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: September 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 September 30, 1998, is 714,509
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 September 30, 1998 and March 31, 1998 3
Consolidated Statements of Income of Mid-Coast Bancorp,
Inc. (Unaudited), Three Months and Six Months Ended
September 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 September 30, 1998 6
Consolidated Statements of Cash Flows of Mid-Coast
Bancorp, Inc. (Unaudited), for the Six Months Ended
September 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 17
SIGNATURES 18
2
MID-COAST BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
(unaudited)
September 30, 1998 March 31, 1998
------------------ --------------
Cash and due from banks $ 1,684,001 $ 1,149,870
Interest bearing deposits 131,966 98,160
Federal funds sold 6,380,000 2,720,000
---------------------------------
Cash and cash equivalents 8,195,967 3,968,030
Time deposits 2,475,000 2,476,000
Investments available for sale, at market 2,949,399 2,144,041
Held to maturity investment securities
(Market value $731,773 and $922,351) 749,953 949,672
Investments in Federal Home Loan Bank stock 734,500 622,000
Loans held for sale 576,671 353,025
Loans 53,014,224 50,624,539
Less: Allowance for loan losses 369,416 346,896
Deferred loan fees 55,417 64,112
---------------------------------
52,589,391 50,213,531
Bank premises and equipment, net 1,731,229 1,490,827
Other Assets:
Accrued interest receivable:
Loans 269,422 239,689
Time deposits/Investments 71,609 58,939
Deferred income taxes 101,561 100,000
Prepaid expenses and other assets 343,792 329,026
Real estate owned 158,379 70,383
---------------------------------
Total other assets 944,763 798,037
---------------------------------
Total assets $70,946,873 $63,015,163
=================================
See accompanying notes.
3
MID-COAST BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
(unaudited)
September 30, 1998 March 31, 1998
------------------ --------------
Liabilities:
Deposits:
Demand deposits $ 3,681,606 $ 2,297,644
NOW accounts 5,279,782 4,018,629
Savings 7,319,118 5,686,227
Money market deposit accounts 4,763,737 5,134,082
Certificates of deposit 31,294,561 28,034,834
----------------------------------
Total deposits 52,338,804 45,171,416
Advances from the Federal Home Loan Bank 12,940,000 12,190,000
Accrued expenses and other liabilities 356,098 313,012
----------------------------------
Total liabilities 65,634,902 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; 714,509 Shares
issued and outstanding (711,960
at March 31, 1998) 714,509 711,960
Paid-in capital 1,527,930 1,521,041
Accumulated other comprehensive income
(loss) 7,577 0
Retained earnings 3,301,298 3,253,517
Unearned compensation (239,343) (145,783)
----------------------------------
Total stockholders' equity 5,311,971 5,340,735
----------------------------------
Total liabilities and stockholders'
equity $70,946,873 $63,015,163
==================================
See accompanying notes.
4
MID-COAST BANCORP, INC
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Six Months Ended
September 30, September 30,
-------------------------- --------------------------
1998 1997 1998 1997
---- ---- ---- ----
Interest income:
Interest on loans $1,133,638 $1,120,283 $2,279,621 $2,213,600
Interest on investment securities 73,725 50,655 141,704 102,858
Interest on time deposits 36,216 14,084 71,480 27,766
Interest on fed funds sold 61,030 36,138 96,569 55,387
Other 1,575 1,296 4,508 2,616
----------------------------------------------------------
Total interest income 1,306,184 1,222,456 2,593,882 2,402,227
Interest expense:
Interest on deposits 529,424 482,762 1,038,741 954,006
Interest on borrowed money 184,001 170,718 377,048 332,124
----------------------------------------------------------
Total interest expense 713,425 653,480 1,415,789 1,286,130
----------------------------------------------------------
Net interest income 592,759 568,976 1,178,093 1,116,097
Provision for loan losses 18,000 15,000 30,000 32,000
----------------------------------------------------------
Net interest income after
provision for loan losses 574,759 553,976 1,148,093 1,084,097
Non interest income:
Loan service and other loan fees 13,183 11,260 25,228 23,042
Gain on loans sold 40,408 16,132 69,791 17,482
Other 51,749 50,592 111,445 103,309
----------------------------------------------------------
Total non interest income 105,340 77,984 206,464 143,833
Non interest expenses:
Compensation of directors, officers,
and staff 227,354 189,762 460,227 363,597
Building occupancy 23,654 9,795 48,458 20,751
Repairs and maintenance 30,475 7,228 47,801 18,299
Depreciation, amortization, and
software expense 62,927 42,278 122,302 91,399
Advertising 29,526 10,296 55,300 20,791
Insurance and bonds 18,871 18,597 38,011 37,221
Legal, audit and examinations 35,993 16,042 58,858 33,313
Taxes (other than income) 15,560 12,292 33,911 25,491
Employee benefits 18,535 24,597 35,357 50,070
Data processing 14,858 16,284 28,292 27,247
Other 116,943 97,077 227,567 178,895
Real estate owned 1,709 0 7,511 2,776
----------------------------------------------------------
Total non interest expenses 596,405 444,248 1,163,595 869,850
----------------------------------------------------------
Income before income taxes 83,694 187,712 190,962 358,080
Income taxes 36,668 61,357 72,033 119,207
----------------------------------------------------------
Net income $ 47,026 $ 126,355 $ 118,929 $ 238,873
==========================================================
Earnings per share:
Basic $ 0.07 $ 0.18 $ 0.17 $ 0.34
Diluted $ 0.07 $ 0.18 $ 0.17 $ 0.34
==========================================================
See accompanying notes.
5
MID-COAST BANCORP, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited)
For the Period April 1, 1997 to September 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 $5,075,545
Net income 0 0 0 238,873 0 238,873
Issuance of 1,552 shares of
common stock upon exercise
of options 1,552 14,140 0 0 0 15,692
Net change in market value of
investments available for
sale, net of taxes 0 0 7,433 0 0 7,433
Cash Dividends declared
($.09 per share) 0 0 0 (60,194) 0 (60,194)
-----------------------------------------------------------------------------------
Balance, September 30, 1997 232,991 1,483,909 7,433 3,553,016 0 5,277,349
Net income 0 0 0 236,743 0 236,743
Unearned compensation 0 0 0 0 (177,925) (177,925)
Compensation earned 0 0 0 0 32,142 32,142
Issuance of 4,329 shares of
common stock upon exercise
of options 4,329 37,132 0 0 0 41,461
Net change in market value of
investments available for
sale, net of taxes 0 0 (7,433) 0 0 (7,433)
Cash dividends declared
($.09 per share) 0 0 0 (61,602) 0 (61,602)
Stock split effected as
dividend 474,640 0 0 (474,640) 0 0
-----------------------------------------------------------------------------------
Balance, March 31, 1998 711,960 1,521,041 0 3,253,517 (145,783) 5,340,735
Net income 0 0 0 118,929 0 118,929
Other comprehensive income,
net of tax:
Net change in market value of
investments available for
sale 0 0 7,577 0 0 7,577
----------
Comprehensive income 126,506
Unearned compensation 0 0 0 0 (109,630) (109,630)
Compensation earned 0 0 0 0 16,070 16,070
Issuance of 2,549 shares of
common stock upon exercise
of options 2,549 6,889 0 0 0 9,438
Cash dividends declared
($.10 per share) 0 0 0 (71,148) 0 (71,148)
-----------------------------------------------------------------------------------
Balance, September 30, 1998 $714,509 $1,527,930 $7,577 $3,301,298 ($239,343) $5,311,971
===================================================================================
See accompanying notes.
6
MID-COAST BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
September 30,
--------------------------
1998 1997
---- ----
Cash flows from operating activities:
Net income $ 118,929 $ 238,873
Adjustments to reconcile net income to net
cash provided (used) by operating activities:
Depreciation, amortization, and accretion 40,761 47,667
Provision for losses on loans 30,000 32,000
Gain on sale of loans (69,791) (17,482)
Deferred fees 6,148 792
Loss on sale of Real Estate Owned 4,285 2,151
Loans originated for sale (3,216,421) (1,091,567)
Proceeds from sales of loans 3,062,566 1,174,049
Increase\Decrease in other assets (62,634) 8,132
Increase other liabilities 43,086 22,210
----------------------------
Net cash provided/(used) by operating activities (43,071) 416,825
Cash flows from investing activities:
Loan originations and repayments, net (2,541,226) (834,426)
Net decrease in time deposits 1,000 0
Investment and mortgage-backed securities:
Purchases (3,706,544) (517,469)
Proceeds from sales, maturities and repayments 3,000,646 510,000
Purchases of property and equipment (280,696) (26,199)
Proceeds from sale of real estate owned 51,780 89,672
----------------------------
Net cash used by investing activities (3,475,040) (778,422)
Cash flows from financing activities:
Net increase in certificates of deposits 3,259,727 2,049,557
Net increase in demand, NOW, savings
and money market deposit accounts 3,907,661 274,336
FHLB Advances 4,000,000 2,000,000
FHLB Advances paid (3,250,000) (2,000,000)
Dividends paid in cash (71,148) (60,194)
Sale of common stock 9,438 15,692
Acquisition of shares for stock award plan (109,630) 0
----------------------------
Net cash provided by financing activities 7,746,048 2,279,391
----------------------------
Net increase in cash and cash equivalents 4,227,937 1,917,794
Cash and cash equivalents, at beginning of period 3,968,030 3,135,910
----------------------------
Cash and cash equivalents, at end of period $ 8,195,967 $ 5,053,704
============================
See accompanying notes.
7
MID-COAST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 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 paid on June 30, 1998 to shareholders of
record on June 1, 1998. In addition, the Board declared a cash dividend in
October, 1998 of $.10 per share of common stock which is payable on December
31, 1998 to shareholders of record on December 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.
5. 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. Comprehensive income for the six months ended September 30,
1997 was $246,306.
6. 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.
8
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 September 30, 1998 had 714,509 shares outstanding.
The Bank had total assets of $70.9 million as of September 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 three branches located in Belfast, Jefferson, and Rockland,
Maine. The Jefferson location recently opened in October. 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 Belfast,
Rockland and Waldoboro, including the surrounding communities in Knox,
Lincoln, and Waldo counties, Maine. Additionally, with the newest branch in
Jefferson, the Bank's market area will be expanding in Jefferson and the
surrounding communities in Lincoln 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."
9
Comparison of Financial Condition at September 30, 1998
and March 31, 1998
Total assets increased $7,931,710 or 12.6% to $70.9 million for the
quarter ended September 30, 1998 from $63.0 million at March 31, 1998. The
growth in assets is primarily due to an increase in deposits, which were
used to fund the purchase of investments and originate loans. The increase
in federal funds sold 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 its short term investments will be
redeployed to fund the origination of loans. If deposit growth continues to
outpace loan growth, management will evaluate paying off some borrowings.
Loans increased $2,389,685 from $50.6 million at March 31, 1998 to
$53.0 million at September 30, 1998. The Bank experienced loan growth in
its commercial, residential, and consumer loan portfolios. Commercial
mortgages increased $1,068,494 or 14.3% and Small Business Administration
(SBA) loans increased $141,943 or 386%. Residential mortgage loans increased
$636,798 or 1.8% and consumer loans increased by $256,733 or 5.2%.
Typically, commercial mortgages provide a higher yield than residential
mortgages, and at September 30, 1998 the yield on commercial mortgages was
9.47% compared to 8.47% for residential mortgages.
At September 30, 1998, total liabilities increased $7,960,474 or 13.8%
from $57.7 million at March 31, 1998 to $65.6 million at September 30, 1998.
Interest bearing deposits increased $5,783,426 or 13.5% and non-interest-
bearing deposits increased $1,383,962 or 60.2%, primarily due to the opening
of our new branch in Belfast and growth at our Rockland location. 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 be
achieved and the overall cost of funds can be lowered by concentrating on
building relationships through core deposit growth.
At September 30, 1998, total stockholders' equity decreased $28,764 or 0.54%
to $5,311,971 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 ("RRP") and the payment of a cash dividend.
The Company has now acquired all the stock authorized under the RRP. This
decrease is partially offset by the Bank's fiscal year net income.
Asset Quality and Allowance for Loan Losses
At March 31, 1998 and September 30, 1998 loans contractually past due 90
days or more totaled $294,626 or 0.58% of loans and $148,678 or 0.28% of
loans, respectively. Nonaccrual of interest on these loans totaled $17,089
at March 31, 1998 as compared to $8,662 at September 30, 1998. At March 31,
1998, the Bank had $69,570 of accruing loans, which were 90 days or more
delinquent as compared to $27,006 at September 30, 1998. Management does
not believe these loans materially affect the overall quality of the Bank's
loan portfolio.
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
$307,057 or 0.43% of total assets at September 30, 1998.
The allowance for loan losses amounted to $346,896 at March 31, 1998
compared to $369,416 at September 30, 1998. The increase in allowance for
loan losses is primarily due to the current periodic provision for loan
losses. At September 30, 1998 the Bank's allowance for loan losses as a
percentage of total loans was 0.70% compared to 0.69% at March 31, 1998.
10
RESULTS OF OPERATIONS
Three Months Ended September 30, 1998 and 1997
Net Income
Mid-Coast recorded net income for the three months ended September 30,
1998 of $47,026 or $0.07 per share (fully diluted) compared to $126,355 or
$0.18 per share (fully diluted) for the three months ended September 30,
1997. The Company's return on average equity (ROE) for the current quarter
was 3.5%, as compared to a ROE of 9.6% for the quarter ending September 30,
1997. The decrease in net income is a direct result of an increase in non-
interest expenses totaling $152,157, consisting primarily of costs related
to the Bank's expansion to Belfast, increased advertising, and additional
employees.
Interest Income
Total interest income for the three months ended September 30, 1998
was $1.3 million as compared to $1.2 million for the three months ended
September 30, 1997. Interest on loans increased $13,355 or 1.2% compared to
the same quarter last year. This increase is primarily due to increases in
the average balances of commercial loans; however, this was partially offset
by declining interest rates on the entire portfolio. The commercial loan
portfolio increased $533,164 or 34.1%, and commercial mortgages increased
$1,651,464 or 25.7%. 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. The decline in interest rates was a result of the global economic
turmoil that led investors to seek the safety of U.S. treasury debt. This
in turn drove down the rates paid on US Treasury bonds. In addition, the
Federal Reserve Bank lowered the targeted federal funds rate by 50 basis
points over the quarter, which led to a decline in the prime rate of 50
basis points.
Interest on investment securities increased $23,070 or 45.5% from
$50,655 for the three months ended September 30, 1997 to $73,725 for the
three months ended September 30, 1998, primarily due to increases in the
average balance of the Bank's investment portfolio of $1,615,000 or 47.4%.
Management's investment strategy continues to focus on increasing yield in
the investment portfolio through purchases of callable and bullet 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 Time Deposits and Federal Funds sold increased $22,132 and
$24,892, respectively, primarily due to increases in the average balances.
The average balances of Time Deposits and Federal Funds increased by
$1,433,000 and $1,571,000, respectively.
Interest Expense
Total interest expense for the three month period ended September 30,
1998 increased $59,945 or 9.2% to $713,425 compared to $653,480 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 $4,499,000 or 10.6% and $1,956,000 or 17.4%, 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 September 30, 1998, the cost of funds was 4.68% as
compared to 4.76% at September 30, 1997.
Net Interest Income
Net interest income, before provision for loan losses, increased
$23,783 or 4.2% to $592,759 for the quarter ended September 30, 1998, as
compared to $568,976 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 increase in average balances of deposits and borrowings. The
Bank's net
11
interest margin was 3.71% for the quarter ending on September 30, 1998 as
compared to 3.88% at September 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 September 30, 1998, increased to $18,000, as compared to
$15,000 for the same period last year.
Non-Interest Income
Total non-interest income for the three month period ended September
30, 1998 increased $27,356 or 35.1%, from $77,984 for the three months ended
September 30, 1997 to $105,340 for the three months ended September 30,
1998, primarily from the gain on the sale of loans to the secondary market.
The Bank generally sells the Federal Home Loan Mortgage Corp. (FHLMC)
conforming fixed rate loans it originates. In addition, the Bank recently
became a Small Business Administration (SBA) approved lender and generally
sells the guaranteed portion of the SBA loans it originates. During the
quarter, the Bank sold several FHLMC and SBA loans, resulting in non-
interest income of $32,808 and $7,600, respectively. 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 $152,157 or 34.2% to $596,405
for the three-month period ended September 30, 1998, as compared to $444,248
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, and expenses associated
with the Bank's stock award program. 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. While the recent
opening of our branch in Jefferson will further impact operating expenses,
management has embarked on a cost savings program. All discretionary items
are being reviewed to determine which expenses can be lowered and which can
be held to current levels.
Six Months Ended September 30, 1998 and 1997
Net Income
Mid-Coast reported net income of $118,929 or $0.17 per share for the
six months ended September 30, 1998, compared to $238,873 or $0.34 per share
for the six months ended September 30, 1997. During the period, the Bank
recorded an increase in net interest income, before provision for loan
losses, of $61,996 or 5.6%, and an increase in total non-interest income of
$62,631 or 43.5%. Total non-interest expense increased $293,745 or 33.8%,
primarily due to the expenses associated with opening the Bank's new office
in Belfast.
12
Interest Income
Total interest income for the six months ended September 30, 1998
increased $191,655 or 8% as compared to the same period in the previous
fiscal year. Interest on loans increased $66,021 or 3% primarily due to
increases in the average balances of mortgage, commercial and consumer
loans. Interest on investment securities increased $38,846 or 37.8%, due to
the increased balance of the investment portfolio. Interest on Time
Deposits and Federal Funds sold increased $43,714 and $41,182, respectively,
primarily due to increased balances. The average balances of Time Deposits
and Federal Funds increased by $1,433,000 and $1,571,000, respectively.
Interest Expense
Total interest expense for the six-month period ended September 30,
1998 increased $129,659 or 10.1%. Interest expense on borrowed money
increased $44,924 or 13.5% and interest on deposits increased $84,735 or
8.9%. Interest expense increased due to an increase in balances of deposit
accounts and borrowings. The Bank's strategy remains focused on reducing
the average cost of funds on deposits and borrowings. This is accomplished
through a combination of increased transaction account balances, Certificate
of Deposit "specials" and borrowings at rates more favorable than available
in the market place.
Net Interest Income
Total net interest income for the six months ended September 30, 1998
increased $61,996 or 5.6%. This increase is primarily the result of
increases in the average balances of mortgage, commercial and consumer
loans, which is partially offset by increased interest expense associated
with increases in average balances of deposit accounts and Federal Home Loan
Bank advances.
Provisions for Loan Losses
The Bank's provision for loan losses during the three month period
ended September 30, 1998, decreased to $30,000 as compared to $32,000 for
the same period last year. While the provision decreased slightly, the
Bank's allowance for loan losses as a percentage of total loans increased.
At September 30, 1998, the allowance for loan losses as a percentage of
total loans was 0.70% compared to 0.64% at September 30, 1997.
Non-Interest Income
Non-interest income for the six months ended September 30, 1998
increased $62,631 or 43.5%, compared to the same period in the previous
fiscal year. Increases occurred in all categories of Non-Interest income;
however, gains on loans sold represented the majority of the gain,
increasing $52,309 or 299%. This gain was driven by an increase in the
number of loans sold on the secondary market and by the sale of SBA loans.
Over the six-month period, gains on the sale of mortgage loans totaled
$41,922, while gains on the sale of SBA loans totaled $27,869.
Non-Interest Expenses
Non-interest expenses for the six-month period ended September 30,
1998 increased $293,745 or 33.8% as compared to the same period in the
previous fiscal year. This increase in non-interest expenses primarily
resulted from costs associated with the Bank's recent expansion to Belfast.
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
13
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.
Up until the past quarter, the interest rate environment was in a
period of relative stability, which allowed the Bank to maintain a fairly
consistent interest rate spread. However, during the last quarter there was
a decline in interest rates, which resulted in a relatively flat yield
curve. A continued flat yield curve could cause a decline in the net
interest margin, which would negatively impact earnings. Typically, in a
declining interest rate environment the Bank's interest rate spread would
increase because liabilities would be repricing faster than assets for the
same period. In contrast, in a rising rate environment, the spread would
decrease resulting in an adverse effect on the Bank's net interest income.
Liquidity and Capital Resources
On September 30, 1998, the Holding Company's stockholders' equity was
$5,311,971 or 7.49% 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 September 30, 1998, Waldoboro's liquidity ratio was
approximately 22%, compared to 17% at September 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%. 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 asset depends upon
the degree of credit risk that is deemed to be associated with that type of
asset.
At September 30, 1998, Waldoboro had tangible capital of $5,260,000 or
7.42% of adjusted total assets, which exceeds the minimum required tangible
capital and leverage ratio or "core" capital requirements. Waldoboro had
total risk-based capital of $5,629,000 or 14.06% of risk-weighted assets at
September 30, 1998.
14
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 the first three phases and is currently working on the validation
phase. The following is a brief synopsis of each phase:
1) Awareness Phase - This phase consists of defining the Year 2000
problem and developing a strategy that encompasses all of the bank's
and 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 September 30, 1998, the largest commercial loan
relationship approximated $600,000) 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. The Company also relies on several third party service providers
for key business processes. It continues to work closely with these
companies to monitor the progress of their year 2000 efforts. 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' regulatory agency, the Office of Thrift Supervision, has been
monitoring, and plans to continue monitoring, the Bank's progress in
addressing year 2000 matters.
15
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.
16
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 September 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.
On July 15, 1998, at the Annual Meeting of Shareholders of Mid-Coast
Bancorp, Inc. Wesley E. Richardson was elected a Director for a term of
three years and until his respective successor is appointed. The vote for
the director was as follows:
FOR WITHHELD
--- --------
Wesley E. Richardson 591,976 8,922
Samuel Cohen, Lincoln O. Orff, Ronald E. Dolloff, Waite Weston, Robert
Spear and Sharon Crowe are continuing as Directors following said meeting.
In addition, the shareholders also voted to ratify at the annual
meeting the appointment of Baker, Newman & Noyes as the Company's
independent auditors for the 1999 fiscal year. The vote ratifying the
appointment of the independent auditors was:
FOR 598,876
AGAINST 1,698
ABSTAIN 324
Item 5. Other Information.
On August 11, 1998 George Seaver and Peter Van Alstine were elected to
the Board of Directors of the Bank and Mid-Coast. The addition of Messrs.
Seaver and Alstine brings each Board to nine members.
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.
17
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 November 13, 1998 /s/ Wesley E. Richardson
(Signature)
Wesley E. Richardson
President and Treasurer
18