but Years but
Within Within
Within 1 Year 5 Years 10 Years After 10 Years Total
------------- ---------- ---------- -------------- ----------
<S> <C> <C> <C> <C> <C>
Held to maturity:
U.S. Treasury Obligations
Book Value $ 299,672 $ ---- $ ---- $ ---- $ 299,672
Yield 4.75% ---- ---- ---- 4.75%
Federal Home Loan Bank Bonds
Book Value $ 200,000 $ ---- $ 200,000 $ ---- $ 400,000
Yield 3.00% ---- 3.93% ---- 3.47%
Federal National Mortgage
Association Bonds:
Book Value $ 250,000 $ ---- $ ---- $ ---- $ 250,000
Yield 5.75% ---- ---- ---- 5.75%
--------------------------------------------------------------------
Held to Maturity Total $ 749,672 $ ---- $ 200,000 $ ---- $ 949,672
--------------------------------------------------------------------
Available for Sale:
U.S. Treasury Obligations:
Book Value $ 499,329 $ ---- $ ---- $ ---- $ 499,329
Yield 5.75% ---- ---- ---- 5.75%
Federal Home Loan Bank Bonds
Book Value $ ---- $ 798,980 $ ---- $ ---- $ 798,980
Yield ---- 6.08% ---- ---- 6.08%
Federal National Mortgage
Association Bonds:
Book Value $ ---- $ 250,000 $ ---- $ ---- $ 250,000
Yield ---- 6.94% ---- ---- 6.94%
--------------------------------------------------------------------
Available for Sale Total $ 499,329 $1,048,980 $ ---- $ ---- $1,548,309
--------------------------------------------------------------------
Total $1,249,001 $1,048,980 $200,000 $ ---- $2,497,981
====================================================================
</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.
<PAGE> 12
At March 31, 1998, money market and savings deposits remained stable
while NOW accounts increased $557,771 or 16.1% and certificates of deposit
increased $2,475,002 or 9.7%. Demand deposits decreased $49,086 or 2.1%.
As a member of the FHLB System, the Bank is required to maintain liquid
assets at minimum levels that 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 certificate of deposit "specials" and other deposit
alternatives that are more responsive to market conditions than the Bank's
savings 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 Knox, Lincoln and Waldo 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.
<PAGE> 13
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, 1998
---------------------------------------------
% of
Average Average Interest Average
Balance Deposits Expense Rate
----------- -------- ---------- -------
<S> <C> <C> <C> <C>
Demand deposits $ 2,187,357 4.95 $ ---- ----
NOW Accounts 3,977,843 9.01 63,365 1.59
Savings 5,625,718 12.74 164,437 2.92
Money Market deposit accounts 5,022,940 11.37 191,859 3.82
Certificates of deposit 27,352,018 61.93 1,544,788 5.65
---------------------------------------------
$44,165,876 100.00% $1,964,449 4.45%
=============================================
<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%
=============================================
</TABLE>
<PAGE> 14
The maturities of certificates of deposit in amounts greater than or
equal to $100,000 at March 31, 1998 are set forth in the following table.
<TABLE>
<CAPTION>
Maturity Amount
--------------- ----------
<S> <C>
0 - 3 months $ 517,090
3 - 6 months 876,577
6 -12 months 756,606
After 12 months 300,889
----------
$2,451,162
==========
</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, 1998, $3,026,939 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, 1998, Waldoboro had $12,190,000 in
outstanding advances from the FHLB at a weighted average stated rate of 5.71%.
Waldoboro also has access to a line of credit approximating $1,157,000 at
March 31, 1998, 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, 1998.
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.
<PAGE> 15
Asset/Liability Management
The following table sets forth the scheduled repricing or maturity of the
Holding Company's financial assets and liabilities at March 31, 1998.
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. FHLB callable
advances are slotted based on there first call date. These assumptions may not
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) $12,245,970 $ 4,441,309 $ 5,813,092 $ 1,696,603 $3,432,784 $ 85,755 $27,715,513
Fixed-rate 1 - 4 family 54,034 11,740 148,675 201,326 610,365 6,488,422 7,514,562
Fixed-rate - other ---- ---- 70,305 ---- ---- 294,137 364,442
Consumer & other loans 5,601,367 808,526 1,963,526 2,156,103 1,956,383 2,544,117 15,030,022
Investments & other interest-
earning assets 6,940,193 498,180 249,700 499,800 200,000 ---- 8,387,873
---------------------------------------------------------------------------------------------
Total financial assets $24,841,564 $ 5,759,755 $ 8,245,298 $ 4,553,832 $6,199,532 $9,412,431 $59,012,412
=============================================================================================
Financial Liabilities (1):
Deposits:
NOW accounts, Savings and Money
Market Accounts 14,838,938 ---- ---- ---- ---- ---- 14,838,938
Certificates of deposit 22,299,337 4,247,336 1,040,439 447,722 ---- ---- 28,034,834
FHLB borrowings 8,975,000 ---- 2,000,000 ---- 1,000,000 215,000 12,190,000
---------------------------------------------------------------------------------------------
Total financial liabilities $46,113,275 $ 4,247,336 $ 3,040,439 $ 447,722 $1,000,000 $ 215,000 $55,063,772
=============================================================================================
GAP $ -21,271,711 1,512,419 5,204,859 4,106,110 5,199,532 9,197,431
GAP to total assets % -33.76 2.40 8.26 6.52 8.25 14.60
Cumulative GAP $ -21,271,711 -19,759,292 -14,554,433 -10,448,323 -5,248,791 3,948,640
Cumulative GAP to total assets % -33.76 -31.36 -23.10 -16.58 -8.33 6.27
<FN>
- --------------------
<F1> For purposes of this table, financial assets financial assets are defined
as all interest earning assets other than FHLB stock. Financial
liabilities consist of all interest-bearing liabilities.
</FN>
</TABLE>
Employees
At March 31, 1998, the Bank had a total of 25 full-time employees and 7
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 that 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.
<PAGE> 16
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, 1998, 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 come from the other thrifts
and commercial banks located in its primary market area of Knox, Lincoln and
Waldo 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 fifth 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 programs 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 of Federal Savings Associations
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
<PAGE> 17
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.
Business Activities. The Bank derives its lending and investment powers
from the Home Owners' Loan Act, as amended (the "HOLA"), and the regulations of
the OTS 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 assets on
the aggregate amount of loans secured by non-residential real estate property;
(c) a limit of 20% of an association's assets on the aggregate amount of
commercial loans, with the amount of commercial loans in excess of 10% of
assets being limited to small business loans; (d) a limit of 35% of an
association's assets on the aggregate amount of consumer loans and acquisitions
of certain debt securities; (e) a limit of 5% of assets on non-conforming loans
(loans in excess of the specific limitations of the HOLA); and (f) a limit 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.
Loans to One Borrower. Under the HOLA, savings associations are generally
subject to the same limits on loans to one borrower as are imposed on national
banks. Generally, under these limits, a savings association may not make a loan
or extend credit to a single or related group of borrowers in excess of 15% of
the association's unimpaired capital and surplus. Additional amounts may be
lent, not in excess of 10% of unimpaired capital and surplus, if such loans or
extensions of credit are fully secured by readily-marketable collateral. Such
collateral is defined to include certain debt and equity securities and
bullion, but generally does not include real estate
QTL Test. The HOLA requires a savings association to meet a qualified
thrift lender, or "QTL" test. Under the QTL test, a savings association is
required to maintain at least 65% of its "portfolio assets" in certain
"qualified thrift investments" in at least nine months of the most recent
12-month period. "Portfolio assets" means, in general, an association's total
assets less the sum of (a) specified liquid assets up to 20% of total assets,
(b) goodwill and other intangible assets, and (c) the value of property used to
conduct the association's business. "Qualified thrift investments" includes
various types of loans made for residential and housing purposes, investments
related to such purposes, including certain mortgage-backed and related
securities, and loans for personal, family, household and certain other
purposes up to a limit of 20% of an association's portfolio assets. Recent
legislation broadened the scope of "qualified thrift investments" to include
100% of an institution's credit card loans, education loans, and small business
loans. A savings association may also satisfy the QTL test by qualifying as a
domestic building and loan association" as defined in the Internal Revenue Code
of 1986. As of March 31, 1998, 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.
<PAGE> 18
A savings association that fails the QTL test must either operate under
certain restrictions on its activities or convert to a bank charter. The
initial restrictions include prohibitions against (a) engaging in any new
activity not permissible for a national bank, (b) paying dividends not
permissible under national bank regulations, (c) obtaining new advances from
any Federal Home Loan Bank and (d) establishing any new branch office in a
location not permissible for a national bank in the association's home state.
In addition, within one year of the date that a savings association ceases to
meet the QTL test, any company controlling the association would have to
register under, and become subject to the requirements of, the Bank Holding
company Act of 1956, as amended (the "BHC Act"). If the savings association
does not requalify under the QTL test within the three-year period after it
failed the QTL test, it would be required to terminate any activity and to
dispose of any investment not permissible for a national bank and would have to
repay as promptly as possible any outstanding advances from a Federal Home Loan
Bank. A savings association that has failed the QTL test may requalify under
the QTL test and be free of such limitations, but it may do so only once.
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, 1998, the Bank had no
investments in or extensions of credit to nonincludable subsidiaries, and its
tangible capital amounted to approximately $5,127,000 or 8.15% of its adjusted
total assets.
<PAGE> 19
Core Capital Requirements. Capital requirements also require core capital
equal to at least 4% 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, 1998, the Bank had no supervisory goodwill and the
Bank's core capital amounted to approximately $5,127,000 or 8.15% 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, 1998, 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 non-qualifying residential mortgage loans and
that portion of land loans and nonresidential construction loans that 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, 1998, the Bank's total capital amounted to approximately
$5,474,000 or 14.83% of its total risk-weighted assets.
<PAGE> 20
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, 1998.
<TABLE>
<CAPTION>
Minimum Required Actual Excess
----------------- ------------------- ----------
<S> <C> <C> <C> <C> <C>
Tangible Capital 1.5% $ 944,000 8.15% $5,127,000 $4,183,000
Tier 1 (Core) Capital 4.0% $2,517,000 8.15% $5,127,000 $2,610,000
Risk-based Capital 8.0% $2,953,000 14.83% $5,474,000 $2,521,000
</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 that 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.
Insurance of Deposits. The Bank is a member of the SAIF, and the Bank
pays its deposit insurance assessments to the SAIF. The FDIC also maintains
another insurance fund, the Bank Insurance Fund (the "BIF"), which primarily
insures the deposits of banks and state chartered savings banks.
<PAGE> 21
Pursuant to FDICIA, the FDIC established a new risk-based assessment
system for determining the deposit insurance assessments to be paid by insured
depository institutions. Under the assessment system, the FDIC assigns an
institution to one of three capital categories based on the institution's
financial information as of the reporting period ending seven months before the
assessment period. The three capital categories consist of (a) well
capitalized, (b) adequately capitalized, or (c) undercapitalized. The FDIC also
assigns an institution to one of three supervisory subcategories within each
capital group. The supervisory subgroup to which an institution is assigned is
based on a supervisory evaluation provided to the FDIC by the institution's
primary federal regulator and information that the FDIC determines to be
relevant to the institution's financial condition and the risk posed to the
deposit insurance funds. An institution's assessment rate depends on the
capital category and supervisory category to which it is assigned. Under the
regulation, there are nine assessment risk classifications (i.e., combinations
of capital groups and supervisory subgroups) to which different assessment
rates are applied. Assessment rates currently range from 0.0% of deposits for
an institution in the highest category (i.e., well-capitalized and financially
sound, with no more than a few minor weaknesses) to 0.27% of deposits for an
institution in the lowest category (i.e., undercapitalized and substantial
supervisory concern). The FDIC is authorized to raise the assessment rates as
necessary to maintain the required reserve ratio of 1.25%. As a result of the
Deposit Insurance Funds Act of 1996 (the "Funds Act"), both the BIF and the
SAIF currently satisfy the reserve ratio requirement. If the FDIC determines
that assessment rates should be increased, institutions in all risk categories
could be affected. The FDIC has exercised this authority several times in the
past and could raise insurance assessment rates in the future. If such action
is taken by the FDIC, it could have an adverse effect on the earnings of the
Bank.
The Funds Act also amended the FDIA to expand the assessment base for the
payments on the FICO bonds. Beginning January 1, 1997, the assessment base for
the FICO bonds included the deposits of both BIF- and SAIF- insured
institutions. 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 shall be one-fifth of the rate imposed on SAIF-assessable deposits.
The annual rate of assessments for the payments on the FICO bonds for the
semi-annual period beginning on January 1, 1997 was 0.0130% for BIF-assessable
deposits and 0.0648% for SAIF-assessable deposits. For the semi-annual period
beginning on July 1, 1997, the rates of assessment for the FICO bonds was
0.0126% for BIF-assessable deposits and 0.0630% 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 abolition of separate charters for
banks and thrifts and to report the Secretary's conclusions and findings to the
Congress. The Secretary of the Treasury recommended to the Congress 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 bank holding companies to engage in
such non-financial activities, the Secretary of the Treasury recommended that
the thrift charter be retained. Other legislation has been introduced in
Congress to eliminate the federal thrift charter, but the future of such
legislation is uncertain.
<PAGE> 22
Under the FDI Act, insurance of deposits may be terminated by the FDIC
upon a finding that the institution has engaged in unsafe or unsound practices,
is in an unsafe or unsound condition to continue operations or has violated any
applicable law, regulation, rule, order or condition imposed by the FDIC or the
OTS. The management of the Bank does not know of any practice, condition or
violation that might lead to termination of deposit insurance.
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 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.
Year 2000
The Holding Company has conducted a review of its computer systems to
identify the systems that could be affected by the "Year 2000" issue and has
developed a plan to resolve the issue. The Year 2000 issue is the result of
computer programs being written using two digits rather than four to define the
applicable year. Any of the Holding Company's programs that have time-sensitive
software may recognize a date using "00" as the year 1900 rather than the year
2000. This could result in a major system failure or miscalculations. The
Holding Company has adopted the regulatory plan that has five phases:
1) Awareness Phase - This phase consists of defining the Year 2000 problem
and developing a strategy that encompasses all of the bank's and our
vendor's systems. This phase has been completed by the institution.
2) Assessment Phase - This phase consists of assessing the Year 2000 problem
and detailing the steps necessary to address the issue. This phase must
identify all software, hardware, other miscellaneous items, and customer
and vendor interdependencies affected by the Year 2000 issue. This phase
also sets a timeline and responsibilities for each section of the plan.
While this phase is largely complete management recognizes that other
issues could arise that would need to be assessed.
3) Renovation Phase - This phase includes upgrades to hardware and software,
system upgrades, vendor certifications, and other associated changes. For
those applications handled by an outside vendor management has had
ongoing discussions about how they are addressing this issue, and we will
continue to monitor their progress. The Holding Company plans on having
this phase completed by December 31, 1998.
4) Validation Phase - This phase consists of testing all hardware and
software to ensure that it is compatible with our systems. Management
will also be testing systems and data files that are
<PAGE> 23
supplied by vendors and will monitor their testing on an on-going basis.
The Holding Company anticipates having this phase completed by March 31,
1999.
5) Implementation Phase - During the final phase all systems should be
certified as Year 2000 compliant. Any systems that fail certification
must be addressed and contingency plans must be implemented to ensure
continuity. In addition, all new systems and changes to existing systems
must be verified as Year 2000 compliant. The Holding Company anticipates
completion of this phase by June 30, 1999.
The Holding Company presently believes that because of the conversion to
new software in fiscal 1997, the year 2000 problem will not pose significant
operational problems for the Holding Company's and the Bank's computer systems
or material costs to be incurred. Also, the Bank's loan portfolio is not
significantly concentrated with any single borrower (at March 31, 1998, the
largest commercial loan relationship was $604,951) and consists largely of
loans secured by real estate. These factors help mitigate year 2000 risks
pertaining to the valuation of the loan portfolio. The Bank is currently
contacting its significant loan customers regarding their Year 2000 status and
plans. The Holding Company does not anticipate any material concerns regarding
other customers or vendors. It should also be noted that the Bank' regulatory
agency, the Office of Thrift Supervision, has been monitoring, and plans to
continue monitoring, the Bank's progress in addressing year 2000 matters.
<PAGE> 24
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
<PAGE> 25
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). The
Bank does not expect to be subject to the AMT.
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.
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.
Forward Looking Statements
Certain statements contained herein are not based on historical facts and
are "forward-looking statements" within the meaning of Section 21A of the
Securities Exchange Act of 1934. Forward-looking statements which are based on
various assumptions (some of which are beyond the
<PAGE> 26
Company's control), may be identified by reference to a future period or
periods, or by the use of forward-looking terminology, such as "may," "will,"
"believe," "expect," "estimate," "anticipate," "continue," or similar terms or
variations on those terms, or the negative of these terms. Actual results
could differ materially from those set forth in forward looking statements
due to a variety of factors, including, but not limited to, those related to
the economic environment, particularly in the market areas in which the
company operates, competitive products and pricing, fiscal and monetary
policies of the U.S. Government, changes in government regulations affecting
financial institutions, including regulatory fees and capital requirements,
changes in prevailing interest rates, acquisitions and the integration of
acquired businesses, credit risk management, asset-liability management, the
financial and securities markets and the availability of and costs associated
with sources of liquidity.
The Company does not undertake, and specifically disclaims any
obligation, to publicly release the result of any revisions that may be made to
any forward-looking statements to reflect the occurrence of anticipated or
unanticipated events or circumstances after the date of such statements.
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, Rockland and Belfast. 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,
opened in May 1995 is a full service branch with ample parking. The facility is
located in a high traffic area on U.S. Route 1. The Belfast office which opened
May 20, 1998, is leased space, offering full service and is conveniently
located on U.S. Route 3.
The following table sets forth certain information with respect to the
Bank's principal executive offices in Waldoboro and Rockland.
<TABLE>
<CAPTION>
Location Year Occupied/Opened Owned(1)
- ---------------------------- -------------------- --------
<S> <C> <C>
Principal Executive Offices 1988 $783,028
1768 Atlantic Highway
P.O. Box 589
Waldoboro, Maine
Rockland Branch Office 1995 $440,776
73 Camden Street
P.O. Box 669
Rockland, Maine
<FN>
- --------------------
<F1> Includes the building and land net of depreciation.
</FN>
</TABLE>
<PAGE> 27
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, 1998, 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, 1998, there was
no matter that was submitted to a vote of the stockholders.
<PAGE> 28
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
On March 31, 1998, there were 711,960 shares of the Holding Company's
Common Stock outstanding held by approximately 395 holders of record. Also at
such date, the Holding Company had granted options to purchase 12,246 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 Nasdaq
SmallCap Market under the symbol "MCBN."
<TABLE>
<CAPTION>
Cash
Dividends
Paid per
Quarter Ended High(1) Low(1) Share(1)
- ------------------- ------- ------ ---------
<S> <C> <C> <C>
March 31, 1996 $ 6.67 $ 5.83 $ ----
June 30, 1996 6.67 6.00 0.083
September 30, 1996 6.67 6.00 ----
December 31, 1996 6.33 6.25 0.086
March 31, 1997 6.33 6.33 ----
June 30, 1997 6.50 6.17 0.086
September 30, 1997 9.33 7.00 ----
December 31, 1997 10.83 8.83 0.086
March 31, 1998 $14.00 $12.83 $ ----
<FN>
- --------------------
<F1> All figures adjusted to reflect 3 for 1 stock split that took effect in
1998.
</FN>
</TABLE>
On April 14, 1998 the Holding Company declared a dividend of $.10 per
share to Stockholders of record on June 1, 1998 and payable June 30, 1998. See
"Regulation - Dividends" for information about the Holding Company's ability to
pay dividends.
<PAGE> 29
Item 6. Management's Discussion and Analysis.
Management's Discussion and Analysis, on Pages 2 through 12 of the 1998
Annual Report to Shareholders for the year ended March 31, 1998, is
incorporated herein by reference.
Item 7. Financial Statements.
See Item 13 for index to Financial Statements which are incorporated by
reference from pages F-1 through F-28 of the 1998 Annual Report to
Shareholders.
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.
The following information included on pages 4, 5, 7 and 8 of the Holding
Company's Proxy Statement for the 1998 Annual Meeting of Shareholders (the
"Proxy Statement") is incorporated herein by reference: "Proposal 1- Election
of Directors," "Directors Who Will Continue in Office After the Meeting,"
"Executive Officers Who Are Not Directors" and "Compliance with Section 16(a)
of the Act."
Item 10. Executive Compensation.
The following information included on pages 6 through 13 of the Proxy
Statement is incorporated herein by reference: "The Board of Directors and Its
Committees," "Executive Compensation," "Employment Agreement," "Pension Plan,"
"401(k) Plan," "Stock Option Plan" and "Recognition and Retention Plan."
Item 11. Security Ownership of Certain Beneficial Owners and Management.
Information regarding security ownership of certain beneficial owners and
management on Pages 2 and 3 of the Proxy Statement dated June 5, 1998 is
incorporated herein by reference
Item 12. Certain Relationships and Related Transactions.
Information regarding certain relationships and related transactions on
Page 9 of the Proxy Statement dated June 5, 1998 is incorporated herein by
reference.
<PAGE> 30
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 1998 Annual Report to Stockholders:
<TABLE>
<CAPTION>
Pages in
Annual Report
-------------
<S> <C>
Report of Independent Auditors F-1
Consolidated Balance Sheets, March 31, 1998 and 1997 F-2--F-3
Consolidated Statements of Income, Years Ended March 31, 1998,
1997 and 1996 F-4
Consolidated Statements of Changes in Stockholders' Equity, Years
Ended March 31, 1998, 1997 and 1996 F-5
Consolidated Statements of Cash Flows, Years Ended March 31, 1998,
1997 and 1996 F-6--F-7
Notes to Consolidated Financial Statements F-8--F-28
</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.
- -----------
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).
<PAGE> 31
13 Annual Report to the Shareholders for the year ended March 31,
1998.
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, L.L.C.
27 Financial Data Schedules, including restated previously filed
Financial Data Schedules.
<PAGE> 32
SIGNATURES
----------
In accordance with the requirements of The Exchange Act, the registrant
has caused this report to be signed on its behalf by the undersigned, there
unto duly authorized.
MID-COAST BANCORP, INC.
June 26, 1998 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 26, 1998
-------------------------- Treasurer and Director
Wesley E. Richardson
By: /s/ WAITE W. WESTON Director and Chairman June 26, 1998
--------------------------
Waite W. Weston
By: /s/ ROBERT W. SPEAR Director and Vice Chairman June 26, 1998
--------------------------
Robert W. Spear
By: Director June 26, 1998
--------------------------
Sharon Crowe
By: /s/ DONALD DOLLOFF Director June 26, 1998
--------------------------
Donald Dolloff
By: /s/ SAMUEL COHEN Director June 26, 1998
--------------------------
Samuel Cohen
By: Director June 26, 1998
--------------------------
Lincoln Orff
</TABLE>
<PAGE> 33
To Our Shareholders:
Shareholder value, expansion, technology and growth of core services
were the themes that made fiscal 1998 a successful year. During the past
year our shareholders gained nearly $5.5 million in value. We are pleased
with this growth, and will continue to focus on developing and implementing
strategies to provide long term growth for Mid-Coast and its shareholders.
As part of this plan the bank completed a 3 for 1 stock split on March 31,
1998 aimed at providing additional liquidity for Mid-Coast Bancorp, Inc.
As it completes its third year of operation, we remain pleased with
the success of the Rockland branch. On May 20th, 1998 we opened our latest
branch in Belfast. Although this expansion moves the bank into an entirely
new market area, we are confident that our people and products will make
this move successful. In addition, the bank has applied to the OTS for
approval to open a branch in Jefferson. Assuming approval, we anticipate the
project will move rapidly forward with an opening in August 1998.
Technology will continue to play a paramount role in the future of
banking. Since our technology conversion in February of 1997, the Bank has
focused on maintaining and upgrading its equipment, so as to remain at the
forefront of banking technology.
Core service growth is at the heart of the success for the Bank. Our
goal firmly remains aimed at increasing checking account business, while
developing multiple relationships with our customers. This deposit
relationship coupled with developing and pricing of loan products for the
needs of mid-coast Maine is the formula we believe will make Mid-Coast
Bancorp successful well into the next century.
Net income for the fiscal year ended March 31, 1998 was $475,616
representing $0.68 per share-basic or $0.67 per share diluted. Fiscal
1998's income represented an increase of $232,841 over the year ended March
31, 1997. The significance of the increase was effected by the SAIF payment
made in fiscal 1997. Fiscal 1998 earnings without the assessment still
represent a 19% increase over the previous year. Additional highlights
include: a $4.1 million increase in assets, a 6.6% increase in net interest
income, a 29% increase in other income and a 5.2% increase in total
stockholder's equity.
The communities that we serve are comprised of various civic groups,
agencies, schools, and other non-profit organizations. The Bank remains
committed to providing financial support for these groups. Equally as
important is our staff and the countless hours of volunteer work they
provide. We are extremely proud of their efforts and will continue to
maintain our support in the Mid-Coast region.
On behalf of the Board of Directors, I would like to express my
sincere thanks to all our management and staff. To our shareholders, I
appreciate your continued 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
<PAGE>
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 years 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,
-----------------------------------------------------------------------
1998 1997 1996 1995 1994
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Financial condition data:
Loans, net $50,213,531 $48,979,032 $42,465,559 $43,358,622 $42,746,098
Other interest-Earning
assets 9,362,898 6,523,454 9,422,891 7,125,838 5,381,549
Total assets 63,015,163 58,925,368 54,362,066 52,749,000 49,685,023
Deposits 45,171,416 42,180,698 41,816,902 37,121,110 35,023,932
Borrowings 12,190,000 11,440,000 7,465,000 10,715,000 10,215,000
Stockholders' equity $ 5,340,735 $ 5,075,545 $ 4,926,077 $ 4,722,596 $ 4,297,094
</TABLE>
<TABLE>
<CAPTION>
For the Years Ended March 31,
------------------------------------------------------------------
1998 1997 1996 1995 1994
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operating data:
Interest income $4,917,589 $4,588,646 $4,389,689 $3,939,940 $3,728,547
Interest expense 2,623,506 2,436,580 2,485,256 2,007,051 1,904,185
------------------------------------------------------------------
Net interest income 2,294,083 2,152,066 1,904,433 1,932,889 1,824,362
Provision for loan Losses 73,000 87,000 62,010 81,000 140,000
Other income 303,286 235,021 183,277 157,268 181,717
Other expense 1,809,874 1,913,379 1,565,259 1,293,308 1,167,565
------------------------------------------------------------------
Income before Income taxes 714,495 386,708 460,441 715,849 698,514
Income tax expense 238,879 143,933 156,994 248,474 232,462
------------------------------------------------------------------
Income before Accounting
change 475,616 242,775 303,447 467,375 466,052
Change in accounting (1) -- -- -- -- 47,000
------------------------------------------------------------------
Net income $ 475,616 $ 242,775 $ 303,447 $ 467,375 $ 513,052
==================================================================
</TABLE>
<PAGE> 2
<TABLE>
<CAPTION>
For the Years Ended March 31,
----------------------------------------------
1998 1997 1996 1995 1994
----------------------------------------------
<S> <C> <C> <C> <C> <C>
Basic earnings per share(2):
Income before Accounting change $ .68 $ .35 $ .44 $ .69 $ .70
Change in accounting (1) -- -- -- -- .07
----------------------------------------------
Net income per share $ .68 $ .35 $ .44 $ .69 $ .77
==============================================
Diluted earnings per share(2):
Income before Accounting change 0.67 0.34 0.43 0.67 0.68
Change in accounting (1) -- -- -- -- 0.07
----------------------------------------------
Net income per share $ 0.67 $ 0.34 $ 0.43 $ 0.67 $ 0.75
==============================================
</TABLE>
<TABLE>
<CAPTION>
For the Years Ended March 31,
------------------------------------------
1998 1997 1996 1995 1994
------------------------------------------
<S> <C> <C> <C> <C> <C>
Statistical data (3):
Interest rate spread 3.63% 3.67% 3.30% 3.56% 3.53%
Net yield on average earning assets 3.99 4.07 3.68 3.88 3.83
Return on average assets 0.78 0.43 0.56 0.90 1.04
Return on average equity 9.06 4.74 6.28 10.38 12.54
Average equity to average assets 8.62 9.12 8.92 8.67 8.27
Dividend payout ratio 25.61 48.27 35.30 18.50 11.92
<F1> Represents cumulative effect of adoption of FASB Statement No. 109-
"Accounting For Income Taxes."
<F2> All years restated to reflect 3 for 1 stock split in 1998 and 5% stock
dividend in 1996, and the adoption of FASB Statement No. 128-"Earnings
per Share".
<F3> Average balances were computed using month end amounts.
</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 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
<PAGE> 3
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.
FINANCIAL CONDITION
Total assets at March 31, 1998 were $63,015,163, an increase of
$4,089,795 from March 31, 1997. Asset increases include $1,387,000 in time
deposits, $325,379 in investments available for sale, $1,234,499 in net
loans and a $845,000 increase in federal funds sold.
The Bank had, as of March 31, 1998, a net loan portfolio of
$50,213,531, representing 80% of total assets. Stockholders' equity at year
end was $5,340,735, an increase of $265,190 from March 31, 1997, as a result
of 1998 net income after dividends, on options exercised, and effects of
stock award program. 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. Currently the Bank's liabilities are more rate sensitive than
its assets. 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, 1998, the adjustable rate loans in the residential
mortgage loan portfolio amounted to $24.0 million or 71.0% and adjustable
rate loans in the commercial loan portfolio amounted to $6.0 million or
63.0%. 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 $28.0 million or 62.0% of the Bank's deposits.
During fiscal 1998, the interest rate environment remained relatively
stable. This allowed the bank to maintain a consistent interest rate
spread. However, in a declining interest rate environment the Bank's
interest rate spread would increase because liabilities would be repricing
faster than assets for the same period. In contrast, in a rising rate
environment the spread would decrease resulting in an adverse effect on the
Bank's net interest income.
<PAGE> 4
NONPERFORMING ASSETS
A summary of nonperforming assets for the last three years is shown
below.
<TABLE>
<CAPTION>
At March 31,
----------------------------------
1998 1997 1996
----------------------------------
<S> <C> <C> <C>
Nonperforming loans:
Mortgage loans in process of foreclosure $ -- $ -- $160,919
Loans more than 90 days past due and still accruing 69,570 -- --
Nonaccrual loans 225,056 145,466 214,419
----------------------------------
Total nonperforming loans 294,626 145,466 375,338
Real estate owned, net 70,383 91,823 224,137
----------------------------------
Total nonperforming assets $365,009 $237,289 $599,475
==================================
Ratio of nonperforming loans to total loans 0.58% 0.29% 0.88%
Ratio of nonperforming assets to total assets 0.58% 0.40% 1.10%
</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 and/or interest. In these cases, interest on such
loans is recognized only when received. It is the policy of the company to
generally place all loans which are 90 days or more past due on nonaccrual
status, unless in management's judgement the loan is well secured and in the
process of collection.
At March 31, 1998, the holding company had $69,570 of accruing loans
which were 90 days or more delinquent as compared to no such loans at March
31, 1997 or 1996. Unrecognized interest income on all loans on non-accrual
status at March 31, 1998 totaled $17,089.
Management does not believe that any loans other than those
represented in the table above are potential problem loans at present.
<PAGE> 5
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, 1998 Year Ended March 31, 1997
---------------------------------- ---------------------------------
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans $49,601,915 $4,464,822 9.00% $45,541,246 $4,155,451 9.12%
Interest bearing &
Time deposits 1,559,093 87,522 5.61% 1,213,001 66,307 5.47%
Federal funds sold 2,806,836 155,004 5.52% 1,461,338 76,435 5.23%
Investments & mortgage-
Backed securities 3,487,291 210,241 6.03% 4,687,712 290,453 6.20%
------------------------- -------------------------
Total interest-earning
assets 57,455,135 4,917,589 8.56% 52,903,297 4,588,646 8.67%
Other assets:
Allowance for loan losses (318,443) (269,238)
Cash and due from banks 1,158,854 870,617
Fixed assets 1,539,018 1,451,401
Other assets 1,093,918 1,163,155
----------- -----------
Total assets $60,928,482 $56,119,232
=========== ===========
Interest-bearing liabilities:
NOW, savings & money
Market accounts 14,626,501 419,661 2.87% 13,218,258 394,708 2.99%
Certificates of deposit 27,352,018 1,544,788 5.65% 26,255,429 1,514,948 5.77%
Borrowings 11,185,205 659,057 5.89% 9,226,284 526,924 5.71%
----------------------------------------------------------------------
Total interest-bearing
liabilities 53,163,724 2,623,506 4.93% 48,699,971 2,436,580 5.00%
Other liabilities:
Demand deposits 2,187,357 2,113,328
Other liabilities 325,651 187,113
----------- -----------
Total liabilities 55,676,732 51,000,412
Stockholders' equity 5,251,750 5,118,820
----------- -----------
Total liabilities and
stockholders' equity $60,928,482 $56,119,232
=========== ===========
---------- ----------
Net interest income $2,294,083 $2,152,066
========== ==========
Interest rate spread 3.63% 3.67%
Net interest income as a
percentage of average
interest-earning assets 3.99% 4.07%
</TABLE>
<PAGE> 6
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, 1998 Year Ended March 31, 1997
Compared to 1997 Compared to 1996
Increase (Decrease) Increase (Decrease)
--------------------------------- --------------------------------
Volume Rate Net Volume Rate Net
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest on interest-earning
assets:
Loans $364,619 $(55,248) $309,371 $146,093 $ 43,758 $189,851
Interest-bearing & time
deposits 19,384 1,831 21,215 6,342 8,517 14,859
Federal funds sold 74,079 4,490 78,569 (37,795) (15,922) (53,717)
Investments & mortgage-
backed securities (72,562) (7,650) (80,212) 4,849 43,115 47,964
---------------------------------------------------------------------
Total Interest Income $385,520 $(56,577) $328,943 $119,489 $ 79,468 $ 198,957
---------------------------------------------------------------------
Interest on interest-bearing
liabilities:
Savings, NOW, & money
Market deposit accounts 39,448 (14,495) 24,953 34,403 (50,676) (16,273)
Certificates of deposit 60,554 (30,714) 29,840 (4,685) (42,119) (46,804)
Borrowings 114,963 17,170 132,133 (1,500) 15,901 14,401
---------------------------------------------------------------------
Total Interest Expense 214,965 (28,039) 186,926 28,218 (76,894) (48,676)
---------------------------------------------------------------------
NET INTEREST INCOME $170,555 $(28,538) $142,017 $ 91,271 $156,362 $ 247,633
=====================================================================
</TABLE>
<PAGE> 7
RESULTS OF OPERATIONS
COMPARISON OF YEARS ENDED MARCH 31, 1998 AND 1997
NET INCOME
Net income for the year ended March 31, 1998 amounted to $475,616.
This represents a 96% increase compared to fiscal 1997 income of $242,775.
It should be noted that fiscal 1997 income was effected by the one-time
assessment paid to recapitalize SAIF. Without the SAIF assessment, fiscal
1998 earnings would have increased 19% over the previous fiscal year.
Highlights comparing fiscal 1998 to 1997 include: an increase in total
interest income of $328,943 or 7.2%, an increase in total interest expense
of $186,926 or 7.7%, an increase in net interest income of $142,017 or 6.6%,
an increase in other income of $68,265 or 29.1% and a decrease in other
expenses of $103,505 or 5.4%. These highlights will be explained in greater
detail throughout the remainder of the results of operations.
INTEREST INCOME
Total interest income for the year ended March 31, 1998 increased
$328,943 or 7.2% compared to the previous fiscal year. The increase is
partially related to an increase of $4.1 million or 8.9% in the average
balances of mortgage, consumer and commercial loans compared to the previous
fiscal year. Additionally, other interest income which is comprised of
interest on Federal funds sold and interest-bearing time deposits, increased
due to an increase in the volume on those assets; however, offsetting this
was a decrease in interest on investments due to a decrease in the average
balance of investments.
INTEREST EXPENSE
Total interest expense for the year ended March 31, 1998, increased
$186,926 or 7.7% from March 31, 1997. This increase is primarily due to
increases in the average balances in certificates of deposit and borrowings,
which is partially offset by a reduction in rates.
PROVISION FOR LOAN LOSSES
The Bank's provision for loan losses was $73,000 for the year ended
March 31, 1998, compared to $87,000 for the previous year. Combined with
net charge-offs, this resulted in an allowance for loan losses of $346,896
or a 17.4% increase over the previous fiscal year. Management has increased
the allowance for loan losses to account for the growth in the commercial
loan portfolio.
The allowance for loan losses to non-performing loans was 118% at
March 31, 1998 compared with 203% a year ago. Management believes that the
provision for loan losses is adequate based on the Bank's historical loan
loss ratios and the commensurate risk associated with the loan portfolio.
<PAGE> 8
OTHER INCOME
Other income for the year ended March 31, 1998 was derived primarily
from gains on sales of loans and fee income. Other income increased $68,265
or 29.1% compared to the same period last year. The increase in gain on
sales of loans consisted primarily of loans sold to secondary market
sources. The increase in fee income was primarily generated by the growth of
checking accounts which generated fee income, primarily relating to the
collection of overdraft fees.
OTHER EXPENSES
Other expenses consists primarily of the Bank's general and
administrative expenses. Other expenses decreased $103,505 or 5.4% compared
to March 31, 1997. This decrease is due primarily to the one-time
assessment the Bank paid in fiscal 1997. Without the assessment other
expenses would have increased $137,894 or 8.25%. The increase is primarily
related to compensation of directors, officers and staff, due to an
additional staff person, regular scheduled salary increases, and expenses
related to the Recognition and Retention Plan. In addition, occupancy and
equipment expenses increased due to depreciation on new equipment and other
expenses increased due to added telephone, office supplies, postage, and
real estate taxes. Other expenses are likely to increase during fiscal year
1999 due to the additional expenses associated with the new branches.
INCOME TAX EXPENSE
The provision for income tax for the year ended March 31, 1998, was
$238,879 an increase of $94,946 or 66.0% from the previous year. See note 6
to the consolidated financial statements for further information regarding
income taxes.
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
to recapitalize the 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 4.5%, a
decrease in total interest expense of $48,676 or 2%, a increase in the
provision for loan losses of $24,990 or 40.3%, an increase in other income
of $51,744 or 28.2%, an increase in other expenses of $348,120 or 22.2%, 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 8.3%.
<PAGE> 9
INTEREST INCOME
Total interest income for the year ended March 31, 1997, increased
$198,957or 4.5% 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 2% 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.
PROVISION FOR LOAN LOSSES
The Bank 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 $51,774 or 28.2% 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
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 22.2% 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.
<PAGE> 10
INCOME TAX EXPENSE
The provision for income tax for the year ended March 31, 1997, was
$143,933, a decrease of 8.3% from the previous year. The effective tax rate
for the year was 37.2%. See note 6 to 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's current borrowing capacity
exceeds $28,000,000. At March 31, 1998 the Bank's borrowings from the FHLB
were $12.2 million.
At year end March 31, 1998, stockholders' equity was $5,340,735 or
8.48% of assets compared to $5,075,545 or 8.61% at March 31, 1997. The Bank
is required to maintain specified amounts of capital pursuant to federal
regulations. At year end March 31, 1998 the Bank's capital substantially
exceeded core capital, tangible capital and risk based capital regulatory
requirements. See note 11 to the consolidated financial statements for
further information.
YEAR 2000
The Holding Company has conducted a review of its computer systems to
identify the systems that could be affected by the "Year 2000" issue and has
developed a plan to resolve the issue. The Year 2000 issue is the result of
computer programs being written using two digits rather than four to define
the applicable year. Any of the Holding Company's programs that have time-
sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. This could result in a major system failure or
miscalculations.
The Holding Company presently believes that because of the conversion
to new software in fiscal 1997, the Year 2000 problem will not pose
significant operational problems for the Holding Company's and the Bank's
computer systems or material costs to be incurred. The Holding Company has
plans to complete testing of its software and hardware on-site by December
31, 1998. Also, the Bank's loan portfolio is not significantly concentrated
with any single borrower (at March 31, 1998, the largest commercial loan
relationship was $595,000) and consists largely of loans secured by real
estate. These factors help mitigate year 2000 risks pertaining to the
valuation of the loan portfolio. The Bank is currently contacting its
significant loan customers regarding their Year 2000 status and plans. The
Holding Company does not anticipate any material concerns regarding other
customers or vendors. It should also be noted that the Bank's regulatory
agency, the Office of Thrift Supervision,
<PAGE> 11
has been monitoring, and plans to continue such monitoring, the Bank's
progress in addressing year 2000 matters.
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 (see "Financial
Condition - Asset/Liability Management"), 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.
<PAGE> 12
PART II
MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
On March 31, 1998, there were 711,960 shares of the Holding Company's
Common Stock outstanding held by approximately 395 holders of record. Also
at such date, the Holding Company had granted options to purchase 12,246
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
Nasdaq SmallCap Market under the symbol "MCBN."
<TABLE>
<CAPTION>
Cash
Dividends
Paid per
Quarter Ended High(1) Low(1) Share(1)
- ----------------------------------------------------------------
<S> <C> <C> <C>
March 31, 1996 $ 6.67 $ 5.83 $ --
June 30, 1996 6.67 6.00 0.083
September 30, 1996 6.67 6.00 --
December 31, 1996 6.33 6.25 0.086
March 31, 1997 6.33 6.33 --
June 30, 1997 6.50 6.17 0.086
September 30, 1997 9.33 7.00 --
December 31, 1997 10.83 8.83 0.086
March 31, 1998 $14.00 $12.83 $ --
<F1> All figures adjusted to reflect 3 for 1 stock split that took effect
in 1998.
</TABLE>
On April 14, 1998 the Holding Company declared a dividend of $.10 per
share to Stockholders of record on June 1, 1998 and payable June 30, 1998.
<PAGE> 13
Mid-Coast Bancorp, Inc.
Audited Financial Statements
Years Ended March 31, 1998, 1997 and 1996
With Independent Auditors' Report
<PAGE>
MID-COAST BANCORP, INC.
INDEX TO FINANCIAL STATEMENTS
Page
----
Independent Auditors' Report F-1
Consolidated Balance Sheets as of March 31, 1998 and 1997 F-2
Consolidated Statements of Income for the Three Years Ended
March 31, 1998 F-4
Consolidated Statements of Changes in Stockholders' Equity
for the Three Years Ended March 31, 1998 F-5
Consolidated Statements of Cash Flows for the Three Years
Ended March 31, 1998 F-6
Notes to Consolidated Financial Statements F-8
<PAGE>
BAKER NEWMAN & NOYES [LETTERHEAD]
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, 1998 and 1997, and the related
consolidated statements of income, changes in stockholders' equity and cash
flows for each of the three years in the period ended March 31, 1998. 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, 1998 and 1997, and the
consolidated results of their operations and their cash flows for each of
the three years in the period ended March 31, 1998, in conformity with
generally accepted accounting principles.
/s/ Baker Newman & Noyes
May 1, 1998 Limited Liability Company
Portland, Maine
<PAGE> F-1
MID-COAST BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
March 31, 1998 and 1997
ASSETS
------
<TABLE>
<CAPTION>
1998 1997
--------------------------
<S> <C> <C>
Cash and due from banks $ 1,149,870 $ 1,156,227
Interest bearing deposits 98,160 104,683
Federal funds sold 2,720,000 1,875,000
--------------------------
Cash and cash equivalents 3,968,030 3,135,910
Time deposits 2,476,000 1,089,000
Investment securities available for sale, at market (note 2) 2,144,041 1,818,662
Held to maturity investment securities (market value of
$922,351 in 1998 and $911,125 in 1997) (note 2) 949,672 949,109
Investment in Federal Home Loan Bank stock (note 9) 622,000 622,000
Loans held for sale 353,025 65,000
Loans (note 3): 50,624,539 49,394,455
Less: Allowance for loan losses (note 4) 346,896 295,457
Deferred loan fees 64,112 119,966
--------------------------
50,213,531 48,979,032
Bank premises and equipment, net (note 5) 1,490,827 1,580,290
Other assets:
Accrued interest receivable - loans 239,689 244,474
Accrued interest receivable - time deposits 12,445 9,162
Accrued interest receivable - investment securities 46,494 50,268
Deferred income taxes (note 6) 100,000 98,000
Prepaid expenses and other assets 329,026 192,638
Real estate owned (note 7) 70,383 91,823
--------------------------
Total other assets 798,037 686,365
--------------------------
Total assets $63,015,163 $58,925,368
==========================
<PAGE> F-2
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<CAPTION>
1998 1997
--------------------------
<S> <C> <C>
Liabilities:
Deposits (note 8):
Demand deposits $ 2,297,644 $ 2,346,730
NOW accounts 4,018,629 3,460,858
Savings 5,686,227 5,693,545
Money market deposit accounts 5,134,082 5,119,733
Certificates of deposit 28,034,834 25,559,832
--------------------------
Total deposits 45,171,416 42,180,698
Advances from the Federal Home Loan Bank (note 9) 12,190,000 11,440,000
Accrued expenses and other liabilities 313,012 229,125
--------------------------
Total liabilities 57,674,428 53,849,823
Commitments and contingencies (note 10)
Stockholders' equity (notes 11 and 12):
Common stock, $1 par value, 1,500,000 shares authorized;
711,960 shares issued and 710,160 shares outstanding
(231,439 shares in 1997) 711,960 231,439
Paid-in capital 1,521,041 1,469,769
Retained earnings 3,253,517 3,374,337
Unearned compensation (145,783) --
--------------------------
Total stockholders' equity 5,340,735 5,075,545
--------------------------
Total liabilities and stockholders' equity $63,015,163 $58,925,368
==========================
</TABLE>
See accompanying notes.
<PAGE> F-3
MID-COAST BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
Years Ended March 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
--------------------------------------
<S> <C> <C> <C>
Interest income:
Interest on loans $4,464,822 $4,155,451 $3,965,600
Interest on investment securities 210,241 257,426 215,270
Interest on mortgage-backed securities - 33,027 15,794
Other 242,526 142,742 193,025
--------------------------------------
Total interest income 4,917,589 4,588,646 4,389,689
Interest expense:
Interest on deposits (note 8) 1,964,449 1,909,656 1,972,733
Interest on borrowings 659,057 526,924 512,523
--------------------------------------
Total interest expense 2,623,506 2,436,580 2,485,256
--------------------------------------
Net interest income 2,294,083 2,152,066 1,904,433
Provision for loan losses (note 4) 73,000 87,000 62,010
--------------------------------------
2,221,083 2,065,066 1,842,423
Other income:
Loan servicing and other loan fees 52,089 46,335 42,273
Gain on sales of loans 54,785 31,436 36,935
Deposit account fees 188,619 140,654 98,268
Gain on sale of investment securities
available for sale (note 2) - 6,748 -
Miscellaneous 7,793 9,848 5,801
--------------------------------------
303,286 235,021 183,277
Other expenses:
Compensation of directors, officers, and staff 695,130 652,237 631,779
Employee benefits (notes 12 and 13) 105,906 91,430 67,670
Occupancy and equipment expense 195,749 137,900 133,864
Insurance expense 74,834 360,328 137,163
Real estate owned (note 7) 12,243 11,678 46,831
Other (note 14) 726,012 659,806 547,952
--------------------------------------
1,809,874 1,913,379 1,565,259
--------------------------------------
Income before income taxes 714,495 386,708 460,441
Income tax expense (note 6) 238,879 143,933 156,994
--------------------------------------
Net income $ 475,616 $ 242,775 $ 303,447
======================================
Earnings per share - basic $ .68 $ 0.35 $ 0.44
======================================
Earnings per share - diluted $ .67 $ 0.34 $ 0.43
======================================
</TABLE>
See accompanying notes.
<PAGE> F-4
MID-COAST BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended March 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
Total
Common Paid-in Retained Unearned Stockholders'
Stock Capital Earnings Compensation Equity
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at April 1, 1995 $217,084 $1,258,178 $3,247,334 $ - $4,722,596
Issuance of 1,172 shares of common
stock upon exercise of options 1,172 8,223 - - 9,395
Issuance of 10,775 shares of common
stock as a 5% stock dividend 10,775 181,881 (194,893) - (2,237)
Net income - - 303,447 - 303,447
Dividends declared ($.16 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 ($.17 per share) - - (117,202) - (117,202)
-------------------------------------------------------------------
Balance at March 31, 1997 231,439 1,469,769 3,374,337 - 5,075,545
Issuance of 5,881 shares of common
stock upon exercise of options 5,881 51,272 - - 57,153
Net income - - 475,616 - 475,616
Dividends declared ($.17 per share) - - (121,796) - (121,796)
Stock split effected as dividend (note 11) 474,640 - (474,640) - -
Acquisition of shares for stock award
plan (note 12) - - - (177,925) (177,925)
Amortization of unearned compensation - - - 32,142 32,142
-------------------------------------------------------------------
Balance at March 31, 1998 $711,960 $1,521,041 $3,253,517 $(145,783) $5,340,735
===================================================================
</TABLE>
See accompanying notes.
<PAGE> F-5
MID-COAST BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended March 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
---------------------------------------
<S> <C> <C> <C>
Operating activities:
Net income $ 475,616 $ 242,775 $ 303,447
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 114,817 62,268 66,906
Net accretion on investment securities (3,085) (6,250) (11,416)
Gain on sale of investment securities available
for sale - (6,748) -
Amortization of unearned compensation 32,142 - -
Loss on disposal of bank premises and equipment 10,252 - -
Provision for losses on real estate owned - - 38,789
Provision for loan losses 73,000 87,000 62,010
Net change in deferred loan fees (55,854) (31,288) (18,562)
Proceeds from sales of loans 3,447,347 2,248,585 2,688,085
Loans originated for sale (3,680,587) (1,723,070) (3,142,729)
Gain on sales of loans (54,785) (31,436) (36,935)
Loss on sale of real estate owned 8,235 - -
Deferred income taxes (2,000) (4,000) 2,000
Change in accrued interest receivable 5,276 10,687 (39,341)
Change in prepaid expenses and other assets (136,388) (94,757) (13,607)
Change in income taxes receivable - 60,220 (48,809)
Change in accrued expenses and other liabilities 83,887 75,038 (36,207)
---------------------------------------
Net cash flows from operating activities 317,873 889,024 (186,369)
Investing activities:
Net change in time deposits (1,387,000) 692,101 (1,381,694)
Investment securities available for sale:
Proceeds from sale of investment securities 10,000 508,942 -
Proceeds from maturities, calls and principal
pay downs 750,000 552,805 -
Purchases (1,082,857) (2,405,881) (528,673)
Held to maturity investment securities:
Purchases - - (1,204,212)
Proceeds from maturities, calls and principal
pay downs - 2,619,219 948,982
Net change in loans (1,400,539) (6,566,937) 877,655
Additions to real estate owned - - (641)
Proceeds from sale of real estate owned 162,099 130,066 -
Proceeds from sale of bank premises and equipment - 1,500 -
Purchases of bank premises and equipment (35,606) (257,469) (158,855)
---------------------------------------
Net cash flows from investing activities (2,983,903) (4,725,654) (1,447,438)
</TABLE>
<PAGE> F-6
MID-COAST BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
Years Ended March 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
---------------------------------------
<S> <C> <C> <C>
Financing activities:
Net change in certificates of deposit $2,475,002 $(1,957,322) $2,062,511
Net change in other deposits 515,716 2,321,118 2,633,281
Maturities of advances from Federal Home Loan Bank (8,250,000) (4,525,000) (6,975,000)
Advances from Federal Home Loan Bank 9,000,000 8,500,000 3,725,000
Issuance of stock 57,153 23,895 9,395
Dividends paid (121,796) (117,202) (109,361)
Acquisition of shares for stock award plan (177,925) - -
---------------------------------------
Net cash flows from financing activities 3,498,150 4,245,489 1,345,826
---------------------------------------
Net (decrease) increase in cash and cash equivalents 832,120 408,859 (287,981)
Cash and cash equivalents at beginning of year 3,135,910 2,727,051 3,015,032
---------------------------------------
Cash and cash equivalents at end of year $3,968,030 $ 3,135,910 $2,727,051
=======================================
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest (including $2,380,566, $1,655,818,
and $1,674,077, credited to deposit accounts
in 1998, 1997 and 1996, respectively) $2,595,603 $ 2,411,059 $2,505,789
Income taxes 162,084 55,174 203,802
Net transfer of real estate owned and similar
assets to (from) loans (148,894) 2,248 (28,040)
</TABLE>
See accompanying notes.
<PAGE> F-7
MID-COAST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998, 1997 and 1996
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 at the Federal Reserve Bank and is restricted from investing
these amounts. At March 31, 1998, this required balance was $150,000.
Investments
-----------
The Company's investments in securities are classified and accounted
for as follows:
Held to Maturity Investment 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.
<PAGE> F-8
MID-COAST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998, 1997 and 1996
1. Accounting Policies (Continued)
-------------------------------
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.
The Bank's required investment in Federal Home Loan Bank stock is
accounted for at cost.
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. Management, after reviewing 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 (generally when loans are ninety days past due); 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 (88% and 89% at March 31, 1998 and 1997,
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.
<PAGE> F-9
MID-COAST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998, 1997 and 1996
1. Accounting Policies (Continued)
-------------------------------
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.
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.
Stock-based Compensation
------------------------
Compensation expense for the Stock Option Plan and the Recognition and
Retention Plan is accounted for in accordance with Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees. The Stock Option Plan is a noncompensatory plan and no
expense is recognized. The Recognition and Retention Plan is a
compensatory plan and expense is recognized as employee benefits
expense based on the fair value of the Company's shares awarded to
participants as the shares vest. Unawarded shares are not considered
outstanding for purposes of computing earnings per share.
<PAGE> F-10
MID-COAST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998, 1997 and 1996
1. Accounting Policies (Continued)
-------------------------------
Earnings Per Share
------------------
Earnings per share (EPS) 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. All amounts have been restated to reflect the
three-for-one stock split effective on March 31, 1998. Shares
issuable relative to stock options granted have been reflected as an
increase in the shares outstanding used to calculate diluted EPS,
after applying the treasury stock method. The number of shares
outstanding for Basic and Diluted EPS are presented as follows:
<TABLE>
<CAPTION>
1998 1997 1996
-----------------------------
<S> <C> <C> <C>
Average share outstanding, used in computing
Basic EPS 702,692 689,925 682,986
Additional shares due to stock options 8,282 15,102 16,734
-----------------------------
Average equivalent shares outstanding, used
in computing Diluted EPS 710,974 705,027 699,720
=============================
</TABLE>
EPS amounts for all years presented have also been restated to give
effect to Statement of Financial Accounting Standards No. 128,
Earnings per Share, adopted by the Company in 1998.
There is no difference between net income and net income available to
common stockholders.
Reclassification
----------------
Certain 1997 and 1996 amounts have been reclassified to conform with
current year presentation.
<PAGE> F-11
MID-COAST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998, 1997 and 1996
2. Investment Securities
---------------------
Investment Securities Available for Sale
----------------------------------------
The amortized cost and market values of available for sale investment
securities at March 31, 1998 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 $ 499,329 $1,138 $ - $ 500,467
U.S. Agency Obligations 1,048,980 700 - 1,049,680
---------------------------------------------------
1,548,309 1,838 - 1,550,147
Mutual fund 595,732 - (1,838) 593,894
---------------------------------------------------
$2,144,041 $1,838 $(1,838) $2,144,041
===================================================
</TABLE>
During 1998 investment securities were sold for proceeds of $10,000 at
no gross realized gain or loss.
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
Other 10,000 - - 10,000
---------------------------------------------------
$1,818,662 $3,618 $3,618 $1,818,662
===================================================
</TABLE>
During 1997 investment securities were sold for proceeds of $508,942
and gross realized gain of $6,748.
<PAGE> F-12
MID-COAST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998, 1997 and 1996
2. Investment Securities (Continued)
---------------------------------
The March 31, 1998 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 $ 499,329 $ 500,467
Due after one year through five years 1,048,980 1,049,680
------------------------
$1,548,309 $1,550,147
========================
</TABLE>
Held to Maturity Investment Securities
--------------------------------------
The amortized cost and market values of held to maturity investment
securities at March 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
March 31, 1998
-----------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
-----------------------------------------------
<S> <C> <C> <C> <C>
Debt Securities:
U.S. Treasury Obligations $299,672 $ - $ 1,055 $298,617
U.S. Agency Obligations 650,000 - 26,266 623,734
----------------------------------------------
$949,672 $ - $27,321 $922,351
==============================================
<CAPTION>
March 31, 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
==============================================
</TABLE>
<PAGE> F-13
MID-COAST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998, 1997 and 1996
2. Investment Securities (Continued)
---------------------------------
The March 31, 1998 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 $749,672 $747,105
Due after one year through five years - -
Due after five years through ten years 200,000 175,246
--------------------
$949,672 $922,351
====================
</TABLE>
Included in U.S. Agency Obligations at March 31, 1998 are two inverse
floater structured notes maturing in 1998 and 2003, with amortized
costs totalling $400,000 and market values totalling $373,734.
At March 31, 1998, an investment security with carrying value of
$299,672 was pledged to secure deposits.
3. Loans
-----
Loans at March 31, 1998 and 1997 consisted of the following:
<TABLE>
<CAPTION>
1998 1997
--------------------------
<S> <C> <C>
Real estate mortgage - residential $33,971,535 $35,300,010
Real estate mortgage - commercial 7,464,541 6,314,688
Construction, net of undisbursed funds 2,189,613 1,262,210
Other commercial 2,071,625 1,406,317
Home equity 1,092,794 1,300,254
Passbook loans 261,888 281,967
Installment and other 3,572,543 3,529,009
--------------------------
$50,624,539 $49,394,455
==========================
</TABLE>
Loans serviced for others at March 31, 1998, 1997 and 1996 totalled
$7,546,489, $7,269,828, and $7,030,478, respectively.
<PAGE> F-14
MID-COAST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998, 1997 and 1996
3. Loans (Continued)
-----------------
Nonperforming loans (contractually past due and nonaccruing as to
interest income) totalled $225,056 and $145,466 at March 31, 1998 and
1997, respectively. Unrecognized accrued interest on such loans
totalled $17,089 and $9,852 at March 31, 1998 and 1997, respectively.
<TABLE>
<CAPTION>
1998 1997
--------------------
<S> <C> <C>
Year-end approximate recorded investment in impaired loans
with no valuation allowance $266,000 $117,000
Year-end approximate total recorded investment in impaired
loans 266,000 117,000
Approximate average investment in impaired loans for the year 345,000 151,000
</TABLE>
Approximately $3,000 of interest income was recognized on impaired
loans during 1998. No interest income was recognized on impaired
loans during 1997 or 1996.
Activity in loans to directors and officers who had outstanding
balances greater than $60,000 during the year ended March 31, 1998 is
shown below.
<TABLE>
<CAPTION>
Balance Balance
April 1, 1997 Additions Reductions March 31, 1998
----------------------------------------------------------
<S> <C> <C> <C>
$594,502 $120,188 $(139,511) $575,179
=====================================================
</TABLE>
4. Allowance for Loan Losses
-------------------------
<TABLE>
<CAPTION>
Years Ended March 31,
--------------------------------
1998 1997 1996
--------------------------------
<S> <C> <C> <C>
Balance, beginning of year 295,457 $221,356 $183,683
Charge-offs (22,429) (20,810) (28,165)
Recoveries 868 7,911 3,828
Provisions for losses 73,000 87,000 62,010
--------------------------------
Balance, end of year $346,896 $295,457 $221,356
================================
</TABLE>
<PAGE> F-15
MID-COAST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998, 1997 and 1996
5. Bank Premises and Equipment
---------------------------
Bank premises and equipment at March 31, 1998 and 1997 consisted of
the following:
<TABLE>
<CAPTION>
1998 1997
------------------------
<S> <C> <C>
Building and improvements $1,320,928 $1,288,397
Land and land improvements 198,060 194,860
Furniture, fixtures and equipment 508,170 635,998
------------------------
2,027,158 2,119,255
Less accumulated depreciation 536,331 538,965
------------------------
Net bank premises and equipment $1,490,827 $1,580,290
========================
</TABLE>
6. Income Taxes
------------
Income tax expense (benefit) for the years ended March 31, 1998, 1997
and 1996 consisted of the following:
<TABLE>
<CAPTION>
1998 1997 1996
--------------------------------
<S> <C> <C> <C>
Currently payable:
Federal $232,072 $140,933 $146,300
State 8,807 7,000 8,694
--------------------------------
240,879 147,933 154,994
Deferred (2,000) (4,000) 2,000
--------------------------------
$238,879 $143,933 $156,994
================================
</TABLE>
Income taxes were computed as follows:
<TABLE>
<CAPTION>
Year Ended March 31,
--------------------------------
1998 1997 1996
--------------------------------
<S> <C> <C> <C>
At federal statutory rates $242,928 $131,481 $156,550
State taxes, net of federal tax effect 5,812 4,620 5,738
Other, net (9,861) 7,832 (5,294)
--------------------------------
$238,879 $143,933 $156,994
================================
</TABLE>
<PAGE> F-16
MID-COAST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998, 1997 and 1996
6. Income Taxes (Continued)
------------------------
At March 31, 1998 and 1997, the net deferred tax asset consisted of:
<TABLE>
<CAPTION>
1998 1997
--------------------
<S> <C> <C>
Deferred tax assets, primarily related to the allowance
for loan losses $142,000 $128,100
Deferred tax liabilities, primarily related to depreciation (42,000) (30,100)
--------------------
$100,000 $ 98,000
====================
</TABLE>
The net deferred tax asset at March 31, 1998 and 1997 is recoverable
through income taxes paid in the carry-back period.
7. Real Estate Owned
-----------------
Real estate owned consisted of real estate acquired by foreclosure at
March 31, 1998, 1997 and 1996:
Activity in the allowance for losses on real estate owned and similar
assets for the years ended March 31, 1997 and 1996 is shown below.
There was no activity in 1998.
<TABLE>
<CAPTION>
1997 1996
------------------
<S> <C> <C>
Balance, beginning of year $23,000 $20,000
Provision for losses, included in
real estate owned expense - 38,789
Charge-downs (23,000) (35,789)
------------------
Balance, end of year $ - $23,000
==================
</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. Deposits
--------
Demand deposits include $459,116 and $429,273 of official and other
outstanding checks drawn on the Bank at March 31, 1998 and 1997,
respectively.
Certificates of deposit $100,000 and over totalled $2,451,162 at March
31, 1998 and $1,660,105 at March 31, 1997.
<PAGE> F-17
MID-COAST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998, 1997 and 1996
8. Deposits (Continued)
--------------------
Scheduled maturities for certificates of deposit at March 31, 1998 are
as follows:
<TABLE>
<CAPTION>
Year Ending
-----------
<S> <C>
March 31, 1999 $22,299,336
March 31, 2000 4,247,336
March 31, 2001 1,040,439
March 31, 2002 188,282
March 31, 2003 246,609
Thereafter 12,832
-----------
$28,034,834
===========
</TABLE>
Interest expense by type of deposit is shown below.
<TABLE>
<CAPTION>
1998 1997 1996
--------------------------------------
<S> <C> <C> <C>
NOW accounts $ 63,365 $ 70,486 $ 72,855
Savings 160,408 135,482 128,570
Money market deposit accounts 191,859 188,740 209,556
Certificates of deposit 1,548,817 1,514,948 1,561,752
--------------------------------------
$1,964,449 $1,909,656 $1,972,733
======================================
</TABLE>
9. Advances From Federal Home Loan Bank
------------------------------------
Advances from the Federal Home Loan Bank (FHLB) at March 31, 1998 and
1997 consisted of the following:
<TABLE>
<CAPTION>
1998 1997
---------------------------- ----------------------------
Interest Interest
Rates Balance Rates Balance
------------------------------------------------------------
<S> <C> <C> <C> <C>
Advances maturing within:
One year 5.56% - 7.12% $ 7,475,000 5.42% - 5.99% $ 6,750,000
Two years - - 5.56% - 7.12% 3,475,000
Three years 5.56% - 6.15% 2,000,000 - -
Four years - - 6.15% 1,000,000
After five years 2.00% - 5.76% 2,715,000 2.00% 215,000
----------- -----------
$12,190,000 $11,440,000
=========== ===========
</TABLE>
<PAGE> F-18
MID-COAST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998, 1997 and 1996
9. Advances From Federal Home Loan Bank (Continued)
------------------------------------------------
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, 1998, the
Bank's limitation on advances from the FHLB approximated $32,000,000.
Additionally, the Bank has available a line of credit for short-term
borrowings under the FHLB "Ideal Way" program totalling approximately
$1,157,000. Federal Home Loan Bank stock is pledged to secure
borrowings under this line. There were no borrowings under this line
at March 31, 1998 or 1997.
10. 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,
------------------------
1998 1997
------------------------
<S> <C> <C>
Commitments for new loans $2,411,500 $ 428,500
Unused home equity and other lines of credit 2,551,374 2,413,083
------------------------
$4,962,874 $2,841,583
========================
</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.
At March 31, 1998 and 1997, 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.
<PAGE> F-19
MID-COAST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998, 1997 and 1996
11. 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, 1998 and 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
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
established by the Federal Deposit Insurance Corporation as set forth
in the table below. The Bank is also subject to certain capital
requirements established by the OTS. At March 31, 1998 and 1997, the
Bank ratios exceeded the OTS regulatory requirements. Management
believes that the Bank meets all capital adequacy requirements to
which it is subject as of March 31, 1998.
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, 1998:
Total capital (to risk
weighted assets) $5,474 14.8% >=$2,953(1) >=8.0%(1) >=$3,691(1) >=10.0%(1)
Tier 1 Capital (to risk
weighted assets) 5,127 13.9% >= 1,476(1) >=4.0%(1) >= 2,214(1) >= 6.0%(1)
Tier 1 Capital (to
total assets) 5,127 8.1% >= 2,517(1) >=4.0%(1) >= 3,147(1) >= 5.0%(1)
</TABLE>
<PAGE> F-20
MID-COAST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998, 1997 and 1996
11. Capital and Other Regulatory Limitations (Continued)
----------------------------------------------------
<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(1) >=8.0%(1) >=$3,528(1) >=10.0%(1)
Tier 1 Capital (to risk
weighted assets) 5,025 14.2% >= 1,411(1) >=4.0%(1) >= 2,117(1) >= 6.0%(1)
Tier 1 Capital (to
total assets) 5,025 8.9% >= 2,266(1) >=4.0%(1) >= 2,832(1) >= 5.0%(1)
<FN>
<F1> >= means greater than or equal to.
</FN>
</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, 1998, unrestricted
retained earnings of the Bank under such OTS limitations approximated
$1,725,000.
The following table reconciles core capital per the Waldoboro Bank's
reports to OTS at March 31, 1998 to the total of stockholders' equity
shown on the accompanying consolidated financial statements.
<TABLE>
<CAPTION>
In Thousands
------------
<S> <C>
Capital per the OTS Report $5,128
Impact of Mid-Coast Bancorp 213
------
Stockholders' equity per consolidated
financial statements $5,341
======
</TABLE>
The Company's Board of Directors declared a three-for-one stock split
on March 31, 1998 to stockholders of record on March 2, 1998; per
share data for all prior periods has been restated to reflect this
stock split.
<PAGE> F-21
MID-COAST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998, 1997 and 1996
12. Stock Compensation Plans
------------------------
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 1998, 1997 and 1996 appears below. The number of
shares has been retroactively restated for the stock split in 1998.
<TABLE>
<CAPTION>
Per Share Option Price
(Adjusted for 1994 and 1996 Stock Dividends and 1998 Stock Split)
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Total
Exercise Price: $2.47 $3.16 $3.31 $3.74 $4.07 $4.68 Options
-----------------------------------------------------------------------------
Outstanding option
shares,
March 31, 1995
(all exercisable) 13,287 4,860 1,854 13,332 - 5,556 38,889
Exercised - 1996 (3,216) - - (300) - - (3,516)
Adjustment for
stock dividend 507 234 90 636 - 273 1,740
-----------------------------------------------------------------------------
Outstanding option
shares,
March 31, 1996
(all exercisable) 10,578 5,094 1,944 13,668 - 5,829 37,113
Exercised - 1997 (1,305) (1,194) (1,944) (2,631) - (150) (7,224)
-----------------------------------------------------------------------------
Outstanding option
shares,
March 31, 1997
(all exercisable) 9,273 3,900 - 11,037 - 5,679 29,889
Exercised - 1998 (7,323) (3,396) - (4,374) - (2,550) (17,643)
-----------------------------------------------------------------------------
Outstanding option
shares,
March 31, 1998
(all exercisable) 1,950 504 - 6,663 - 3,129 12,246
=============================================================================
Options expire in 1999 2002 2003 2005
</TABLE>
<PAGE> F-22
MID-COAST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998, 1997 and 1996
12. Stock Compensation Plans (Continued)
------------------------------------
Recognition and Retention Plan
------------------------------
In 1998, the Company adopted its Recognition and Retention Plan which
authorizes the Company to make discretionary awards of up to 27,621
shares of common stock to directors and management at no cost to the
recipients. The shares awarded will vest over a five-year period.
Until vested, the shares are held in trust by a trustee. The
recipients have voting and dividend rights based on shares awarded,
regardless of the amount vested.
At March 31, 1998, 18,600 shares have been acquired at a cost of
$177,925 for the Plan and are held by the trustee. Dividends paid
during 1998 on shares held in trust were not material. Of the total
shares held at March 31, 1998, 16,800 shares were awarded and 1,800
shares were unawarded. The expense associated with the Plan was
$32,142 for 1998; this expense is not materially different from the
expense that would be computed under Statement of Financial Accounting
Standards No. 123, Accounting for Stock-Based Compensation.
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. The net pension benefit
was $1,802 for the year ended March 31, 1998. Pension expense
totalled $34,968 and $27,631 for the years ended March 31, 1997 and
1996, 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, 1997, net assets available for benefits (approximately
$1,660 million) exceeded the actuarial present value of accumulated
plan benefits by approximately $518 million. The actuarial present
value of accumulated plan benefits for June 30, 1997 is based upon a
discount rate of 8.0%; the discount rate for June 30, 1996 was 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 1998 and
1997 were $16,433 and $11,106, respectively.
<PAGE> F-23
MID-COAST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998, 1997 and 1996
14. Other Expenses
--------------
Included in other expenses for the years ended March 31, 1998, 1997
and 1996 are:
<TABLE>
<CAPTION>
1998 1997 1996
--------------------------------
<S> <C> <C> <C>
Advertising $ 33,131 $ 25,678 $ 30,524
Taxes (other than income taxes) 53,135 61,191 50,553
Data processing 136,640 200,351 111,404
Stockholder expenses 81,842 58,456 53,017
Audit and examination 55,327 41,225 43,250
Legal expense 37,414 17,912 14,528
Other 328,523 254,993 244,676
--------------------------------
$726,012 $659,806 $547,952
================================
</TABLE>
15. 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 below 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, 1998 and 1997, 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
---------------------
The fair value of investment securities is estimated based on bid
prices published in financial newspapers or bid quotations received
from securities dealers at or near March 31, 1998 and 1997, except for
FHLB stock which is valued at its cost since there is no market.
<PAGE> F-24
MID-COAST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998, 1997 and 1996
15. Fair Value of Financial Instruments (Continued)
-----------------------------------------------
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, 1998 and 1997. 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, 1998 and 1997, 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.
<PAGE> F-25
MID-COAST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998, 1997 and 1996
15. Fair Value of Financial Instruments (Continued)
-----------------------------------------------
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, 1998 and 1997 are summarized below, in thousands of dollars:
<TABLE>
<CAPTION>
1998 1997
------------------ -----------------
Carrying Fair Carrying Fair
Value Value Value Value
---------------------------------------
<S> <C> <C> <C> <C>
Assets:
Cash and cash equivalents $ 3,968 $ 3,968 $ 3,136 $ 3,136
Time deposits 2,476 2,484 1,089 1,093
Investments 3,716 3,688 3,390 3,352
Loans and loans held for sale 50,567 51,338 49,044 49,663
Accrued interest receivable 299 299 304 304
Liabilities:
Deposit liabilities 45,171 45,294 42,181 42,301
Borrowed funds 12,190 12,131 11,440 11,280
</TABLE>
<PAGE> F-26
MID-COAST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998, 1997 and 1996
16. Mid-Coast Bancorp, Inc.
-----------------------
Condensed financial statements for Mid-Coast Bancorp, Inc. at March
31, 1998 and 1997 and for the years ended March 31, 1998, 1997 and
1996 are presented below.
Balance Sheets
--------------
<TABLE>
<CAPTION>
1998 1997
------------------------
<S> <C> <C>
Assets:
Cash and due from the Bank $ 202,673 $ 51,568
Investment in the Bank 5,127,134 5,025,628
Deferred tax asset 10,928 -
------------------------
Total assets $5,340,735 $5,077,196
========================
Liabilities and stockholders' equity:
Due to the Bank $ - $ 1,651
Stockholders' equity 5,340,735 5,075,545
------------------------
Total liabilities and stockholders' equity $5,340,735 $5,077,196
========================
</TABLE>
Statements of Operations
------------------------
<TABLE>
<CAPTION>
1998 1997 1996
--------------------------------
<S> <C> <C> <C>
Investment income $ 2,290 $ - $ -
Operating expenses 39,108 9,900 15,126
--------------------------------
Loss before income taxes and equity in
earnings of subsidiary (36,818) (9,900) (15,126)
Income tax benefit 10,928 - -
--------------------------------
Loss before equity in earnings of the Bank (25,890) (9,900) (15,126)
Equity in earnings of the Bank:
Remitted 400,000 150,000 -
Unremitted 101,506 102,675 318,573
--------------------------------
501,506 252,675 318,573
--------------------------------
Net income $475,616 $242,775 $303,447
================================
</TABLE>
<PAGE> F-27
MID-COAST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998, 1997 and 1996
16. Mid-Coast Bancorp, Inc. (Continued)
-----------------------------------
Statements of Cash Flows
------------------------
<TABLE>
<CAPTION>
1998 1997 1996
--------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $475,616 $242,775 $303,447
Adjustments to reconcile net income to net cash used
by operating activities:
Equity in unremitted earnings of subsidiary (101,506) (102,675) (318,573)
Income tax benefit (10,928) - -
Amortization of unearned compensation 32,142 - -
--------------------------------
Net cash provided (used) by operating activities 395,324 140,100 (15,126)
Cash flows from financing activities:
Issuance of common stock 57,153 23,895 9,395
Increase in due to the Bank (1,651) 1,651 -
Dividends paid (121,796) (117,202) (109,361)
Acquisition of shares for stock award plan (177,925) - -
--------------------------------
Net cash used by financing activities (244,219) (91,656) (99,966)
--------------------------------
Net increase (decrease) in cash and due from the Bank 151,105 48,444 (115,092)
Cash and due from the Bank at beginning of year 51,568 3,124 118,216
--------------------------------
Cash and due from the Bank at end of year $202,673 $ 51,568 $ 3,124
================================
</TABLE>
<PAGE> F-28
<TABLE>
<CAPTION>
Stockholders' Information
<S> <C>
Directors Transfer Agent and Registrar
Inquiries regarding stockholder administration
Waite W. Weston and services should be directed to:
Chairman of the Board
Owner, Weston's Hardware American Stock Transfer and Trust Company
40 Wall Street
Robert W. Spear New York, New York 10005
Vice Chairman of the Board (800) 937-5449
Owner, Spear Farm, Inc.
Independent Auditors
Wesley E. Richardson Baker Newman & Noyes,
President, Chief Executive Officer and Treasurer Limited Liability Company
of the Bank 100 Middle Street
Portland, Maine 04101
Samuel Cohen (207) 879-2100
Attorney at Law
Legal Counsel
Ronald E. Dolloff Thacher Proffitt & Wood
Retired Principal 1500 K Street, N.W., Suite 200
Washington, D.C. 20005
Sharon E. Crowe (202) 347-8400
Public Relations, Sebasticook County Hospital
Stock Information
Lincoln O. Orff The Bank's Common Stock trades on the Nasdaq
Real Estate Broker SmallCap System under the symbol "MCBN."
Executive Officers Investor Relations
Inquiries regarding Mid-Coast Bancorp Inc.
Wesley E. Richardson should be directed to:
President, Chief Executive Officer and Treasurer
Robert E. Carter, Jr.
Robert E. Carter, Jr. Mid-Coast Bancorp, Inc.
Vice President c/o The Waldoboro Bank, F.S.B.
1768 Atlantic Highway
P.O. Box 589
Waldoboro, Maine 04572
</TABLE>
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 15, 1998, at the Samoset Resort, Rockport,
Maine. Holders of common stock as of the close of business on June 1, 1998
will be eligible to vote.
<PAGE>
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 1, 1998, included in
the 1998 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. and in the Registration Statement (Form S-8 No. 333-
49003) pertaining to the Recognition and Retention Plan of Mid-Coast
Bancorp, Inc. of our report dated May 1, 1998, with respect to the
consolidated financial statements of Mid-Coast Bancorp, Inc. incorporated by
reference in this Annual Report (Form 10-KSB) for the year ended March 31,
1998.
/s/ Baker Newman & Noyes
Limited Liability Company
Portland, Maine
June 26, 1998
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the March
31, 1998 financial statement and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 1,149,870
<INT-BEARING-DEPOSITS> 98,160
<FED-FUNDS-SOLD> 2,720,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 2,144,041
<INVESTMENTS-CARRYING> 949,672
<INVESTMENTS-MARKET> 922,351
<LOANS> 50,624,539
<ALLOWANCE> 346,896
<TOTAL-ASSETS> 63,015,163
<DEPOSITS> 45,171,416
<SHORT-TERM> 0
<LIABILITIES-OTHER> 313,012
<LONG-TERM> 12,190,000
0
0
<COMMON> 711,960
<OTHER-SE> 4,628,775
<TOTAL-LIABILITIES-AND-EQUITY> 63,015,163
<INTEREST-LOAN> 4,464,822
<INTEREST-INVEST> 210,241
<INTEREST-OTHER> 242,526
<INTEREST-TOTAL> 4,917,589
<INTEREST-DEPOSIT> 1,964,449
<INTEREST-EXPENSE> 2,623,506
<INTEREST-INCOME-NET> 2,294,083
<LOAN-LOSSES> 73,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,809,874
<INCOME-PRETAX> 714,495
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 475,616
<EPS-PRIMARY> 0.68<F1>
<EPS-DILUTED> 0.67<F1>
<YIELD-ACTUAL> 3.99
<LOANS-NON> 225,056
<LOANS-PAST> 69,570
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 295,457
<CHARGE-OFFS> 22,429
<RECOVERIES> 868
<ALLOWANCE-CLOSE> 346,896
<ALLOWANCE-DOMESTIC> 346,896
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
<FN>
<F1>A three for one stock split occurred on March 31, 1998. Previously filed
Financial Data Schedules have not been restated for this recapitalization.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
These schedules contain summary financial information extracted from the
September 30, 1997, June 30, 1997 and March 30, 1997 financial statements and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<RESTATED>
<S> <C> <C> <C>
<PERIOD-TYPE> 6-MOS 3-MOS 12-MOS
<FISCAL-YEAR-END> MAR-31-1998 MAR-31-1998 MAR-31-1997
<PERIOD-END> SEP-30-1997 JUN-30-1997 MAR-31-1997
<CASH> 1,117,193 1,314,495 1,156,277
<INT-BEARING-DEPOSITS> 111,511 426,311 104,683
<FED-FUNDS-SOLD> 3,825,000 2,125,000 1,875,000
<TRADING-ASSETS> 0 0 0
<INVESTMENTS-HELD-FOR-SALE> 2,458,718 2,119,625 2,440,662
<INVESTMENTS-CARRYING> 949,391 949,250 949,109
<INVESTMENTS-MARKET> 942,369 913,791 911,125
<LOANS> 50,223,342 50,040,573 49,394,455
<ALLOWANCE> 321,918 308,217 295,457
<TOTAL-ASSETS> 61,473,275 59,738,638 58,925,368
<DEPOSITS> 44,504,591 42,390,618 42,180,698
<SHORT-TERM> 0 0 0
<LIABILITIES-OTHER> 251,335 267,351 229,125
<LONG-TERM> 11,440,000 11,940,000 11,440,000
0 0 0
0 0 0
<COMMON> 232,991 232,583 231,439
<OTHER-SE> 5,044,358 4,907,906 4,844,106
<TOTAL-LIABILITIES-AND-EQUITY> 61,473,275 59,738,638 58,925,368
<INTEREST-LOAN> 2,213,600 1,093,317 4,155,451
<INTEREST-INVEST> 102,858 52,203 258,042
<INTEREST-OTHER> 85,769 34,251 175,153
<INTEREST-TOTAL> 2,402,227 1,179,771 4,588,646
<INTEREST-DEPOSIT> 954,006 471,244 1,909,686
<INTEREST-EXPENSE> 1,286,130 632,650 2,436,580
<INTEREST-INCOME-NET> 1,116,097 547,121 2,152,066
<LOAN-LOSSES> 32,000 17,000 87,000
<SECURITIES-GAINS> 0 0 6,748
<EXPENSE-OTHER> 869,850 425,602 1,913,379
<INCOME-PRETAX> 358,080 170,368 386,708
<INCOME-PRE-EXTRAORDINARY> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 238,873 112,518 242,775
<EPS-PRIMARY> 1.03 0.49 1.06
<EPS-DILUTED> 1.01 0.48 1.03
<YIELD-ACTUAL> 4.18 4.05 4.07
<LOANS-NON> 337,296 438,210 145,466
<LOANS-PAST> 0 0 0
<LOANS-TROUBLED> 0 0 0
<LOANS-PROBLEM> 0 0 0
<ALLOWANCE-OPEN> 295,457 295,457 221,356
<CHARGE-OFFS> 5,773 4,773 20,180
<RECOVERIES> 234 533 7,911
<ALLOWANCE-CLOSE> 321,918 308,217 295,457
<ALLOWANCE-DOMESTIC> 321,918 308,217 295,457
<ALLOWANCE-FOREIGN> 0 0 0
<ALLOWANCE-UNALLOCATED> 0 0 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
These schedules contain summary financial information extracted from the
December 31, 1996, September 30, 1996 and March 31, 1996 financial statements
and are qualified in its entirety by reference to such financial statements.
</LEGEND>
<RESTATED>
<S> <C> <C> <C>
<PERIOD-TYPE> 9-MOS 6-MOS 12-MOS
<FISCAL-YEAR-END> MAR-31-1997 MAR-31-1997 MAR-31-1996
<PERIOD-END> DEC-31-1996 SEP-30-1996 MAR-31-1996
<CASH> 994,980 1,230,773 296,198
<INT-BEARING-DEPOSITS> 98,002 70,046 805,853
<FED-FUNDS-SOLD> 1,125,000 875,000 1,625,000
<TRADING-ASSETS> 0 0 0
<INVESTMENTS-HELD-FOR-SALE> 2,052,734 2,596,389 528,673
<INVESTMENTS-CARRYING> 2,077,426 2,542,655 4,123,185
<INVESTMENTS-MARKET> 2,068,983 2,504,573 4,081,351
<LOANS> 48,284,883 46,127,942 42,838,169
<ALLOWANCE> 296,389 276,663 221,356
<TOTAL-ASSETS> 57,838,744 55,955,998 54,362,066
<DEPOSITS> 42,440,188 42,649,898 41,816,902
<SHORT-TERM> 0 0 0
<LIABILITIES-OTHER> 233,565 451,402 154,087
<LONG-TERM> 10,190,000 7,940,000 7,465,000
0 0 0
0 0 0
<COMMON> 230,171 230,086 229,031
<OTHER-SE> 4,744,820 4,684,612 4,697,046
<TOTAL-LIABILITIES-AND-EQUITY> 57,838,744 55,955,998 54,362,066
<INTEREST-LOAN> 3,089,153 2,039,118 3,965,600
<INTEREST-INVEST> 226,981 140,734 210,078
<INTEREST-OTHER> 110,802 81,647 214,011
<INTEREST-TOTAL> 3,426,936 2,261,499 4,389,689
<INTEREST-DEPOSIT> 1,450,791 976,936 1,972,733
<INTEREST-EXPENSE> 1,811,304 1,199,421 2,485,256
<INTEREST-INCOME-NET> 1,615,632 1,062,078 1,904,433
<LOAN-LOSSES> 72,000 51,000 62,010
<SECURITIES-GAINS> 6,748 0 0
<EXPENSE-OTHER> 1,469,833 1,056,400 1,565,259
<INCOME-PRETAX> 252,097 70,848 460,441
<INCOME-PRE-EXTRAORDINARY> 0 0 460,441
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 155,164 33,795 303,447
<EPS-PRIMARY> 0.68 0.15 1.33
<EPS-DILUTED> 0.66 0.14 1.30
<YIELD-ACTUAL> 4.01 4.06 3.68
<LOANS-NON> 105,528 58,477 375,338
<LOANS-PAST> 0 0 0
<LOANS-TROUBLED> 0 0 0
<LOANS-PROBLEM> 0 0 0
<ALLOWANCE-OPEN> 221,356 221,356 183,683
<CHARGE-OFFS> 2,414 330 28,165
<RECOVERIES> 5,447 4,637 3,828
<ALLOWANCE-CLOSE> 296,389 276,663 221,356
<ALLOWANCE-DOMESTIC> 296,389 276,663 221,356
<ALLOWANCE-FOREIGN> 0 0 0
<ALLOWANCE-UNALLOCATED> 0 0 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the June 30,
1996 financial statements and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 1,367
<INT-BEARING-DEPOSITS> 104
<FED-FUNDS-SOLD> 625
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 2,030
<INVESTMENTS-CARRYING> 3,151
<INVESTMENTS-MARKET> 3,108
<LOANS> 44,764
<ALLOWANCE> 254
<TOTAL-ASSETS> 55,048
<DEPOSITS> 41,207
<SHORT-TERM> 0
<LIABILITIES-OTHER> 425
<LONG-TERM> 8,440
0
0
<COMMON> 230
<OTHER-SE> 4,746
<TOTAL-LIABILITIES-AND-EQUITY> 55,048
<INTEREST-LOAN> 1,011
<INTEREST-INVEST> 62
<INTEREST-OTHER> 51
<INTEREST-TOTAL> 1,124
<INTEREST-DEPOSIT> 491
<INTEREST-EXPENSE> 596
<INTEREST-INCOME-NET> 528
<LOAN-LOSSES> 30
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 400
<INCOME-PRETAX> 162
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 108
<EPS-PRIMARY> .47
<EPS-DILUTED> .46
<YIELD-ACTUAL> 4.11
<LOANS-NON> 7
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 221
<CHARGE-OFFS> 0
<RECOVERIES> 3
<ALLOWANCE-CLOSE> 254
<ALLOWANCE-DOMESTIC> 254
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
