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, 1999 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, 1999, is 715,632.
Transitional Small Business Disclosure Format: Yes [ ] No [X]
Page 1 of 18
MID-COAST BANCORP, INC.
Index
PART I FINANCIAL INFORMATION Page
Item 1: Consolidated Balance Sheets of Mid-Coast Bancorp, Inc.
(Unaudited) at June 30, 1999 and March 31, 1999 3
Consolidated Statements of Income of Mid-Coast Bancorp,
Inc. (Unaudited), Three Months Ended June 30, 1999 and 1998 5
Consolidated Statement of Changes in Stockholders'
Equity of Mid-Coast Bancorp, Inc. (Unaudited) for the
period April 1, 1998 to June 30, 1999 6
Consolidated Statements of Cash Flows of Mid-Coast
Bancorp, Inc. (Unaudited), for the Three Months Ended
June 30, 1999 and 1998 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 17
2
MID-COAST BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
(unaudited)
June 30, 1999 March 31, 1999
------------- --------------
ASSETS
Cash and due from banks $ 1,862,510 $ 1,583,693
Interest bearing deposits 92,127 93,095
Federal funds sold 605,000 2,120,000
----------------------------
Cash and cash equivalents 2,559,637 3,796,788
Time deposits 2,377,000 2,079,000
Investment securities available for sale 6,027,702 5,216,681
Held to maturity investment securities
(market value of $189,241 at June 30, 1999
and $186,415 at March 31, 1999) 200,000 200,000
Investment in Federal Home Loan Bank stock 734,500 734,500
Loans held for sale 403,400 179,000
Loans 57,776,525 56,429,522
Less: Allowance for loan losses 427,796 404,385
Deferred loan fees 69,648 60,589
----------------------------
57,279,081 55,964,548
Bank premises and equipment, net 1,704,061 1,734,619
Other assets:
Accrued interest receivable-loans 301,767 288,413
Accrued interest receivable-time deposits 13,943 18,328
Accrued interest receivable-investment
and mortgage-backed securities 67,928 70,213
Deferred income taxes 130,332 113,137
Prepaid expenses and other assets 374,142 375,636
Real estate owned\other repo assets 1,957 0
----------------------------
Total other assets 890,069 865,727
----------------------------
Total assets $72,175,450 $70,770,863
============================
3
June 30, 1999 March 31, 1999
------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Demand deposits $ 3,464,764 $ 3,106,977
NOW Accounts 5,574,517 5,309,433
Savings 7,656,968 6,582,120
Money Market deposit accounts 4,834,067 4,711,304
Certificates of deposit 32,503,840 32,705,039
----------------------------
Total deposits 54,034,156 52,414,873
Advances from the Federal Home Loan Bank 12,465,000 12,715,000
Accrued expenses and other liabilities 294,055 267,370
Total liabilities 66,793,211 65,397,243
Stockholders' equity
Common stock, $1 par value, 1500,000
shares authorized; 715,632 shares
issued and outstanding (715,457 shares
at March 31, 1999) 715,632 715,457
Paid-in capital 1,531,078 1,535,412
Retained earnings 3,425,366 3,371,524
Accumulated other comprehensive income (80,767) (25,500)
Unearned compensation (209,070) (223,273)
----------------------------
Total stockholders' equity 5,382,239 5,373,620
Total liabilities and stockholders'
equity $72,175,450 $70,770,863
============================
4
MID-COAST BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
Three Months Ended
June 30,
--------------------
1999 1998
---- ----
Interest income:
Interest on loans $1,187,729 $1,145,983
Interest on investment securities 61,456 67,979
Interest on mortgage-backed securities 23,701 0
Other interest income 66,650 73,736
--------------------------
Total interest income 1,339,536 1,287,698
Interest expense:
Interest on deposits 518,203 509,317
Interest on borrowings 170,871 193,047
--------------------------
Total interest expense 689,074 702,364
--------------------------
Net interest income 650,462 585,334
Provision for loan losses 19,000 12,000
--------------------------
Net interest income after
provision for loan losses 631,462 573,334
Other income:
Loan servicing and other loan fees 15,245 12,045
Gain on sale of loans 33,061 29,383
Deposit account fees 60,833 57,317
Miscellaneous 3,525 2,379
--------------------------
112,664 101,124
Other expenses:
Compensation of directors, officers
and staff 204,587 207,573
Building occupancy 24,547 24,804
Repairs and maintenance 16,284 17,326
Depreciation, amortization and software
expense 71,451 59,375
Advertising 11,818 25,774
Insurance expense 22,516 19,140
Professional fees 16,861 22,865
Employee benefits 54,881 42,122
Real estate owned 156 5,802
Other 136,824 142,409
--------------------------
559,925 567,190
--------------------------
Income before income taxes 184,201 107,268
Income tax expense 59,748 35,365
--------------------------
Net income $ 124,453 $ 71,903
==========================
Earnings per share - basic $ 0.17 $ 0.10
==========================
Earnings per share - diluted $ 0.17 $ 0.10
==========================
5
MID-COAST BANCORP, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited)
For the Period April 1, 1998 to June 30, 1999
Accumulated
Other
Comprehensive Total
Common Paid-In Retained Income Unearned Stockholders'
Stock Capital Earnings (Loss) Compensation Equity
------ ------- -------- ------------- ------------ -------------
Balance March 31, 1998 $711,960 $1,521,041 $3,253,517 $ 0 $(145,783) $5,340,735
Net income 0 0 71,903 0 0 71,903
Acquisition of shares
for stock award plan 0 0 0 0 (109,630) (109,630)
Amortization of unearned
compensation 0 0 0 0 8,035 8,035
Issuance of 1,055 shares
of common stock upon
exercise of options 1,055 1,646 0 0 0 2,701
Net change in market value
of investments available
for sale, net of taxes 0 0 0 (1,821) 0 (1,821)
Cash dividends declared
($.10 perhare) 0 0 (71,149) 0 0 (71,149)
-------------------------------------------------------------------------------------
Balance June 30, 1998 713,015 1,522,687 3,254,271 (1,821) (247,378) 5,240,774
Net income 185,883 185,883
Acquisition of shares
for stock award plan 0 0 0 0 0 0
Amortization of unearned
compensation 0 0 0 0 24,105 24,105
Issuance of 2,442 shares
of common stock upon
exercise of options 2,442 12,725 0 0 0 15,167
Net change in market value
of investments available
for sale, net of taxes 0 0 0 (23,679) 0 (23,679)
Cash dividends declared
($.10 per share) 0 0 (68,630) 0 0 (68,630)
-------------------------------------------------------------------------------------
Balance March 31, 1999 715,457 1,535,412 3,371,524 (25,500) (223,273) 5,373,620
Net income 0 0 124,453 0 0 124,453
Net change in market value
investments available for
sale, net of taxes 0 0 0 (55,267) 0 (55,267)
----------
Total comprehensive income 69,186
Issuance of 175 shares
of common stock upon
exercise of options 175 480 0 0 0 655
Cash dividends declared
($.10 per share) 0 0 (70,611) 0 0 (70,611)
Amortization of unearned
compensation 0 0 0 0 9,566 9,566
Other activity related to
Recognition and Retention
Plan 0 (4,814) 0 0 4,637 (177)
-------------------------------------------------------------------------------------
Balance June 30, 1999 $715,632 $1,531,078 $3,425,366 ($80,767) ($209,070) $5,382,239
=====================================================================================
MID-COAST BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
June 30,
----------------------
1999 1998
---- ----
Cash flows from operating activities:
Net income $ 124,453 $ 71,903
Adjustments to reconcile net income to net
cash provided (used) by operating activities:
Depreciation, amortization, and accretion 51,885 29,028
Provision for losses on loans 19,000 12,000
Gain on sale of loans (33,061) (29,383)
Deferred fees 13,385 (1,021)
Loss on sale of Real Estate Owned 0 4,285
Loans originated for sale (1,279,561) (1,250,309)
Proceeds from sales of loans 1,088,222 1,071,805
Increase\(decrease) in other assets 2,486 (50,514)
Increase other liabilities 26,508 218,910
-----------------------------
Net cash provided by operating activities 13,317 76,704
Cash flows from investing activities:
Loan originations and repayments, net (1,344,549) (502,619)
Net (increase)\decrease in time deposits (298,000) 100,000
Investment and mortgage-backed securities:
Purchases (958,720) (2,626,642)
Proceeds from sales, maturities and repayments 66,868 800,000
Purchases of property and equipment (15,394) (214,733)
Proceeds from sale of real estate owned 0 51,780
-----------------------------
Net cash used by investing activities (2,549,795) (2,392,214)
Cash flows from financing activities:
Net increase\(decrease) in certificates
of deposits (201,199) 1,576,548
Net increase in demand, NOW, savings
and money market deposit accounts 1,820,482 348,095
FHLB Advances 750,000 3,500,000
FHLB Advances paid (1,000,000) (3,250,000)
Dividends paid in cash (70,611) (71,149)
Sale of common stock 655 2,701
Acquisition of shares for stock award plan 0 (109,630)
-----------------------------
Net cash provided by financing activities 1,299,327 1,996,565
-----------------------------
Net decrease in cash and cash equivalents (1,237,151) (318,945)
Cash and cash equivalents, at beginning of period 3,796,788 3,968,030
-----------------------------
Cash and cash equivalents, at end of period $ 2,559,637 $ 3,649,085
=============================
7
MID-COAST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
June 30, 1999
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, 1999 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, 1999 to
shareholders of record on June 1, 1999.
3. Investments Available for Sale
If significant, unrealized gains and losses, net of tax, on
securities available for sale are reported as a component of accumulated
other comprehensive income 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
The Company maintains a Recognition and Retention Plan for officers
and directors. The cost of this stock is recorded in unearned compensation
as a component of stockholders' equity. Once awarded, the unearned
compensation is amortized as compensation expense during the vesting
period.
8
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.
9
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, 1999 had 715,632 shares outstanding.
The Bank had total assets of $72.2 million as of June 30, 1999. 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 three branches located in Belfast, Jefferson and Rockland,
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, Rockland, Belfast and Jefferson including the surrounding
communities in Waldo, Knox and Lincoln counties, 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 reflects the Bank's efforts to
structure 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.
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."
10
Comparison of Financial Condition at June 30,1999 and March 31,1999
Total assets increased $1.4 million or 2.0% to $72.2 million for the
quarter ended June 30, 1999 from $70.8 million at March 31, 1999. The
modest growth in assets is primarily due to an increase in deposits which
were used to fund the purchase of investments and originate loans.
Net loans, including loans available for sale, increased $1.5 million
from $56.1 million to $57.7 million at June 30, 1999. The Bank experienced
loan growth in its commercial, construction, net of undisbursed funds,
loans available for sale and consumer loan portfolios, resulting primarily
from the Banks recent branch expansion. The $488,983 or 18.7% increase in
commercial loans was primarily attributable to increases in time and demand
loans and Small Business Administration (SBA) loans. Construction loans,
net of undisbursed funds, increased $451,012 or 16.0% and were
predominately comprised of non-speculative commercial projects involving
renovations and new construction. Loans available for sale increased
$224,400 or 125.4% and consists of residential secondary market loans.
Consumer loans consisting of installment and home equity loans increased
$213,521 or 4.0%.
Investments, including Time Deposits, increased $1.1 million to $9.3
million at June 30, 1999. Time Deposits increased $298,000 or 14.3% and
investments available for sale increased $811,021 or 15.6%. The increase
in the balance of the investment portfolio is based on management's
decision to maximize yield on deposit growth not currently used to
fund loans.
At June 30, 1999 total liabilities increased $1.4 million to $66.8
million. Demand deposits (non-interest bearing deposits) increased
$357,787 or 11.5%, NOW, Savings and Money Market accounts increased $1.5
million or 8.8%, and Certificates of Deposit remained stable. The Bank's
goal continues to focus on increased marketshare and is achieved by
focusing on specific products, such as retail and commercial checking
accounts, savings and Money Market Accounts. Certificates of Deposit
(CD's) remain a part of deposit growth, but to a lesser extent. When core
deposits increase more rapidly than CD's the Bank's overall cost of funds
is reduced.
Total Stockholders' Equity increased $8,619 to $5,382,239 at June 30,
1999. The increase in equity is attributable to net income of $124,453
which is partially offset by the payment of a cash dividend of $70,611 and
the decline in accumulated other comprehensive income of $55,267 due to
changes in market value of investments available for sale.
Asset Quality and Allowance for Loan Losses
At March 31, 1999 and June 30, 1999 total loans contractually past
due 90 days or more amounted to $143,131 or 0.25% of loans and $139,539 or
0.24%, respectively. Non-accrual of interest on these loans totaled
$7,253 at March 31, 1999 and $0 at June 30, 1999. At March 31, 1999, the
Bank had $69,580 of accruing loans, which were 90 days or more delinquent
as compared to $139,539 at June 30, 1999.
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 $143,131 or 0.20% of total assets at March 31, 1999 compared to
$141,496 or 0.20% at June 30, 1999.
The allowance for loan losses amounted to $427,796 at June 30, 1999
compared to $404,385 at March 31, 1999. The increase in allowance for loan
losses is primarily due to the current periodic provision for loan losses
of $19,000 and net recoveries of $4,411. The Bank's allowance for loan
losses as a percentage of total loans was 0.90% at June 30, 1999.
11
RESULTS OF OPERATIONS
Three Months Ended June 30, 1999 and 1998
Net Income
Mid-Coast recorded net income for the three months ended June 30,
1999 of $124,453 or $0.17 per share (fully diluted) compared to $71,903 or
$0.10 per share (fully diluted) for the three months ended June 30, 1998.
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. The
$52,550 or 73.1% increase in net income is attributable to a $65,128 or
11.1% increase in net interest income (the spread), a $11,540 or 11.4%
increase in other income and a $7,265 or 1.3% decrease in other expenses.
Interest Income
Total interest income for the three months ended June 30, 1999
increased $51,838 or 4.0% compared to the same period last year. The
increase is primarily related to increases in the balances of the real
estate and commercial mortgage portfolios. The real estate mortgage and
commercial mortgage loan portfolio increased $3,788,714 or 10.5% and
$2,270,342 or 28.0%, respectively. The increase in residential mortgage
activity is related to four factors; a generally positive economic climate
in the area, a reduction in interest rates during the period, the Bank's
recent branch expansion and increased marketing efforts focusing on
mortgage loans. Commercial mortgage increases have benefited from branch
expansion, a positive economic climate and the active solicitation of the
business by the Bank's lending team.
Interest on investment securities, including mortgage-backed
securities, increased $17,178 or 25.3% for the period ended June 30, 1999
compared to the same period last year, primarily due to increases in the
average balance of the Bank's investment portfolio of $1,421,839 or 29.6%.
Management's investment strategy continues to focus on two points;
supporting liquidity and Increasing yields on available funds, through
purchases of callable agency bonds and U.S. Treasuries.
Other interest income, which is primarily comprised of Time Deposits
and Federal Funds sold decreased $7,086 or 9.6% for the period ended June
30, 1999 compared to June 30, 1998. The decrease is primarily related to a
decrease in the average balance of Federal Funds sold.
Interest Expense
Total interest expense for the three month period ended June 30, 1999
decreased $13,290 or 1.9% compared to the three month period ended June 30,
1998. The decrease is primarily due to the Bank's ability to attract low
cost transaction accounts coupled with a Certificate of Deposit (CD's)
strategy focused in offering short-term "specials". As a result of this
strategy the cost of funds decreased 60 basis points from 4.78% to 4.18%
for the three months ending June 30, 1998 and 1999 respectively. Growth in
transaction accounts for the period ended June 30, 1999 totaled $4,045,639
or 23.1% compared to the same period last year while Certificate of Deposit
growth was $2,892,458 or 9.8% for the comparable period. Federal Home Loan
Bank borrowings remain consistent for the period ended June 30,1999
compared to last year. The growth in deposits is primarily related to the
expansion in Belfast and Jefferson and continued growth of the existing
offices in Waldoboro and Rockland.
Net Interest Income
Net interest income, before provision for loan losses, increased
$65,128 or 11.1%. The difference between total interest income and total
interest expense (the spread) is a significant component of the Bank's
profitability. The Bank's spread at June 30, 1999 was 3.59% compared to
3.46% for the same period last year.
12
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, 1999 was $19,000 compared to $12,000
for the same period last year
Non Interest Income
Total non-interest income for the period ended June 30, 1999
increased $11,540 or 11.4% compared to the same period last year. This
increase is related to growth in sale of mortgages to the secondary market,
which generates gain on sale and loan servicing income, Small Business
Administration (SBA) loans, in which, the guaranteed portion is sold and
fees and charges primarily related to increased deposit volume, rather than
rates.
Non Interest Expenses
Total non-interest expenses decreased $7,265 or 1.3% for the period
ended June 30, 1999 compared to June 30, 1998. The Bank's expansion to
Belfast and Jefferson had a significant effect on non-interest expenses for
the three months ended June 30,1998. The recent quarter ended June 30,1999
represents non interest expenses more in line with the Bank's normal
operating expenses. The decrease in compensation for directors' officers
and employees of $2,986 or 1.4% incorporates the branch expansion and the
hiring of a Senior Vice President of lending. The Bank currently has an
opening on its Senior Management team and is attempting to fill the
position. Increases in Depreciation, Insurance and Employee benefits amounted
to $12,076 or 20.3%, $3,376 or 17.6% and $12,759 or 30.3%, respectively.
These increases are directly related to branch expansion. A decrease in
advertising of $13,956 or 54.2% compared to June 30, 1998 is a reduction in
promotion materials and additional advertising related to the Bank's branch
expansion. The decrease of $6,004 or 26.3% in professional fees relates to
costs related in hiring the Senior Vice President in fiscal 1999. The
decrease in other miscellaneous expenses of $5,585 or 3.9% relates to cost
savings in utilities, postage, office supplies and travel.
Asset/Liability Management
Like other institutions, the Bank's most significant form of market
risk is interest rate risk. The Bank is subject to interest rate risk to
the degree that the Bank's interest-bearing liabilities, primarily deposits
with short and medium-term maturities, mature or reprice at different rates
than the Bank's interest-earning assets. The Bank believes it is critical
to manage the relationship between interest rates and the effect on the
Bank's net portfolio value ("NPV"). This approach calculates the
difference between the present value of expected cash flows from assets and
the present value of expected cash flows from liabilities, as well as cash
flows from off-balance sheet contracts. The Bank manages assets and
liabilities within the context of the marketplace, regulatory limitations
and within limits established by the Bank's Board of Directors on the
amount of change in NPV which is acceptable given certain interest rate
changes.
An asset or liability is interest rate sensitive within a specific
time period if it will mature or reprice within that time period. If the
Bank's assets mature or reprice more quickly or to a greater extent than
the Bank's liabilities, the Bank's net portfolio value and net interest
income would tend to increase during periods of rising interest rates but
decrease during periods of falling interest rates. Conversely, if the
Bank's assets mature or reprice more slowly or to a lessor extent than the
Bank's liabilities, the Bank's net portfolio value and net interest income
would tend to decrease during periods of rising interest rates but increase
during periods of falling interest rates. The Bank's policy has been to
mitigate the interest rate risk inherent in the historical savings
institution business of originating long-term loans funded by short-term
deposits by pursuing certain strategies designed to decrease the
vulnerability of the Bank's earnings to material and
13
prolonged changes in interest rates. In this regard, the Bank's attempts
to minimize interest rate risk by, among other things, emphasizing the
origination and retention of adjustable-rate loans and loans with shorter
maturities and the sale of long-term one-to-four family fixed-rate loans in
the secondary market.
Liquidity and Capital Resources
On June 30, 1999, the Holding Company's stockholders' equity was
$5,382,239 or 7.46% of total assets compared to $5,373,620 or 7.59% at
March 31, 1999.
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, 1999, Waldoboro's liquidity ratio was
$6,601,925 approximately 11.94%, compared to 13.37% at June 30, 1998.
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, 1999, Waldoboro had tangible capital of $5,401,000 or
7.46% of adjusted total assets, which exceeds the minimum required tangible
capital and leverage ratio or "core" capital requirements. Waldoboro had
risk-based capital of $5,829,000 or 13.54% of risk-weighted assets at June
30, 1999.
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. The Company has
substantially completed all five phases. The following is a brief synopsis
of each phase:
1) Awareness Phase - This phase consists of defining the Year 2000
problem and developing a strategy that encompasses all of the
bank's and 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
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vendor management has had ongoing discussions about how
the vendors are addressing this issue, and we will continue to
monitor their progress. The Holding Company has completed this
phase.
4) Validation Phase - This phase consists of testing all hardware
and software to ensure that it is compatible with our systems.
In addition to testing components, connections with other
systems must be verified and all changes should be accepted by
internal and external users. Management has established
controls to assure the effective and timely completion of all
hardware and software testing prior to final implementation.
As with the renovation phase, the Company will be in ongoing
discussions with its vendors on the success of their validation
efforts. The Company has completed testing all of its critical
systems and has completed this phase.
5) Implementation Phase - During the final phase all systems
should be certified as Year 2000 compliant. Any systems that
fail certification must be addressed and contingency plans must
be implemented to ensure continuity. The Company has completed
this phase. In addition, all new systems and changes to existing
systems must be verified as Year 2000 compliant.
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, 1999, the largest
commercial loan relationship approximated $739,164) 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 has contacted
its significant loan customers regarding their Year 2000 efforts and
believes, based on the information provided, that its significant loan
customers are compliant. In addition, the Company has developed a
contingency plan in case any systems are not operational after the year
2000. This plan will be continually reviewed and revised to address all
critical systems. It should also be noted that the Bank's regulatory
agency, The Office of Thrift Supervision, has been monitoring, and plans to
continue monitoring, the Bank's progress in addressing Year 2000 matters.
The Bank on July 14, 1999 had its year 2000 examination by the OTS. To date
the Bank has spent approximately $27,000 on the Year 2000 issue primarily
due to the purchase of computer hardware, related installation cost and
overtime for key employees.
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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, 1999.
Item 2. Changes in Securities and Use of Proceeds.
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.
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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, 1999 /s/ Wesley E. Richardson
----------------------------
(Signature)
Wesley E. Richardson
President and Treasurer