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, 2000
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. [ ]
Total revenue for the issuer's fiscal year ended March 31, 2000 was
$6,100,126.
The number of shares outstanding as of June 12, 2000 is 753,727.
Aggregate market value of common stock held by non-affiliates, based
on the last reported sale price on May 24, 2000: $8,947,650.
DOCUMENTS INCORPORATED BY REFERENCE
None.
TABLE OF CONTENTS
<TABLE>
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Page
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PART I 1
Item 1. Description of Business 1
Item 2. Description of Property 25
Item 3. Legal Proceedings 27
Item 4. Submission of Matters to a Vote of Security Holders 27
PART II 27
Item 5. Market for Common Equity and Related Stockholder Matters 27
Item 6. Management's Discussion and Analysis 29
Item 7. Financial Statements 41
Item 8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 41
PART III 41
Item 9. Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of the
Exchange Act 41
Item 10. Executive Compensation 47
Item 11. Security Ownership of Certain Beneficial Owners
and Management 48
Item 12. Certain Relationships and Related Transactions 50
Item 13. Exhibits 51
SIGNATURES 54
</TABLE>
PART I
Forward Looking Statements
Certain statements contained herein are not based on historical facts
and are "forward-looking statements" within the meaning of Section 21E of
the Securities Exchange Act of 1934. Forward-looking statements which are
based on various assumptions (some of which are beyond the Mid-Coast
Bancorp, Inc.'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.
Mid-Coast Bancorp 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 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. 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.
Pending Merger Agreement
On March 27, 2000 the Company entered into an Agreement and Plan of
Merger with Union Bankshares Company (Union) whereby Union will acquire all
the Company's common stock to Union for $15.875 per share and the Company
will be merged with and into a newly created merger subsidiary of Union.
Union will be the surviving Company in the merger. The merger is subject to
approval of the shareholders of both the Company and Union, as well as the
approval of various state and federal banking regulatory authorities. The
merger is expected to occur in the third quarter of 2000. The agreement
stipulates that the Bank will, shortly after consummation the transaction,
be merged with and into Union Trust Company, a subsidiary of Union.
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, 2000, the Bank had total assets of $82,451,013, total
deposits of $59,739,814, total borrowings of $16,715,000 and stockholders'
equity of $5,482,528. As of March 31, 2000, the Bank had full service
branch facilities in Waldoboro, Rockland, Belfast and Jefferson, Maine. The
Bank has one wholly-owned subsidiary, First Waldo Corporation, which is
currently inactive. The Bank's executive offices are located at 1768
Atlantic Highway, Waldoboro, Maine and its telephone number is (207) 832-
7521.
The principal business of the Bank is to attract deposits from the
general public and to make loans secured by residential and commercial real
estate, enabling borrowers to purchase, refinance, construct or improve
property. In addition, the Bank makes various types of secured and
unsecured consumer and passbook loans, such as home equity, commercial and
automobile loans, and holds investment securities. See "Lending Activities"
and "Investments."
Market Area
The Bank's market area is Knox and Lincoln counties, 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 $61,783,671 at March 31, 2000,
representing approximately 74.9% of its total assets. At that date,
approximately 64.0% of the Bank's loan portfolio consisted of permanent
mortgage loans secured by residential properties. In addition,
approximately 16.6% 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 16.0% of the
Bank's loan portfolio. Finally, construction loans represented 3.4% 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,
----------------------------------------------
2000 1999
--------------------- ---------------------
Amount % Amount %
------ - ------ -
<S> <C> <C> <C> <C>
Mortgage loans:
Residential $39,890,731 64.0% $35,973,168 63.7%
Commercial 10,341,277 16.6 9,699,298 17.2
Construction, net of undisbursed funds 2,131,063 3.4 2,824,413 5.0
---------------------------------------------
Total mortgage loans 52,363,071 84.0 48,496,879 85.9
---------------------------------------------
Other loans:
Home equity 1,783,823 2.9 1,467,125 2.6
Commercial 3,444,558 5.5 2,618,523 4.6
Passbook loans 303,215 0.5 317,548 0.6
Installment and other 4,466,327 7.1 3,529,447 6.3
---------------------------------------------
Total other loans 9,997,923 16.0 7,932,643 14.1
---------------------------------------------
Total loans $62,360,994 100.0% $56,429,522 100.0%
=============================================
</TABLE>
Residential Mortgage Loans. A substantial portion of the Bank's lending
activity is comprised of residential mortgage loans, which, at March 31,
2000, represented 64.0% 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 Authority, 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 5% 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.
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 are generally written to secondary
market standards. During the fiscal year ended March 31, 2000, the Bank
originated $5,225,205 in fixed-rate loans, of which $3,620,196 or 69.3%
were sold to the secondary market. The remaining $1,605,009 or 30.7% of the
fixed-rate loan originations were added to the Bank's portfolio.
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 $2,131,063, or 3.4% of the Bank's loan portfolio at March
31, 2000.
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, 2000, $10,341,277 or 16.6% 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 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, 2000, such loans amounted to $3,444,558 or
5.5% 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, 2000, Waldoboro had secured and
unsecured consumer loans, which includes loans on deposit accounts, and
home equity loans of $6,553,365 or 10.5% 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"), the Bank's federal banking regulator,
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, 2000 was $842,000. At March 31, 2000, the
three largest outstanding balances of loans to any one borrower and related
entities were $793,000, $608,000 and $546,000.
Scheduled Loan Maturities
The following table presents information regarding contractual
maturities of portions of Waldoboro's loan portfolio at March 31, 2000.
Demand loans are reported as due in one year or less. No prepayment
assumptions are utilized for purposes of this table. Scheduled principal
payments prior to the loans maturity date are not reflected in payment
periods prior to maturity.
<TABLE>
<CAPTION>
Payment Due in Year Ended March 31,
Balance at ---------------------------------------
March 31, 2000 2001 2002-2005 2006+
-------------- ---- --------- -----
<S> <C> <C> <C> <C>
Fixed rate loans:
Residential real estate loans $12,070,432 $ 130,769 $ 83,958 $11,855,705
Commercial real estate
& business loans 4,016,348 86,897 962,049 2,967,402
Consumer loans 3,740,250 86,200 1,941,981 1,712,069
--------------------------------------------------------
Total fixed rate 19,827,030 303,866 2,987,988 16,535,176
Adjustable rate loans:
Residential real estate loans 29,480,170 3,116 461,934 29,015,120
Commercial real estate
& business loans 10,185,118 857,573 1,126,830 8,200,715
Consumer loans 2,868,676 594 1,001,784 1,866,298
--------------------------------------------------------
Total adjustable rate 42,533,964 861,283 2,590,548 39,082,133
--------------------------------------------------------
Total loans $62,360,994 $1,165,149 $5,578,536 $55,617,309
========================================================
</TABLE>
Origination, Purchase and Sale of Loans
The primary lending activity of Waldoboro is the origination of
conventional loans secured by first mortgage liens on residential
properties, principally single family residences, substantially all of
which are located in Lincoln, 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
secured 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, 2000, the Bank received $3,752,099 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, 2000, net origination fees deferred to future periods were
$94,964.
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 it is 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 judgment the loan is well
secured and in the process of collection.
At March 31, 2000 the Holding Company had $13,222 of accruing loans
that were 90 days or more delinquent as compared to $69,580 at March 31,
1999. Unrecognized interest income on all loans on non-accrual status at
March 31, 2000 totaled $4,212.
At March 31, 2000, there were four residential real estate loans,
with a combined outstanding balance of $275,867, whereby the borrowers have
filed for bankruptcy. All four loans are current with their payments and
have loan to value ratios of less than 70%. Management does not anticipate
any future losses associated with these four loans. Management is not aware
of any other loans which are potential problem loans at present.
Nonperforming Assets
<TABLE>
<CAPTION>
At March 31,
--------------------------------
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Nonperforming loans:
Mortgage loans in process of foreclosure $109,740 $ -- $ --
Loans more than 90 days past due and still accruing 13,222 69,580 69,570
Nonaccrual loans 8,625 73,551 225,056
--------------------------------
Total nonperforming loans 131,587 143,131 294,626
Real estate owned, net 180,000 -- 70,383
--------------------------------
Total nonperforming assets $311,587 $143,131 $365,009
================================
Ratio of nonperforming loans to total loans 0.21% 0.25% 0.58%
Ratio of nonperforming assets to total assets 0.38% 0.20% 0.58%
</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 OTS reviews the ALL as part of its routine
examinations. The OTS can require additions to the ALL based on its
examination findings.
An analysis of activity in the allowance for loan losses for the
years ended March 31, 2000 and 1999 is provided below.
<TABLE>
<S> <C>
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
Charge-offs - Primarily Consumer (4,986)
Recoveries 4,960
--------
Net charge-offs (26)
Provision for loan losses 78,000
--------
Balance, March 31, 2000 $482,359
========
Net charge-offs to average loans outstanding:
<S> <C>
Year ended March 31, 1999 0.02%
Year ended March 31, 2000 0.00%
</TABLE>
A breakdown of the allowance for loan losses at March 31, 2000 and
1999 is shown below:
<TABLE>
<CAPTION>
2000 1999
--------------------- ----------------------
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 67.4% $ 60,000 68.7%
Mortgage loans - commercial 100,000 16.6 100,000 17.2
Other commercial 215,000 5.5 100,000 4.6
Consumer and other loans 55,000 10.5 45,000 9.5
General allocation 52,359 -- 99,385 --
--------------------------------------------
$482,359 100.0% $404,385 100.0%
============================================
</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, 2000, 10.0% of the total
consolidated assets of the Holding Company were investment securities. See
Note 2 of the Holding Company's Consolidated Financial Statements included
herein.
Currently, the Bank's debt securities are classified as "held-to-
maturity" or "available for sale" in accordance with Financial Accounting
Standards No. 115, "Accounting For Certain Investments in Debt and Equity
Securities." The investment securities classified as "held-to-maturity" are
reported in the Bank's financial statements at amortized cost. Investments
in a mutual fund of $687,249 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,
----------------------------------------------------------------
2000 1999
------------------------------ ------------------------------
Amortized Cost Market Value Amortized Cost Market Value
-------------- ------------ -------------- ------------
<S> <C> <C> <C> <C>
Held to maturity:
Investment securities:
U.S. Agency Obligations 200,000 185,445 200,000 186,415
-------------------------------------------------------------
Total Investment securities $ 200,000 $ 185,445 $ 200,000 $ 186,415
=============================================================
Available for sale:
Investment securities:
U.S. Treasury Obligations $2,599,840 $2,541,265 $ -- $ --
U.S. Agency Obligations 2,000,000 1,932,528 3,099,567 3,073,472
Mortgage-backed securities 2,058,591 1,977,440 1,498,574 1,487,355
-------------------------------------------------------------
$6,658,431 $6,451,233 $4,598,141 $4,560,827
Mutual Fund 687,249 687,249 657,177 655,854
Required investment in Federal
Home Loan Bank Stock 910,800 910,800 734,500 734,500
-------------------------------------------------------------
$8,256,400 $8,049,282 $5,989,818 $5,951,181
=============================================================
</TABLE>
The following table shows the maturities of the Bank's bonds at March
31, 2000 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
Amortized Cost $ -- $ 200,000 $ -- $ -- $ 200,000
Yield -- 3.93% -- -- 3.93%
--------------------------------------------------------------------
Held to Maturity Total $ -- $ 200,000 $ -- $ -- $ 200,000
--------------------------------------------------------------------
Available for Sale:
U.S. Treasury Obligations
Amortized Cost $ -- $2,000,000 $ -- $ -- $2,000,000
Yield -- 6.07% -- -- 6.07%
U.S. Agency Obligations:
Amortized Cost $ -- $2,299,840 $300,000 $ -- $2,599,840
Yield -- 6.03% 8.00% -- 6.26%
Mortgage-backed securities:
Amortized Cost $ -- $ -- $ -- $2,058,591 $2,058,591
Yield -- -- -- 6.95% 6.95%
--------------------------------------------------------------------
Available for Sale Total $ -- $4,299,840 $300,000 $2,058,591 $6,658,431
--------------------------------------------------------------------
Total $ -- $4,499,840 $300,000 $2,058,591 $6,858,431
====================================================================
</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.
At March 31, 2000, compared to March 31, 1999, money market accounts
decreased $118,622 or 2.5%, while certificates of deposit decreased
$856,355 or 2.6%, NOW accounts increased $6,069,138 or 114.3%, primarily
due to a $5.0 million deposit received during the fourth quarter, savings
deposits increased $1,197,841 or 18.2% and demand deposits increased
$926,558 or 29.8%.
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, 2000
------------------------------------------------
% of
Average Average Interest Average
Balance Deposits Expense Rate
------- -------- -------- -------
<S> <C> <C> <C> <C>
Demand deposits $ 3,324,369 6.03% $ -- --%
NOW Accounts 6,332,339 11.49 84,869 1.34
Savings 7,939,781 14.41 169,858 2.14
Money Market Deposit accounts 5,018,060 9.11 188,650 3.76
Certificates of deposit 32,478,943 58.96 1,691,888 5.21
----------------------------------------------
$55,093,492 100.00% $2,135,265 3.88%
==============================================
<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%
==============================================
</TABLE>
The maturities of certificates of deposit in amounts greater than or
equal to $100,000 at March 31, 2000 are set forth in the following table.
<TABLE>
<CAPTION>
Maturity Amount
<S> <C>
0 - 3 months $1,977,066
3 - 6 months 730,729
6-12 months 1,035,559
After 12 months 440,857
----------
$4,184,211
==========
</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, 2000, $3,157,000 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, 2000, Waldoboro had
$16,715,000 in outstanding advances from the FHLB at a weighted average
stated rate of 5.68%.
Waldoboro has access to a line of credit approximating $1,258,000 at
March 31, 2000 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, 2000.
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, 2000.
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>
(Dollars in thousands)
1 year or >1 to 2 >2 to 3 >3 to 5 >5 to 10 Over 10
less years years years years years Total
--------- ------- ------- ------- -------- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Financial assets(1):
Mortgage loans & mortgage
backed securities:
Residential mortgage loans:
Balloon & adjustable rate $ 9,812 $ 8,331 $ 8,262 $ 2,013 $ 1,062 $ -- $29,480
Fixed rate 1,433 918 762 1,310 2,353 5,294 12,070
Mortgage backed securities 35 38 40 90 293 1,563 2,059
Consumer & commercial loans 8,686 2,332 1,822 2,639 1,940 3,392 20,811
Investments & other
earning assets 8,043 -- -- 4,500 300 -- 12,843
------------------------------------------------------------------------------
Total financial assets 28,009 11,619 10,886 10,552 5,948 10,249 77,263
Financial liabilities(1)
Deposits:
NOW accounts, savings and
Money market accounts 23,751 -- -- -- -- -- 23,751
Certificates of deposit 28,776 2,183 504 364 22 -- 31,849
FHLB borrowings 9,500 2,500 1,000 1,000 2,715 -- 16,715
------------------------------------------------------------------------------
Total financial liabilities $ 62,027 $ 4,683 $ 1,504 $ 1,364 $ 2,737 -- $72,315
GAP $-34,018 $ 6,936 $ 9,382 $ 9,188 $ 3,211 $10,249 $ 4,948
GAP to total assets -41.25% 8.41% 11.38% 11.14% 3.89% 12.43%
Cumulative GAP -34,018 -27,082 -17,700 -8,512 -5,301 4,948
Cumulative GAP to total assets -41.25% -32.84% -21.46% -10.32% -6.43% 6.00%
<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, 2000, the Bank had a total of 23 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, 2000, 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, 2000, the
Bank had met the QTL 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, 2000, the Bank had no investments in or extensions of credit to
nonincludable subsidiaries, and its tangible capital amounted to
approximately $5,624,000 or 6.8% 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, 2000, the Bank had no supervisory
goodwill and the Bank's core capital amounted to approximately $5,624,000
or 6.8% 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, 2000, 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 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, 2000, the Bank's total capital amounted to approximately
$6,106,000 or 12.7% 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, 2000.
<TABLE>
<CAPTION>
Minimum
Required Actual Excess
------------------ ------------------- ------
<S> <C> <C> <C> <C> <C>
Tangible Capital 1.5% $1,244,000 6.8% $5,624,000 $4,380,000
Tier 1 (Core) Capital 4.0% $3,317,000 6.8% $5,624,000 $2,307,000
Risk-based Capital 8.0% $3,843,000 12.7% $6,106,000 $2,263,000
</TABLE>
Limitation on Capital Distribution. Effective April 1, 1999, the OTS
amended its capital distribution regulations to reduce regulatory burdens
on savings associations. 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 2000 were 0.0588%, 0.0580%, 0.0592% and 0.0212%,
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.
Financial Modernization Act. Landmark financial services
legislation, titled the Gramm-Leach-Bliley Act, was signed into law by
President Clinton on November 12, 1999. The legislation modernizes the
financial services industry by establishing a comprehensive framework to
permit affiliations among commercial banks, insurance companies and other
financial service providers. Generally, the legislation (i) repeals the
historical restrictions and eliminate many federal and state law barriers
to affiliations among banks and securities firms, insurance companies and
other financial service providers (ii) provides a uniform framework for the
activities of banks, savings institutions and their holding companies,
(iii) broaden the activities that may be conducted by national banks,
banking subsidiaries of bank holding companies and their financial
subsidiaries, (iv) provides an enhanced framework for protecting the
privacy of consumers' information, (v) adopts a number of provisions
related to the capitalization, membership, corporate governance and other
measures designed to modernize the Federal Home Loan Bank system, (vi)
modifies the laws governing the implementation of the Community
Reinvestment Act and (vii) addresses a variety of other legal and
regulatory issues affecting both day-to-day operations and long-term
activities of financial institutions, including the functional regulation
of securities and insurance activities conducted in a financial holding
company.
In particular, the legislation restricts certain of the powers that
unitary savings and loan holding companies currently have. Unitary savings
and loan holding companies that are "grandfathered," i.e., became a unitary
savings and loan holding company pursuant to an application filed with the
OTS before May 4, 1999, (such as the Holding Company) retain their
authority under the law. All other savings and loan holding companies would
be limited to financially related activities permissible for bank holding
companies, as defined under the new law. The legislation also prohibits
non-financial companies from acquiring savings and loan holding companies.
The Holding Company does not believe that the legislation will have a
material adverse effect on our operations in the near term. However, to the
extent the legislation permits banks, securities firms and insurance
companies to affiliate, the financial services industry may experience
further consolidation. This could result in a growing number of larger
financial institutions that offer a wider variety of financial services
than the Bank currently offers and that can aggressively compete in the
markets it currently serves.
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.
Maine State Taxation
The State of Maine imposes a franchise tax on banks, such as
Waldoboro, doing business in Maine. The tax is comprised of two components.
The first component is a 1% tax on Maine net income as reported on such
bank's federal income tax return. The amount represents net book income
after reduction for federal and state income and franchise taxes. The
second component is a tax of $.08 per $1,000 of assets at the end of the
year as reported on Schedule L of the Bank's federal income tax return.
Item 2. Description of Property
The Holding Company neither owns nor leases any real property. It
presently uses the premises, equipment and furniture of Waldoboro without
direct payment of any rental fees to the Bank. The Bank conducts its
business out of its offices in Waldoboro, 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, Rockland, Belfast and Jefferson.
<TABLE>
<CAPTION>
Net Book Value at
Location Year Occupied/Opened Owned/Leased March 31, 2000
----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Principal Executive Offices 1988 Owned $735,717
1768 Atlantic Highway
P. O. Box 589
Waldoboro, Maine
Rockland Branch Office 1995 Owned $425,759
73 Camden Street
P. O. Box 669
Rockland, Maine
Belfast Branch Office 1998 Leased $ 74,386
3 Starrett Drive
Belfast , Maine
Jefferson Branch Office 1998 Leased $ 76,181
Route 32
P. O. Box 239
Jefferson, Maine
<FN>
<F1> Includes the building, leasehold improvements 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, 2000, 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, 2000, 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, 2000, there were 753,570 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 5,583
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, 1998 $13.34 $12.22 --
June 30, 1998 11.67 10.96 $0.095
September 30, 1998 9.29 8.10 --
December 31, 1998 9.29 6.67 0.095
March 31, 1999 $ 9.53 $ 6.67 --
June 30, 1999 8.10 5.72 0.095
September 30, 1999 8.34 6.55 --
December 31, 1999 8.13 7.00 0.095
March 31, 2000 15.88 6.00 --
<FN>
<F1> All figures adjusted to reflect a 5% stock dividend on December 31,
1999.
</FN>
</TABLE>
On April 11, 2000 the Holding Company declared a dividend of $.10 per
share to Stockholders of record on June 2, 2000 and payable June 30, 2000.
The ability of the Holding Company to pay dividends, is dependent, in part,
on the ability of the Bank to pay dividends to the Holding Company. See
Note 10 to the Consolidated Financial Statements for a discussion of the
Bank's ability to pay dividends to the Holding Company.
Item 6. Management's Discussion and Analysis.
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,
-----------------------------------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Financial condition data:
Loans, net $61,783,671 $55,964,548 $50,213,531 $48,979,032 $42,465,559
Other interest-
earning assets 15,812,708 10,622,276 9,362,898 6,523,454 9,422,891
Total assets 82,464,022 70,770,863 63,015,163 58,925,368 54,362,066
Deposits 59,633,433 52,414,873 45,171,416 42,180,698 41,816,902
Borrowings 16,715,000 12,715,000 12,190,000 11,440,000 7,465,000
Stockholders' equity $ 5,626,663 $ 5,373,620 $ 5,340,735 $ 5,075,545 $ 4,926,077
<CAPTION>
For the Years Ended March 31,
-----------------------------------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Operating data:
Interest income $5,623,498 $5,229,465 $4,917,589 $4,588,646 $4,389,689
Interest expense 2,871,099 2,814,771 2,623,506 2,436,580 2,485,256
----------------------------------------------------------------------
Net interest income 2,752,399 2,414,694 2,294,083 2,152,066 1,904,433
Provision for loan
losses 78,000 68,000 73,000 87,000 62,010
Other income 476,628 460,938 303,286 235,021 183,277
Other expense 2,437,508 2,408,014 1,809,874 1,913,379 1,565,259
----------------------------------------------------------------------
Income before
income taxes 713,519 399,618 714,495 386,708 460,441
Income tax expense 250,331 141,832 238,879 143,933 156,994
----------------------------------------------------------------------
Net income $ 463,188 $ 257,786 $ 475,616 $ 242,775 $ 303,447
======================================================================
Basic earnings per
Share(1) $ 0.62 $ 0.35 $ 0.64 $ 0.33 $ 0.42
======================================================================
Diluted earnings per
share(1) $ 0.62 $ 0.35 $ 0.64 $ 0.32 $ 0.41
======================================================================
<CAPTION>
For the Years Ended March 31,
------------------------------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Statistical data (2):
Interest rate spread 3.56% 3.39% 3.63% 3.67% 3.30%
Net yield on average
Earning assets 3.90 3.76 3.99 4.07 3.68
Return on average assets 0.62 0.38 0.78 0.43 0.56
Return on average equity 8.48 4.96 9.06 4.74 6.28
Average equity to
average assets 7.31 7.65 8.62 9.12 8.92
Dividend payout ratio 32.26 54.22 25.61 48.27 35.30
<FN>
<F1> All years restated to reflect 5% stock dividend in 2000, 3 for 1
stock split in 1998 and 5% stock dividend in 1996.
<F2> Average balances were computed using month end amounts.
</FN>
</TABLE>
General
The following discussion should be read in conjunction with the
consolidated financial statements and related notes included in item 7 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 changing
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 increased $11.7 million or 16.5% to $82.5 million at
March 31, 2000 from $70.8 million at March 31, 1999. The growth in assets
is primarily due to an increase in deposits, which were used to fund the
purchase of investments and originate loans.
Total loans, including loans held for sale, increased $5.8 million,
or 10.2%, from $56.6 million to $62.4 million at March 31, 2000.
The following table shows loans held for sale and loans at March 31,
2000 and March 31, 1999, the net change and the percentage of change:
<TABLE>
<CAPTION>
March 31, 2000 March 31, 1999 Change % change
-------------- -------------- ------ --------
<S> <C> <C> <C> <C>
Loans held for sale $ -- $ 179,000 $ (179,000) (100.0)%
Real estate mortgages-
residential 39,890,731 35,973,168 3,917,563 10.9
Real estate mortgages-
commercial 10,341,277 9,699,298 641,979 6.6
Construction, net of
undisbursed 2,131,063 2,824,413 (693,350) (24.6)
Other commercial 3,444,558 2,618,523 826,035 31.6
Home equity 1,783,823 1,467,125 316,698 21.6
Installment and other 4,769,542 3,846,995 922,547 24.0
------------------------------------------------------
Total $62,360,994 $56,608,522 $5,752,472 10.2%
======================================================
</TABLE>
The growth in other commercial loans and consumer loans has been
primarily a result of the Bank's branch expansion during 1998, a positive
economic climate in the Bank's market area and active solicitation of the
business by the Bank's lending team.
Federal funds sold increased $3,265,000 or 154.0% to $5,385,000 at
March 31, 2000. The increase resulted from a strategy to invest, on a short
term basis, the proceeds from a large deposit received during quarter
ending March 31, 2000. These funds will be invested into loans and longer
term investments.
Investments, including Time Deposits, increased $2.1 million to $10.3
million at March 31, 2000. Time Deposits increased $2,000 and investments
available for sale increased $1.9 million or 36.8%. The increase in the
investment portfolio reflects management's decision to maximize the yield
relating to deposit growth while maintaining the Bank's liquidity targets.
At March 31, 2000, total liabilities increased $11.4 million to $76.8
million. Demand deposits (non-interest bearing deposits) increased $926,558
or 29.8%, NOW, Savings and Money Market accounts increased $7.1 million or
43.1%, and Certificates of Deposit decreased $856,355 or 2.6%. The increase
in transaction accounts (non Certificates of Deposit) reflects the Bank's
successful strategy to expand its marketing efforts to attract such
deposits.
Total Stockholders' Equity increased $253,043 to $5.6 million at
March 31, 2000. The increase in equity is attributable to net income of
$463,188 which is partially offset by the payment of cash dividends of
$142,607, the decline in accumulated other comprehensive income of
$113,539, due to a decline in market value of investments available for
sale and an increase of $46,001 attributable to activity related to
employee and director benefit plans.
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, 2000, the adjustable rate loans in the residential
mortgage loan portfolio totaled $29.5 million or 71.0% and adjustable rate
loans in the commercial loan portfolio totaled $10.2 million or 71.7%. The
Bank's strategy regarding liabilities is to attempt to restructure its
deposits by increasing NOW and savings accounts and decreasing certificates
of deposit. Certificates of deposit represent $31.8 million or 53.4% of the
Bank's deposits at March 31, 2000 as compared to $32.7 million or 62.4% at
March 31, 1999.
Typically, in a rising interest rate environment, the Bank's interest
rate spread would decrease because liabilities would be repricing faster
than assets for the same period. In contrast, in a declining rate
environment, the spread would increase resulting in a positive affect on
the Bank's net interest income. However many of the Bank's interest bearing
liabilities have no stated maturity date and therefore interest rate
changes on such deposit products are more subject to control by management.
With this in mind, management allows for an asset/liability position in
which liabilities are more rate sensitive than the assets within limits
established by the Bank's Asset/Liability Committee.
Average Balance, Interest and Yield/Rates
The following tables present 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, 2000 Year Ended March 31, 1999
----------------------------------- -----------------------------------
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
------- -------- ------ ------- -------- ------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans $59,135,697 $4,946,955 8.36% $52,902,202 $4,588,941 8.67%
Interest bearing &
time deposits 2,458,735 133,992 5.45% 3,655,632 207,952 5.69%
Federal funds sold 1,749,967 90,199 5.15% 3,829,465 196,752 5.14%
Investments & mortgage-
backed securities 7,216,243 452,352 6.27% 3,877,991 235,820 6.08%
------------------------- -------------------------
Total interest-earning
assets 70,560,642 5,623,498 7.97% 64,265,290 5,229,465 8.14%
Other assets:
Allowance for loan losses (443,344) (367,609)
Cash and due from banks 1,867,030 1,418,678
Fixed assets 1,665,516 1,696,547
Other assets 1,051,158 985,600
----------- -----------
Total assets $74,701,002 $67,998,506
=========== ===========
Interest-bearing liabilities:
NOW, savings & money
market accounts 19,290,180 443,377 2.30% 16,460,915 423,854 2.57%
Certificates of deposit 32,478,943 1,691,888 5.21% 30,216,858 1,670,643 5.53%
Borrowings 13,368,579 735,834 5.50% 12,547,603 720,274 5.74%
------------------------- -------------------------
Total interest-bearing
liabilities 65,137,702 2,871,099 4.41% 59,225,376 2,814,771 4.75%
Other liabilities:
Demand deposits 3,324,369 3,142,831
Other liabilities 777,136 431,470
----------- -----------
Total liabilities 69,239,207 62,799,677
Stockholders' equity 5,461,795 5,198,829
----------- -----------
Total liabilities and
stockholders' equity $74,701,002 $67,998,506
=========== ===========
Net interest income $2,752,399 $2,414,694
========== ==========
Interest rate spread 3.56% 3.39%
Net interest income as a
percentage of average
interest-earning assets 3.90% 3.76%
<CAPTION>
Year Ended March 31, 1998
-----------------------------------
Average Yield/
Balance Interest Rate
------- -------- ------
<S> <C> <C> <C>
Interest-earning assets:
Loans $49,601,915 $4,464,822 9.00%
Interest bearing &
time deposits 1,559,093 87,522 5.61%
Federal funds sold 2,806,836 155,004 5.52%
Investments & mortgage-
backed securities 3,487,291 210,241 6.03%
-------------------------
Total interest-earning
assets 57,455,135 4,917,589 8.56%
Other assets:
Allowance for loan losses (318,443)
Cash and due from banks 1,158,854
Fixed assets 1,539,018
Other assets 1,093,918
-----------
Total assets $60,928,482
===========
Interest-bearing liabilities:
NOW, savings & money
market accounts 14,626,501 419,661 2.87%
Certificates of deposit 27,352,018 1,544,788 5.65%
Borrowings 11,185,205 659,057 5.89%
-------------------------
Total interest-bearing
liabilities 53,163,724 2,623,506 4.93%
Other liabilities:
Demand deposits 2,187,357
Other liabilities 325,651
-----------
Total liabilities 55,676,732
Stockholders' equity 5,251,750
-----------
Total liabilities and
stockholders' equity $60,928,482
===========
Net interest income $2,294,083
==========
Interest rate spread 3.63%
Net interest income as a
percentage of average
interest-earning assets 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, 2000 Year Ended March 31, 1999
Compared to 1999 Compared to 1998
Increase (Decrease) Increase (Decrease)
------------------------- -------------------------
Volume Rate Net Volume Rate Net
------ ---- --- ------ ---- ---
<S> <C> <C> <C> <C> <C> <C>
Interest on interest-earning assets:
Loans $521,458 $(163,444) $358,014 $273,311 $(149,192) $124,119
Interest-bearing
& time deposits (65,227) (8,733) (73,960) 119,247 1,183 120,430
Federal funds sold (107,184) 631 (106,553) 51,612 (9,864) 41,748
Investments &
mortgage-backed
securities 209,260 7,272 216,532 23,744 1,835 25,579
----------------------------------------------------------------------------
Total Interest Income $558,307 $(164,274) $394,033 $467,914 $(156,038) $311,876
----------------------------------------------------------------------------
Interest on interest-bearing liabilities:
Savings, NOW, & money market
deposit accounts 65,720 (46,197) 19,523 23,010 (18,817) 4,193
Certificates of deposit 117,508 (96,263) 21,245 157,535 (31,680) 125,855
Borrowings 45,188 (29,628) 15,560 77,651 (16,434) 61,217
----------------------------------------------------------------------------
Total Interest Expense 228,416 (172,088) 56,328 258,196 (66,931) 191,265
----------------------------------------------------------------------------
NET INTEREST INCOME $329,891 $ 7,814 $337,705 $209,718 $ (89,107) $120,611
============================================================================
</TABLE>
RESULTS OF OPERATIONS
Comparison of Years Ended March 31, 2000 and 1999
Net Income
Mid-Coast recorded net income of $463,188 or $0.62 per share for the
year ended March 31, 2000 compared to $257,786 or $0.35 per share for the
year ended March 31,1999.
The 79.70% increase in net income has resulted from increases to
total interest income, relatively level total interest expense, and
increases in fee income, a modest increase in provision for loan losses,
stable other expenses and an increase in income taxes. Discussion of all of
these components follows.
These results are attributed to a number of factors including, the
Bank's 1998 branch expansion to Belfast and Jefferson, increased and
consistent marketing efforts and a positive economic climate in Mid Coast
Maine.
Interest Income
Total interest income amounted to $5,623,498 an increase of $394,033
or 7.5%. The increases in total interest income are attributable to the
growth in interest earning assets, primarily loans, offset by a decline in
the yields.
Interest income on Investments and mortgage backed securities
increased $216,532 or 91.8% primarily due to a $3.3 million increase in the
average balance outstanding.
Interest income on loans increased $358,014 or 7.8% primarily due to
a $6.2 million or 11.8% increase in the average balance outstanding. The
average yield on loans decreased to 8.36% from 8.67%, a result of the
Bank's emphasis on adjustable rate loans.
The following table shows total interest earning assets, and the
percentage of total interest earning assets to total assets at the dates
indicated:
<TABLE>
<CAPTION>
Total interest % of
earning assets total assets
-------------- ------------
<S> <C> <C>
At:
March 31, 2000 $78,173,702 94.8%
December 31, 1999 72,565,470 94.9
September 30, 1999 72,186,155 95.3
June 30, 1999 68,216,254 94.5
March 31, 1999 67,051,798 94.7
</TABLE>
Interest Expense
Total interest expense amounted to $2,871,099, an increase of $56,328
or 2.0%, due primarily to a $5.9 million or 10.0% increase in the average
outstanding balances of deposits and borrowings.
Interest expense has been positively impacted by the Bank's emphasis
on increasing lower cost transaction accounts. As a result of this
strategy, the average rate paid on deposits decreased to 4.41% from 4.75%.
The following table shows balances of Certificates of deposit,
Transaction deposit accounts (Demand deposits, NOW accounts, savings
accounts, and money market accounts) and Advances from the Federal Home
Loan Bank and their respective percentage to total funding at the dates
indicated:
<TABLE>
<CAPTION>
March 31, 2000 December 31,1999 September 30,1999 March 31, 1999
-------------- ---------------- ----------------- --------------
<S> <C> <C> <C> <C>
Certificates of deposit $31,848,684 $33,127,164 $33,658,752 $32,705,039
% of total funding 41.7% 47.0% 48.2% 50.2%
Transaction accounts 27,784,749 24,686,954 23,769,161 19,709,834
% of total funding 36.4% 35.0% 34.0% 30.3%
Total deposits 59,633,433 57,814,118 57,427,913 52,414,873
% of total funding 78.1% 82.0% 82.2% 80.5%
FHLB advances 16,715,000 12,715,000 12,465,000 12,715,000
% of total funding 21.9% 18.0% 17.8% 19.5%
Total funding $76,348,433 $70,529,118 $69,892,913 $65,129,873
% of total funding 100.00% 100.00% 100.00% 100.00%
</TABLE>
Net Interest Income
As a result of increases in total interest income and relatively
level total interest expense, net interest income amounted to $2,752,399,
an increase of $337,705 or 14.0%.
Changes in net interest income occur from volume changes in interest
earning assets and interest bearing liabilities, the mix of these
components, and changes in interest rates. Loans, the primary component of
interest earning assets, are comprised of products having fixed rates of
interest over the life of the loan and variable rates of interest that
change periodically as changes in the prime lending rate and other indices
change. As of March 31, 2000, approximately $42.5 million or 68.2% of total
loans had adjustable rates of interest.
Provisions for Loan Losses
The allowance for loan losses is established through a provision for
loan losses based on management's evaluation of the risk inherent in its
loan portfolio and the general economy. Such evaluation considers numerous
factors including general economic conditions, loan portfolio compositions,
prior loss experience, the estimated fair value of the underlying
collateral and other factors that warrant recognition in providing for an
adequate loan loss allowance. The Bank's provision for loan losses amounted
to $78,000, an increase of $10,000 or 14.7%. This increase is related to
the growth in commercial and commercial real estate loans. As of March 31,
2000, the allowance for loan losses amounted to $482,359, an increase of
$77,794. As a percentage of outstanding loans the allowance is 0.77% and as
a percentage of nonperforming loans the allowance is 366.6% at March 31,
2000.
Non Interest Income
Total non interest income amounted to $476,628, an increase of
$15,690 or 3.4%. This increase is attributable to a $33,861 or 16.1%
increase in deposit account fees, due to an increase in the number of
accounts, a $10,090 or 17.2% increase in loan servicing related fees,
offset by a $51,199 or 28.0% decrease in gain on sale of loans due to lower
loan sales volume and a $22,938 increase in other noninterest income.
For the fiscal year 2000, proceeds from sale of loans and loans held
for sale amounted to $3,752,099 as compared to $6,130,644 in 1999. As of
March 31, 2000, loans serviced for others amounted to $14,121,272 million,
compared to $11,687,993 million at March 31, 1999.
Non Interest Expenses
Total non interest expenses amounted to $2,437,508, an increase of
$24,494 or 1.2%. This increase is the net effect of an $8,198 or 0.7%
increase in compensation related expenses (including benefits), a $44,927
or 23.8% increase in professional fees, related primarily to corporate
planning including evaluation and planning of potential merger and
acquisition activity, a $48,002 or 51.3% decrease in advertising and
marketing expenses, and a $24,371 or 2.3% increase in all other operating
expenses.
Income Tax Expense
Income tax expense increased $108,499 or 76.5% as a result of the
increase in pretax income from operations.
Comparison of Years Ended March 31, 1999 and 1998
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 to four by establishing new
locations. Net income was $0.35 earnings per share of common stock . This
compares to $0.64 earnings per share of common stock for the 1998 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 are discussed throughout the remainder of this section.
Total interest income for the year ended March 31, 1999 increased
$311,876 or 6.34% compared to fiscal 1998. 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.
Total interest expense for the year ended March 31, 1999, increased
$191,265 or 7.29% compared to the same period in the prior 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.
The Bank's provision for loan losses was $68,000 for the year ended
March 31, 1999, compared to $73,000 for 1998. 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% at March 31, 1998. The allowance to total
loans was 0.72% at March 31, 1999 compared to 0.68% at March 31, 1998.
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 year ended March 31, 1998. 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.
Total noninterest expenses increased $598,140 or 33.0%, due primarily
to the branch expansion. The branch expansion impacted compensation and
benefits with increased staffing levels, occupancy and equipment, and
advertising and marketing relating to branch promotional activities. In
addition the Bank upgraded it's communication system and data processing
system to accommodate increased volume.
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.
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 $46,000,000. At March 31, 2000, the Bank's borrowings from the FHLB
were $16.7 million.
At year end March 31, 2000, stockholders' equity was $5,626,663 or
6.82% of assets compared to $5,373,620 or 7.59% at March 31,1999. 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, 2000, the Bank's capital
substantially exceeded core capital, tangible capital and risk based
capital regulatory requirements. See note 10 of the consolidated financial
statements for further information.
Impact of Inflation and Changing Interest Rates
The Holding Company's consolidated financial statements and related
notes presented elsewhere herein have been prepared in accordance with
generally accepted accounting principles ("GAAP"), which require the
measurement of financial position and operating results in terms of
historical dollars without considering changes in the relative purchasing
power of money over time due to inflation. Unlike many industrial
companies, substantially all of the assets and virtually all of the
liabilities of the Holding Company are monetary in nature. As a result,
interest rates have a more significant impact on the Holding Company's
performance than the general level of inflation. Over short periods of
time, interest rates may not necessarily move in the same direction or in
the same magnitude as the prices of goods and services. Management believes
that, through the implementation of its strategic plan (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.
Item 7. Financial Statements.
See Pages F-1 to F-30.
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.
BOARD OF DIRECTORS
<TABLE>
<CAPTION>
Director Term
Name Since* Expires Age Position
--------------------------------------------------------------
<S> <C> <C> <C> <C>
Samuel Cohen 1990 2002 59 Chairman
Ronald Dolloff 1988 2002 63 Director
Lincoln O. Orff 1991 2002 68 Director
Sharon E. Crowe 1994 2000 45 Director
Wesley E. Richardson 1989 2001 57 President
George Seaver 1998 2001 51 Director
Robert W. Spear 1976 2000 59 Vice Chairman
Peter Van Alstine 1998 2001 55 Director
Waite W. Weston 1967 2000 59 Director
<FN>
<F*> Includes service as director of the Bank prior to the formation of
the Holding Company.
</FN>
</TABLE>
SAMUEL COHEN, Chairman of the Board, is an attorney in Waldoboro. He is
currently a member of the American Legion, the Masons, the Lincoln County
Bar Association and the Maine Trial Lawyers Association. Mr. Cohen is also
a member of the Maine and Massachusetts Bars.
RONALD E. DOLLOFF has been employed in education since 1956 and is a
retired member of the Maine and National Secondary Principals Associations.
Mr. Dolloff is a former selectman, assessor and acting Town Manager of
Waldoboro and currently serves as treasurer, organist and minister of the
Waldoboro United Methodist Church.
LINCOLN O. ORFF is a real estate broker in Jefferson, Maine. He is a Past
Master of the Riverside Lodge, Past Patron of the Eastern Star and the
former owner of the Tilton Agency, an insurance agency located in
Jefferson, Maine. He served 34 years as First Selectman of Jefferson and he
also serves as the secretary of The Windsor Agricultural Fair.
SHARON E. CROWE, works in the Marketing and Program Development Office at
the Maine General Medical Center. Ms. Crowe serves on the Board of
Directors for the United Way of Mid-Maine, is a former member and past
president of Rockland Rotary Club and is a Rotary International Paul Harris
Fellow. She is also an alumnus of the Leadership Maine Program.
WESLEY E. RICHARDSON has been President, Chief Executive Officer and
Treasurer of the Bank since 1985. He is a former Vice President of
Tanglewood, a 4H camp, a former trustee of Northeast Healthcare and a
member of the Rockland Rotary.
GEORGE SEAVER since 1992 has been Vice President and part owner of Ocean
Organics Corporation, a company providing specialty organic fertilizers for
golf courses. In addition, Mr. Seaver manages Waldoboro Environmental Park,
a small business park, is a former treasurer of the Maine Seaweed Council,
serves on the Board of Directors of the Dutch Neck Cemetery Association and
is a member of the Waldo Theatre Board of Directors. He is a former member
of the Maine School Administrative District 40 school Board of Directors.
ROBERT W. SPEAR, Vice Chairman of the Board, owns and operates Spear Farm,
Inc., a 450 acre dairy and crop operation. Mr. Spear served 16 years on the
Board of Selectmen for the Town of Nobleboro, Maine, and 18 years as a
State Representative for District 59 in the Maine House of Representatives.
Mr. Spear currently serves as the State of Maine Commissioner of
Agriculture.
PETER VAN ALSTINE, in 1978, founded and remains principal of Peter Van
Alstine Insurance and Financial Services providing a variety of Insurance
and financial services to individuals and businesses. Mr. Van Alstine is a
trustee and treasurer of Northeast Health.
WAITE W. WESTON, owns and operates Weston's Hardware, a family business
that has been in existence since 1921.
Executive Officers Who Are Not Directors
ROBERT E. CARTER, JR., 49, has been Senior Vice President and Chief
Operations Officer since 1999; prior to that Mr. Carter served as Vice
President of the Bank and Vice President of the Holding Company since its
incorporation. Mr. Carter is a director of Mid-Coast Children's Services, a
pre-school agency for children with special needs, President of Knox
Suburban Little League, and chairman of a local scholarship committee.
Compliance with Section 16(a) of the Exchange Act
Section 16 of the Exchange Act requires the Holding Company's
executive officers and directors, and any person owning more than ten
percent (10%) of a class of the Holding Company's stock, to file certain
reports of ownership and changes in ownership with the Securities and
Exchange Commission ("SEC").
Director Robert Spear failed to file a Form 4 in a timely manner
reporting the exercise of 735 option of common stock. The transaction has
been reported on Form 5, and Director Spear is now current in his Section
16(a) filings.
Senior Vice President Robert E. Carter, Jr. failed to file a Form 4
in a timely manner reporting the exercise of 537 options of common stock.
The transaction has been reported on a Form 5 and Mr. Carter is now current
in his Section 16 (a) filings.
Based solely upon a review of the reports filed with the SEC and
furnished to the Holding Company, as well as information furnished to the
Holding Company by various reporting persons, the Holding Company believes
that all other Section 16(a) filing requirements were complied with.
Item 10. Executive Compensation.
Currently, the Chairman of the Board receives a quarterly stipend of
$5,000, which will continue until the merger with Union is finalized. The
Vice Chairman of the Board receives a $1,000 annual retainer. Directors of
the Bank receive $250 for each board meeting attended, and $50 for each
committee meeting attended. Committee appointments are made yearly in
August of the given fiscal year.
During the fiscal year ended March 31, 2000, the Holding Company did
not pay any cash compensation to its officers and directors.
Executive Compensation Table
The following table provides certain summary information concerning
compensation paid or accrued by the Bank to or on behalf of the Holding
Company's President, Treasurer and Chief Executive Officer for the last
three fiscal years ended March 31, 2000.
<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation
-------------------------------------------- ---------------------------------------------------------
Awards Payouts
-------------------------- -------
Other Restricted Securities
Name and Annual Stock Underlying LTIP All Other
Principal Position Year Salary Bonus Compensation(1) Award(2) Options/SARs Payouts Compensation(3)
--------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Wesley E. Richardson 2000 $86,991 $ -- $3,600 -- -- -- $5,549
President, Treasurer 1999 $86,991 $5,109 $3,600 -- -- -- $3,456
and CEO 1998 $86,991 $6,531 $3,600 $46,800 -- -- $2,195
<FN>
<F1> Includes an annual mileage allowance for Mr. Richardson.
<F2> Pursuant to the RRP, Mr. Richardson was awarded 7,560 shares of
restricted stock, as of July 16, 1997, which vest in 20% increments
on an annual basis, with the first installment vested on April 1,
1998. The dollar amount shown in the table for 1998 is based the
closing price of a share of common stock on July 16, 1997, which was
$6.50. The aggregate fair market value of the restricted stock awards
made to Mr. Richardson was $22,680 at March 31, 2000, based on a
closing price of $15.00 per share. Dividends attributable to such
shares are paid to individuals on the payment date for such
dividends.
<F3> Includes amounts paid on behalf of Mr. Richardson for group life
insurance and medical coverage and any matching contributions made to
the 401(k) plan on his behalf
</FN>
</TABLE>
Employment Agreement
The Bank and the Holding Company have entered into an employment
agreement with Wesley E. Richardson as President of the Bank and the
Holding Company. The base salary payable to Mr. Richardson under the
employment agreement for fiscal year 2000 was $86,991. The employment
agreement also provides for participation in discretionary bonuses, stock
option, retirement and other benefit plans.
In addition, the employment agreement provides for a severance
payment equal to 2.99 times the average annual compensation paid to Mr.
Richardson and includable in his gross income, for federal income tax
purposes, during the five calendar years preceding the taxable year in
which the date of termination occurs in the event of termination of
employment by Mr. Richardson for "good reason" following a change in
control of the Holding Company or the Bank. "Good reason" includes a breach
by either the Holding Company or the Bank of the agreement and, subsequent
to a change in control of the Holding Company or the Bank, the assignment
of Mr. Richardson to duties inconsistent with those performed immediately
prior to the change in control, a change in Mr. Richardson's reporting
responsibilities, title of office, a reduction in annual salary or failure
of the Bank or the Holding Company to continue for him any bonus, benefit
or compensation plan. The term "change in control" as defined in the
agreement includes, but is not limited to, the following: (1) the
acquisition of beneficial ownership by certain individuals of 25% or more
of the combined voting power of the Holding Company's or the Bank's then
outstanding securities; or (2) during any period of two consecutive years,
a change in the majority of the Board of Directors of the Holding Company
or the Bank for any reason unless the election of each new director was
approved by at least two-thirds of the directors then still in office who
were directors at the beginning of the period.
If Mr. Richardson terminates his employment for good reason following
a change in control, such severance payments will be paid in a lump sum on
or before the fifth day following the date of termination. However, if the
severance payment would be deemed to constitute an "excess parachute
payment" under Section 280G of the Internal Revenue Code of 1986, as
amended (the "Code"), the severance payment will be reduced to the extent
necessary to ensure that no portion of the severance payment is subject to
the excise tax imposed by Section 4999 of the Code.
If Mr. Richardson terminates his employment at any time for breach of
contract by the Bank or the Holding Company, which termination is not
preceded by a change of control, or the Bank or the Holding Company
terminates his employment, during the contract period, for other than just
cause, he will receive periodic severance payments over a period not to
exceed two years in the amount equal to his current salary in effect at the
date of termination times the lesser of the number of years (including
partial years) remaining in the term of his employment agreement or 2.99.
Termination Agreement
Under the terms of the merger agreement with Union Bankshares
Company, signed on March 27, 2000, Wesley E. Richardson, President and
Chief Executive Officer of the Holding Company, will enter into a
termination agreement as of or prior to the effective date of the merger
with Union Bankshares Company, which will provide for the payment of
approximately $300,000 of severance benefits in satisfaction of all amounts
otherwise due under Mr. Richardson's employment agreement.
Pension Plan
The Bank maintains a qualified, noncontributory, defined benefit
pension plan (the "Pension Plan") for the benefit of its employees. The
Pension Plan is administered by Pentegra. All employees participate in the
Pension Plan upon the attainment of age 21 and the completion of one year
of service. Retirement benefits are fully vested after five years of
service or age 65. There are no deductions for Social Security or other
offset amounts under the Pension Plan.
Beginning July 1, 1991, the Pension Plan changed to an integrated
plan with Social Security. The current plan uses the year of birth of a
participant employee as an additional factor in calculating the retirement
benefit, along with the highest five consecutive years' average salary, and
the number of years of benefit service.
The Pension Plan provides an early retirement allowance for
participants who commence benefits prior to age 65 after becoming partially
or fully vested. The vested accrued benefit otherwise payable at age 65 is
reduced by applying an early retirement factor based on the participants
age and vesting service when payments begin. Provisions in the Pension
Plan, allows for benefits to be delayed after age 65.
The Pension Plan is qualified under Section 401(a) of the Code and is
being administered in accordance with all applicable legal requirements.
The Bank makes contributions in an amount sufficient to fund the
Pension Plan's normal cost of pension benefits and the one-year term cost
of death and disability benefits and to amortize unfunded accrued
liabilities to the extent required by law.
The following table illustrates annual pension benefits for a
participant retiring in 2000 at age 65, for various levels of compensation
and years of service.
ANNUAL PENSION BENEFITS BASED ON YEAR OF SERVICE
<TABLE>
<CAPTION>
Average
Compensation 15 Years 20 Years 30 Years 40 Years
------------ -------- -------- -------- --------
<S> <C> <C> <C> <C>
$ 20,000 $ 3,000 $ 4,000 $ 6,000 $ 8,000
40,000 6,394 8,524 12,788 16,050
60,000 10,894 14,524 21,788 29,050
80,000 15,384 20,254 30,788 41,050
100,000 19,894 26,254 39,788 53,050
</TABLE>
Estimated annual retirement benefits under the Bank's pension plan at
the normal retirement date computed upon the basis of present salary level
would be $25,200 for Mr. Richardson. Mr. Richardson presently has 16 years
of service for purposes of the Pension Plan.
Stock Option Plan
The Holding Company has in effect an Option Plan, under which an
amount equal to 10% of the common stock of the Holding Company is reserved
from the authorized but unissued common stock of the Holding Company for
future issuance upon exercise of stock options granted to certain key
employees and to directors of the Holding Company and the Bank from time to
time. The purpose of the Option Plan is to encourage the retention of such
key employees and directors by facilitating their purchase of a stock
interest in the Holding Company. The Option Plan is intended to provide for
the granting of "incentive stock options" under Section 422A of the Code to
employees and non-incentive stock options to directors who are not
employees of the Holding Company or the Bank.
The Option Plan is administered by the Option Committee of the
Holding Company's Board of Directors. The Committee selects the employees
from the Bank and the Holding Company to whom options are to be granted and
the number of shares to be granted.
The following table provides information with respect to the named
executive officers concerning the exercise of options during the last
fiscal year and unexercised options held as of end of last year:
2000 FISCAL YEAR END OPTION VALUES
<TABLE>
<CAPTION>
Value of
Number of Unexercised
Unexercised In-the-Money
Options at Options at
Shares FY-End (#) FY-End
Acquired On Value/ Exercisable/ Exercisable/
Name Exercise (#) Realized Unexercisable Unexercisable
---- ------------ -------- ------------- -------------
<S> <C> <C> <C> <C>
Wesley E. Richardson -- -- 1,244/0(1) $14,455/0(2)
<FN>
<F1> All of Mr. Richardson's stock options are immediately exercisable.
<F2> Based upon a market price of $ 15.00 at March 31, 2000, minus the
exercise price.
</FN>
</TABLE>
Recognition and Retention Plan
The RRP was adopted by the Board of Directors of the Holding Company
and approved by its shareholders at the 1997 Annual Meeting. Similar to the
Option Plan, the RRP functions as a long-term incentive compensation
program for eligible officers, employees and outside directors of the
Holding Company. The RRP is administered by the members of the Board's
Compensation Committee who are disinterested directors ("Compensation
Committee"). All costs and expenses of administering the RRP are paid by
the Holding Company.
As required by the terms of the RRP, the Holding Company has
established a trust ("Trust") with Merrill Merchants Bank and has
contributed to the Trust, funds sufficient to purchase 29,002 shares of
Common Stock, the maximum number of restricted stock awards ("Restricted
Stock Awards") that may be granted under the RRP. Shares of Common Stock
subject to a Restricted Stock Award are held in the Trust until the Award
vests at which time the shares of Common Stock attributable to the portion
of the Award that have vested are distributed to the Award holder. An Award
recipient is entitled to exercise voting rights and receive cash dividends
with respect to the shares of Common Stock subject to his Award, whether or
not the underlying shares have been vested. Restricted Stock Awards are
granted under the RRP on a discretionary basis to eligible officers and
executives selected by the Compensation Committee and are awarded to
outside directors pursuant to the terms of the RRP.
Item 11. Security Ownership of Certain Beneficial Owners and Management.
To the knowledge of management of Bancorp, the following shareholders
beneficially owned, directly or indirectly, more than 5% of Bancorp's
common stock as of May 14, 2000.
<TABLE>
<CAPTION>
Amount and Nature Percent
Name and Address of Beneficial Owner of Beneficial Ownership of Class
------------------------------------ ----------------------- --------
<S> <C> <C>
Wesley E. Richardson 39,060 (1) 5.18%
893 North Pond Road
Warren, Maine 04864
<FN>
<F1> Includes 1,244 shares of common stock subject to options granted to
Mr. Richardson, all of which are immediately exercisable. Also
includes 7,560 shares granted under the Recognition and Retention
Plan of Mid-Coast Bancorp, Inc.
</FN>
</TABLE>
The following table sets forth the amount and percentage of Bancorp's
common stock beneficially owned, directly or indirectly, by directors and
executive officers of the Holding Company individually, and by directors
and executive officers of the Holding Company as a group as of May 14,
2000.
<TABLE>
<CAPTION>
AMOUNT AND
NATURE OF
BENEFICIAL PERCENT
NAME OWNERSHIP(1)(2) OF CLASS
---- --------------- --------
<S> <C> <C>
Robert E. Carter, Jr. 7,701 (3) 1.02%
Samuel Cohen 29,529 (4) 3.91%
Sharon E. Crowe 6,451 (5) 0.85%
Ronald E. Dolloff 9,519 (6) 1.26%
Lincoln O. Orff 27,306 (7) 3.62%
Wesley E. Richardson 39,060 (8) 5.18%
George Seaver 861 0.11%
Robert W. Spear 18,358 (9) 2.44%
Peter Van Alstine 1,071 0.14%
Waite Weston 17,204 (10) 2.28%
Total owned by directors
and executive officers as
a group (10 persons) 157,060 20.81%
<FN>
--------------------
<F1> All shares are held individually unless otherwise indicated.
<F2> Includes restricted stock awards of 945 shares of Common Stock made
to the outside directors (except, Directors George Seaver and Peter
Van Alstine) under the Recognition and Retention Plan of Mid-Coast
Bancorp, Inc. ("RRP"). Under the RRP, Messrs. Richardson and Carter
were also granted restricted stock awards of 7,560 and 4,410 shares
of common stock, respectively. Each recipient of a restricted stock
award has sole voting, but no investment power, over the shares of
common stock covered by the award. The restricted stock awards vest
in 20% increments on an annual basis, with the first installment
vesting on April 1, 1998. Directors Van Alstine and Seaver were
awarded 756 shares each. Their restricted stock awards vest in 20%
increments on an annual basis with the first installment vesting on
April 1, 1999.
<F3> Includes 1026 shares held individually by spouse, for which Mr.
Carter disclaims beneficial ownership, 828 shares held by his son,
529 shares held by another son, over which Mr. Carter exercises
voting and investment control.
<F4> Includes 27,408 shares held jointly with spouse.
<F5> Includes 1,867 options which are exercisable immediately
exercisable.
<F6> Includes 7,566 shares held jointly with spouse.
<F7> Includes 25,209 shares held jointly with spouse.
<F8> Includes 8,353 shares held jointly with spouse, 3,792 shares held
individually by spouse, for which Mr. Richardson disclaims beneficial
ownership, and 1,244 stock options which are immediately exercisable.
<F9> Includes 6,504 shares held jointly with spouse, 806 shares held
individually by spouse.
<F10> Includes 13,685 shares held jointly with spouse.
</FN>
</TABLE>
Item 12. Certain Relationships and Related Transactions.
The Bank has extended real estate or consumer loans to certain of its
directors, officers and employees. These loans are made in the ordinary
course of business on substantially the same terms, including interest
rates and collateral, as those prevailing at the time of comparable
transactions with other persons and, in the judgement of management, do not
involve more than the normal risk of noncollectibility or other unfavorable
features. In this regard, extension of credit to executive officers and
directors is in full compliance with applicable federal law.
Item 13. Exhibits.
a) Exhibits
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).
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 (filed in electronic format only)
b) Reports on Form 8-K
The Holding Company filed a current report on Form 8-K with the
SEC on April 3, 2000 to report the signing of a definitive merger
agreement with Union Bankshares Company.
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 7, 2000 /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 7, 2000
----------------------------- Officer, Treasurer and
Wesley E. Richardson Director
By: /s/ SAMUEL COHEN Director and Chairman June 7, 2000
-----------------------------
Samuel Cohen
By: /s/ ROBERT W. SPEAR Director and Vice Chairman June 7, 2000
-----------------------------
Robert W. Spear
By: /s/ SHARON CROWE Director June 7, 2000
-----------------------------
Sharon Crowe
By: /s/ RONALD DOLLOFF Director June 7, 2000
-----------------------------
Ronald Dolloff
By: /s/ WAITE W. WESTON Director June 7, 2000
-----------------------------
Waite W Weston
By: /s/ LINCOLN ORFF Director June 7, 2000
-----------------------------
Lincoln Orff
By: /s/ PETER VAV ALSTINE Director June 7, 2000
-----------------------------
Peter Van Alstine
By: /s/GEORGE SEAVER Director June 7, 2000
-----------------------------
George Seaver
</TABLE>
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, 2000 and 1999 F-2
Consolidated Statements of Income for each of the Years Ended
March 31, 2000 F-4
Consolidated Statements of Changes in Stockholders' Equity for
each of the Years Ended March 31, 2000 F-5
Conslidated Statements of Cash Flows for each of the Years Ended
March 31, 2000 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, 2000 and 1999, 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, 2000. 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, 2000 and 1999, and the
consolidated results of their operations and their cash flows for each of
the three years in the period ended March 31, 2000, in conformity with
generally accepted accounting principles.
/s/ Baker Newman & Noyes
-------------------------
Portland, Maine Limited Liability Company
April 28, 2000
MID-COAST BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
March 31, 2000 and 1999
<TABLE>
<CAPTION>
ASSETS
------
2000 1999
---- ----
<S> <C> <C>
Cash and due from banks $ 2,131,302 $ 1,583,693
Interest bearing deposits 97,426 93,095
Federal funds sold 5,385,000 2,120,000
-------------------------
Cash and cash equivalents 7,613,728 3,796,788
Time deposits 2,081,000 2,079,000
Investment securities available for sale,
at market (notes 2 and 8) 7,138,482 5,216,681
Held to maturity investment securities
(market value of $185,445 in 2000 and
$186,415 in 1999) (notes 2 and 8) 200,000 200,000
Investment in Federal Home Loan Bank
stock (note 8) 910,800 734,500
Loans held for sale - 179,000
Loans (notes 3 and 8): 62,360,994 56,429,522
Less: Allowance for loan losses (note 4) 482,359 404,385
Net deferred loan fees 94,964 60,589
-------------------------
61,783,671 55,964,548
Bank premises and equipment, net (note 5) 1,576,500 1,734,619
Other assets:
Accrued interest receivable - loans 324,328 288,413
Accrued interest receivable - time deposits 15,626 18,328
Accrued interest receivable - investment
and mortgage-backed securities 96,284 70,213
Deferred income taxes (note 6) 176,948 113,137
Prepaid expenses and other assets 366,655 375,636
Real estate owned 180,000 -
-------------------------
Total other assets 1,159,841 865,727
-------------------------
Total assets $82,464,022 $70,770,863
=========================
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Liabilities:
Deposits (note 7):
Demand deposits $ 4,033,535 $ 3,106,977
NOW accounts 11,378,571 5,309,433
Savings 7,779,961 6,582,120
Money market deposit accounts 4,592,682 4,711,304
Certificates of deposit 31,848,684 32,705,039
-------------------------
Total deposits 59,633,433 52,414,873
Advances from the Federal Home Loan
Bank (note 8) 16,715,000 12,715,000
Accrued expenses and other liabilities 488,926 267,370
-------------------------
Total liabilities 76,837,359 65,397,243
Commitments and contingencies (note 9)
Stockholders' equity (notes 10 and 11):
Common stock, $1 par value, 1,500,000
shares authorized; 753,570 shares
issued and outstanding (715,457
shares in 1999) 753,570 715,457
Paid-in capital 1,754,980 1,535,412
Retained earnings 3,437,526 3,371,524
Accumulated other comprehensive income (loss) (139,039) (25,500)
Unearned compensation (note 11) (180,374) (223,273)
-------------------------
Total stockholders' equity 5,626,663 5,373,620
-------------------------
Total liabilities and
stockholders' equity $82,464,022 $70,770,863
=========================
</TABLE>
See accompanying notes.
MID-COAST BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
Years Ended March 31, 2000, 1999 and 1998
<TABLE>
<CAPTION>
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Interest income:
Interest on loans $4,946,955 $4,588,941 $4,464,822
Interest on investment securities 337,070 200,263 210,241
Interest on mortgage-backed securities 115,282 35,557 -
Other 224,191 404,704 242,526
--------------------------------------
Total interest income 5,623,498 5,229,465 4,917,589
Interest expense:
Interest on deposits (note 7) 2,135,265 2,094,497 1,964,449
Interest on borrowings 735,834 720,274 659,057
--------------------------------------
Total interest expense 2,871,099 2,814,771 2,623,506
--------------------------------------
Net interest income 2,752,399 2,414,694 2,294,083
Provision for loan losses (note 4) 78,000 68,000 73,000
--------------------------------------
2,674,399 2,346,694 2,221,083
Other income:
Loan servicing and other loan fees 68,718 58,628 52,089
Gain on sale of loans 131,903 183,102 54,785
Deposit account fees 244,654 210,793 188,619
Gain (loss) on sale of investment
securities available for sale (note 2) - (3,012) -
Miscellaneous 31,353 11,427 7,793
--------------------------------------
476,628 460,938 303,286
Other expenses:
Compensation and benefits (notes 11 and 12) 1,133,528 1,125,330 854,026
Depreciation, amortization and software expense 286,709 249,203 186,005
Building occupancy 108,615 99,197 41,560
Repairs and maintenance 67,998 87,128 41,988
Advertising 45,544 93,546 33,131
Insurance expense 81,778 81,066 74,834
Professional fees and shareholders services 233,547 188,620 181,359
Real estate owned 2,996 18,397 12,243
Other (note 13) 476,793 465,527 384,728
--------------------------------------
2,437,508 2,408,014 1,809,874
--------------------------------------
Income before income taxes 713,519 399,618 714,495
Income tax expense (note 6) 250,331 141,832 238,879
--------------------------------------
Net income $ 463,188 $ 257,786 $ 475,616
======================================
Earnings per share - basic (note 1) $ 0.62 $ 0.35 $ 0.64
======================================
Earnings per share - diluted (note 1) $ 0.62 $ 0.35 $ 0.64
======================================
</TABLE>
See accompanying notes.
MID-COAST BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended March 31, 2000, 1999 and 1998
<TABLE>
<CAPTION>
Common Paid-in Retained
Stock Capital Earnings
------ ------- --------
<S> <C> <C> <C>
Balance at March 31, 1997 $231,439 $1,469,769 $3,374,337
Net income (and total comprehensive income) - - 475,616
Issuance of 5,881 shares of common stock
upon exercise of options 5,881 51,272 -
Dividends declared ($.17 per share) - - (121,796)
Stock split effected as dividend (note 10) 474,640 - (474,640)
Acquisition of shares for stock award plan
(note 11) - - -
Amortization of unearned compensation - - -
------------------------------------
Balance at March 31, 1998 711,960 1,521,041 3,253,517
Net income - - 257,786
Other comprehensive income, net of tax:
Net unrealized loss on investments
available for sale, net of
reclassification adjustment (note 14) - - -
Total comprehensive income
Issuance of 3,497 shares of common
stock upon exercise of options 3,497 9,305 -
Dividends declared ($.20 per share) - - (139,779)
Acquisition of shares for stock award plan
(note 11) - - -
Amortization of unearned compensation - - -
Other activity relating to stock award plan - 5,066 -
------------------------------------
Balance at March 31, 1999 715,457 1,535,412 3,371,524
Net income - - 463,188
Other comprehensive income, net of tax:
Net unrealized loss on investments
available for sale, net of
reclassification adjustment (note 14) - - -
Total comprehensive income
Issuance of 2,384 shares of common
stock upon exercise of options 2,384 5,532 -
Dividends declared ($.20 per share) - - (141,437)
5% stock dividend issued (35,729 shares)
(note 10) 35,729 218,850 (255,749)
Amortization of unearned compensation - - -
Other activity related to stock award plan - (4,814) -
------------------------------------
Balance at March 31, 2000 $753,570 $1,754,980 $3,437,526
<CAPTION>
Accumulated Other Total
Comprehensive Unearned Stockholders'
Income (Loss) Compensation Equity
----------------- ------------ -------------
<S> <C> <C> <C>
Balance at March 31, 1997 $ - $ - $5,075,545
Net income (and total comprehensive income) - - 475,616
Issuance of 5,881 shares of common stock
upon exercise of options - - 57,153
Dividends declared ($.17 per share) - - (121,796)
Stock split effected as dividend (note 10) - - -
Acquisition of shares for stock award plan
(note 11) - (177,925) (177,925)
Amortization of unearned compensation - 32,142 32,142
------------------------------------------
Balance at March 31, 1998 - (145,783) 5,340,735
Net income - - 257,786
Other comprehensive income, net of tax:
Net unrealized loss on investments
available for sale, net of
reclassification adjustment (note 14) (25,500) - (25,500)
----------
Total comprehensive income 232,286
Issuance of 3,497 shares of common
stock upon exercise of options - - 12,802
Dividends declared ($.20 per share) - - (139,779)
Acquisition of shares for stock award plan
(note 11) - (109,630) (109,630)
Amortization of unearned compensation - 32,140 32,140
Other activity relating to stock award plan - - 5,066
------------------------------------------
Balance at March 31, 1999 (25,500) (223,273) 5,373,620
Net income - - 463,188
Other comprehensive income, net of tax:
Net unrealized loss on investments
available for sale, net of
reclassification adjustment (note 14) (113,539) - (113,539)
----------
Total comprehensive income 349,649
Issuance of 2,384 shares of common
stock upon exercise of options - - 7,916
Dividends declared ($.20 per share) - - (141,437)
5% stock dividend issued (35,729 shares)
(note 10) - - (1,170)
Amortization of unearned compensation - 38,262 38,262
Other activity related to stock award plan - 4,637 (177)
------------------------------------------
Balance at March 31, 2000 $(139,039) $(180,374) $5,626,663
==========================================
</TABLE>
See accompanying notes.
MID-COAST BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended March 31, 2000, 1999 and 1998
<TABLE>
<CAPTION>
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Operating activities:
Net income $ 463,188 $ 257,786 $ 475,616
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, amortization and accretion 216,909 189,574 143,874
Loss on sale of investment securities
available for sale - 3,012 -
Loss on disposal of bank premises and equipment - - 10,252
Provision for loan losses 78,000 68,000 73,000
Deferred tax benefit (16,104) (10,928) (2,000)
Net change in deferred loan fees 34,375 (3,523) (55,854)
Proceeds from sales of loans 3,752,099 6,130,644 3,447,347
Loans originated for sale (3,441,196) (5,830,700) (3,680,587)
Gain on sales of loans (131,903) (183,102) (54,785)
Loss on sale of real estate owned - 12,779 8,235
Change in other assets (47,207) (67,753) (131,112)
Change in accrued expenses and other liabilities 232,307 (29,648) 83,887
-----------------------------------------
Net cash flows from operating activities 1,140,468 536,141 317,873
Investing activities:
Net change in time deposits (2,000) 397,000 (1,387,000)
Investment securities available for sale:
Proceeds from sale of investment securities,
maturities and repayments 209,134 3,871,682 760,000
Purchases (2,307,952) (6,985,168) (1,082,857)
Held to maturity investment securities:
Proceeds from maturities and repayments - 750,000 -
Purchases of Federal Home Loan Bank stock (176,300) (112,500) -
Net change in loans (6,111,498) (6,028,076) (1,400,539)
Proceeds from sale of real estate owned - 270,186 162,099
Purchases of bank premises and equipment (18,781) (402,357) (35,606)
-----------------------------------------
Net cash flows from investing activities (8,407,397) (8,239,233) (2,983,903)
Financing activities:
Net change in certificates of deposit $ (856,355) $ 4,670,205 $ 2,475,002
Net change in other deposits 8,074,915 2,573,252 515,716
Maturities of advances from Federal Home Loan Bank (8,750,000) (7,475,000) (8,250,000)
Advances from Federal Home Loan Bank 12,750,000 8,000,000 9,000,000
Issuance of stock 7,916 12,802 57,153
Dividends paid (142,607) (139,779) (121,796)
Acquisition of shares for stock award plan - (109,630) (177,925)
-----------------------------------------
Net cash flows from financing activities 11,083,869 7,531,850 3,498,150
-----------------------------------------
Net (decrease) increase in cash and cash equivalents 3,816,940 (171,242) 832,120
Cash and cash equivalents at beginning of year 3,796,788 3,968,030 3,135,910
-----------------------------------------
Cash and cash equivalents at end of year $ 7,613,728 $ 3,796,788 $ 3,968,030
=========================================
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest (including $2,708,313, $2,607,554
and $2,380,566 credited to deposit accounts
in 2000, 1999 and 1998, respectively) $ 2,853,296 $ 2,798,829 $ 2,595,603
Income taxes 98,340 288,639 162,084
Supplemental disclosure of noncash transactions:
Net transfer of real estate owned and similar
assets from loans (180,000) (212,582) (148,894)
Entries required to recognize net unrealized gain
or loss on investment securities available for sale:
Unrealized loss on investment securities
available for sale (168,231) (38,637) -
Deferred tax asset 54,692 13,137 -
Stockholders' equity (113,539) (25,500) -
Net effect of stock award plan:
Deferred tax asset (10,928) (10,928) -
Additional paid-in capital 4,814 (5,066) -
Other liabilities 10,751 15,994 -
Unearned compensation (4,637) - -
</TABLE>
See accompanying notes.
MID-COAST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2000, 1999 and 1998
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, 2000, 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 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, 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 (84% and 89% at March 31, 2000 and 1999,
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.
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
--------------------
The Company has 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. Amounts for fiscal 1998 have been restated to
reflect the three-for-one stock split effective on March 31, 1998;
amounts for fiscal 1999 and 1998 have been restated for the 5% stock
dividend declared December 31, 1999. 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>
2000 1999 1998
----- ---- ----
<S> <C> <C> <C>
Average shares outstanding 752,770 749,749 739,244
Less average unawarded shares in
Recognition and Retention Plan (9,850) (9,827) (1,418)
-----------------------------
Average shares outstanding, used in
computing basic EPS 742,920 739,922 737,826
Additional shares due to stock options 3,698 6,032 8,282
-----------------------------
Average equivalent shares outstanding,
used in computing diluted EPS 746,618 745,954 746,108
=============================
</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 2002.
Reclassification
----------------
Certain 1999 and 1998 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, 2000 is presented below:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- ------
<S> <C> <C> <C> <C>
U.S. Treasury and
Agency Obligations $4,599,840 $ 546 $(126,593) $4,473,793
Mortgage-backed securities 2,058,591 - (81,151) 1,977,440
Mutual fund 687,249 - - 687,249
---------------------------------------------------
$7,345,680 $ 546 $(207,744) $7,138,482
===================================================
</TABLE>
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 March 31, 2000 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 4,299,840 4,173,247
Due after five through ten years 300,000 300,546
Mortgage-backed securities 2,058,591 1,977,440
------------------------
$6,658,431 $6,451,233
========================
</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 2000, 1999 and 1998 are summarized below:
<TABLE>
<CAPTION>
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Gross gains $ - $ - $ -
Gross losses - (3,012) -
------------------------------
Net gain or loss $ - $(3,012) $ -
==============================
</TABLE>
Held to Maturity Investment Securities
--------------------------------------
The amortized cost and market values of held to maturity investment
securities at March 31, 2000 and 1999 are as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- ------
<S> <C> <C> <C> <C>
March 31, 2000
--------------
U.S. Agency Obligations $200,000 $ - $14,555 $185,445
================================================
March 31, 1999
--------------
U.S. Agency Obligations $200,000 $ - $13,585 $186,415
================================================
</TABLE>
The U.S. Agency Obligation at March 31, 2000 and 1999 is an inverse
floater structured note maturing in 2003.
At March 31, 2000 and 1999, investment securities with carrying values
of $185,445 and $186,415, respectively, were pledged to secure deposits.
3. Loans
-----
Loans at March 31, 2000 and 1999 consisted of the following:
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Real estate mortgage - residential $39,890,731 $35,973,168
Real estate mortgage - commercial 10,341,277 9,699,298
Construction, net of undisbursed funds 2,131,063 2,824,413
Other commercial 3,444,558 2,618,523
Home equity 1,783,823 1,467,125
Passbook loans 303,215 317,548
Installment and other 4,466,327 3,529,447
--------------------------
$62,360,994 $56,429,522
==========================
</TABLE>
Loans serviced for others at March 31, 2000, 1999 and 1998 totaled
$14,121,272, $11,687,993 and $7,546,489, respectively. Mortgage
servicing rights (included in prepaid expenses and other assets) at
March 31, 2000 and 1999 (net of amortization) totaled $104,785 and
$61,729, respectively; mortgage servicing rights at March 31, 1998 were
immaterial.
Loans contractually past due and nonaccruing as to interest income
totaled $118,365 and $73,551 at March 31, 2000 and 1999, respectively.
Unrecognized accrued interest on such loans totaled $5,446 and $7,253 at
March 31, 2000 and 1999, respectively.
Information with respect to impaired loans is presented below:
<TABLE>
<CAPTION>
March 31,
--------------------------------
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Year-end recorded investment in impaired loans $243,978 $114,181 $266,146
Approximate average investment in impaired loans for the year 129,000 268,000 345,000
Approximate interest income recognized on impaired loans 2,000 4,000 3,000
</TABLE>
There was no valuation allowance directly allocated to impaired loans
at March 31, 2000, 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, 2000 is shown below.
<TABLE>
<CAPTION>
Balance Balance
April 1, 1999 Additions Reductions March 31, 2000
------------- --------- ---------- --------------
<S> <C> <C> <C>
$597,983 $28,000 $161,806 $464,177
</TABLE>
4. Allowance for Loan Losses
-------------------------
Activity in the allowance for loan losses is shown below.
<TABLE>
<CAPTION>
Years Ended March 31,
--------------------------------
2000 1999 1998
------ ---- ------
<S> <C> <C> <C>
Balance, beginning of year $404,385 $346,896 $295,457
Charge-offs (4,986) (11,657) (22,429)
Recoveries 4,960 1,146 868
Provisions for losses 78,000 68,000 73,000
--------------------------------
Balance, end of year $482,359 $404,385 $346,896
================================
</TABLE>
5. Bank Premises and Equipment
---------------------------
Bank premises and equipment at March 31, 2000 and 1999 consisted of
the following:
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Building and improvements $1,474,161 $1,473,405
Land and land improvements 202,360 200,059
Furniture, fixtures and equipment 767,255 756,051
------------------------
2,443,776 2,429,515
Less accumulated depreciation 867,276 694,896
------------------------
Net bank premises and equipment $1,576,500 $1,734,619
========================
</TABLE>
6. Income Taxes
------------
Income tax expense (benefit) for the years ended March 31, 2000, 1999
and 1998 consisted of the following:
<TABLE>
<CAPTION>
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Currently payable:
Federal $255,206 $143,182 $232,072
State 11,229 9,578 8,807
--------------------------------
266,435 152,760 240,879
Deferred federal (16,104) (10,928) (2,000)
--------------------------------
$250,331 $141,832 $238,879
================================
</TABLE>
Income taxes were computed as follows:
<TABLE>
<CAPTION>
Year Ended March 31,
--------------------------------
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
At federal statutory rates $242,596 $135,870 $242,928
State taxes, net of federal tax effect 7,411 6,321 5,812
Other, net 324 (359) (9,861)
--------------------------------
$250,331 $141,832 $238,879
================================
</TABLE>
At March 31, 2000 and 1999, the net deferred tax asset consisted of:
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Deferred tax assets relating to:
Allowance for loan losses $164,000 $137,000
Stock award plan 13,000 10,000
Investments 68,000 13,000
Accrued expenses 15,000 14,000
Other 10,734 9,169
--------------------
Total 270,734 183,169
--------------------
Deferred tax liabilities relating to:
Depreciation 42,000 39,000
Net deferred loan origination fees 13,000 7,000
Mortgage servicing rights 36,000 21,000
Other 2,786 3,032
--------------------
Total 93,786 70,032
--------------------
Net deferred tax asset $176,948 $113,137
====================
</TABLE>
The net deferred tax asset at March 31, 2000 and 1999 is recoverable
through income taxes paid in the carry-back period.
Retained earnings at March 31, 2000 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 utilized for any other purpose other than to
absorb losses, income taxes would be imposed at the then applicable
rates.
7. Deposits
--------
Demand deposits include $325,072 and $303,149 of official and other
outstanding checks drawn on the Bank at March 31, 2000 and 1999,
respectively.
Certificates of deposit with balances equal to $100,000 or more
totaled $4,184,211 at March 31, 2000 and $4,419,493 at March 31,
1999.
Scheduled maturities for certificates of deposit at March 31, 2000
are as follows:
<TABLE>
<CAPTION>
Year Ending
-----------
<S> <C>
March 31, 2001 $28,775,945
March 31, 2002 2,182,950
March 31, 2003 504,405
March 31, 2004 311,436
March 31, 2005 52,217
Thereafter 21,731
-----------
$31,848,684
===========
</TABLE>
Interest expense by type of deposit is shown below.
<TABLE>
<CAPTION>
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
NOW accounts $ 84,869 $ 75,973 $ 63,365
Savings 169,858 179,002 160,408
Money market deposit accounts 188,650 168,879 191,859
Certificates of deposit 1,691,888 1,670,643 1,548,817
--------------------------------------
$2,135,265 $2,094,497 $1,964,449
======================================
</TABLE>
8. Advances From Federal Home Loan Bank
------------------------------------
Advances from the Federal Home Loan Bank (FHLB) at March 31, 2000 and
1999 consisted of the following:
<TABLE>
<CAPTION>
2000 1999
------------------------------------------------------------
Interest Interest
Rates Balance Rates Balance
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Advances maturing within:
One year 5.05% - 6.38% $ 6,000,000 4.93% - 4.99% $ 1,500,000
Two years - - 5.05% - 6.15% 2,500,000
Three years 4.99% 1,000,000 - -
Four years 5.84% 1,000,000 4.99% 1,000,000
After five years 2.00% - 6.09% 8,715,000 2.00% - 5.88% 7,715,000
----------- -----------
$16,715,000 $12,715,000
=========== ===========
</TABLE>
Of the total advances at March 31, 2000 maturing after five years,
$3,500,000 are subject to being called by the FHLB within one year
and $2,500,000 within two years.
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, 2000, the Bank's limitation on
advances from the FHLB approximated $46,000,000.
Additionally, the Bank has available a line of credit for short-term
borrowings under the FHLB "Ideal Way" program totaling approximately
$1,258,000. There were no borrowings under this line at March 31,
2000 or 1999.
9. Commitments and Contingencies
-----------------------------
Pending Merger Agreement
------------------------
On March 27, 2000 the Company entered into an Agreement and Plan of
Merger with Union Bankshares Company (Union) whereby Union will
acquire all the Company's common stock for $15.875 per share and
Company will be merged with a newly created merger subsidiary of
Union. Union will be the surviving corporation in the merger. The
merger is subject to the approval of the shareholders of both the
Company and Union, as well as the approval of various banking
regulatory authorities. The merger is expected to occur in the third
quarter of 2000. The Agreement stipulates that the Bank will,
after consummation of the transaction, be merged with and into Union
Trust Company, a subsidiary of Union.
Loan Commitments
----------------
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,
------------------------
2000 1999
---- ----
<S> <C> <C>
Commitments for new loans $1,978,500 $1,950,000
Unused home equity and other lines of credit 3,140,136 3,914,714
------------------------
$5,118,636 $5,864,714
========================
</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.
Leases
------
The Company leases two branch facilities under noncancellable
operating leases. These leases contain renewal clauses. Rent expense
was $52,400 and $49,969 for 2000 and 1999. 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, 2000:
<TABLE>
<S> <C>
2001 $ 49,800
2002 50,350
2003 56,400
2004 56,400
2005 51,600
Thereafter 103,200
--------
$367,750
========
</TABLE>
Other
-----
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.
Under the terms of the Merger Agreement described above, the
President of the Bank and Company will enter into a termination
agreement as of or prior to the effective date of the merger with
Union which will provide for the payment of approximately $300,000 of
severance benefits in satisfaction of all amounts otherwise due under
the President's employment agreement.
At March 31, 2000 and 1999, 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.
10. 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, 2000 and 1999, the most recent notification from the
Office of Thrift Supervision (OTS) categorized the Bank as "well
capitalized" under the regulatory framework for prompt corrective
action. To be categorized as "well capitalized" the Bank must
maintain minimum total risk-based, Tier 1 risk-based and Tier 1
capital as set forth in the table below. There are no conditions or
events since that notification that management believes have changed
the institution's category.
Quantitative measures established by regulation to ensure capital
adequacy require the Bank to maintain minimum amounts and ratios
established by the Federal Deposit Insurance Corporation as set forth
in the table below. The Bank is also subject to certain capital
requirements established by the OTS. At March 31, 2000 and 1999, 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, 2000 and 1999.
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, 2000:
Total capital (to risk
weighted assets) $6,106 12.7% >/=$3,843 >/=8.0% >/=$4,803 >/=10.0%
Tier 1 Capital (to risk
weighted assets) 5,624 11.7% >/= 1,921 >/=4.0% >/= 2,882 >/= 6.0%
Tier 1 Capital (to
total assets) 5,624 6.8% >/= 3,317 >/=4.0% >/= 4,146 >/= 5.0%
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%
</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 any of its common stock in excess
of OTS-stipulated amounts (generally current year net income plus
retained net income for the past two years). At March 31, 2000, this
limit approximated $936,000.
The Company's Board of Directors declared a 5% stock dividend on
December 31, 1999 and a three-for-one stock split on March 31, 1998;
per share data for all prior periods has been restated to reflect
these actions.
11. Stock Compensation Plans
------------------------
Recognition and Retention Plan
------------------------------
In 1998, the Company adopted its Recognition and Retention Plan which
authorizes the Company to acquire up to 29,002 shares of common stock
(adjusted for the 5% stock dividend) and make discretionary awards 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, 2000 and 1999, all the authorized shares have been
acquired by the Plan at a cost of $287,555. Dividends paid on
unawarded shares held in trust are not material. Of the total shares
held at March 31, 2000, 19,152 shares were awarded (16,800 shares at
March 31, 1999) and 9,850 shares were unawarded (10,821 shares at
March 31, 1999). 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.
The expense associated with the Plan was $38,262 for 2000; $32,140
for 1999; and $32,142 in 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.
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) and exercised during 2000, 1999, and 1998 appears
below. The number of shares exercisable at March 31, 1997 and
exercised in fiscal 1998 has been retroactively restated for the
stock split in 1998.
<TABLE>
<CAPTION>
Per Share Option Price
(Adjusted for 1994, 1996 and 2000 Stock Dividends and 1998 Stock Split)
-----------------------------------------------------------------------
Total
Exercise Price: $ 2.35 $ 3.01 $ 3.56 $ 4.46 Options
====== ====== ====== ====== -------
<S> <C> <C> <C> <C> <C>
Outstanding option
shares, March 31,
1997 (all exercisable) 9,273 3,900 11,037 5,679 29,889
Exercised (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 (1,224) - (923) (1,350) (3,497)
------------------------------------------------
Outstanding option
shares, March 31,
1999 (all exercisable) 726 504 5,740 1,779 8,749
Exercised (726) (102) (1,556) - (2,384)
Cancelled - - (1,102) - (1,102)
Effect of 5% stock
dividend - 20 212 88 320
------------------------------------------------
Outstanding option
shares, March 31,
2000 (all exercisable) - 422 3,294 1,867 5,583
================================================
Options expire in
fiscal year - 2002 2003 2005
</TABLE>
12. 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 $4,158 for the year ended March 31, 2000. Pension
expense/(benefit) totaled $975 and $(1,802) for the years ended March
31, 1999 and 1998, 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, 1999, net assets available for benefits (approximately
$1,850 million) exceeded the actuarial present value of accumulated
plan benefits by approximately $564 million. The actuarial present
value of accumulated plan benefits for June 30, 1999 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 fiscal
2000, 1999 and 1998 were $19,331, $15,975 and $16,433, respectively.
13. Other Expenses
--------------
Included in other expenses for the years ended March 31, 2000, 1999
and 1998 are:
<TABLE>
<CAPTION>
2000 1999 1998
--------------------------------
<S> <C> <C> <C>
Telephone $ 67,311 $ 75,896 $ 46,577
Computer expense 69,853 61,074 52,591
Other 339,629 328,557 285,560
--------------------------------
$476,793 $465,527 $384,728
================================
</TABLE>
14. 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. The components of other comprehensive
income for 2000 and 1999 are as follows:
<TABLE>
<CAPTION>
2000 1999
----------------------
<S> <C> <C>
Unrealized losses arising during the year,
net of tax effect $55,286 in 2000 and
$14,158 in 1999 $(114,693) $(28,356)
Less: reclassification adjustment for
losses included in net income,
net of tax effect of $594 in
2000 and $1,471 in 1999 1,154 2,856
----------------------
Other comprehensive income $(113,539) $(25,500)
======================
</TABLE>
15. Fair Value of Financial Instruments
-----------------------------------
As required by Statement of Financial Accounting Standards No. 107,
fair value estimates, methods and assumptions are set forth below for
the Company's estimated fair values of its financial instruments.
Fair values have been calculated based on the value of one unit
without regard to any premium or discount that may result from
concentrations of ownership of a financial instrument, possible tax
ramifications, or estimated transaction costs. If these
considerations had been incorporated into the fair value estimates,
the aggregate fair value amount could have changed.
Management has made estimates of fair value discount rates that it
believes to be reasonable. However, because there is no market for
many of these financial instruments, management has no basis to
determine whether the fair value presented below would be indicative
of the value negotiated in the actual sale.
Cash, Due from Banks and Federal Funds Sold
-------------------------------------------
The fair value of cash, due from banks and federal funds sold
approximates their relative book values at March 31, 2000 and 1999,
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, 2000 and 1999, 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, 2000 and 1999. 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, 2000 and 1999, 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, 2000 and 1999 are summarized below, in thousands of
dollars:
<TABLE>
<CAPTION>
2000 1999
------------------- -------------------
Carrying Fair Carrying Fair
Value Value Value Value
-------- ----- -------- -----
<S> <C> <C> <C> <C>
Assets:
Cash and cash equivalents $ 7,614 $ 7,614 $ 3,797 $ 3,797
Time deposits 2,081 2,095 2,079 2,089
Investments and FHLB stock 8,249 8,235 6,151 6,138
Loans and loans held for sale, net 61,784 61,485 56,144 56,846
Accrued interest receivable 436 436 377 377
Liabilities:
Deposit liabilities 59,633 59,812 52,415 52,561
Borrowed funds 16,715 16,600 12,715 12,719
</TABLE>
16. Mid-Coast Bancorp, Inc.
-----------------------
Condensed financial statements for Mid-Coast Bancorp, Inc. at March
31, 2000 and 1999 and for the years ended March 31, 2000, 1999 and
1998 are presented below.
Balance Sheets
--------------
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Assets:
Cash and due from the Bank $ 106,381 $ 104,106
Investment in the Bank 5,482,528 5,242,591
Other assets 37,754 26,923
------------------------
Total assets $5,626,663 $5,373,620
========================
Liabilities and stockholders' equity:
Liabilities $ - $ -
Stockholders' equity 5,626,663 5,373,620
------------------------
Total liabilities and stockholders' equity $5,626,663 $5,373,620
========================
<CAPTION>
Statements of Income
--------------------
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Investment income $ 156 $ - $ 2,290
Operating expenses 51,452 44,100 39,108
--------------------------------
Loss before income taxes and equity in
earnings of subsidiary (51,296) (44,100) (36,818)
Income tax benefit 11,009 10,928 10,928
--------------------------------
Loss before equity in earnings of the Bank (40,287) (33,172) (25,890)
Equity in earnings of the Bank:
Remitted 150,000 150,000 400,000
Unremitted 353,475 140,958 101,506
--------------------------------
503,475 290,958 501,506
--------------------------------
Net income $463,188 $257,786 $475,616
================================
<CAPTION>
Statements of Cash Flows
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2000 1999 1998
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<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 463,188 $ 257,786 $ 475,616
Adjustments to reconcile net income to net
cash used by operating activities:
Equity in unremitted earnings of the Bank (353,475) (140,958) (101,506)
Income tax benefit (11,009) (10,928) (10,928)
Amortization of unearned compensation 38,262 32,140 32,142
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Net cash provided by operating activities 136,966 138,040 395,324
Cash flows from financing activities:
Issuance of common stock 7,916 12,802 57,153
Increase in due to the Bank - - (1,651)
Dividends paid (142,607) (139,779) (121,796)
Acquisition of shares for stock award plan - (109,630) (177,925)
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Net cash used by financing activities (134,691) (236,607) (244,219)
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Net increase (decrease) in cash and due from the Bank 2,275 (98,567) 151,105
Cash and due from the Bank at beginning of year 104,106 202,673 51,568
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Cash and due from the Bank at end of year $ 106,381 $ 104,106 $ 202,673
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</TABLE>
