SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-QSB
Quarterly Report Pursuant to Section 13 or 15 (d) of
The Securities Exchange Act of 1934.
For the Quarter ended: June 30, 1998 Commission File No. 0-18096
MID-COAST BANCORP, INC.
(Exact name of registrant as specified in its charter)
Delaware 01-0454232
(State or other jurisdiction I.R.S. Employer
of incorporation or organization) Identification No.)
1768 Atlantic Highway, PO Box 589
Waldoboro, Maine 04572
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (207) 832-7521
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes X No ___
The number of shares outstanding of each of the registrant's classes
of common stock, as of June 30, 1998, is 713,015.
Transitional Small Business Disclosure Format: Yes ___ No X
Page 1 of 16.
MID-COAST BANCORP, INC.
Index
PART I FINANCIAL INFORMATION Page
Item 1: Consolidated Balance Sheets of Mid-Coast
Bancorp, Inc. (Unaudited) at June 30, 1998
and March 31, 1998 3
Consolidated Statements of Income of Mid-Coast
Bancorp, Inc. (Unaudited), Three Months Ended
June 30, 1998 and 1997 5
Consolidated Statement of Changes in Stockholders'
Equity of Mid-Coast Bancorp, Inc. (Unaudited) for
the period April 1, 1997 to June 30, 1998 6
Consolidated Statements of Cash Flows of Mid-Coast
Bancorp, Inc. (Unaudited), for the Three Months
Ended June 30, 1998 and 1997 7
Notes to the Consolidated Financial Statements
(Unaudited) 8
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
PART II OTHER INFORMATION 15
SIGNATURES 16
MID-COAST BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
June 30, 1998 March 31, 1998
------------- --------------
(unaudited) (audited)
Cash and due from banks $ 1,683,106 $ 1,149,870
Interest bearing deposits 100,979 98,160
Federal funds sold 1,865,000 2,720,000
------------------------------
Cash and cash equivalents 3,649,085 3,968,030
Time deposits 2,376,000 2,476,000
Investments available for sale,
at market 3,856,050 2,144,041
Held to maturity investment securities
(Market value $931,675 and $922,351) 949,813 949,672
Investments in Federal Home Loan Bank
stock 734,500 622,000
Loans held for sale 560,912 353,025
Loans 50,983,637 50,624,539
Less: Allowance for loan losses 359,436 346,896
Deferred loan fees 51,689 64,112
------------------------------
50,572,512 50,213,531
Bank premises and equipment, net 1,672,398 1,490,827
Other Assets:
Accrued interest receivable:
Loans 269,591 239,689
Time deposits/Investments 77,126 58,939
Deferred income taxes 103,670 100,000
Prepaid expenses and other assets 328,719 329,026
Real estate owned 158,379 70,383
------------------------------
Total other assets 937,485 798,037
------------------------------
Total assets $65,308,755 $63,015,163
==============================
See accompanying notes.
MID-COAST BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
June 30, 1998 March 31, 1998
------------- --------------
(unaudited) (audited)
Liabilities:
Deposits:
Demand deposits $ 2,565,254 $ 2,297,644
NOW accounts 4,104,357 4,018,629
Savings 6,105,314 5,686,227
Money market deposit accounts 4,709,752 5,134,082
Certificates of deposit 29,611,382 28,034,834
------------------------------
Total deposits 47,096,059 45,171,416
Advances from the Federal Home
Loan Bank 12,440,000 12,190,000
Accrued expenses and other
liabilities 531,922 313,012
------------------------------
Total liabilities 60,067,981 57,674,428
Stockholders' equity:
Preferred stock, $1 par value, 500,000
shares authorized; none issued or
outstanding 0 0
Common stock, $1 par value, 1,500,000
shares authorized; 713,015 Shares
issued and outstanding (711,960 at
March 31, 1998) 713,015 711,960
Paid-in capital 1,522,687 1,521,041
Accumulated other comprehensive
income (loss) (1,821) 0
Retained earnings 3,254,271 3,253,517
Unearned compensation (247,378) (145,783)
------------------------------
Total stockholders' equity 5,240,774 5,340,735
------------------------------
Total liabilities and
stockholders' equity $65,308,755 $63,015,163
==============================
See accompanying notes.
MID-COAST BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended
June 30,
--------------------------
1998 1997
---- ----
Interest income:
Interest on loans $1,145,983 $1,093,317
Interest on investment securities 67,979 52,203
Other 73,736 34,251
--------------------------
Total interest income 1,287,698 1,179,771
Interest expense:
Interest on deposits 509,317 471,244
Interest on borrowed money 193,047 161,406
--------------------------
Total interest expense 702,364 632,650
--------------------------
Net interest income 585,334 547,121
Provision for losses on loans 12,000 17,000
--------------------------
Net interest income after
provision for loan losses 573,334 530,121
Non interest income:
Loan service and other loan fees 12,045 11,782
Gain on loans sold 29,383 1,350
Other 59,696 52,717
--------------------------
Total non interest income 101,124 65,849
Non interest expenses:
Compensation of directors, officers,
and staff 232,873 173,835
Building occupancy 24,804 10,956
Repairs and maintenance 17,326 11,071
Depreciation, amortization, and software
expense 59,375 49,121
Advertising 25,774 10,495
Insurance and bonds 19,140 18,624
Legal, audit and examinations 22,865 17,271
Taxes (other than income) 18,351 13,199
Employee benefits 16,822 25,473
Data processing 13,434 10,963
Other 110,624 81,818
Real estate owned 5,802 2,776
--------------------------
Total non interest expenses 567,190 425,602
--------------------------
Income before income taxes 107,268 170,368
Income taxes 35,365 57,850
--------------------------
Net income $ 71,903 $ 112,518
==========================
Earnings per share:
Basic $ 0.10 $ 0.16
Diluted $ 0.10 $ 0.16
==========================
See accompanying notes.
MID-COAST BANCORP, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited)
For the Period April 1, 1997 to June 30, 1998
Accumulated
Other
Comprehensive Total
Common Paid-in Income Retained Unearned Stockholders'
Stock Capital (Loss) Earnings Compensation Equity
------ ------- ------------- -------- ------------ -------------
Balance, April 1, 1997 $231,439 $1,469,769 $ 0 $3,374,337 $ 0 $5,075,545
Net income 0 0 0 112,518 0 112,518
Issuance of 1,144 shares
of common stock upon
exercise of options 1,144 11,476 0 0 0 12,620
Net change in market value of
investments available for
sale, net of taxes 0 0 0 0 0 0
Cash Dividends declared
($.09 per share) 0 0 0 (60,194) 0 (60,194)
---------------------------------------------------------------------------------------
Balance, June 30, 1997 232,583 1,481,245 0 3,426,661 0 5,140,489
Net income 0 0 0 363,098 0 363,098
Unearned compensation 0 0 0 0 (177,925) (177,925)
Compensation earned 0 0 0 0 32,142 32,142
Issuance of 4,737 shares
of common stock upon
exercise of options 4,737 39,796 0 0 0 44,533
Cash dividends declared
($.09 per share) 0 0 0 (61,602) 0 (61,602)
Stock split effected as
dividend 474,640 0 0 (474,640) 0 0
---------------------------------------------------------------------------------------
Balance, March 31, 1998 711,960 1,521,041 0 3,253,517 (145,783) 5,340,735
Net income 0 0 0 71,903 0 71,903
Other comprehensive loss, net
of tax:
Net change in market value
of investments available
for sale 0 0 (1,821) 0 0 (1,821)
Comprehensive income 70,082
Unearned compensation 0 0 0 0 (109,630) (109,630)
Compensation earned 0 0 0 0 8,035 8,035
Issuance of 1,055 shares
of common stock upon
exercise of options 1,055 1,646 0 0 0 2,701
Cash dividends declared
($.10 per share) 0 0 0 (71,149) 0 (71,149)
---------------------------------------------------------------------------------------
Balance, June 30, 1998 $713,015 $1,522,687 $(1,821) $3,254,271 $(247,378) $5,240,774
=======================================================================================
See accompanying notes.
MID-COAST BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
June 30,
----------------------------
1998 1997
---- ----
Cash flows from operating activities:
Net income $ 71,903 $ 112,518
Adjustments to reconcile net income to
net cash provided (used) by operating
activities:
Depreciation, amortization, and
accretion 29,028 30,213
Provision for losses on loans 12,000 17,000
Gain on sale of loans (29,383) (1,350)
Deferred fees (1,021) 490
(Gain)\Loss on sale of Real Estate Owned 4,285 2,151
Loans originated for sale (1,250,309) (52,535)
Proceeds from sales of loans 1,071,805 118,885
Increase\Decrease in other assets (50,514) (57,827)
Increase other liabilities 218,910 37,608
----------------------------
Net cash provided by operating activities 76,704 207,153
Cash flows from investing activities:
Loan originations and repayments, net (502,619) (650,358)
Net decrease in time deposits 100,000 198,000
Investment and mortgage-backed securities:
Purchases (2,626,642) (258,689)
Proceeds from sales, maturities and
repayments 800,000 500,000
Purchases of property and equipment (214,733) (19,026)
Proceeds from sale of real estate owned 51,780 89,672
----------------------------
Net cash used by investing activities (2,392,214) (140,401)
Cash flows from financing activities:
Net increase in certificates
of deposits 1,576,548 844,912
Net increase in demand, NOW, savings
and money market deposit accounts 348,095 (634,194)
FHLB Advances 3,500,000 2,000,000
FHLB Advances paid (3,250,000) (1,500,000)
Dividends paid in cash (71,149) (60,194)
Sale of common stock 2,701 12,620
Acquisition of shares for stock award
plan (109,630) 0
----------------------------
Net cash provided by financing activities 1,996,565 663,144
----------------------------
Net increase\(decrease) in cash and cash
equivalents (318,945) 729,896
Cash and cash equivalents, at beginning
of period 3,968,030 3,135,910
----------------------------
Cash and cash equivalents, at end
of period $3,649,085 $3,865,806
===========================
See accompanying notes.
MID-COAST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
June 30, 1998
1. Financial Statements
The accompanying consolidated financial statements include the
accounts of Mid-Coast Bancorp, Inc. (the "Company") and its wholly-
owned subsidiary, The Waldoboro Bank, F.S.B. (the "Bank"). The
accounts of the Bank include its wholly-owned subsidiary, The First
Waldoboro Corporation. Such consolidated financial statements are
unaudited. However, in the opinion of management, all adjustments
necessary for a fair presentation of the consolidated financial
statements have been included, and all such adjustments are of a
normal and recurring nature.
Amounts presented in the consolidated financial statements as of March
31, 1998 were derived from audited consolidated financial statements.
2. Dividends Paid
The Board of Directors of the Company declared a cash dividend of $.10
for each share of common stock, which was payable on June 30, 1998 to
shareholders of record on June 1, 1998.
3. Investments Available for Sale
If significant, unrealized gains and losses, net of tax, on securities
available for sale are reported as a net amount in a separate
component of stockholders' equity until realized. If a decline in
market value is considered other than temporary, the loss is charged
to net securities gains (losses).
4. Stock Award Plan
During the first quarter, the Company acquired an additional 9,021
shares of common stock, for future use under the Company's Recognition
and Retention Plan. The cost of this stock is recorded in unearned
compensation as a component of stockholders' equity. Once awarded,
the stock vests over five years and the unearned compensation is
amortized as compensation expense during the vesting period.
6. Reporting Comprehensive Income
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes standards for reporting and
displaying comprehensive income, which is defined as all changes to
equity except investments by and distributions to shareholders. Net
income is a component of comprehensive income, with all other
components referred to in the aggregate as other comprehensive income.
The Company has adopted SFAS No. 130 effective for the current
quarter.
7. Stock Split
The Company's Board of Directors declared a three-for-one stock split
on March 31, 1998 to stockholders of record on March 2, 1998; per
share data for all prior periods has been restated to reflect this
stock split.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
Mid-Coast Bancorp, Inc. (the "Company" or "Bancorp") was incorporated
for the purpose of becoming the holding company for The Waldoboro Bank,
F.S.B. (the "Bank") a federally-chartered savings association. The results
of the Company essentially represent the operations of the Bank. The Bank
converted to stock form in 1989, and issued 237,500 shares of common stock
at $8.00 per share. On March 31, 1998 the Bank completed a three-for-one
stock split and as of June 30, 1998 had 713,015 shares outstanding.
The Bank had total assets of $65.3 million as of June 30, 1998. The
Bank conducts its business through an office located in Waldoboro, Maine,
where it was originally founded in 1891 as a Maine building and loan
association, and two branches located in Rockland and Belfast, Maine. The
Bank received its federal charter on August 9, 1983 and its deposits are
currently insured up to applicable limits by the Savings Association
Insurance Fund of the Federal Deposit Insurance Corporation.
The Bank considers its primary market area to be located in Waldoboro
and Rockland including the surrounding communities in Knox and Lincoln
counties, Maine. Additionally, with the newest branch in Belfast the Bank's
market area will be expanding into Belfast and the surrounding communities
in Waldo county, Maine.
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.
The Company's results of operations in recent years reflect the
Bank's efforts to restructure its balance sheet to expand its commercial
loans, commercial real estate loans and commercial transactional deposit
relationships. From this strategy, the Bank anticipates its 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 and 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 the availability and cost of funds, and loan refinancing in response to
declining interest rates. Sources of funds for lending activities include
deposits, loan payments, proceeds from sales of loans and investments,
investment returns and borrowings.
Mid-Coast Bancorp, Inc. is headquartered at 1768 Atlantic Highway in
Waldoboro, Maine, (207) 832-7521. The Company's stock trades on the Nasdaq
SmallCap Market under the symbol "MCBN."
Financial Condition
Total assets increased $2,293,592 or 3.6% to $65.3 million for the
quarter ended June 30, 1998 from $63.0 million at March 31, 1998. The
growth in assets is primarily due to an increase deposits and FHLB advances,
which were used to fund the purchase of investments and originate loans.
The increase in investments available for sale is primarily due to
management's investment of excess cash from increased deposits and loan
prepayments that were not immediately needed to fund loan growth. The Bank
anticipates that during the remainder of the fiscal year, a portion of the
investments available for sale will be redeployed to fund the origination of
loans.
Loans increased $359,098 from $50.6 million at March 31, 1998 to $51.0
million at June 30, 1998. The increase in loans is primarily related to
increases in the Bank's commercial loan portfolio, specifically, commercial
mortgages increased $517,282 or 6.9% and Small Business Administration (SBA)
loans increased $167,101 or 454%. The increase was partially offset by a
decrease in mortgage loans of $125,000. Typically, commercial mortgages
provide a higher yield than residential mortgages, and at June 30, 1998 the
yield on commercial mortgages was 9.97% compared to 8.57% for residential
mortgages.
At June 30, 1998 total liabilities increased $2,393,553 or 4.2% from
$57.7 million at March 31, 1998 to $60.1 million at June 30, 1998.
Interest bearing deposits increased $1,657,033 or 3.9% and non-interest
bearing deposits increased $267,610 or 11.6%, primarily due to the opening
of the new branch in Belfast and competitive market rates paid on
certificates of deposit. To that end, the Bank's marketing effort remains
directed toward enhancing market presence. This is achieved by focusing on
specific products, especially the Bank's core deposits such as retail and
commercial checking accounts and certificate of deposit "specials".
Management believes that growth can continue to be achieved and the overall
cost of funds can be lowered by concentrating on building relationships
through core deposit growth.
At June 30, 1998 total stockholders' equity decreased $99,461 or 1.9%
to $5,240,774 compared to $5,340,735 at March 31, 1998. The decrease is
primarily due to the purchase of additional Company stock for the
Recognition and Retention Plan and the payment of a cash dividend. As of
June 30, 1998 the Company had acquired all the stock authorized under the
plan. This decrease is partially offset by the Bank's first quarter net
income.
Asset Quality and Allowance for Loan Losses
At March 31, 1998 and June 30, 1998 loans contractually past due 90
days or more amounted to $294,626 or 0.58% of loans and $328,398 or 0.64% of
loans, respectively. Nonaccrual of interest on these loans totaled $17,089
at March 31, 1998 as compared to $6,356 at June 30, 1998. At March 31,
1998, the Bank had $69,570 of accruing loans, which were 90 days or more
delinquent as compared to $201,256 at June 30, 1998.
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 Bank 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.
Total non performing assets, including real estate owned (REO),
totaled $365,009 or 0.58% of total assets at March 31, 1998 compared to
$486,777 or 0.75% of total assets at June 30, 1998. The total at June 30,
1998 is represented by five loans and 1 REO property. Despite the increase,
management does not believe these loans materially affect the overall
quality of the Bank's loan portfolio.
The allowance for loan losses amounted to $346,896 at March 31, 1998
compared to $359,436 at June 30, 1998. The increase in allowance for loan
losses is primarily due to the current periodic provision for loan losses.
At June 30, 1998 the Bank's allowance for loan losses as a percentage of
total loans was 0.71% compared to 0.69% at March 31, 1998.
RESULTS OF OPERATIONS
Three Months Ended June 30, 1998 and 1997
Net Income
Mid-Coast recorded net income for the three months ended June 30, 1998
of $71,903 or $0.10 per share (fully diluted) compared to $112,518 or $0.16
per share (fully diluted) for the three months ended June 30, 1997. The
Company's return on average equity (ROE) for the current quarter was 6%, as
compared to a ROE of 10% for the quarter ending June 30, 1997. The decrease
in net income is a direct result of an increase in non-interest expenses
totaling $141,588, consisting primarily of costs related to the Bank's
expansion to Belfast.
Interest Income
Total interest income for the three months ended June 30, 1998 was
$1.3 million as compared to $1.2 million for the three months ended June 30,
1997. Interest on loans increased $52,666 or 4.8% compared to the same
quarter last year. This increase is primarily due to increases in the
average balances of commercial loans that increased $511,216 or 33.4%, and
commercial mortgages that increased $1,521,123 or 24.0%. These increases
are directly related to management's focus on increasing the Bank's
commercial lending presence in mid-coast Maine, through active solicitation
of local businesses. The Bank anticipates, as it continues to restructure
its balance sheet, that the average balances of commercial real estate and
commercial loans will increase.
Interest on investment securities increased $15,776 or 30.2% from
$52,203 for the three months ended June 30, 1997 to $67,979 for the three
months ended June 30, 1998, primarily due to increases in the average
balance of the Bank's investment portfolio of $1,311,414 or 36.5%.
Management's investment strategy continues to focus on increasing yield in
the investment portfolio through purchases of callable agency bonds. In
addition, the Bank uses Federal Home Loan Bank advances to fund investments
and loans as a means to augment interest income.
Interest on other investments increased $39,485 or 115.2% primarily
due to increases in the average balance of time deposits of $1,437,736, or
155.0%, and Federal Funds sold of $1,263,901 or 93.0%.
Interest Expense
Total interest expense for the three month period ended June 30, 1998
increased $69,714 or 11.0% to $702,364 compared to $632,650 for the same
period in the previous fiscal year. The increase is primarily due to
increases in the average balance of deposits and Federal Home Loan Bank
borrowings of $2,836,420 or 6.7% and $2,340,934 or 21.7%, respectively.
This increase in interest bearing liabilities was primarily used to fund the
Bank's growth in loans and the investment portfolio, while maintaining a
level cost of funds. At June 30, 1998 the cost of funds was 4.77% as
compared to 4.79% at June 30, 1997.
Net Interest Income
Net interest income, before provision for loan losses, increased
$38,213 or 7.0% to $585,334 for the quarter ended June 30, 1998, as compared
to $547,121 for the same quarter in the previous year. The increase is
primarily the result of an increase in the average balance of commercial
loans and an increase in the volume of Fed Funds sold and Time Deposits,
which was partially offset by the increased interest expense related to the
average balances of deposits and borrowings. The Bank's net interest margin
was 3.78% for the quarter ending on June 30, 1998 as compared to 3.86% at
June 30, 1997.
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 during the three month
period ended June 30, 1998, decreased, to $12,000 as compared to $17,000 for
the same period last year. While the provision decreased the Bank's
allowance for loan losses as a percentage of total loans increased. At June
30, 1998 the allowance for loan losses as a percentage of total loans was
0.71% compared to 0.62% at June 30, 1997.
Non Interest Income
Total non-interest income for the three month period ended June 30,
1998 increased $35,275 or 53.6%, from $65,849 for the three months ended
June 30, 1997 to $101,124 for the three months ended June 30, 1998,
primarily from the gain on the sale of loans to the secondary market. The
Bank generally sells a portion of the FHLMC conforming fixed rate loans it
originates, depending on market conditions and the interest rate
environment. The Bank recently became an SBA approved lender and generally
sells the guaranteed portion of the SBA loans it originates. During the
quarter, the Bank sold several SBA loans, resulting in non-interest income
of $20,269. The Bank anticipates that SBA loan sales will continue to be a
source of non-interest income. The increase in fees and charges is
primarily related to increases in deposit volume, rather than rate
increases.
Non Interest Expenses
Total non-interest expenses increased by $141,588 or 33.3% to $567,190
for the three month period ended June 30, 1998, as compared to $425,602 for
the same period in the previous fiscal year. The increases in non-interest
expense consisted of increases in compensation and other expenses related to
the Bank's recent expansion to Belfast, expenses associated with the Bank's
stock award program and regular scheduled salary increases. Additionally,
increases occurred in depreciation and amortization, advertising and
miscellaneous other expenses, consisting of shareholder services, utilities,
postage, office supplies and training, connected with the Bank's expansion
to Belfast. The Bank anticipates that non interest expenses may increase in
the future as a result of the Bank's expansion and the opening of new
offices.
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.
During the past year the interest rate environment remained relatively
stable, which allowed the Bank to maintain a fairly consistent interest rate
spread. However, in a declining interest rate environment the Bank's
interest rate spread would increase because liabilities would be repricing
faster than assets for the same period. In contrast, in a rising rate
environment the spread would decrease resulting in an adverse effect on the
Bank's net interest income.
Liquidity and Capital Resources
On June 30, 1998, the Holding Company's stockholders' equity was
$5,240,774 or 8.02% of total assets compared to $5,340,735 or 8.48% at March
31, 1998.
The Office of Thrift Supervision ("OTS") requires savings institutions
such as Waldoboro to maintain a specified ratio of cash and short-term
investment securities to new withdrawal deposits and borrowings with
maturities of one year or less. This minimum OTS required liquidity ratio
is currently 4%. This rate may vary from time to time, depending upon
general economic conditions and deposit flows. As a part of its
asset/liability management program, Waldoboro has historically maintained
liquidity in excess of regulatory requirements to better match its short-
term liabilities. At June 30, 1998, Waldoboro's liquidity ratio was
approximately 14.24%, compared to 13.37% at June 30, 1997.
The minimum capital standards set by the OTS have three components:
(1) tangible capital; (2) leverage ratio or "core" capital; and (3) risk-
based capital. The tangible capital requirement is 1.5% and the leverage
ratio or "core" capital requirement is 3% of an institution's adjusted total
assets. The risk-based capital requirement is 8% of risk-weighted assets.
The institution is also subject to the capital requirements outlined under
the FDIC Improvement Act that requires Tier 1 (Core) Capital of 4.0%. The
amount of an institution's risk-weighted assets is determined by assigning a
"risk-weighted" value to each of the institution's assets. Under the
regulations, the "risk-weighting" of a particular type of assets depends
upon the degree of credit risk that is deemed to be associated with that
type of asset.
At June 30, 1998, Waldoboro had tangible capital of $5,204,000 or
7.97% of adjusted total assets, which exceeds the minimum required tangible
capital and leverage ratio or "core" capital requirements. Waldoboro had
risk-based capital of $5,563,000 or 14.69% of risk-weighted assets at June
30, 1998.
Year 2000
The Holding Company has conducted a review of its computer systems to
identify the systems that could be affected by the "Year 2000" issue and has
developed a plan to resolve the issue. The Year 2000 issue is the result of
computer programs being written using two digits rather than four to define
the applicable year. Any of the Holding Company's programs that have time-
sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. This could result in a major system failure or
miscalculations. The Holding Company has adopted the regulatory plan to
address this issue which has five phases:
1) Awareness Phase - This phase consists of defining the Year 2000
problem and developing a strategy that encompasses all of the bank's
and our vendor's systems. This phase has been completed by the
institution.
2) Assessment Phase - This phase consists of assessing the Year 2000
problem and detailing the steps necessary to address the issue. This
phase must identify all software, hardware, other miscellaneous items,
and customer and vendor interdependencies affected by the Year 2000
issue. This phase also sets a timeline and responsibilities for each
section of the plan. While this phase is largely complete management
recognizes that other issues could arise that would need to be
assessed.
3) Renovation Phase - This phase includes upgrades to hardware and
software, system upgrades, vendor certifications, and other associated
changes. For those applications handled by an outside vendor
management has had ongoing discussions about how they are addressing
this issue, and we will continue to monitor their progress. The
Holding Company plans on having this phase completed by December 31,
1998.
4) Validation Phase - This phase consists of testing all hardware and
software to ensure that it is compatible with our systems. Management
will also be testing systems and data files that are supplied by
vendors and will monitor their testing on an on-going basis. The
Holding Company anticipates having this phase completed by March 31,
1999.
5) Implementation Phase - During the final phase all systems should be
certified as Year 2000 compliant. Any systems that fail certification
must be addressed and contingency plans must be implemented to ensure
continuity. In addition, all new systems and changes to existing
systems must be verified as Year 2000 compliant. The Holding Company
anticipates completion of this phase by June 30, 1999.
The Holding Company presently believes that because of the conversion
to new software in fiscal 1997, the year 2000 problem will not pose
significant operational problems for the Holding Company's and the Bank's
computer systems and that it does not anticipate any material costs to be
incurred. Also, the Bank's loan portfolio is not significantly concentrated
with any single borrower (at June 30, 1998, the largest commercial loan
relationship approximated $554,000) and consists largely of loans secured by
real estate. These factors help mitigate year 2000 risks pertaining to the
valuation of the loan portfolio. The Bank is currently contacting its
significant loan customers regarding their Year 2000 status and plans. The
Holding Company does not anticipate any material concerns regarding other
customers or vendors. It should also be noted that the Bank' regulatory
agency, the Office of Thrift Supervision, has been monitoring, and plans to
continue monitoring, the Bank's progress in addressing year 2000 matters.
Forward Looking Statements
Certain statements contained herein are not based on historical facts
and are "forward-looking statements" within the meaning of Section 21A of
the Securities Exchange Act of 1934. Forward-looking statements which are
based on various assumptions (some of which are beyond the Company's
control), may be identified by reference to a future period or periods, or
by the use of forward-looking terminology, such as "may," "will," "believe,"
"expect," "estimate," "anticipate," "continue," or similar terms or
variations on those terms, or the negative of these terms. Actual results
could differ materially from those set forth in forward looking statements
due to a variety of factors, including, but not limited to, those related to
the economic environment, particularly in the market areas in which the
company operates, competitive products and pricing, fiscal and monetary
policies of the U.S. Government, changes in government regulations affecting
financial institutions, including regulatory fees and capital requirements,
changes in prevailing interest rates, acquisitions and the integration of
acquired businesses, credit risk management, asset-liability management, the
financial and securities markets and the availability of and costs
associated with sources of liquidity.
The Company does not undertake, and specifically disclaims any
obligation, to publicly release the result of any revisions that may be made
to any forward-looking statements to reflect the occurrence of anticipated
or unanticipated events or circumstances after the date of such statements.
PART II OTHER INFORMATION
Item 1. Legal Proceedings.
There was no material litigation pending to which the Registrant was a
party or to which the property of the Registrant was subject during the
quarter ended June 30, 1998.
Item 2. Changes in Securities.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits required by Item 601 of Regulation S-B.
(27) Financial Data Schedule*
*Submitted only with filing in electronic format.
(b) Reports on Form 8-K.
None.
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, thereunto duly authorized.
MID-COAST BANCORP, INC.
Date August 10, 1998 /s/ Wesley E. Richardson
(Signature)
Wesley E. Richardson
President and Treasurer