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, 1999
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, 1999 was
$257,786.
Revenues for the issuer's fiscal year ended March 31, 1999 were
$5,690,403.
The number of shares outstanding as of March 31, 1999 is 715,457.
Aggregate market value of common stock held by non-affiliates, based
on the last reported sale price on June 22, 1999: $4,347,089.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement pursuant to Regulation
14A, which was delivered to the Commission for filing on June 18, 1999, and
the Annual Report for the fiscal year ended March 31, 1999, are
incorporated by reference into Part II and III of this report.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I 1
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 29
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 30
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 and Reports on Form 8-K. 31
SIGNATURES 33
</TABLE>
PART I
Item 1. Description of Business
Business of Mid-Coast Bancorp, Inc.
Mid-Coast Bancorp, Inc. ("Bancorp" or the "Holding Company") was
organized in 1989 for the purpose of becoming a holding company and 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, 1999, the Bank had total assets of $70,770,863, total
deposits of $52,414,873, total borrowings of $12,715,000 and stockholders'
equity of $5,373,620. As of March 31, 1999, the Bank had full service
branch facilities in Waldoboro, Rockland, Belfast and 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 included offices in
Belfast and Jefferson. We are confident that our people and products will
make this move successful. While we anticipate these branches will increase
operating costs and as a result impact earnings in fiscal 2000, 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
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,
Jefferson, 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 net loan portfolio totaled $55,964,548 at March 31, 1999,
representing approximately 79.1% of its total assets. At that date,
approximately 63.7% of the Bank's loan portfolio consisted of permanent
mortgage loans secured by residential properties. In addition,
approximately 17.2% 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 14.1% of the
Bank's loan portfolio. Finally, construction loans represented 5.0% 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 table sets 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,
-------------------------------------------------
1999 1998
---------------------- ----------------------
Amount % Amount %
------ - ------ -
<S> <C> <C> <C> <C>
Mortgage loans:
Residential $35,973,168 63.7% $33,971,535 67.1%
Commercial 9,699,298 17.2 7,464,541 14.7
Construction, net
of undisbursed funds 2,824,413 5.0 2,189,613 4.3
------------------------------------------------
Total mortgage loans 48,496,879 85.9 $43,625,689 86.1
------------------------------------------------
Other loans:
Home equity 1,467,125 2.6 1,092,794 2.2
Commercial 2,618,523 4.6 2,071,625 4.1
Passbook loans 317,548 0.6 261,888 0.5
Installment and other 3,529,447 6.3 3,572,543 7.1
------------------------------------------------
Total other loans 7,932,643 14.1 6,998,850 13.9
------------------------------------------------
Total loans $56,429,522 100.0% $50,624,539 100.0%
================================================
</TABLE>
Residential Mortgage Loans. A substantial portion of the Bank's
lending activity is comprised of residential mortgage loans, which, at
March 31, 1999, represented 63.7% 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, advertising 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, with the top 15% of the loan covered by private mortgage
insurance, and Maine state housing, FHA and VA guaranteed loans ranging
from 95% to 100% of appraised value.
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 3% 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, which report is incorporated herein by reference.
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, which generally written to secondary market
standards. During the fiscal year ended March 31, 1999, the Bank originated
$13,084,300 in fixed rate loans, of which 40% were sold to the secondary
market. The remaining 60% of fixed rate loans were added to the Bank's
portfolio. These loans were underwritten using secondary market guidelines.
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 $2,824,413, or 5.0% of the Bank's loan portfolio at March
31, 1999.
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, 1999, $9,699,298 or 17.2% 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
all of 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, 1999, such loans amounted to $2,618,523 or
4.6% 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, 1999, Waldoboro had secured and
unsecured consumer loans, which includes loans on deposit accounts, and
home equity loans of approximately $5.3 million or 9.5% 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, 1999, was
$790,500. At March 31, 1999, the three largest outstanding balances of
loans to any one borrower and related entities were $749,000, $611,687 and
$568,904.
Scheduled Loan Maturities
The following table presents information regarding contractual
maturities of portions of Waldoboro's loan portfolio at March 31, 1999.
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, 2001-
1999 2000 2004 2005+
---------- ---- ----- -----
<S> <C> <C> <C> <C>
Mortgages- construction $2,824,413 $434,338 $377,061 $2,013,014
Commercial loans - non
real estate 2,618,523 990,331 996,628 631,564
</TABLE>
The following table shows information concerning the type and amount
of fixed-rate and adjustable-rate loans in the above portfolio that come
due after one year.
<TABLE>
<CAPTION>
Loans Due After March 31, 2000
--------------------------------------
With With
Fixed Adjustable
Rates Rates Total
----- ---------- -----
<S> <C> <C> <C>
Mortgages- construction $644,102 $1,745,973 $2,390,075
Commercial loans - non real
estate 173,208 1,454,984 1,628,192
</TABLE>
Also, see Asset/Liability Management on page 16.
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, Knox and Waldo counties, Maine. At fiscal
year end, substantially all of the real estate loans originated were
secured by properties in Lincoln, Knox and Waldo counties.
Waldoboro appraises the security for each new loan. Such appraisals
are performed for the Bank by qualified appraisers in accordance with
standards set by the OTS. The appraisal of the real property upon which
Waldoboro makes a real estate loan is of particular significance to the
Bank in the event that the loan must be foreclosed. An improper appraisal
may contribute to a loss or other financial detriment to the Bank upon the
disposition of foreclosed property.
The Bank's underwriting standards are guided by a formal written loan
policy that is reviewed and approved annually by the board of directors of
the Bank (the "Board"). This policy provides that the Loan Committee ratify
or approve all loans, depending on loan size. Subsequently, the loan must
be ratified or approved by the Board depending on loan size. 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, 1999, the Bank received $6,130,644 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. At March 31, 1999, net origination fees deferred to future
periods were $60,589.
Classified Assets and Delinquencies
If a borrower fails to make a required payment on a loan, the loan is
classified as delinquent. In this event, Waldoboro will make contact with
the borrower at prescribed intervals in an effort to bring the loan
current. In most cases, delinquencies are cured promptly, but if a mortgage
loan delinquency is not cured within 60 days, Waldoboro will generally
initiate foreclosure proceedings under applicable state law. If the loan
remains delinquent, the mortgaged property typically will be sold through a
foreclosure sale.
The remedies available to a lender in the event of a default or
delinquency, and the procedures by which such remedies may be exercised,
are generally subject to laws and regulations of the jurisdiction where the
property is located in the case of mortgage loans, or of the jurisdiction
where the lender and/or borrower is situated in the case of unsecured
loans. Federal and Maine law generally require notice of default and right
to cure and notice of the availability of credit counseling and potential
state-provided financial assistance prior to the time a lender commences a
legal action or takes possession of Maine residential real estate securing
a loan. Management attempts to secure payment with regard to consumer and
commercial business loans 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 may
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 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 their continuance as assets without the establishment of a
specific loss reserve is not warranted. When an insured institution
classifies problem assets as "loss", it is required either to establish a
specific allowance for losses equal to 100% of the amount of the asset so
classified or to charge off such amount.
The 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 Holding
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, 1999, the Holding Company had $69,580 of accruing loans
that were 90 days or more delinquent as compared to $69,570 at March 31,
1998. Unrecognized interest income on all loans on non-accrual status at
March 31, 1999 totaled $7,253.
Nonperforming Assets
<TABLE>
<CAPTION>
At March 31,
----------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Nonperforming loans:
Mortgage loans in process of foreclosure $ ---- $ ---- $ ----
Loans more than 90 days past due and still accruing 69,580 69,570 ----
Nonaccrual loans 73,551 225,056 145,466
----------------------------------
Total nonperforming loans 143,131 294,626 145,466
Real estate owned, net $ ---- 70,383 91,823
----------------------------------
Total nonperforming assets $143,131 $365,009 $237,289
==================================
Ratio of nonperforming loans to total loans 0.25% 0.58% 0.29%
Ratio of nonperforming assets to total assets 0.20% 0.58% 0.40%
</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
OTS reviews the ALL as part of its routine examinations. The OTS can
require additions to the ALL based on its examination findings. At the
last OTS examination on November 12, 1997 the examiners deemed the ALL to
be adequate.
An analysis of activity in the allowance for loan losses for the
years ended March 31, 1999 and 1998 is provided below.
<TABLE>
<S> <C>
Balance, March 31, 1997 $295,457
Charge-offs - Primarily Consumer (22,429)
Recoveries 868
--------
Net charge-offs (21,561)
Provision for loan losses 73,000
--------
Balance, March 31, 1998 $346,896
Charge-offs - Primarily Consumer (11,657)
Recoveries 1,146
--------
Net charge-offs (10,511)
Provision for loan losses 68,000
--------
Balance, March 31, 1999 $404,385
========
Net charge-offs to average loans outstanding:
<S> <C>
Year ended March 31, 1998 0.04%
Year ended March 31, 1999 0.02%
</TABLE>
A breakdown of the allowance for loan losses at March 31, 1999 and
1998 is shown below:
<TABLE>
<CAPTION>
1999 1998
------------------------ ------------------------
Percent of Percent of
Loans to Loans to
Amount Total Loans Amount Total Loans
------ ----------- ------ -----------
<S> <C> <C> <C> <C>
Mortgage loans - residential and construction $ 60,000 68.7% $ 65,560 71.4%
Mortgage loans - commercial 100,000 17.2 127,810 14.7
Other commercial 100,000 4.6 30,718 4.1
Consumer and other loans 45,000 9.5 45,912 9.8
General allocation 99,385 ---- 76,896 ----
-------------------------------------------------
$404,385 100.0% $346,896 100.0%
=================================================
</TABLE>
Investments
Federally chartered thrift institutions have authority to invest in
various types of liquid assets, including U.S. Treasury obligations,
securities of various federal agencies, certain certificates of deposit of
insured banks and thrift institutions, certain bankers' acceptances and
federal funds. Subject to various restrictions, federally chartered thrift
institutions may also invest a portion of their assets in commercial paper
and corporate debt securities and in mutual funds whose assets conform to
the investments that a federally chartered thrift institution is otherwise
authorized to make directly. At March 31, 1999, 8.75% 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 (Asset Management Fund-Adjustable Rate Mortgage Portfolio)
of $655,854 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.
<TABLE>
<CAPTION>
At March 31,
-------------------------------------------------------------------
1999 1998
------------------------------- -------------------------------
Amortized Cost Market Value Amortized Cost Market Value
-------------- ------------ -------------- ------------
<S> <C> <C> <C> <C>
Held to maturity:
Investment securities
Federal Home Loan Bank
Bonds $ 0 $ 0 $ 400,000 $ 373,734
U.S. Treasury Obligations 0 0 299,672 298,617
Federal National Mortgage
Association Bonds 0 0 250,000 250,000
U.S. Agency Obligations 200,000 186,415 0 0
----------------------------------------------------------------
Total Investment
securities $ 200,000 $ 186,415 $ 949,672 $ 922,351
================================================================
Available for sale:
Investment securities:
U.S. Treasury Obligations $ 0 $ 0 $ 499,329 $ 500,467
U.S. Agency Obligations 3,099,567 3,073,472 1,048,980 1,049,680
Mortgage-backed securities 1,498,574 1,487,355 0 0
----------------------------------------------------------------
$4,598,141 $4,560,827 $1,548,309 $1,550,147
Mutual Fund 657,177 655,854 595,732 593,894
----------------------------------------------------------------
$5,255,318 $5,216,681 $2,144,041 $2,144,041
================================================================
Required investment in Federal
Home Loan Bank Stock $ 734,500 $ 734,500 $ 622,000 $ 622,000
================================================================
</TABLE>
The following table shows the maturities of the Bank's bonds at March
31, 1999 and the weighted average yield on such securities. Mortgage-
backed securities are shown at final maturity dates.
<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:
Federal Home Loan Bank Bonds
Book Value $ ---- $ 200,000 $ ---- $ ---- $ 200,000
Yield ---- 3.93% ---- ---- 3.93%
-------------------------------------------------------------------------
Held to Maturity Total $ ---- $ 200,000 $ ---- $ ---- $ 200,000
=========================================================================
Available for Sale:
U.S. Agency Obligations:
Book Value $ ---- $3,073,472 $ ---- $ ---- $3,073,472
Yield ---- 5.77% ---- ---- 5.77%
Mortgage-backed securities:
Book Value $ ---- $ ---- $ ---- $1,487,355 $1,487,355
Yield ---- ---- ---- 6.52% 6.52%
-------------------------------------------------------------------------
Available for Sale Total $ ---- $3,073,472 $ ---- $1,487,355 $4,560,827
=========================================================================
</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.
During the fiscal year ended March 31, 1999, money market accounts
decreased $422,778 or 8.2%, while certificates of deposit increased
$4,670,205 or 16.7%, NOW accounts increased $1,290,804 or 32.1%, savings
accounts increased $895,893 or 15.8% and demand deposits increased $809,333
or 35.2%.
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.
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 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, 1999
---------------------------------------------------
% of
Average Average Interest Average
Balance Deposits Expense Rate
------- -------- -------- -------
<S> <C> <C> <C> <C>
Demand deposits $ 3,142,831 6.31% $ ---- ----%
NOW Accounts 4,999,798 10.04 75,973 1.52
Savings 6,676,381 13.41 179,002 2.68
Money Market
deposit accounts 4,784,736 9.60 168,879 3.53
Certificates of deposit 30,216,858 60.64 1,670,643 5.53
-------------------------------------------------
$49,820,604 100.00% $2,094,497 4.20%
=================================================
<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%
=================================================
</TABLE>
The maturities of certificates of deposit in amounts greater than or
equal to $100,000 at March 31, 1999 are set forth in the following table.
<TABLE>
<CAPTION>
Maturity Amount
<S> <C>
0 - 3 months $ 840,321
3 - 6 months 1,323,917
6-12 months 1,205,421
After 12 months 1,049,833
----------
$4,419,492
==========
</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, 1999, $2,996,000 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. At March 31, 1999, Waldoboro had
$12,715,000 in outstanding advances from the FHLB at a weighted average
stated rate of 5.33%.
Waldoboro has access to a line of credit approximating $1,157,000 at
March 31, 1999, 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, 1999.
The Bank intends to continue to fund its mortgage loan commitments
with borrowed funds from the FHLB of Boston when the supply of other
lendable funds is insufficient or more costly and/or when such borrowings
would enhance the Bank's ability to manage its mix of assets and
liabilities.
Asset/Liability Management
The following table sets forth the scheduled repricing or maturity of
the Holding Company's financial assets and liabilities at March 31, 1999.
For purposes of this table no portfolio loans are assumed to prepay
before their scheduled maturity date. Mortgage-backed securities reflect
contractual amortization. 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 their 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:
Residential real estate 1-4 family
Balloon & adjustable rate $ 8,160,860 $ 4,554,886 $ 5,901,688 $ 4,167,411 $ 632,697 $ 84,388 $23,501,930
Fixed rate 605 124,615 506,641 80,512 594,188 9,412,272 10,718,833
Mortgage-backed securities 27,571 29,569 31,714 70,501 230,764 1,108,455 1,498,574
Consumer & other loans 8,617,663 2,402,354 2,661,279 2,034,990 2,252,101 4,240,372 22,208,759
Investments & other
interest-earning assets (includes
loans held for sale) 5,128,272 0 250,000 3,009,433 0 1,497 8,389,202
-----------------------------------------------------------------------------------------
Total financial assets $21,934,971 $ 7,111,424 $ 9,351,322 $ 9,362,847 $ 3,709,750 $14,846,984 $66,317,298
=========================================================================================
Financial Liabilities(1):
Deposits:
NOW accounts, Savings and
Money Market Accounts 16,602,857 $ 0 $ 0 $ 0 $ 0 $ 0 $16,602,857
Certificates of deposit 28,225,483 3,465,243 905,223 109,090 0 0 32,705,039
FHLB borrowings 4,000,000 2,500,000 2,500,000 2,000,000 1,500,000 215,000 12,715,000
-----------------------------------------------------------------------------------------
Total financial liabilities $48,828,340 $ 5,965,243 $ 3,405,223 $ 2,109,090 $ 1,500,000 $ 215,000 $62,022,896
=========================================================================================
GAP -26,893,369 1,146,181 5,946,099 7,253,757 2,209,750 14,631,984
GAP to total assets -38.00% 1.62% 8.40% 10.25% 3.12% 20.68%
Cumulative GAP -26,893,369 -25,747,188 -19,801,089 -12,547,332 -10,337,582 4,294,402
Cumulative GAP to total assets -38.00% -36.38% -27.98% -17.73% -14.61% 6.07%
<FN>
- --------------------
<F1> For purposes of this table, 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, 1999, the Bank had a total of 25 full-time employees and
8 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.
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, 1999, the Bank's direct investment in First
Waldoboro was $10,000.
Competition
Waldoboro faces strong price-oriented competition in the attraction
of deposits. Its most direct competition for deposits comes from the other
thrifts and commercial banks located in its primary market area of Knox,
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 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. Additionally, the association may
include 100% of its credit card loans, education loans and small business
loans as "qualified thrift investments." 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, 1999, 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.
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, 1999, the Bank had no investments in or extensions of credit to
nonincludable subsidiaries, and its tangible capital amounted to
approximately $5,270,000 or 7.40% of its adjusted total assets.
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, 1999, the Bank had no supervisory
goodwill and the Bank's core capital amounted to approximately $5,270,000
or 7.40% 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, 1999, 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, 1999, the Bank's total capital amounted to approximately
$5,674,000 or 13.50% of its total risk-weighted assets.
When determining its compliance with the risk-based capital
requirement, a savings institution with "above normal" interest rate risk
is required to deduct a portion of its total capital to account for any
"above normal" interest rate risk. An institution's interest rate risk is a
measure of the potential percentage decline in the economic value of its
portfolio equity resulting from a hypothetical 200 basis point increase or
decrease in interest rates (whichever change results in the greater
decline). A savings association whose measured interest rate risk exceeds
2% would be considered to have "above normal" risk. The amount to be
deducted from capital is an amount equal to 50% of its "excess" interest
rate risk exposure (the percentage in excess of 2%) multiplied by the
estimated economic value of its total assets. While the effective date of
the interest rate risk requirement was January 1, 1994, the OTS has
indefinitely deferred implementation of the interest rate risk deduction.
The OTS continues to monitor the interest rate risk of individual
institutions and retains the right to impose additional capital
requirements on individual institutions. The Bank remains in compliance
with its risk-based capital requirements as would be adjusted by the
interest-rate risk component.
The following table sets forth the various components of the
regulatory capital for the Bank at March 31, 1999.
<TABLE>
<CAPTION>
Minimum
Required Actual Excess
------------------ -------------------- ------
<S> <C> <C> <C> <C> <C>
Tangible Capital 1.5% $1,064,000 7.40% $5,270,000 $4,206,000
Tier 1 (Core) Capital 4.0% $2,838,000 7.40% $5,270,000 $2,432,000
Risk-based Capital 8.0% $3,361,000 13.50% $5,674,000 $2,313,000
</TABLE>
Limitation on Capital Distribution. Effective April 1, 1999, the OTS
amended its capital distribution regulations to reduce regulatory burdens
on savings associations. The regulations being replaced, which were
effective throughout 1998, established limitations upon capital
distributions by savings associations, such as cash dividends, payments to
repurchase or otherwise acquire its shares, payments to shareholders of
another institution in a cashout merger, and other distributions charged
against capital. At least 30-days written notice to the OTS was required
for a proposed capital distribution by a savings association, and capital
distributions in excess of specified earnings or by certain institutions
were subject to approval by the OTS. An association that had capital in
excess of all fully phased in regulatory capital requirements before and
after a proposed capital distribution and that was not otherwise restricted
in making capital distributions, could, after prior notice but without the
approval of the OTS, make capital distributions during a calendar year
equal to the greater of (a) 100% of its net earnings to date during the
calendar year plus the amount that would reduce by half its "surplus
capital ratio" (excess capital over its fully phased in capital
requirements) at the beginning of the calendar year, or (b) 75% of its net
earnings for the previous four quarters. Any additional capital
distributions would require prior OTS approval. Under the amendments
adopted by the OTS, certain savings associations will be permitted to pay
capital distributions during a calendar year that do not exceed the
association's net income for that year plus its retained net income for the
prior two years, without notice to, or the approval of the OTS. However, a
savings association subsidiary of a savings and loan holding company, such
as the Bank, will continue to have to file a notice unless the specific
capital distribution requires an application. In addition, the OTS can
prohibit a proposed capital distribution, otherwise permissible under the
regulation, if the OTS has determined that the association is in need of
more that normal supervision or if it determines that a proposed
distribution by an association would constitute an unsafe or unsound
practice. Furthermore, under the OTS prompt corrective action regulations,
the Bank would be prohibited from making any capital distribution if, after
the distribution, the Bank failed to meet its minimum capital requirements,
as described above.
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.
Pursuant to FDIC Improvement Act, the FDIC has established a 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 assessment on SAIF-assessable deposits for the
payments on FICO bonds for the first, second, third and forth quarters of
fiscal 1999 were 0.0622%, 0.0610%, 0.0582% and 0.0640%, respectively.
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 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 to
address this issue which has five phases. The Company has substantially
completed the first four phases and is currently working on the
implementation phase. The following is a brief synopsis of each phase:
1) Awareness Phase - This phase consists of defining the Year 2000
problem and developing a strategy that encompasses all of the Bank's
and Holding Company's vendor 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. While this phase is 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.
4) Validation Phase - This phase consists of testing all hardware and
software to ensure that it is compatible with our system. In
addition to testing components, connections with other systems must
be verified, and all changes should be accepted by internal and
external users. Management has established controls to assure the
effective and timely completion of all hardware and software testing
prior to final implementation.
As with the renovation phase, the Company will be in ongoing
discussions with its vendors on the success of their validation
efforts. The Company has completed the testing all of its critical
systems and has completed this phase.
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 will not pose significant
operational problems for the Holding Company's and the Bank's computer
system and it does not anticipate any further material costs to be
incurred. Also, the Bank's loan portfolio is not significantly
concentrated with any single borrower (at March 31, 1999, the largest
commercial loan relationship approximated $749,000) and consists largely of
loans secured by real estate. These factors help mitigate Year 2000 risks
pertaining to the valuation of the loan portfolio; however, the Bank is
currently contacting its significant loan customers regarding their Year
2000 efforts. In addition, the Company has developed a contingency plan in
case any systems or key vendors are not operational after the year 2000.
This plan will be continually reviewed and revised to address all critical
systems. It should also be noted that the Bank's regulatory agency, the
Office of Thrift Supervision, has been monitoring, and plans to continue
monitoring, the Bank's progress in addressing Year 2000 matters. To date
the Bank has spent approximately $27,000 on the Year 2000 issue primarily
due to the purchase of computer hardware, related installation cost and
overtime for key employees and anticipates that it may spend an additional
$15,000 in the future.
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.
Tax Legislation Regarding Tax Bad Debt Reserves. Prior to the
enactment, on August 20, 1996, of the Small Business Job Protection Act of
1996 (the "Small Business Act"), for federal income tax purposes, thrift
institutions such as the Bank, which met certain definitional tests
primarily relating to their assets and the nature of their business, were
permitted to establish tax reserves for bad debts and to make annual
additions thereto, which additions could, within specified limitations, be
deducted in arriving at their taxable income. The Bank's deduction with
respect to "qualifying loans," which are generally loans secured by certain
interests in real property, could be computed using an amount based on a
six-year moving average of the Bank's actual loss experience (the
"Experience Method"), or a percentage equal to 8.0% of the Bank's taxable
income (the "PTI Method"), computed without regard to this deduction and
with additional modifications and reduced by the amount of any permitted
addition to the non-qualifying reserve.
Under the Small Business Act, the PTI Method was repealed and the
Bank, as a "small bank" (one with assets having an adjusted basis of $500
million or less), is required to use the Experience Method of computing
additions to its bad debt reserve for taxable years beginning with the
Bank's taxable year beginning April 1, 1996. In addition, the Bank will be
required to recapture (i.e., take into taxable income) over a six-year
period, beginning with the Bank's taxable year beginning April 1, 1996, the
excess of the balance of its bad debt reserves (other than the supplemental
reserve) as of March 31, 1996 over the greater of (a) the balance of its
"base year reserve," i.e., its reserves as of March 31, 1988 or (b) an
amount that would have been the balance of such reserves as of March 31,
1996 had the Bank always computed the additions to its reserves using the
Experience Method. However, such recapture requirements were suspended for
each of the two successive taxable years beginning April 1, 1996 in which
the Bank originates a minimum amount of certain residential loans during
such years that is not less than the average of the principal amounts of
such loans made by the Bank during its six taxable years preceding April 1,
1996. Since the Bank has already provided a deferred income tax liability
related to this for financial reporting purposes, there will be no adverse
impact to the Bank's financial condition or results of operations from the
enactment of this legislation.
Distributions. To the extent that the Bank makes "nondividend
distributions" to shareholders, such distributions will be considered to
result in distributions from the Bank's base year reserve and then from its
supplemental reserve for losses on loans, and an amount based on the amount
distributed will be included in the Bank's taxable income. Nondividend
distributions include distributions in excess of the Bank's current and
accumulated earnings and profits, distributions in redemption of stock and
distributions in partial or complete liquidation. However, dividends paid
out of the Bank's current or accumulated earnings and profits, as
calculated for federal income tax purposes, will not constitute nondividend
distributions and, therefore, will not be included in the Bank's income.
The amount of additional taxable income created from a nondividend
distribution is an amount that, when reduced by the tax attributable to the
income, is equal to the amount of the distribution. Thus, approximately one
and one-half times the nondividend distribution would be includable in
gross income for federal income tax purposes, assuming a 34% federal
corporate income tax rate. The Bank does not intend to pay dividends that
would result in a recapture of any portion of its tax bad debt reserve.
Corporate Alternative Maximum Tax. The Internal Revenue Code (the
"Code") imposes a tax on alternative minimum taxable income ("AMTI") at a
rate of 20% . AMTI is increased by certain preference items. 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 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, Belfast and Jefferson.
The office buildings in Waldoboro and Rockland are owned by the Bank and
provide full-service banking with ample parking and are conveniently
located on Route One. The Belfast office is leased space, offering full
service and is conveniently located on U.S. Route Three. The Jefferson
office is leased space located in the village of Jefferson on Route 32.
The following table sets forth certain information with respect to
the Bank's 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>
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, 1999, 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, 1999, there
was no matter that was submitted to a vote of the stockholders.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
On March 31, 1999, there were 715,457 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 8,749
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, 1997 $ 6.33 $ 6.33 $ ---
June 30, 1997 6.50 6.17 0.086
September 30, 1997 9.33 7.00 ---
December 31, 1996 10.83 8.83 0.086
March 31, 1998 $14.00 $12.83 ---
June 30, 1998 12.25 11.50 0.10
September 30, 1998 9.75 8.50 ---
December 31, 1998 9.75 7.00 0.10
March 31, 1999 $10.00 $ 7.00 $ ---
<FN>
<F1> All figures adjusted to reflect 3 for 1 stock split that took effect
in 1998.
</FN>
</TABLE>
On April 14, 1999 the Holding Company declared a dividend of $.10 per
share to Stockholders of record on June 1, 1999 and payable June 30, 1999.
See "Regulation - Dividends" for information about the Holding Company's
ability to pay dividends.
Item 6. Management's Discussion and Analysis.
Management's Discussion and Analysis, on Pages 2 through 14 of the
1999 Annual Report to Shareholders for the year ended March 31, 1999, 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-30 of the 1999 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 1999 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 12 of the Proxy
Statement is incorporated herein by reference: "The Board of Directors and
Its Committees," "Executive Compensation," "Employment Agreement," "Pension
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 18, 1999
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 18, 1999 is incorporated herein
by reference.
Item 13. Exhibits and Reports on Form 8-K.
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 1999 Annual Report to
Stockholders:
Pages in Annual
Report
Report of Independent Auditors F-1
Consolidated Balance Sheets,
March 31, 1999 and 1998 F-2 to F -3
Consolidated Statements of Income, Years Ended
March 31, 1999, 1998 and 1997 F - 4
Consolidated Statements of Changes in Stockholders'
Equity, Years Ended March 31, 1999, 1998 and 1997 F - 5
Consolidated Statements of Cash Flows, Years Ended
March 31, 1999, 1998 and 1997 F-6 to F -7
Notes to Consolidated Financial Statements F- 8 to F - 30
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).
10.2 Regulation and Retention Plan of Mid-Coast Bancorp, Inc.
(previously filed on June 7, 1997, as Appendix A with the
Company's Proxy Statement and incorporated herein by
reference).
13 Annual Report to the Shareholders for the year ended March 31,
1999.
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, LLC.
27 Financial Data Schedules.
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 25, 1999 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 June 25, 1999
------------------------ Officer, Treasurer and Director -------------
Wesley E. Richardson
By: /s/ WAITE W. WESTON Director and Chairman June 25, 1999
------------------------ -------------
Waite W. Weston
By: /s/ ROBERT W. SPEAR Director and Vice Chairman June 25, 1999
------------------------ -------------
Robert W. Spear
By: Director June 25, 1999
------------------------ -------------
Sharon Crowe
By: /s/ RONALD DOLLOFF Director June 25, 1999
------------------------ -------------
Ronald Dolloff
By: /s/ SAMUEL COHEN Director June 25, 1999
------------------------ -------------
Samuel Cohen
By: Director June 25, 1999
------------------------ -------------
Lincoln Orff
By: Director June 25, 1999
------------------------ -------------
Peter Van Alstine
By: Director June 25, 1999
------------------------ -------------
George Seaver
</TABLE>
Dear Shareholders,
As we approach our 10th anniversary as a public company, I believe, now,
more than ever all our goals cannot be achieved in months, quarters or years.
Rather, we must be diligent and steadfast for the long term in reaching our
goals. The number one goal remains... VALUE TO OUR SHAREHOLDERS. Over the past
years we have strived to create franchise value. We have accomplished that
goal by opening three branches; Rockland, Belfast and Jefferson, with Belfast
and Jefferson opening during the year ending March 31st 1999. While this
expansion has had a negative impact on fiscal year earnings, we believe our
franchise to be more valuable, therefore, ultimately providing more value to
our shareholders.
With the rapid approach of the new millennium, we must now focus on
earnings. The completion of this goal will simply add more value to the
company. In addition to earnings, the bank, along with the entire financial
services industry, has been preparing for the year 2000. We believe that
because of our conversion to new software in fiscal 1997, the year 2000 will
not pose a significant problem for the bank. In addition, the company has
developed a contingency plan in case any systems or key vendors are not
operational. This plan is under continuous review addressing all critical
systems. Additionally, our regulatory agency, The Office of Thrift
Supervision (OTS), continues to monitor the Bank's process in addressing Year
2000 issues.
The company is pleased to be paying our 18th consecutive dividend. The
$0.10 dividend is payable on June 30th to shareholders of record on June 1st.
Financial highlights for fiscal 1999 include:
* Assets increases of $7.8 million
* Deposit increases of $7.2 million
* Net loan increases of $5.8 million
* Interest income increasing $312,000
* Interest expense increasing $191,000
* Operating expenses increasing $598,000
* Fiscal year earnings $257,786
* Earnings per share (diluted) $0.36
We firmly believe that the initial expenses related to the expansion
were necessary in order for future growth and anticipate earnings growth to
begin showing significant improvement in fiscal 2000.
I would like to express my sincere thanks to the employees of the Bank
for their continued effort toward the fulfillment of our goals. I truly
appreciate their support and commitment to you, our shareholders. The entire
staff and I truly appreciate your support of the Company.
Sincerely,
Mid-Coast Bancorp, Inc.
/s/ Wesley E. Richardson
------------------------------
Wesley E. Richardson
President and Chief Executive Officer
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
Management is pleased to present the following discussion and analysis
of the financial condition and results of operations of Mid-Coast Bancorp,
Inc. (the "Holding Company").
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The following tables set forth selected consolidated financial and other
data of the Holding Company at the dates and for the 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,
-----------------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Financial condition data:
Loans, net $55,964,548 $50,213,531 $48,979,032 $42,465,559 $43,358,622
Other interest-
earning assets 10,622,276 9,362,898 6,523,454 9,422,891 7,125,838
Total assets 70,770,863 63,015,163 58,925,368 54,362,066 52,749,000
Deposits 52,414,873 45,171,416 42,180,698 41,816,902 37,121,110
Borrowings 12,715,000 12,190,000 11,440,000 7,465,000 10,715,000
Stockholders' equity $ 5,373,620 $ 5,340,735 $ 5,075,545 $ 4,926,077 $ 4,722,596
<CAPTION>
For the Years Ended March 31,
-----------------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Operating data:
Interest income $ 5,229,465 $ 4,917,589 $ 4,588,646 $ 4,389,689 $ 3,939,940
Interest expense 2,814,771 2,623,506 2,436,580 2,485,256 2,007,051
-----------------------------------------------------------------------
Net interest income 2,414,694 2,294,083 2,152,066 1,904,433 1,932,889
Provision for loan
losses 68,000 73,000 87,000 62,010 81,000
Other income 460,938 303,286 235,021 183,277 157,268
Other expense 2,408,014 1,809,874 1,913,379 1,565,259 1,293,308
-----------------------------------------------------------------------
Income before
income taxes 399,618 714,495 386,708 460,441 715,849
Income tax expense 141,832 238,879 143,933 156,994 248,474
-----------------------------------------------------------------------
Net income $ 257,786 $ 475,616 $ 242,775 $ 303,447 $ 467,375
-----------------------------------------------------------------------
Basic earnings per share(1) $ 0.37 $ 0.68 $ 0.35 $ 0.44 $ 0.69
=======================================================================
Diluted earnings per
share(1) $ 0.36 $ 0.67 $ 0.34 $ 0.43 $ 0.67
=======================================================================
<CAPTION>
For the Years Ended March 31,
----------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Statistical data (2):
Interest rate spread 3.39% 3.63% 3.67% 3.30% 3.56%
Net yield on average
earning assets 3.76 3.99 4.07 3.68 3.88
Return on average assets 0.38 0.78 0.43 0.56 0.90
Return on average equity 4.96 9.06 4.74 6.28 10.38
Average equity to
average assets 7.65 8.62 9.12 8.92 8.67
Dividend payout ratio 54.22 25.61 48.27 35.30 18.50
<F1> All years restated to reflect 3 for 1 stock split in 1998 and 5% stock
dividend in 1996.
<F2> 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 Bank's business strategy is to operate as a well-capitalized and
profitable community bank dedicated to financing loans secured by residential
and commercial real estate, enabling borrowers to refinance, construct or
improve property. The Bank has implemented this strategy by; (i) closely
monitoring the needs of customers and providing quality service; (ii)
originating residential mortgage loans, construction loans, commercial real
estate loans, consumer loans, and by offering checking accounts and other
financial services and products; (iii) focusing on expanding the volume of the
Bank's commercial real estate and commercial lending activities to serve the
needs of the small business community; and (iv) focusing on expanding the
volume of the Bank's mortgage loan servicing portfolio.
From this strategy, the Bank anticipates its interest and non-interest
income will increase. Like most financial institutions, Waldoboro's earnings
are primarily dependent upon its net interest income, which is determined by
(i) the difference between yields on interest-earning assets and rates paid on
interest bearing liabilities (known as the interest rate spread) and (ii) the
relative amounts of interest earning assets and interest bearing liabilities
outstanding.
The Bank and the entire financial services industry are significantly
affected by prevailing economic conditions as well as government policies and
regulations concerning, among other things, monetary and fiscal affairs,
housing and financial institutions. Deposit flows are influenced by a number
of factors including interest rates on money market funds, the stock market,
other competing investments, account maturities and levels of personal income
and savings. Lending activities are influenced by, among other things, the
demand for and supply of housing, conditions in the construction industry, and
loan refinancing in response to declining interest rates. Sources of funds
for lending activities include deposits, loan payments, proceeds from sales of
loans and investments, investment returns and borrowings.
FINANCIAL CONDITION
Total assets at March 31, 1999 were $70,770,863, an increase of
$7,755,700 from March 31, 1998 primarily derived from deposit growth at
existing and new branches. The Bank has restructured its investment portfolio
to maximize yield and flexibility for the Bank. To that end, the Bank has
increased its investment securities available for sale, while decreasing time
deposits and investments held to maturity. The net effect is an increase in
the investment portfolio of $1,925,968. Net loans also increased $5,751,017.
The Bank had, as of March 31, 1999, a net loan portfolio of $55,964,548,
representing 79% of total assets. Stockholders' equity at year end was
$5,373,620, an increase of $32,885 from March 31, 1998, as a result of 1999
net income after dividends, 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. As
such, the Bank has concentrated on maintaining a high percentage of adjustable
rate loans in its residential, commercial, and commercial real estate
portfolios. In addition, the Bank utilizes Federal Home Loan Bank advances to
control the repricing of a segment of its liabilities.
At March 31, 1999, the adjustable rate loans in the residential mortgage
loan portfolio amounted to $25.9 million or 72.0% and adjustable rate loans in
the commercial loan portfolio amounted to $8.9 million or 72.3%. 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 $32.7 million or 62.4% of the
Bank's deposits.
The current interest rate environment is relatively stable with a flat
yield curve. However, in a sustained flat yield curve, some of the Bank's
adjustable rate mortgages may reprice more dramatically than some of the
Bank's liabilities. Typically, 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 affect on
the Bank's net interest income.
NONPERFORMING ASSETS
A summary of nonperforming assets for the last three years is shown
below.
<TABLE>
<CAPTION>
At March 31,
--------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Nonperforming loans:
Mortgage loans in process of foreclosure $ --- $ --- $ ---
Loans more than 90 days past due and still accruing 69,580 69,570 ---
Nonaccrual loans 73,551 225,056 145,466
--------------------------------
Total nonperforming loans 143,131 294,626 145,466
Real estate owned, net --- 70,383 91,823
--------------------------------
Total nonperforming assets $143,131 $365,009 $237,289
================================
Ratio of nonperforming loans to total loans 0.25% 0.58% 0.29%
Ratio of nonperforming assets to total assets 0.20% 0.58% 0.40%
</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, 1999, the Bank had $69,580 of accruing loans which were 90
days or more delinquent as compared to $69,570 at March 31, 1998 and no such
loans at March 31, 1997. Unrecognized interest income on all loans on non-
accrual status at March 31, 1999 totaled $7,253.
Management is not aware of any loans other than those represented in the
table above which are potential problem loans at present.
AVERAGE BALANCE, INTEREST AND YIELD/RATES
The following table presents average balances, yields and rates for
major classes of interest-earning assets and interest-bearing liabilities for
the periods indicated. Additionally, the table presents interest rate spreads
and ratios of net interest income to average interest-earning assets. All
average balances have been computed using month-end amounts. Non-performing
loan amounts have been included in average balances. Since the Holding
Company has had no significant investments or loans for which interest was
exempt from income taxes, no tax equivalent adjustments have been reflected.
<TABLE>
<CAPTION>
Year Ended March 31, 1999 Year Ended March 31, 1998
----------------------------------- -----------------------------------
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ----
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans $52,902,202 $4,588,941 8.67% $49,601,915 $4,464,822 9.00%
Interest bearing &
time deposits 3,655,632 207,952 5.69% 1,559,093 87,522 5.61%
Federal funds sold 3,829,465 196,752 5.14% 2,806,836 155,004 5.52%
Investments & mortgage-
backed securities 3,877,991 235,820 6.08% 3,487,291 210,241 6.03%
----------- ---------- ----------- ----------
Total interest-earning
assets 64,265,290 5,229,465 8.14% 57,455,135 4,917,589 8.56%
Other assets:
Allowance for loan losses (367,609) (318,443)
Cash and due from banks 1,418,678 1,158,854
Fixed assets 1,696,547 1,539,018
Other assets 985,600 1,093,918
----------- -----------
Total assets $67,998,506 $60,928,482
=========== ===========
Interest-bearing liabilities:
NOW, savings & money
market accounts 16,460,915 423,854 2.57% 14,626,501 19,661 2.87%
Certificates of deposit 30,216,858 1,670,643 5.53% 27,352,018 1,544,788 5.65%
Borrowings 12,547,603 720,274 5.74% 11,185,205 659,057 5.89%
----------- ---------- ----------- ----------
Total interest-bearing
liabilities 59,225,376 2,814,771 4.75% 53,163,724 2,623,506 4.93%
Other liabilities:
Demand deposits 3,142,831 2,187,357
Other liabilities 431,470 325,651
----------- -----------
Total liabilities 62,799,677 55,676,732
Stockholders' equity 5,198,829 5,251,750
----------- -----------
Total liabilities and
stockholders' equity $67,998,506 $60,928,482
=========== ===========
Net interest income $2,414,694 $2,294,083
========== ==========
Interest rate spread 3.39% 3.63%
Net interest income as a
percentage of average
interest-earning assets 3.76% 3.99%
</TABLE>
Rate/Volume Analysis
A significant contributor to the Holding Company's level of
profitability over the long term is its net interest income, which is a
function of both the interest rates it earns or pays and of the amount, or
volume, of its interest-earning assets and interest-bearing liabilities. The
relative significance that rate and volume have had in various periods on the
Holding Company's results of operations can be observed by measuring the
extent to which the change in each has been responsible for increases or
decreases in net interest income.
The table below sets forth certain information regarding the changes in
the components of net interest income for the periods indicated. For each
category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (1) changes in rate (change
in rate multiplied by old volume) and (2) changes in volume (change in volume
multiplied by old rate). The net change attributable to both volume and rate
has been allocated proportionately.
<TABLE>
<CAPTION>
Year Ended March 31, 1999 Year Ended March 31, 1998
Compared to 1998 Compared to 1997
Increase (Decrease) Increase (Decrease)
---------------------------------- ---------------------------------
Volume Rate Net Volume Rate Net
------ ---- --- ------ ---- ---
<S> <C> <C> <C> <C> <C> <C>
Interest on interest-earning assets:
Loans $273,311 $(149,192) $124,119 $364,619 $(55,248) $309,371
Interest-bearing
& time deposits 119,247 1,183 120,430 19,384 1,831 21,215
Federal funds sold 51,612 (9,864) 41,748 74,079 4,490 78,569
Investments &
mortgage-backed
securities 23,744 1,835 25,579 (72,562) (7,650) (80,212)
-----------------------------------------------------------------------
Total Interest Income $467,914 $(156,038) $311,876 $385,520 $(56,577) $328,943
-----------------------------------------------------------------------
Interest on interest-bearing
liabilities:
Savings, NOW, & money
market deposit accounts 23,010 (18,817) 4,193 39,448 (14,495) 24,953
Certificates of deposit 157,535 (31,680) 125,855 60,554 (30,714) 29,840
Borrowings 77,651 (16,434) 61,217 114,963 17,170 132,133
-----------------------------------------------------------------------
Total Interest Expense 258,196 (66,931) 191,265 214,965 (28,039) 186,926
-----------------------------------------------------------------------
NET INTEREST INCOME $209,718 $ (89,107) $120,611 $170,555 $(28,538) $142,017
=======================================================================
</TABLE>
RESULTS OF OPERATIONS
COMPARISON OF YEARS ENDED MARCH 31, 1999 AND 1998
NET INCOME
Net income for the year ended March 31, 1999 amounted to $257,786,
compared to $475,616 for the year ended March 31, 1998. This decrease is
primarily related to the increased expenses caused by the Bank's decision to
expand its branch system from two locations for four by establishing new
locations. Net income was $0.37 basic earnings per share of common stock or
$0.36 diluted earnings per share. This compares to $0.68 basic earnings per
share of common stock and $0.67 diluted earnings per share for the previous
fiscal year.
Changes from March 31, 1998 to March 31, 1999, include an increase in
total interest income of $311,876 or 6.34%, an increase in total interest
expense of $191,265 or 7.29%, an increase in net interest income of $120,611
or 5.26%, an increase in other income of $157,652 or 51.98%, and in increase
in other expenses of $598,140 or 33.05%. The details of these changes will be
discussed throughout the remainder of this section.
INTEREST INCOME
Total interest income for the year ended March 31, 1999 increased
$311,876 or 6.34% compared to the previous fiscal year. The increase is
partially related to an increase of $3.3 million or 6.65% in the average
balances of mortgage, consumer and commercial loans compared to the previous
fiscal year, which is partially off set by declining yields. The increase in
average balances of all loan types is primarily related to the new branches in
Belfast and Jefferson, and continued growth in Rockland. Primarily growth has
been in mortgages and consumer loans at the branches, while in Waldoboro the
primary growth is in commercial loans. Additional interest income is
comprised of interest on mortgage-backed securities of $35,557, and other
interest income of $404,704, which is comprised of other interest bearing
deposits and federal funds sold.
The increase in interest on mortgage-backed securities is related to the
Bank's strategy to improve interest yields by increasing the average balances
of investments. Other interest income which is comprised of Federal Funds
sold and interest bearing time deposits increased due to an increase in the
volume of those assets.
INTEREST EXPENSE
Total interest expense for the year ended March 31, 1999, increased
$191,265 or 7.29% compared to the same period last year. This increase is
primarily related to increases in the average balances of NOW accounts,
savings, certificates of deposit and borrowings. These increases in deposit
accounts are primarily related to certificate of deposit growth at the Bank's
three branches, coupled with lesser increases in NOW accounts and savings.
These increases are partially offset by an overall reduction in the average
rate equal to 12 basis points on certificates of deposit and 30 basis points
on NOW accounts and savings.
PROVISION FOR LOAN LOSSES
The Bank's provision for loan losses was $68,000 for the year ended
March 31, 1999, compared to $73,000 for the previous year. Combined with net
charge-offs of $10,511, this resulted in an allowance for loan losses of
$404,385 or a 16.57% increase over the previous fiscal year. The increase
corresponds to the growth in residential mortgages and commercial loans.
The allowance for loan losses to non-performing loans was 282% at March
31, 1999, compared to 118% a year ago. The allowance to total loans is 0.72%
at March 31, 1999 compared to 0.68% at March 31, 1998. Management believes
that the allowance is sufficient given the commensurate risk associated with
the loan portfolio.
OTHER INCOME
Other income for the year ended March 31, 1999 was primarily generated
from three areas; loan servicing and other loan fees, gain on sale of loans
and deposit account fees. The increase in other income totaled $157,652 or
51.98% compared to a year ago. The increases in loan servicing and gain on
sale of loans is primarily related to the Bank's continued effort to increase
loan sales to the secondary market. Proceeds from loan sales were $6.1
million in fiscal 1999 compared to $3.4 million in 1998. Increases in deposit
account fees are consistent with the accounts that generate fee income,
primarily relating to overdraft fees.
OTHER EXPENSES
The increase in other expenses is primarily related to the Bank's
decision to expand its branch network. The areas primarily affected include:
compensation, employee benefits, occupancy and equipment and other expenses
including data processing, advertising, telephone and ATM processing.
The increase in compensation amounted to $196,846 or 28.32%. This
increase consists of various promotions and salary increases to current staff,
the addition of four full-time tellers and a branch manager in Belfast, the
promotion of a current staff member to branch manager in Jefferson, and the
hiring of one teller for the Jefferson branch.
The increase in employee benefits amounted to $74,458 or 46.86%. This
increase consists of increases in FICA expense, life and medical insurance,
unemployment taxes, bonus payments and accrued vacation expense.
Occupancy and equipment increased $149,141 or 76.19% due to depreciation
of leasehold improvements made in Belfast and Jefferson, depreciation and
maintenance of related banking and computer equipment for each location and
the rent in Belfast.
Miscellaneous other expenses increased $165,309 or 24.56% consisting
primarily of increases in advertising relating to the new branches and the use
of an ad agency, ATM processing due to the addition of the Belfast ATM and
increased use of the Rockland and Jefferson ATMs telephone expense due to
additional phone lines and service to Belfast and Jefferson branches and
upgrading of the communications network between Waldoboro and Rockland, and
data processing related to increased total transaction volume.
INCOME TAX EXPENSE
The provision for income tax for the year ended March 31, 1999, was
$141,832 a decrease of $97,047 from the previous year due to lower income
before income taxes. See note 6 to the consolidated financial statements for
further information regarding income taxes.
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 of $241,299 paid to recapitalize Savings Association Insurance Fund
(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.
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 consist 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.
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
$34,000,000. At March 31, 1999, the Bank's borrowings from the FHLB were
$12.7 million.
At year end March 31, 1999, stockholders' equity was $5,373,620 or 7.59%
of assets compared to $5,340,735 or 8.48% at March 31,1998. The reduced
percentage reflects the increase in assets during the period. The Bank is
required to maintain specified amounts of capital pursuant to federal
regulations. At yearend March 31, 1999, the Bank's capital substantially
exceeded core capital, tangible capital and risk based capital regulatory
requirements. See note 11 of 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 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 to address this issue
which has five phases. The Company has substantially completed the first four
phases and is currently working on the implementation phase. The following is
a brief synopsis of each phase:
1) Awareness Phase - This phase consists of defining the Year 2000 problem
and developing a strategy that encompasses all of the Bank' and Holding
Company's vendor 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. While this phase is 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.
4) Validation Phase - This phase consists of testing all hardware and
software to ensure that it is compatible with our system. In addition
to testing components, connections with other systems must be verified,
and all changes should be accepted by internal and external users.
Management has established controls to assure the effective and timely
completion of all hardware and software testing prior to final
implementation.
As with the renovation phase, the Company will be in ongoing discussions
with its vendors on the success of their validation efforts. The
Company has completed the testing all of its critical systems and has
completed this phase.
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 will not pose significant
operational problems for the Holding Company's and the Bank's computer system
and it does not anticipate any further material costs to be incurred. Also,
the Bank's loan portfolio is not significantly concentrated with any single
borrower (at March 31, 1999, the largest commercial loan relationship
approximated $749,000) and consists largely of loans secured by real estate.
These factors help mitigate Year 2000 risks pertaining to the valuation of the
loan portfolio, however, the Bank is currently contacting its significant loan
customers regarding their Year 2000 efforts. In addition, the Company has
developed a contingency plan in case any systems or key vendors are not
operational after the year 2000. This plan will be continually reviewed and
revised to address all critical systems. It should also be noted that the
Bank's regulatory agency, the Office of Thrift Supervision, has been
monitoring, and plans to continue monitoring, the Bank's progress in
addressing Year 2000 matters. To date the Bank has spent approximately
$27,000 on the Year 2000 issue primarily due to the purchase of computer
hardware, related installation cost and overtime for key employees and
anticipates that it may spend $15,000 additional in the future.
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.
PART II
MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
On March 31, 1999, there were 715,457 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 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, 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 ---
June 30, 1998 12.25 11.50 0.10
September 30, 1998 9.75 8.50 ---
December 31, 1998 9.75 7.00 0.10
March 31, 1999 10.00 7.00 ---
<F1> All figures adjusted to reflect 3 for 1 stock split that took effect in
1998.
</TABLE>
On April 14, 1999 the Holding Company declared a dividend of $.10 per
share to Stockholders of record on June 1, 1999 and payable June 30, 1999.
Mid-Coast Bancorp, Inc.
Audited Financial Statements
Years Ended March 31, 1999, 1998 and 1997
With Independent Auditors' Report
MID-COAST BANCORP, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report F-1
Consolidated Balance Sheets as of March 31, 1999 and 1998 F-2
Consolidated Statements of Income for each of the Three Years
Ended March 31, 1999 F-4
Consolidated Statements of Changes in Stockholders' Equity
for each of the Three Years Ended March 31, 1999 F-5
Consolidated Statements of Cash Flows for each of the Three
Years Ended March 31, 1999 F-6
Notes to Consolidated Financial Statements F-8
</TABLE>
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, 1999 and 1998, 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, 1999. 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, 1999 and 1998, and the
consolidated results of their operations and their cash flows for each of
the three years in the period ended March 31, 1999, in conformity with
generally accepted accounting principles.
/s/ Baker Newman & Noyes
------------------------------
April 30, 1999 Limited Liability Company
Portland, Maine
MID-COAST BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
March 31, 1999 and 1998
<TABLE>
<CAPTION>
ASSETS
------
1999 1998
---- ----
<S> <C> <C>
Cash and due from banks $ 1,583,693 $ 1,149,870
Interest bearing deposits 93,095 98,160
Federal funds sold 2,120,000 2,720,000
--------------------------
Cash and cash equivalents 3,796,788 3,968,030
Time deposits 2,079,000 2,476,000
Investment securities available for sale, at market (notes 2 and 9) 5,216,681 2,144,041
Held to maturity investment securities (market value of
$186,415 in 1999 and $922,351 in 1998) (notes 2 and 9) 200,000 949,672
Investment in Federal Home Loan Bank stock (note 9) 734,500 622,000
Loans held for sale 179,000 353,025
Loans (notes 3 and 9): 56,429,522 50,624,539
Less: Allowance for loan losses (note 4) 404,385 346,896
Net deferred loan fees 60,589 64,112
--------------------------
55,964,548 50,213,531
Bank premises and equipment, net (note 5) 1,734,619 1,490,827
Other assets:
Accrued interest receivable - loans 288,413 239,689
Accrued interest receivable - time deposits 18,328 12,445
Accrued interest receivable - investment and
mortgage-backed securities 70,213 46,494
Deferred income taxes (note 6) 113,137 100,000
Prepaid expenses and other assets 375,636 329,026
Real estate owned (note 7) - 70,383
--------------------------
Total other assets 865,727 798,037
--------------------------
Total assets $70,770,863 $63,015,163
==========================
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Liabilities:
Deposits (note 8):
Demand deposits $ 3,106,977 $ 2,297,644
NOW accounts 5,309,433 4,018,629
Savings 6,582,120 5,686,227
Money market deposit accounts 4,711,304 5,134,082
Certificates of deposit 32,705,039 28,034,834
--------------------------
Total deposits 52,414,873 45,171,416
Advances from the Federal Home Loan Bank (note 9) 12,715,000 12,190,000
Accrued expenses and other liabilities 267,370 313,012
--------------------------
Total liabilities 65,397,243 57,674,428
Commitments and contingencies (note 10)
Stockholders' equity (notes 11 and 12):
Common stock, $1 par value, 1,500,000 shares authorized;
715,457 shares issued and outstanding (711,960 shares in 1998) 715,457 711,960
Paid-in capital 1,535,412 1,521,041
Retained earnings 3,371,524 3,253,517
Accumulated other comprehensive income (loss) (25,500) -
Unearned compensation (223,273) (145,783)
--------------------------
Total stockholders' equity 5,373,620 5,340,735
--------------------------
Total liabilities and stockholders' equity $70,770,863 $63,015,163
==========================
</TABLE>
See accompanying notes.
MID-COAST BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
Years Ended March 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Interest income:
Interest on loans $4,588,941 $4,464,822 $4,155,451
Interest on investment securities 200,263 210,241 257,426
Interest on mortgage-backed securities 35,557 - 33,027
Other 404,704 242,526 142,742
--------------------------------------
Total interest income 5,229,465 4,917,589 4,588,646
Interest expense:
Interest on deposits (note 8) 2,094,497 1,964,449 1,909,656
Interest on borrowings 720,274 659,057 526,924
--------------------------------------
Total interest expense 2,814,771 2,623,506 2,436,580
--------------------------------------
Net interest income 2,414,694 2,294,083 2,152,066
Provision for loan losses (note 4) 68,000 73,000 87,000
--------------------------------------
2,346,694 2,221,083 2,065,066
Other income:
Loan servicing and other loan fees 58,628 52,089 46,335
Gain on sale of loans 183,102 54,785 31,436
Deposit account fees 210,793 188,619 140,654
Gain (loss) on sale of investment securities
available for sale (note 2) (3,012) - 6,748
Miscellaneous 11,427 7,793 9,848
--------------------------------------
460,938 303,286 235,021
Other expenses:
Compensation of directors, officers and staff 891,976 695,130 652,237
Employee benefits (notes 12 and 13) 233,354 158,896 141,733
Occupancy and equipment expense 344,890 195,749 137,900
Insurance expense (note 14) 81,066 74,834 360,328
Real estate owned (note 7) 18,397 12,243 11,678
Other (note 14) 838,331 673,022 609,503
--------------------------------------
2,408,014 1,809,874 1,913,379
--------------------------------------
Income before income taxes 399,618 714,495 386,708
Income tax expense (note 6) 141,832 238,879 143,933
--------------------------------------
Net income $ 257,786 $ 475,616 $ 242,775
======================================
Earnings per share - basic $ 0.37 $ 0.68 $ 0.35
======================================
Earnings per share - diluted $ 0.36 $ 0.67 $ 0.34
======================================
</TABLE>
See accompanying notes.
MID-COAST BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Years Ended March 31, 1999, 1998 and 1997
---------------------------------------------------------------------------------
Accumulated Other Total
Common Paid-in Retained Comprehensive Unearned Stockholders'
Stock Capital Earnings Income (Loss) Compensation Equity
------ ------- -------- ----------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1996 $229,031 $1,448,282 $3,248,764 - - $4,926,077
Net income (and total comprehensive income) - - 242,775 - - 242,775
Issuance of 2,408 shares of common stock
upon exercise of options 2,408 21,487 - - - 23,895
Dividends declared ($.17 per share) - - (117,202) - - (117,202)
-------------------------------------------------------------------------------
Balance at March 31, 1997 231,439 1,469,769 3,374,337 - - 5,075,545
Net income (and total comprehensive income) - - 475,616 - - 475,616
Issuance of 5,881 shares of common stock
upon exercise of options 5,881 51,272 - - - 57,153
Dividends declared ($.17 per share) - - (121,796) - - (121,796)
Stock split effected as dividend (note 11) 474,640 - (474,640) - - -
Acquisition of shares for stock award plan
(note 12) - - - - (177,925) (177,925)
Amortization of unearned compensation - - - - 32,142 32,142
-------------------------------------------------------------------------------
Balance at March 31, 1998 711,960 1,521,041 3,253,517 - (145,783) 5,340,735
Net income - - 257,786 - - 257,786
Other comprehensive income net of tax:
Net unrealized loss on investments
available for sale, net of
reclassification adjustment (note 15) - - - (25,500) - (25,500)
----------
Total comprehensive income 232,286
Issuance of 3,497 shares of common
stock upon exercise of options 3,497 9,305 - - - 12,802
Dividends declared ($.20 per share) - - (139,779) - - (139,779)
Acquisition of shares for stock award plan
(note 12) - - - - (109,630) (109,630)
Amortization of unearned compensation - - - - 32,140 32,140
Net tax effect of stock award plan - 5,066 - - - 5,066
-------------------------------------------------------------------------------
Balance at March 31, 1999 $715,457 $1,535,412 $3,371,524 $(25,500) $(223,273) $5,373,620
===============================================================================
</TABLE>
See accompanying notes.
MID-COAST BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended March 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Operating activities:
Net income $ 257,786 $ 475,616 $ 242,775
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 158,565 114,817 62,268
Net accretion on investment securities (1,131) (3,085) (6,250)
Loss (gain) on sale of investment securities
available for sale 3,012 - (6,748)
Amortization of unearned compensation 32,140 32,142 -
Loss on disposal of bank premises and equipment - 10,252 -
Provision for loan losses 68,000 73,000 87,000
Net change in deferred loan fees (3,523) (55,854) (31,288)
Proceeds from sales of loans 6,130,644 3,447,347 2,248,585
Loans originated for sale (5,830,700) (3,680,587) (1,723,070)
Gain on sales of loans (183,102) (54,785) (31,436)
Loss on sale of real estate owned 12,779 8,235 -
Deferred income taxes (10,928) (2,000) (4,000)
Change in accrued interest receivable (78,326) 5,276 10,687
Change in prepaid expenses and other assets 10,573 (136,388) (94,757)
Change in income taxes receivable - - 60,220
Change in accrued expenses and other liabilities (29,648) 83,887 75,038
-------------------------------------------
Net cash flows from operating activities 536,141 317,873 889,024
Investing activities:
Net change in time deposits 397,000 (1,387,000) 692,101
Investment securities available for sale:
Proceeds from sale of investment securities 1,496,988 10,000 508,942
Proceeds from maturities, calls and principal
pay downs 2,374,694 750,000 552,805
Purchases (6,985,168) (1,082,857) (2,405,881)
Held to maturity investment securities:
Proceeds from maturities, calls and principal
pay downs 750,000 - 2,619,219
Purchases of Federal Home Loan Bank stock (112,500) - -
Net change in loans (6,028,076) (1,400,539) (6,566,937)
Proceeds from sale of real estate owned 270,186 162,099 130,066
Proceeds from sale of bank premises and equipment - - 1,500
Purchases of bank premises and equipment (402,357) (35,606) (257,469)
-------------------------------------------
Net cash flows from investing activities (8,239,233) (2,983,903) (4,725,654)
</TABLE>
MID-COAST BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
Years Ended March 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Financing activities:
Net change in certificates of deposit $ 4,670,205 $ 2,475,002 $(1,957,322)
Net change in other deposits 2,573,252 515,716 2,321,118
Maturities of advances from Federal Home Loan Bank (7,475,000) (8,250,000) (4,525,000)
Advances from Federal Home Loan Bank 8,000,000 9,000,000 8,500,000
Issuance of stock 12,802 57,153 23,895
Dividends paid (139,779) (121,796) (117,202)
Acquisition of shares for stock award plan (109,630) (177,925) -
-------------------------------------------
Net cash flows from financing activities 7,531,850 3,498,150 4,245,489
-------------------------------------------
Net (decrease) increase in cash and cash equivalents (171,242) 832,120 408,859
Cash and cash equivalents at beginning of year 3,968,030 3,135,910 2,727,051
-------------------------------------------
Cash and cash equivalents at end of year $ 3,796,788 $ 3,968,030 $ 3,135,910
===========================================
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest (including $2,607,554, $2,380,566
and $1,655,818, credited to deposit accounts
in 1999, 1998 and 1997, respectively) $ 2,798,829 $ 2,595,603 $ 2,411,059
Income taxes 288,639 162,084 55,174
Supplemental disclosure of noncash transactions:
Net transfer of real estate owned and similar
assets to (from) loans (212,582) (148,894) 2,248
Entries required to recognize net unrealized gain
or loss on investment securities available for sale:
Unrealized loss on investment securities
available for sale (38,637) - -
Deferred tax asset 13,137 - -
Stockholders' equity (25,500) - -
Net tax effect of stock award plan:
Deferred tax asset (10,928) - -
Additional paid in capital (5,066) - -
Other liabilities 15,994 - -
</TABLE>
See accompanying notes.
MID-COAST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1999, 1998 and 1997
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. First Waldoboro
Corporation 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 federal 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 maintain certain amounts of cash on deposit
at the Federal Reserve Bank and is restricted from investing these
amounts. At March 31, 1999, 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 to 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. Net unrealized gains or losses (net of tax effect) are
reflected as a separate component of accumulated other
comprehensive income.
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).
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.
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.
Management believes that the allowance for loan losses is adequate.
Arriving at an appropriate level of allowance for loan loss involves
judgment. The primary considerations are the level of delinquencies,
the nature of the loan portfolio, prior loan loss experience, the
local economic conditions, and current real estate market trends.
While management uses available information to recognize losses on
loans, future additions to the allowance may be necessary. In
addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Company's allowance for
loan losses. Such agencies may require the Company to recognize
additions to the allowance based on judgments different from those of
management.
A substantial portion (89% and 88% at March 31, 1999 and 1998,
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 and Loans Sold
----------------------------------
Loans held for sale are carried at the lower of aggregate cost or fair
value.
Gains and losses on sales of loans are determined using the specific
identification method. The gains and losses resulting from the sales
of loans with servicing retained are adjusted to recognize the present
value of future servicing fee income over the estimated lives of the
related loans and are capitalized as mortgage servicing rights as
required by Statement of Financial Accounting Standards No. 125.
Mortgage servicing rights are included with prepaid expenses and other
assets in the consolidated balance sheets.
Mortgage servicing rights are amortized over the estimated weighted
average life of the serviced loans. Amortization is recorded as a
charge against loan servicing fees. The Company's assumptions with
respect to prepayments, which affect the estimated average life of the
loans, are adjusted periodically to reflect current circumstances. To
measure possible impairment, the rights are stratified based on yields
and terms of the underlying loans. Impairment losses are recognized
if the amounts of capitalized rights for a stratum exceeds their fair
value.
Interest Income on Loans
------------------------
Interest on loans is accrued and credited to income based on the
principal amount outstanding. The accrual of interest income is
discontinued when a loan becomes impaired and in management's opinion
is deemed uncollectible in whole or in part as to principal or
interest. In these cases, interest is recognized only when received.
Loan origination fees and certain direct loan origination costs are
deferred and the net amount is 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. 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.
Advertising Costs
-----------------
Advertising costs are expensed as incurred (see note 14).
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. Shares not yet awarded are not
considered outstanding for purposes of computing earnings per share.
Comprehensive Income
--------------------
In 1999, the Company adopted the provisions of Statement of Financial
Accounting Standards (SFAS) No. 130, Reporting Comprehensive Income.
Accumulated other comprehensive income consists solely of net
unrealized gains or losses on investment securities available for
sale.
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. 1998 and 1997 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>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Average shares outstanding 714,074 704,042 689,925
Less average unawarded shares in Recognition
and Retention Plan (9,359) (1,350) -
-------------------------------
Average shares outstanding, used in computing
basic EPS 704,715 702,692 689,925
Additional shares due to stock options 6,032 8,282 15,102
-------------------------------
Average equivalent shares outstanding, used
in computing diluted EPS 710,747 710,974 705,027
===============================
</TABLE>
There is no difference between net income and net income available to
common stockholders.
New Accounting Pronouncements Not Yet Implemented
-------------------------------------------------
SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities, is not expected to have a significant effect on the
Company's financial position or results of operations based on the
Company's current activities. SFAS No. 133 is scheduled to be
effective in fiscal 2001, although the Financial Accounting Standards
Board may delay the effective date until fiscal 2002.
Reclassification
----------------
Certain 1998 and 1997 amounts have been reclassified to conform with
current year presentation.
2. Investment Securities
---------------------
Investment Securities Available for Sale
----------------------------------------
The amortized cost and market values of available for sale investment
securities at March 31, 1999 is presented below:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- ------
<S> <C> <C> <C> <C>
U.S. Agency Obligations $3,099,567 $1,482 $(27,577) $3,073,472
Mortgage-backed securities 1,498,574 - (11,219) 1,487,355
Mutual fund 657,177 - (1,323) 655,854
-------------------------------------------------------
$5,255,318 $1,482 $(40,119) $5,216,681
=======================================================
</TABLE>
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>
The March 31, 1999 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 $ - $ -
Due after one year through five years 3,099,567 3,073,472
Mortgage-backed securities 1,498,574 1,487,355
-------------------------
$4,598,141 $4,560,827
=========================
</TABLE>
For purposes of the maturity table, mortgage-backed securities have
not been allocated.
Gross gains and losses on sales of investment securities available for
sale for 1999, 1998 and 1997 are summarized below:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Gross gains $ - $ - $6,748
Gross losses 3,012 - -
------------------------------
Net gain or loss $(3,012) $ - $6,748
==============================
</TABLE>
At March 31, 1999 and 1998, investment securities with carrying values
of $186,405 and $299,672, respectively, were pledged to secure
deposits.
Held to Maturity Investment Securities
--------------------------------------
The amortized cost and market values of held to maturity investment
securities at March 31, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
March 31, 1999
----------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- ------
<S> <C> <C> <C> <C>
U.S. Agency Obligations $200,000 $ - $13,585 $186,415
====================================================
<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
====================================================
</TABLE>
The U.S. Agency Obligation at March 31, 1999 is an inverse floater
structured note maturing in 2003, with an amortized cost of $200,000
and market value of $186,415.
3. Loans
-----
Loans at March 31, 1999 and 1998 consisted of the following:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Real estate mortgage - residential $35,973,168 $33,971,535
Real estate mortgage - commercial 9,699,298 7,464,541
Construction, net of undisbursed funds 2,824,413 2,189,613
Other commercial 2,618,523 2,071,625
Home equity 1,467,125 1,092,794
Passbook loans 317,548 261,888
Installment and other 3,529,447 3,572,543
---------------------------
$56,429,522 $50,624,539
===========================
</TABLE>
Loans serviced for others at March 31, 1999, 1998 and 1997 totaled
$11,687,993, $7,546,489 and $7,269,828, respectively. Mortgage
servicing rights (included in prepaid expenses and other assets) at
March 31, 1999 (net of amortization) totaled $61,729; mortgage
servicing rights at March 31, 1998 and 1997 were immaterial.
Loans contractually past due and nonaccruing as to interest income
totaled $73,551 and $225,056 at March 31, 1999 and 1998, respectively.
Unrecognized accrued interest on such loans totaled $7,253 and $17,089
at March 31, 1999 and 1998, respectively.
Information with respect to impaired loans is presented below:
<TABLE>
<CAPTION>
March 31,
---------------------
1999 1998
---- ----
<S> <C> <C>
Year-end recorded investment in impaired loans $114,181 $266,146
Approximate average investment in impaired loans for the year 268,000 345,000
</TABLE>
Approximately $4,000 and $3,000 of interest income was recognized on
impaired loans during 1999 and 1998. No interest income was
recognized on impaired loans during 1997. There was no valuation
allowance directly allocated to impaired loans at March 31, 1999 or
1998.
Activity in loans to directors and officers (and their affiliates) who
had outstanding balances greater than $60,000 during the year ended
March 31, 1999 is shown below.
<TABLE>
<CAPTION>
Balance Balance
April 1, 1998 Additions Reductions March 31, 1999
------------- --------- ---------- --------------
<S> <C> <C> <C>
$575,179 $82,101 $331,697 $325,583
======== ======= ======== ========
</TABLE>
4. Allowance for Loan Losses
-------------------------
<TABLE>
<CAPTION>
Years Ended March 31,
----------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Balance, beginning of year $346,896 $295,457 $221,356
Charge-offs (11,657) (22,429) (20,810)
Recoveries 1,146 868 7,911
Provisions for losses 68,000 73,000 87,000
----------------------------------
Balance, end of year $404,385 $346,896 $295,457
==================================
</TABLE>
5. Bank Premises and Equipment
---------------------------
Bank premises and equipment at March 31, 1999 and 1998 consisted of
the following:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Building and improvements $1,473,405 $1,320,928
Land and land improvements 200,059 198,060
Furniture, fixtures and equipment 756,051 508,170
------------------------
2,429,515 2,027,158
Less accumulated depreciation 694,896 536,331
------------------------
Net bank premises and equipment $1,734,619 $1,490,827
========================
</TABLE>
6. Income Taxes
------------
Income tax expense (benefit) for the years ended March 31, 1999, 1998
and 1997 consisted of the following:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Currently payable:
Federal $143,182 $232,072 $140,933
State 9,578 8,807 7,000
--------------------------------
152,760 240,879 147,933
Deferred federal (10,928) (2,000) (4,000)
--------------------------------
$141,832 $238,879 $143,933
================================
</TABLE>
Income taxes were computed as follows:
<TABLE>
<CAPTION>
Year Ended March 31,
--------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
At federal statutory rates $135,870 $242,928 $131,481
State taxes, net of federal tax effect 6,321 5,812 4,620
Other, net (359) (9,861) 7,832
--------------------------------
$141,832 $238,879 $143,933
================================
</TABLE>
At March 31, 1999 and 1998, the net deferred tax asset consisted of:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Deferred tax assets, primarily related to
the allowance for loan losses $183,169 $142,000
Deferred tax liabilities, primarily related to depreciation (70,032) (42,000)
---------------------
$113,137 $100,000
=====================
</TABLE>
The net deferred tax asset at March 31, 1999 and 1998 is recoverable
through income taxes paid in the carry-back period.
Retained earnings at March 31, 1999 included approximately $590,000
representing bad debt deductions allowed for tax purposes for which no
provisions for income taxes has been made. If this portion of
retained earnings is reduced for any other purpose other than to
absorb losses, income taxes would be imposed at the then applicable
rates.
7. Real Estate Owned
-----------------
Activity in the allowance for losses on real estate owned and similar
assets for the year ended March 31, 1997 is shown below. There was no
activity in 1999 or 1998.
<TABLE>
<CAPTION>
1997
----
<S> <C>
Balance, beginning of year $ 23,000
Provision for losses, included in real estate
owned expense -
Charge-downs (23,000)
--------
Balance, end of year $ -
========
</TABLE>
8. Deposits
--------
Demand deposits include $303,149 and $459,116 of official and other
outstanding checks drawn on the Bank at March 31, 1999 and 1998,
respectively.
Certificates of deposit over $100,000 totaled $3,819,492 at March 31,
1999 and $2,451,162 at March 31, 1998.
Scheduled maturities for certificates of deposit at March 31, 1999 are
as follows:
<TABLE>
<CAPTION>
Year Ending
-----------
<S> <C>
March 31, 2000 $28,225,483
March 31, 2001 3,465,243
March 31, 2002 905,223
March 31, 2003 109,090
-----------
$32,705,039
===========
</TABLE>
Interest expense by type of deposit is shown below.
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
NOW accounts $ 75,973 $ 63,365 $ 70,486
Savings 179,002 160,408 135,482
Money market deposit accounts 168,879 191,859 188,740
Certificates of deposit 1,670,643 1,548,817 1,514,948
--------------------------------------
$2,094,497 $1,964,449 $1,909,656
======================================
</TABLE>
9. Advances From Federal Home Loan Bank
------------------------------------
Advances from the Federal Home Loan Bank (FHLB) at March 31, 1999 and
1998 consisted of the following:
<TABLE>
<CAPTION>
1999 1998
----------------------------- -----------------------------
Interest Interest
Rates Balance Rates Balance
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Advances maturing within:
One year 4.93% - 4.99% $ 1,500,000 5.56% - 7.12% $ 7,475,000
Two years 5.05% - 6.15% 2,500,000 - -
Three years - - 5.56% - 6.15% 2,000,000
Four years 4.99% 1,000,000 - -
After five years 2.00% - 5.88% 7,715,000 2.00% - 5.76% 2,715,000
----------- -----------
$12,715,000 $12,190,000
=========== ===========
</TABLE>
The FHLB advances are generally secured by a blanket lien on
investments and mortgage loans 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, 1999, the Bank's limitation on
advances from the FHLB approximated $34,000,000.
Additionally, the Bank has available a line of credit for short-term
borrowings under the FHLB "Ideal Way" program totaling approximately
$1,157,000. There were no borrowings under this line at March 31,
1999 or 1998.
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,
-------------------------
1999 1998
---- ----
<S> <C> <C>
Commitments for new loans $1,950,000 $2,411,500
Unused home equity and other lines of credit 3,914,714 2,551,374
-------------------------
$5,864,714 $4,962,874
=========================
</TABLE>
Loan commitments include unfunded portions of real estate construction
and other loans, and unused lines of credit. Loan commitments are
subject to the same credit policies as loans and generally have
expiration dates and termination clauses. The Company obtains
collateral to secure loans based upon management's credit assessment
of the counterparty. Collateral is usually in the form of real
estate.
The Bank and the Company have entered into an employment contract with
the President of the Bank and the Company that provides for
employment, compensation and benefits; it also provides for severance
upon change in control of the Company.
At March 31, 1999 and 1998, 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.
Leases
------
The Company leases two branch facilities under noncancellable
operating leases. These leases contain renewal clauses. Rent expense
was $49,969 and $3,230 for 1999 and 1998. The following is a schedule
by years of future minimum rental payments required under operating
leases that have initial or remaining noncancellable lease terms in
excess of one year at March 31, 1999:
<TABLE>
<S> <C>
2000 $ 47,178
2001 45,000
2002 45,550
2003 51,600
2004 51,600
Thereafter 154,800
--------
$395,728
========
</TABLE>
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, 1999 and 1998, 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 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, 1999 and 1998, 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, 1999 and 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 significantly 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, 1999:
Total capital (to risk
weighted assets) $5,674 13.5% >/=$3,361 >/=8.0% >/=$4,202 >/=10.0%
Tier 1 Capital (to risk
weighted assets) 5,270 12.5% >/= 1,681 >/=4.0% >/= 2,521 >/= 6.0%
Tier 1 Capital (to
total assets) 5,270 7.4% >/= 2,838 >/=4.0% >/= 3,547 >/= 5.0%
As of March 31, 1998:
Total capital (to risk
weighted assets) $5,474 14.8% >/=$2,953 >/=8.0% >/=$3,691 >/=10.0%
Tier 1 Capital (to risk
weighted assets) 5,127 13.9% >/= 1,476 >/=4.0% >/= 2,214 >/= 6.0%
Tier 1 Capital (to
total assets) 5,127 8.1% >/= 2,517 >/=4.0% >/= 3,147 >/= 5.0%
</TABLE>
In connection with the conversion of the Bank from a mutual to a stock
institution in 1989, the Company was required by OTS regulations to
establish a liquidation account in the amount of the Bank's retained
earnings at the date of conversion, which totaled 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 is 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, 1999, unrestricted
retained earnings of the Bank under such OTS limitations approximated
$1,410,000.
The following table reconciles core capital per the Waldoboro Bank's
reports to OTS at March 31, 1999 to the total of stockholders' equity
shown on the accompanying consolidated financial statements.
<TABLE>
<CAPTION>
In Thousands
------------
<S> <C>
Capital per the OTS Report $5,284
Impact of Mid-Coast Bancorp 90
------
Stockholders' equity per consolidated financial statements $5,374
======
</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.
12. Stock Compensation Plans
------------------------
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, 1999, 27,621 shares have been acquired at a cost of
$287,555 for the Plan and are held by the trustee. Dividends paid
during 1999 on shares held in trust were not material. Of the total
shares held at March 31, 1999, 16,800 shares were awarded and 10,821
shares were unawarded. The expense associated with the Plan was
$32,140 for 1999 and $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.
At March 31, 1998, 18,600 shares had been acquired at a cost of
$177,925; 16,800 shares were awarded and 1,800 shares were unawarded.
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. A summary of options
granted (all of which were granted at market price on the date of
grant), exercised during 1999, 1998 and 1997 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)
----------------------------------------------------------------- Total
Exercise Price: $ 2.47 $ 3.16 $ 3.31 $ 3.74 $ 4.07 $ 4.68 Options
------ ------ ------ ------ ------ ------ -------
<S> <S> <C> <C> <C> <C> <C> <C>
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
Exercised - 1999 1,224 - - 923 - 1,350 3,497
---------------------------------------------------------------------------
Outstanding option
shares, March 31,
1999 726 504 - 5,740 - 1,779 8,749
===========================================================================
Options expire in
fiscal year 2000 2002 2003 2005
</TABLE>
13. Retirement Plans
----------------
Pension Plan
------------
The Company participates in an industry-sponsored defined benefit
pension plan. This noncontributory plan includes all employees who
meet age and years of service requirements. The net pension expense
was $975 for the year ended March 31, 1999. Pension expense/(benefit)
totaled $(1,802) and $34,968 for the years ended March 31, 1998 and
1997, 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, 1998, net assets available for benefits (approximately
$1,878 million) exceeded the actuarial present value of accumulated
plan benefits by approximately $680 million. The actuarial present
value of accumulated plan benefits for June 30, 1998 and 1997 is based
upon a discount rate of 8%.
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 1999,
1998 and 1997 were $15,975, $16,433 and $11,106, respectively.
14. Insurance and Other Expenses
----------------------------
Insurance expense in 1997 included $241,299 related to the
recapitalization of the Savings Association Insurance Fund.
Included in other expenses for the years ended March 31, 1999, 1998
and 1997 are:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Advertising $ 93,546 $ 33,131 $ 25,678
Telephone 75,896 46,577 51,164
Data processing 164,734 136,640 200,351
Stockholder expenses 67,030 81,842 58,456
Audit and examination 61,681 55,327 41,225
Legal expense 15,043 37,414 17,912
Other 360,401 282,091 214,717
--------------------------------
$838,331 $673,022 $609,503
================================
</TABLE>
15. Other Comprehensive Income
--------------------------
Beginning in 1999, Statement of Financial Accounting Standards
No. 130, Reporting Comprehensive Income, requires display on financial
statements of amounts of total comprehensive income and accumulated
other comprehensive income. There was no net accumulated other
comprehensive income in 1998 or 1997. The components of other
comprehensive income for 1999 are as follows:
<TABLE>
<S> <C>
Unrealized losses arising during the year,
net of tax effect $14,158 $(28,356)
Less: reclassification adjustment for losses
included in net income, net of tax effect
of $1,471 2,856
--------
Other comprehensive income $(25,500)
========
</TABLE>
16. Fair Value of Financial Instruments
-----------------------------------
As required by Statement of Financial Accounting Standards No. 107,
fair value estimates, methods and assumptions are set forth below for
the Company's estimated fair values of its financial instruments.
Fair values have been calculated based on the value of one unit
without regard to any premium or discount that may result from
concentrations of ownership of a financial instrument, possible tax
ramifications, or estimated transaction costs. If these considerations
had been incorporated into the fair value estimates, the aggregate
fair value amount could have changed.
Management has made estimates of fair value discount rates that it
believes to be reasonable. However, because there is no market for
many of these financial instruments, management has no basis to
determine whether the fair value presented 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, 1999 and 1998, 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, 1999 and 1998, except for
the Bank's required investment in FHLB stock which is valued at its
cost since there is no market.
Loans
-----
Fair values are estimated for portfolios of loans with similar
financial characteristics. The fair values of performing loans are
calculated by discounting scheduled cash flows through the estimated
maturity using estimated market discount rates that reflect the credit
and interest rate risk inherent in the loan. The estimates of
maturity are based on the Company's historical experience with
repayments for each loan classification, modified, as required, by an
estimate of the effect of current economic, lending conditions and the
effects of estimated prepayments.
Fair values of any significant nonperforming loans are based on
estimated cash flows discounted using a rate commensurate with the
risk associated with the estimated cash flows. Assumptions regarding
credit risk, cash flows and discount rates are judgmentally determined
using available market information and historical information.
Accrued Interest Receivable
---------------------------
The fair market value of this financial instrument approximates the
book value as this financial instrument has a short maturity.
Deposit Liabilities
-------------------
The fair value of deposits with no stated maturity, such as non-
interest-bearing demand deposits, savings and NOW accounts, and money
market and checking accounts, is equal to the amount payable on demand
as of March 31, 1999 and 1998. 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, 1999 and 1998, the fair value of the Company's
net assets would increase.
Advances from the Federal Home Loan Bank
----------------------------------------
The fair value of advances from the Federal Home Loan Bank is based
upon the discounted value of contractual cash flows, with a discount
rate based upon rates currently offered for similar remaining
maturities.
Commitments to Extend Credit
----------------------------
The fair value of commitments to extend credit cannot be reasonably
estimated without incurring excessive costs as the Company does not
charge fees for such commitments and there is no ready market for this
financial instrument.
Limitations
-----------
Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial
instrument. These values do not reflect any premium or discount that
could result from offering for sale at one time the Company's entire
holdings of a particular financial instrument. Because no market
exists for a significant portion of the Company's financial
instruments, fair value estimates are based on judgments regarding
future expected loss experience, current economic conditions, risk
characteristics of various financial instruments and other factors.
These estimates are subjective in nature and involve uncertainties and
matters of significant judgment and therefore cannot be determined
with precision. Changes in assumptions could significantly affect the
estimates.
Fair value estimates are based on existing on and off balance sheet
financial instruments without attempting to estimate the value of
anticipated future business and the value of assets and liabilities
that are not considered financial instruments. Other significant
assets and liabilities that are not considered financial instruments
include the deferred tax assets, bank 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, 1999 and 1998 are summarized below, in thousands of dollars:
<TABLE>
<CAPTION>
1999 1998
-------------------- --------------------
Carrying Fair Carrying Fair
Value Value Value Value
-------- ----- -------- -----
<S> <C> <C> <C> <C>
Assets:
Cash and cash equivalents $ 3,797 $ 3,797 $ 3,968 $ 3,968
Time deposits 2,079 2,089 2,476 2,484
Investments 6,151 6,138 3,716 3,688
Loans and loans held for sale 56,144 56,846 50,567 51,338
Accrued interest receivable 377 377 299 299
Liabilities:
Deposit liabilities 52,415 52,561 45,171 45,294
Borrowed funds 12,715 12,719 12,190 12,131
</TABLE>
17. Mid-Coast Bancorp, Inc.
-----------------------
Condensed financial statements for Mid-Coast Bancorp, Inc. at
March 31, 1999 and 1998 and for the years ended March 31, 1999, 1998
and 1997 are presented below.
Balance Sheets
--------------
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Assets:
Cash and due from the Bank $ 104,106 $ 202,673
Investment in the Bank 5,242,591 5,127,134
Other assets 26,923 10,928
-------------------------
Total assets $5,373,620 $5,340,735
=========================
Liabilities and stockholders' equity:
Liabilities $ - $ -
Stockholders' equity 5,373,620 5,340,735
-------------------------
Total liabilities and stockholders' equity $5,373,620 $5,340,735
=========================
<CAPTION>
Statements of Income
--------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Investment income $ - $ 2,290 $ -
Operating expenses 44,100 39,108 9,900
-------------------------------------
Loss before income taxes and equity in
earnings of subsidiary (44,100) (36,818) (9,900)
Income tax benefit 10,928 10,928 -
-------------------------------------
Loss before equity in earnings of the Bank (33,172) (25,890) (9,900)
Equity in earnings of the Bank:
Remitted 150,000 400,000 150,000
Unremitted 140,958 101,506 102,675
-------------------------------------
290,958 501,506 252,675
-------------------------------------
Net income $ 257,786 $ 475,616 $ 242,775
=====================================
<CAPTION>
Statements of Cash Flows
------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 257,786 $ 475,616 $ 242,775
Adjustments to reconcile net income to net
cash used by operating activities:
Equity in unremitted earnings of the Bank (140,958) (101,506) (102,675)
Income tax benefit (10,928) (10,928) -
Amortization of unearned compensation 32,140 32,142 -
-------------------------------------
Net cash provided by operating activities 138,040 395,324 140,100
Cash flows from financing activities:
Issuance of common stock 12,802 57,153 23,895
Increase in due to the Bank - (1,651) 1,651
Dividends paid (139,779) (121,796) (117,202)
Acquisition of shares for stock award plan (109,630) (177,925) -
-------------------------------------
Net cash used by financing activities (236,607) (244,219) (91,656)
-------------------------------------
Net increase (decrease) in cash and due from the Bank (98,567) 151,105 48,444
Cash and due from the Bank at beginning of year 202,673 51,568 3,124
-------------------------------------
Cash and due from the Bank at end of year $ 104,106 $ 202,673 $ 51,568
=====================================
</TABLE>
Stockholders' Information
Directors Transfer Agent and Registrar
Inquiries regarding stockholder
administration and services should
Waite W. Weston be directed to:
Chairman of the Board
Owner, Weston's Hardware American Stock Transfer and Trust
Company
Robert W. Spear 40 Wall Street
Vice Chairman of the Board New York, New York 10005
Owner, Spear Farm, Inc. (800) 937-5449
Wesley E. Richardson Independent Auditors
President, Chief Executive Officer Baker Newman & Noyes,
and Treasurer of the Bank Limited Liability Company
100 Middle Street
Samuel Cohen Portland, Maine 04101
Attorney at Law (207) 879-2100
Ronald E. Dolloff Legal Counsel
Retired Principal Thacher Proffitt & Wood
1700 Pennsylvania Avenue NW
Sharon E. Crowe Washington, D.C. 20006
Public Relations, Sebasticook County (202) 347-8400
Hospital
Stock Information
Lincoln O. Orff The Bank's Common Stock trades on
Real Estate Broker the Nasdaq SmallCap System under the
symbol "MCBN."
Executive Officers
Investor Relations
Wesley E. Richardson Inquiries regarding Mid-Coast
President, Chief Executive Officer Bancorp Inc. should be directed to:
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
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 28, 1999, at the Samoset Resort, Rockport,
Maine. Holders of common stock as of the close of business on June 1, 1999
will be eligible to vote.
Exhibit 23
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 April 30, 1999,
included in the 1999 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 April 30, 1999, 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, 1999.
Portland, Maine /s/ Baker Newman & Noyes
June 28, 1999 Limited Liability Company
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 1,583,693
<INT-BEARING-DEPOSITS> 93,095
<FED-FUNDS-SOLD> 2,120,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 5,216,681
<INVESTMENTS-CARRYING> 200,000
<INVESTMENTS-MARKET> 186,415
<LOANS> 56,429,522
<ALLOWANCE> 404,385
<TOTAL-ASSETS> 70,770,863
<DEPOSITS> 52,414,873
<SHORT-TERM> 0
<LIABILITIES-OTHER> 267,370
<LONG-TERM> 12,715,000
0
0
<COMMON> 715,457
<OTHER-SE> 4,658,163
<TOTAL-LIABILITIES-AND-EQUITY> 70,770,863
<INTEREST-LOAN> 4,588,941
<INTEREST-INVEST> 200,263
<INTEREST-OTHER> 440,261
<INTEREST-TOTAL> 5,229,465
<INTEREST-DEPOSIT> 2,094,497
<INTEREST-EXPENSE> 2,814,771
<INTEREST-INCOME-NET> 2,414,694
<LOAN-LOSSES> 68,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 2,408,014
<INCOME-PRETAX> 399,618
<INCOME-PRE-EXTRAORDINARY> 257,786
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 257,786
<EPS-BASIC> .37
<EPS-DILUTED> .36
<YIELD-ACTUAL> 3.76
<LOANS-NON> 73,551
<LOANS-PAST> 69,580
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 346,896
<CHARGE-OFFS> 11,657
<RECOVERIES> 1,146
<ALLOWANCE-CLOSE> 404,385
<ALLOWANCE-DOMESTIC> 404,385
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
