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: December 31, 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 December 31, 1998, is 715,257.
MID-COAST BANCORP, INC.
Index
PART I FINANCIAL INFORMATION Page
Item 1: Consolidated Balance Sheets of
Mid-Coast Bancorp, Inc. (Unaudited)
at December 31, 1998 and March 31, 1998 3
Consolidated Statements of Income of
Mid-Coast Bancorp, Inc. (Unaudited),
Three Months and Nine Months Ended
December 31, 1998 and 1997 5
Consolidated Statement of Changes in Stockholders'
Equity of Mid-Coast Bancorp, Inc (Unaudited)
for the period April 1, 1997 to December 31, 1998 6
Consolidated Statements of Cash Flows of
Mid-Coast Bancorp, Inc. (Unaudited),
for the Nine Months Ended December 31, 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
MID-COAST BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
(unaudited)
December 31, 1998 March 31, 1998
----------------- --------------
Cash and due from banks $ 1,634,156 $ 1,149,870
Interest bearing deposits 115,044 98,160
Federal funds sold 2,665,000 2,720,000
-------------------------------
Cash and cash equivalents 4,414,200 3,968,030
Time deposits 2,673,000 2,476,000
Investments available for sale, at market 4,504,585 2,144,041
Held to maturity investment securities
(Market value $190,297 and $922,351) 200,000 949,672
Investments in Federal Home Loan Bank stock 734,500 622,000
Loans held for sale 630,377 353,025
Loans 55,497,399 50,624,539
Less: Allowance for loan losses 388,750 346,896
Deferred loan fees 54,363 64,112
-------------------------------
55,054,286 50,213,531
Bank premises and equipment, net 1,762,293 1,490,827
Other Assets:
Accrued interest receivable:
Loans 268,084 239,689
Time deposits/Investments 67,880 58,939
Deferred income taxes 107,280 100,000
Income tax receivable 14,908 0
Prepaid expenses and other assets 346,454 329,026
Real estate owned 158,379 70,383
-------------------------------
Total other assets 962,985 798,037
-------------------------------
Total assets $70,936,226 $63,015,163
===============================
See accompanying notes.
MID-COAST BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
(unaudited)
December 31, 1998 March 31, 1998
----------------- --------------
Liabilities:
Deposits:
Demand deposits $ 3,597,897 $ 2,297,644
NOW accounts 5,969,835 4,018,629
Savings 7,474,340 5,686,227
Money market deposit accounts 5,031,649 5,134,082
Certificates of deposit 31,093,444 28,034,834
-------------------------------
Total deposits 53,167,165 45,171,416
Advances from the Federal Home
Loan Bank 12,190,000 12,190,000
Accrued expenses and other liabilities 259,963 313,012
Total liabilities 65,617,128 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; 715,257 Shares
issued and outstanding (711,960 at March 31, 1998) 715,257 711,960
Paid-in capital 1,529,988 1,521,041
Accumulated other comprehensive
income (loss) 1,702 0
Retained earnings 3,303,459 3,253,517
Unearned compensation (231,308) (145,783)
-------------------------------
Total stockholders' equity 5,319,098 5,340,735
-------------------------------
Total liabilities and stockholders' equity $70,936,226 $63,015,163
===============================
See accompanying notes.
MID-COAST BANCORP, INC
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Nine Months Ended
December 31, December 31,
------------------------- -------------------------
1998 1997 1998 1997
---- ---- ---- ----
Interest income:
Interest on loans $1,167,118 $1,129,002 $3,442,953 $3,342,602
Interest on investment securities 54,061 49,860 195,765 152,718
Interest on time deposits 36,826 21,069 108,306 48,835
Interest on mortgage backed securities 10,332 0 14,118 0
Interest on federal funds sold 64,285 55,687 160,854 111,074
Other 2,342 2,387 6,850 5,003
-------------------------------------------------------
Total interest income 1,334,964 1,258,005 3,928,846 3,660,232
Interest expense:
Interest on deposits 539,478 515,520 1,578,219 1,469,526
Interest on borrowed money 167,235 153,160 544,283 485,284
-------------------------------------------------------
Total interest expense 706,713 668,680 2,122,502 1,954,810
-------------------------------------------------------
Net interest income 628,251 589,325 1,806,344 1,705,422
Provisions for loan losses 19,000 18,000 49,000 50,000
-------------------------------------------------------
Net interest income after
provision for loan losses 609,251 571,325 1,757,344 1,655,422
Non interest income:
Loan service and other loan fees 13,295 10,773 38,523 33,815
Gain on loans sold 44,948 19,740 114,739 37,222
Other 53,346 48,339 164,791 151,648
-------------------------------------------------------
Total non interest income 111,589 78,852 318,053 222,685
Non interest expenses:
Compensation of directors, officers, and staff 250,319 190,222 710,546 553,819
Building occupancy 23,644 9,930 72,102 30,681
Repairs and maintenance 28,303 14,888 76,104 33,187
Depreciation, amortization, and software expense 61,798 51,583 184,100 142,982
Advertising 28,716 8,488 84,016 29,279
Insurance and bonds 19,262 18,109 57,273 55,330
Legal, audit and examinations 29,575 22,399 88,433 55,712
Taxes (other than income) 18,601 11,582 52,512 37,073
Employee benefits 19,288 15,368 54,645 65,438
Data processing 15,951 11,506 44,243 38,753
Other 110,654 91,813 338,221 270,708
Real Estate Owned 1,333 5,822 8,844 8,598
-------------------------------------------------------
Total non interest expenses 607,444 451,710 1,771,039 1,321,560
-------------------------------------------------------
Income before income taxes 113,396 198,467 304,358 556,547
Income taxes 39,718 68,946 111,751 188,153
-------------------------------------------------------
Net income $ 73,678 $ 129,521 $ 192,607 $ 368,394
=======================================================
Earnings per share:
Basic $0.10 $0.18 $0.27 $0.53
Diluted $0.10 $0.18 $0.27 $0.52
=======================================================
See accompanying notes
MID-COAST BANCORP, INC
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited)
For the Period April 1, 1997 to December 31, 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 0 368,394 0 368,394
Other comprehensive income, net of tax:
Net change in market value of
investments available for sale 0 0 5,837 0 0 5,837
----------
Comprehensive income 374,231
Acquisition of shares of stock award
plan (177,925) $ (177,925)
Compensation earned 17,219 $ 17,219
Issuance of 5,549 shares
of common stock upon
exercise of options 5,549 48,228 0 0 0 53,777
Cash Dividends declared
($.52 per share) 0 0 0 (121,796) 0 (121,796)
-----------------------------------------------------------------------------------
Balance, December 31, 1997 236,988 1,517,997 5,837 3,620,935 (160,706) 5,221,051
Net income 0 0 0 107,222 0 107,222
Other comprehensive income, net of tax:
Net change in market value of
investments available for sale 0 0 (5,837) 0 0 (5,837)
----------
Comprehensive income 101,385
Acquisition of shares for stock award
plan 0 0 0 0 0 0
Compensation earned 0 0 0 0 14,923 14,923
Issuance of 322 shares
of common stock upon
exercise of options 322 3,044 0 0 0 3,376
Stock split effected as dividend 474,640 0 0 (474,640) 0 0
-----------------------------------------------------------------------------------
Balance, March 31, 1998 711,960 1,521,041 0 3,253,517 (145,783) 5,340,735
Net income 0 0 0 192,607 0 192,607
Other comprehensive income, net of tax:
Net change in market value of
investments available for sale 0 0 1,702 0 0 1,702
----------
Comprehensive income 194,309
Acquisition of shares for stock award
plan 0 0 0 0 (109,630) (109,630)
Compensation earned 0 0 0 0 24,105 24,105
Issuance of 3,297 shares
of common stock upon
exercise of options 3,297 8,947 0 0 0 12,244
Cash dividends declared
($.20 per share) 0 0 0 (142,665) 0 (142,665)
-----------------------------------------------------------------------------------
Balance, December 31, 1998 $715,257 $1,529,988 $ 1,702 $3,303,459 ($231,308) $5,319,098
===================================================================================
See accompanying notes.
MID-COAST BANCORP, INC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
December 31,
---------------------------
1998 1997
---- ----
Cash flows from operating activities:
Net income $ 192,607 $ 238,873
Adjustments to reconcile net income to net
cash provided (used) by operating activities:
Depreciation, amortization, and accretion 81,734 47,667
Provision for losses on loans 49,000 32,000
Gain on sale of loans (114,739) (17,482)
Deferred fees 19,100 792
Loss on sale of Real Estate Owned 4,285 2,151
Loans originated for sale (5,535,930) (1,091,567)
Proceeds from sales of loans 5,373,317 1,174,049
Decrease/(increase) in other assets (77,868) 8,132
Increase other liabilities (53,049) 22,210
---------------------------
Net cash provided/(used) by operating activities (61,543) 416,825
Cash flows from investing activities:
Loan originations and repayments, net (5,024,067) (834,426)
Net increase in time deposits (197,000) 0
Investment and mortgage-backed securities:
Purchases (6,016,214) (517,469)
Proceeds from sales, maturities and repayments 4,324,124 510,000
Purchases of property and equipment (386,608) (26,199)
Proceeds from sale of real estate owned 51,780 89,672
---------------------------
Net cash used by investing activities (7,247,985) (778,422)
Cash flows from financing activities:
Net increase in certificates
of deposits 3,058,610 2,049,557
Net increase in demand, NOW, savings
and money market deposit accounts 4,937,139 274,336
FHLB Advances 5,500,000 2,000,000
FHLB Advances paid (5,500,000) (2,000,000)
Dividends paid in cash (142,665) (60,194)
Sale of common stock 12,244 15,692
Acquisition of shares for stock award plan (109,630) 0
---------------------------
Net cash provided by financing activities 7,755,698 2,279,391
---------------------------
Net increase in cash and cash equivalents 446,170 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 $ 4,414,200 $ 5,053,704
===========================
See accompanying notes.
MID-COAST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
December 31, 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 Mid-Coast Bancorp, Inc. declared a cash
dividend of $.10 for each share of common stock, which was payable on
December 31, 1998 to shareholders of record on December 1, 1998.
3. Investments Available For Sale
------------------------------
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
----------------
The Company maintains a Recognition and Retention Plan for officers
and directors. The cost of acquiring this stock is recorded in
unearned compensation as a component of stockholder's equity. Once
awarded, the stock vests over five years and the unearned compensation
is amortized as compensation expense during the vesting period.
5. Stock Split
-----------
The Company's Board of Directors declared a three-for-one split on
March 31, 1998 to stockholders of record on March 2, 1998; per share
date for all prior periods has been restated to reflect this stock
split.
6. Comprehensive Income
---------------------
The Company has adopted SFAS No. 130 "Reporting Comprehensive Income"
in its first fiscal quarter. Net income is a component of
comprehensive income, with all other components referred to in the
aggregate as other comprehensive income.
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 of 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, this 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.
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, which completed a three-
for-one stock split and as of December 31, 1998, had 715,257 shares
outstanding.
The Bank had total assets of $70.9 million as of December 31, 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, 1998. 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.
From this strategy, the Bank anticipates its interest and non-interest
income will increase. Like most financial institutions, Waldoboro's
earnings are primarily dependent upon its net interest income, which is
determined by (i) the difference between yields on interest-earning assets
and rates paid on interest-bearing liabilities (known as the interest rate
spread) and (ii) the relative amounts of interest-earning assets and
interest-bearing liabilities outstanding.
The Bank and the entire financial services industry are significantly
affected by prevailing economic conditions as well as government policies
and regulations concerning, among other things, monetary and fiscal affairs,
housing and financial institutions. Deposit flows are influenced by a
number of factors including interest rates on money market funds, the stock
market, other competing investments, account maturities and levels of
personal income and savings. Lending activities are influenced by, among
other things, the demand for and supply of housing, conditions in the
construction industry, and loan refinancing in response to declining
interest rates. Sources of funds for lending activities include deposits,
loan payments, proceeds from sales of loans and investments, investment
returns and borrowings.
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."
Comparison of Financial Condition at December 31, 1998 and March 31, 1998.
Total assets increased $7,921,063 or 12.6% to $70.9 million for the
quarter ended December 31, 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.
Loans, including loans available for sale, increased $5,150,212 from
$51.0 million at March 31, 1998, to $56.1 million at December 31, 1998. The
Bank experienced loan growth in its commercial, residential, and consumer
loan portfolios resulting from the Bank's new branches. Commercial mortgage
loans increased $2,061,737 or 27.6% and Small Business Administration (SBA)
loans increased by $113,097 or 308%. Residential mortgage loans increased
$2,112,424 or 5.9% and consumer loans increased by $187,100 or 4.7%.
Typically, commercial mortgages provide a higher yield than residential
mortgages, and at December 31, 1998, the yield on commercial mortgages was
9.15% compared to 8.02% for residential mortgages.
Investments, including Time Deposits, increased $1.8 million from $5.6
million at March 31, 1998, to $7.4 million at December 31, 1998. Time
Deposits increased $197,000 or 8.0% and Investments available for sale
increased $2,360,544 or 110%. The increases in the average balance of the
investment portfolio is based upon management's determination to maximize
yield on deposit growth not currently used to fund loans. These increases
were partially offset by a decrease of $749,672 or 79% in investments held
to maturity, which is primarily due to management's determination to reduce
this investment category by letting these investments mature without
replacement.
At December 31, 1998, total liabilities increased $7,972,700 or 13.8%
from $57.7 million at March 31, 1998, to $65.6 million at December 31, 1998.
Demand deposits (non-interest bearing deposits) increased $1.3 million or
56.6%; NOW, savings and Money Market Accounts increased $3.6 million or
24.5% and Certificates of deposits increased $3.1 million or 10.9%, due to
growth in Belfast, Rockland and the opening of our new branch in Jefferson.
The Bank's marketing efforts remain directed toward enhancing market
presence. This goal is met by focusing on the growth of specific products,
namely core deposits, such as, retail and commercial checking accounts, and
to a lesser extent Certificates of deposit. Management believes that core
deposit relationships are fundamental to the Bank's growth and play an
important role in reducing the overall cost of funds. Compared to March 31,
1998, the Bank's cost of funds has been reduced by 43 basis points.
At December 31, 1998, total stockholders' equity decreased $21,637 or
0.41% to $5,319,098 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 two cash
dividends. 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 December 31, 1998, loans contractually past due
90 days or more totaled $294,626 or 0.58% of loans and $250,575 or 0.45% of
loans, respectively. Non-accrual of interest on these loans totaled $17,089
at March 31, 1998, as compared to $11,371 at December 31, 1998. At March
31, 1998, the Bank had $69,570 or accruing loans, which were 90 days or more
delinquent as compared to $127,174 at December 31,1998. 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 non-accrual
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
$536,310 or 0.76% of total assets at December 31, 1998.
The allowance for loan losses amounted to $346,896 at March 31, 1998,
compared to $388,750 at December 31, 1998. The increase in allowance for
loan losses is primarily due to the current periodic provision for loan
losses. The Bank's allowance for loan losses as a percentage of total loans
was 0.70% at December 31, 1998, and 0.69% at March 31, 1998.
RESULTS OF OPERATIONS
Three Months Ended December 31, 1998 and 1997
Net Income
Mid-Coast recorded net income for the three months ended December 31,
1998 of $73,678 or $0.10 cents per share (fully diluted) compared to
$129,521 or $0.18 cents per share (fully diluted) for the three months ended
December 31, 1998. The Company's return on average equity (ROE) for the
current quarter was 5.5%, as compared to a ROE of 9.9% for the quarter
ending December 31, 1997. The decrease in net income is a direct result of
an increase in non-interest expenses totaling $155,734; consisting primarily
of costs related to the Bank's recent branch expansion to Belfast and
Jefferson, Maine.
Interest Income
Total interest income for the three months ended December 31, 1998
increased $76,959 or 6.1% compared to the same period last year. This
increase is primarily due to increases in the average balances of loans,
investments, including Time deposits and Federal Funds. These increases were
partially offset by declining interest rates effecting the entire portfolio.
The real estate mortgage loan portfolio increased $2,742,581 or 7.8%,
commercial loans increased $3,499,150 or 38.7%. The increase in lending is
effected by two primary factors; management focus on increasing the Bank's
commercial lending presence in Mid-Coast Maine and the Federal Reserve Bank
lowering the targeted federal funds rate by 75 basis points over the
quarter, which led to a decline in the prime rate.
Interest on investment securities increased $14,533 or 29.2% from
$49,860 for the three months ended December 31, 1997 to $64,393 for three
months ended December 31, 1998, primarily due to increases in the average
balance of the Bank's investment portfolio of $989,402 or 26.6%.
Management's investment strategy continues to focus on increasing yield
through purchases of callable and bullet agency bonds and U.S. Treasuries.
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 $15,757 and
$8,598, respectively, for the three-month period compared to the same period
last year, primarily due to increases in the average balances. The average
balances of Time Deposits and Federal Funds increased by $1,115,087 and
$1,166,573, respectively.
Interest Expense
Total interest expense for the three month period ended December 31,
1998 increased $38,033 or 5.7% compared to the same period in the previous
year. The increase is primarily due to increases in the average balance of
deposits and Federal Home Loan Bank borrowings of $6,549,536 or 14.1% and
$2,000,000 or 19.6%, respectively. The increase in interest bearing
liabilities was partially generated by the Bank's recent branch expansion
into the communities of Belfast and Jefferson, Maine, and continued growth
of the Bank's Rockland branch. These funds were primarily used to fund the
Bank's growth in loans and the investment portfolio, while reducing the
Bank's cost of funds. At December 31, 1998, the cost of funds was 4.36% as
compared to 4.73% at December 31, 1997.
Net Interest Income
Net interest income, before provision for loan losses, increased
$38,926 or 6.6% for the period ended December 31, 1998, as compared to the
same period last year. The increase is related to average balance increases
in real estate mortgages, commercial loans, Federal Funds sold, Time
Deposits and the Bank's investment securities portfolio. These increases
are partially offset by increased interest expense related to increases in
the average balances of deposits and borrowings. The Bank's net interest
margin was 3.63% for the quarter ending December 31, 1998, compared to 3.84%
at December 31, 1997.
Provisions for Losses on Loans
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 December 31, 1998 was $19,000 compared to $18,000 for the same
period last year.
Non Interest Income
Total non-interest income for the three-month period ended December
31, 1998, increased $32,737 or 41.5% compared to the same period last year,
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. The Bank also is an approved Small Business
Administration (SBA) lender and generally sells the guaranteed portion of
the SBA loans it originates. During the quarter, the Bank sold $2,485,800
FHLMC loans generating $38,276 in 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 expense increased $155,734 or 34.5% for the three-
month period ended December 31, 1998, compared to the same quarter in the
previous year. The increase in non-interest expense consisted of increases
in compensation and other expenses related to the Bank's recent branch
expansion to Belfast and Jefferson, Maine. Other expenses related to the
expansion include; building occupancy, depreciation, amortization,
advertising, utilities, postage, office supplies and training.
Additionally, management, as part of its strategic plan for lending, hired a
senior lender to oversee and direct all the Bank's lending.
Nine Months Ended December 31, 1998 and 1997
Net Income
Mid-Coast reported net income of $192,607 or $0.27 (basis and diluted)
per share for the nine months ended December 31, 1998, compared to $368,394
or $0.53 (basic) and $0.52 (diluted) per share for the period ended December
31, 1997. During the current period, the Bank recorded an increase in net
interest income, before provision for loan loss, of $100,922 or 5.9%, and an
increase in total non-interest income of $95,368 or 42.8%. Total non-
interest expenses increased $449,479 or 34.0%, due to expenses related with
opening the Bank's new offices in Belfast and Jefferson, Maine.
Interest Income
Total interest income for the nine months ended December 31, 1998,
increased $268,614 or 7.3% as compared to the same period in the previous
fiscal year. Interest on loans increased $100,351 or 3.0% primarily due to
increases in the average balances of the real estate mortgage and commercial
loan portfolios. Interest income on investment securities, inclusive of
mortgage backed securities, increased $57,165 or 37.4% due to average
balance increases in the investment portfolio. Interest on Time Deposits
and Federal Funds sold increased $59,471 and $49,780, respectively,
primarily due to increased balances. Given the Bank's deposit growth,
management's strategy continues to be focused on increasing the Bank's real
estate and commercial lending presence in Mid-Coast Maine.
Interest Expense
Total interest expense for the nine months ended December 31, 1998,
increased $167,692 or 8.6% compared to December 31, 1997. Interest expense
on deposits and borrowings increased $108,693 or 7.4% and $58,999 or 12.2%,
respectively, compared to the same period last year. Interest expense
increased due to an increase in the average balances of deposits and
borrowings. This increase is primarily generated by the Bank's recent
expansion into Belfast and Jefferson, Maine, and the continued growth of the
Rockland branch. This growth coupled with the Bank's focus on reducing the
average cost of funds on deposits and borrowings has reduced the average
cost of funds from 4.75% for the period ended December 31, 1997, to 4.58% at
December 31, 1998.
Net Interest Income
Total net interest income for the nine months ended December 31, 1998,
increased $100,922 or 5.92%. This increase is primarily the result of
increases in the average balances of investment securities, time deposits,
Federal Funds sold, mortgages and commercial loans. These increases were
partially offset by increased interest expense associated with increases in
average balances of deposit accounts and Federal Home Loan Bank advances.
Provisions for Losses on Loans
The Bank's provision for losses on loans for the nine months ended
December 31, 1998, decreased slightly from $50,000 at December 31, 1997, to
$49,000 December 31, 1998. At December 31, 1998, the allowance for loan
losses as a percentage of total loans was 0.70% compared to 0.67% at
December 31, 1997. The provision is deemed appropriate based on
management's belief that the current allowance for loan losses is adequate
given the current loan portfolio and the associated risk.
Non-Interest Income
Non-interest income for the nine months ended December 31, 1998,
increased $95,368 or 42.8%. The increase is primarily related to the gain
on the sale of loans to the secondary market. The increase in fees and
charges is primarily related to increases in deposit volume, rather than
rate increases.
Non-Interest Expenses
Non-interest expenses increased $449,479 or 34.0% as compared to the
same period last year. This increase is primarily related to the Bank's
recent expansion to the communities of Belfast and Jefferson, Maine.
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.
The current interest rate environment is relatively stable with a flat
yield curve. A continued flat yield curve should allow the Bank's interest
margin to remain relatively stable. Typically, in a declining interest rate
environment the Bank's interest rate spread would increase because
liabilities would be repricing faster than assets for the same period. In
contrast, in a rising rate environment the spread would decrease resulting
in an adverse affect on the Bank's net interest income.
Liquidity and Capital Resources
On December 31, 1998, the Holding Company's stockholders' equity was
$5,319,098 or 7.50% 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 December 31, 1998, Waldoboro's liquidity ratio was
approximately 15.57% compared to 12.95% at December 31, 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 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 which is deemed to be associated with
that type of asset.
At December 31, 1998, Waldoboro had tangible capital of $5,196,000 or
7.33% of adjusted total assets, which exceeds the minimum required tangible
capital and leverage ratio or "core" capital requirements. Waldoboro had
risk-based capital of $5,585,000 or 13.46% of risk-weighted assets at
December 31, 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 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 Holding Company's vendor's systems. This phase has been
completed by the institution.
2) Assessment Phase - This phase consists of assessing the Year 200
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.
4) Validation Phase - This phase consists of testing all hardware and
software to ensure that it is compatible with our system. Management
will also be testing systems and data files that are supplied by
vendors and will monitor their testing on an ongoing 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 system. 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 efforts.
In addition, the Company has developed a contingency plan in case any systems
are not operational after the year 2000 and is presenting a plan for Board
approval at its February 1999 meeting. This plan will be continually reviewed
and revised to address all critical systems. It should also be noted that the
Bank's regulatory agency, the Office of Thrift Supervision, has been
monitoring, and plans to continue monitoring, the Bank's progress in
addressing Year 2000 matters. To date the Bank has spent approximately
$27,000 on the Year 2000 issue primarily due to the purchase of computer
hardware, related installation cost and overtime for key employees and
anticipates that it may spend $15,000 additional in the future. Future
costs may be necessary for employee overtime, an external audit and costs
related to computer maintenance.
PART II OTHER INFORMATION
Item 1. Legal Proceedings.
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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 December 31, 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.
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None.
Item 5. Other Information.
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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 February 9, 1999 /s/ Wesley E. Richardson
-----------------------------
Wesley E. Richardson
President and Treasurer