UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For quarter ended September 30, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-10602
MID-AMERICA BANCORP
(Exact name of registrant as specified in its charter)
KENTUCKY 61-1012933
(State or other jurisdiction of (I.R.S. Employer I.D. No.)
incorporation or organization)
500 West Broadway, Louisville, Kentucky 40202
(Address of principal executive offices) (Zip Code)
(502) 589-3351
(Registrant's telephone number, including area code)
NONE
(Former name, former address and former fiscal year,
if changed since last report)
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 a 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
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under
a plan confirmed by a court.
Yes No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
October 30, 1998: 9,930,148 shares of common stock, no par value
MIDAMERICA BANCORP
PART I. FINANCIAL INFORMATION
The consolidated financial statements of MidAmerica Bancorp and
subsidiaries (Company) submitted herewith are unaudited. However, in the
opinion of management, all adjustments (consisting only of adjustments
of a normal recurring nature) necessary for a fair presentation of the
results for the interim periods have been made.
ITEM 1. FINANCIAL STATEMENTS
The following consolidated financial statements of the Company are
submitted herewith:
Consolidated balance sheets - September 30, 1998 and December 31,
1997
Consolidated statements of income - three and nine months ended
September 30, 1998 and 1997
Consolidated statements of changes in shareholders' equity -
nine months ended September 30, 1998 and 1997
Consolidated statements of comprehensive income - three and nine
months ended September 30, 1998 and 1997
Consolidated statements of cash flows - nine months ended September
30, 1998 and 1997
Notes to consolidated financial statements
CONSOLIDATED BALANCE SHEETS
In thousands, except share and per share amounts
Unaudited
<TABLE>
<CAPTION>
September 30 December 31
----------- -----------
1998 1997
ASSETS ----------- -----------
<S> <C> <C>
Cash and due from banks $30,916 $29,002
Federal funds sold 5,600 16,900
Securities purchased under agreements to resell 55,000 --
Securities available for sale, amortized cost
of $305,992 (1998) and $409,497 (1997) 310,143 414,721
Securities held to maturity, market value
of $4,056 (1998) and $108,321 (1997) 4,023 108,178
Loans, net of unearned income 953,566 891,075
Allowance for loan losses (9,216) (9,209)
----------- -----------
Loans, net 944,350 881,866
Premises and equipment 22,227 21,757
Other assets 33,811 37,155
----------- -----------
TOTAL ASSETS $1,406,070 $1,509,579
=========== ===========
LIABILITIES
Deposits:
Non-interest bearing $125,920 $140,092
Interest bearing 769,510 738,737
----------- -----------
Total deposits 895,430 878,829
Securities sold under agreements to repurchase 212,228 284,500
Federal funds purchased 8,965 --
Advances from the Federal Home Loan Bank 76,908 63,165
Gift certificates and money orders
outstanding 29,091 104,609
Accrued expenses and other liabilities 17,994 22,767
----------- -----------
TOTAL LIABILITIES 1,240,616 1,353,870
SHAREHOLDERS' EQUITY
Preferred stock, no par value;
authorized - 750,000 shares; none issued -- --
Common stock, no par value, stated value $2.77 per
share; authorized - 12,000,000 shares; issued
and outstanding - 9,930,148 shares (1998)
and 9,878,803 shares (1997) 27,541 27,399
Additional paid-in capital 115,845 115,182
Retained earnings 19,370 9,773
Accumulated other comprehensive income 2,698 3,355
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 165,454 155,709
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,406,070 $1,509,579
=========== ===========
See notes to consolidated financial statements.
/TABLE
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
In thousands, except per share amounts
Unaudited
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30 September 30
------------------ ------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans $22,190 $19,497 $64,210 $57,375
Interest and dividends on:
Taxable securities 3,836 5,068 12,120 14,859
Tax-exempt securities 709 691 2,130 1,956
Interest on federal funds sold 125 230 471 898
Interest on securities purchased under
agreements to resell 1,161 1,120 4,647 4,529
-------- -------- -------- --------
Total interest income 28,021 26,606 83,578 79,617
-------- -------- -------- --------
INTEREST EXPENSE:
Interest on deposits 8,792 8,110 25,954 23,945
Interest on federal funds purchased
and securities sold under
agreements to repurchase 2,947 3,043 9,833 10,005
Interest on Federal Home
Loan Bank advances 1,169 1,009 3,212 3,093
-------- -------- -------- --------
Total interest expense 12,908 12,162 38,999 37,043
-------- -------- -------- --------
Net interest income before
provision for loan losses 15,113 14,444 44,579 42,574
Provision for loan losses -- -- 500 --
-------- -------- -------- --------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 15,113 14,444 44,079 42,574
-------- -------- -------- --------
NON-INTEREST INCOME:
Income from trust department 643 376 1,757 901
Service charges on deposit accounts 1,434 1,328 4,041 3,743
Gift certificate and money order fees 56 572 177 1,882
Securities gains (losses) 3 (9) 30 59
Other 1,588 969 9,652 3,019
-------- -------- -------- --------
Total non-interest income 3,724 3,236 15,657 9,604
-------- -------- -------- --------
OTHER OPERATING EXPENSES:
Salaries and employee benefits 7,318 6,865 21,216 19,437
Occupancy expense 794 818 2,265 2,309
Furniture and equipment expenses 1,061 1,209 3,238 3,427
Other 3,462 2,456 10,464 7,453
-------- -------- -------- --------
Total other operating expenses 12,635 11,348 37,183 32,626
-------- -------- -------- --------
Income before income taxes 6,202 6,332 22,553 19,552
Income tax expense 1,792 2,007 6,710 6,105
-------- -------- -------- --------
NET INCOME $4,410 $4,325 $15,843 $13,447
======== ======== ======== ========
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic 9,930 9,814 9,911 9,776
Diluted 10,115 10,018 10,125 9,927
NET INCOME PER COMMON SHARE
Basic $0.44 $0.44 $1.60 $1.38
Diluted 0.44 0.43 1.57 1.35
See notes to consolidated financial statements.
/TABLE
<PAGE>
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
In thousands
Unaudited
<TABLE>
<CAPTION>
Nine months ended
September 30
----------------------
1998 1997
---------- ----------
<S> <C> <C>
Balance, January 1 $155,709 $140,638
Net income 15,843 13,447
Other comprehensive income
(loss), net of tax (657) 2,078
Cash dividends declared (6,246) (5,412)
Stock options exercised, including
related tax benefits 805 2,250
---------- ----------
Balance, September 30 $165,454 $153,001
========== ==========
See notes to consolidated financial statements.
</TABLE>
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
In Thousands
Unaudited
<TABLE>
<CAPTION>
Three months Nine months
ended September 30 ended September 30
---------------------- --------------------
1998 1997 1998 1997
---------- ---------- --------- ---------
<S> <C> <C> <C> <C>
Net Income $4,410 $4,325 $15,843 $13,447
Other comprehensive income (loss), net of tax:
Unrealized gains (losses)
on securities available for sale:
Unrealized holding gains (losses)
arising during the period 1,124 1,704 (677) 2,040
Less reclassification adjustment for
(gains) losses included in net income (2) 6 (20) (39)
---------- ---------- --------- ---------
1,122 1,710 (697) 2,001
Pension liability adjustment -- -- 40 77
---------- ---------- --------- ---------
Other comprehensive income (loss) 1,122 1,710 (657) 2,078
---------- ---------- --------- ---------
COMPREHENSIVE INCOME $5,532 $6,035 $15,186 $15,525
========== ========== ========= =========
See notes to consolidated financial statements.
/TABLE
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
In Thousands
Unaudited
<TABLE>
<CAPTION> Nine Months
ended September 30
----------------------
1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES: ---------- ----------
<S> <C> <C>
Net income $15,843 $13,447
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation, amortization and accretion, net 4,031 3,599
Provision for loan losses 500 --
Federal Home Loan Bank stock dividend (852) (784)
Gains on sales of securities (30) (59)
Gains on sales of other real estate (814) (58)
Gain on sale of subsidiary (4,213) --
Deferred taxes (483) 426
Increase in interest receivable (1,864) (837)
Increase in other assets (1,342) (2,734)
Increase in other liabilities 1,665 3,030
---------- ----------
Net cash provided by operating activities 12,441 16,030
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of securities available for sale (81,710) (124,643)
Proceeds from maturities of
securities available for sale 170,923 70,126
Proceeds from sales of securities available for sale 7,206 42,023
Purchases of securities held to maturity (2,529) (9,386)
Proceeds from maturities of securities held to maturity 76,000 65,000
Net cash proceeds from sale of subsidiary 8,134 --
Increase in customer loans (63,641) (25,880)
Proceeds from sales of other real estate 3,535 1,216
Payments for purchases of premises and equipment (3,171) (1,969)
---------- ----------
Net cash provided by investing activities 114,747 16,487
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 16,601 3,772
Net decrease in securities sold
under agreements to repurchase (72,272) (67,416)
Net increase (decrease) in federal funds purchased 8,965 (4,000)
Advances from the Federal Home Loan Bank 26,216 --
Repayment of advances from the Federal Home Loan Bank (12,473) (3,934)
Decrease in gift certificates and money
orders outstanding (43,000) (24,308)
Stock options exercised 635 1,940
Dividends paid (6,246) (5,412)
---------- ----------
Net cash used in financing activities (81,574) (99,358)
---------- ----------
Net increase (decrease) in cash and cash equivalents 45,614 (66,841)
Cash and cash equivalents at January 1 45,902 161,084
---------- ----------
Cash and cash equivalents at September 30 $91,516 $94,243
========== ==========
See notes to consolidated financial statements.
/TABLE
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1.The accounting and reporting policies of MidAmerica Bancorp and
its subsidiaries (the Company) conform with generally accepted
accounting principles and general practices within the banking
industry. The accompanying unaudited consolidated financial statements
should be read in conjunction with the Summary of Significant Accounting
Policies footnote which appears in the Company's 1997 Annual Report and
Form 10-K filed with the Securities and Exchange Commission. The
consolidated financial statements reflect all adjustments (consisting
only of adjustments of a normal recurring nature) which are, in the
opinion of management, necessary for a fair presentation of financial
condition and results of operating for the interim periods.
2.The Company adopted FASB Statement No. 130, "Reporting
Comprehensive Income", during the first quarter of 1998.
The statement establishes standards for reporting and
display of comprehensive income and its components.
Comprehensive income includes net income and other
comprehensive income, which for the Company includes
unrealized gains and losses on securities available for
sale and a minimum pension liability adjustment.
3.The following table presents the numerators (net income) and
denominators (average shares outstanding) for the basic and
diluted net income per share computations:
<TABLE>
<CAPTION>
In thousands, except per share amounts
Three Months Ended Nine Months Ended
September 30 September 30
-------------------- --------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net income, basic and diluted $4,410 $4,325 $15,843 $13,447
========= ========= ========= =========
Average shares outstanding 9,930 9,814 9,911 9,776
Effect of dilutive securities 185 204 214 151
Average shares outstanding including --------- --------- --------- ---------
dilutive securities 10,115 10,018 10,125 9,927
========= ========= ========= =========
Net income per share, basic $0.44 $0.44 $1.60 $1.38
========= ========= ========= =========
Net income per share, diluted $0.44 $0.43 $1.57 $1.35
========= ========= ========= =========
</TABLE>
Share information in the consolidated financial statements
has been adjusted for the 3% stock dividend of November 1997, for all
periods presented.
4.The amortized cost and market value of securities available for
sale are summarized as follows:
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
-------------------- --------------------
In thousands Amortized Market Amortized Market
Cost Value Cost Value
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
U.S. Treasury and
U.S. government agencies $49,365 $50,140 $156,040 $156,654
Collateralized mortgage obligations 180,849 179,764 183,792 185,474
States and political subdivisions 50,626 55,054 50,352 53,272
Corporate obligations 6,734 6,767 1,757 1,765
Equity securities 18,418 18,418 17,556 17,556
--------- --------- --------- ---------
$305,992 $310,143 $409,497 $414,721
========= ========= ========= =========
</TABLE>
The amortized cost and market value of securities held to maturity are
summarized as follows:
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
-------------------- --------------------
In thousands Amortized Market Amortized Market
Cost Value Cost Value
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
U.S. Treasury and
U.S. government agencies $4,023 $4,056 $108,078 $108,221
Corporate obligations -- -- 100 100
--------- --------- --------- ---------
$4,023 $4,056 $108,178 $108,321
========= ========= ========= =========
</TABLE>
5.Activity in the allowance for loan losses follows:
<TABLE>
<CAPTION>
September 30, December 31,
In thousands 1998 1997
--------- ---------
<S> <C> <C>
Balance, January 1 $9,209 $9,167
Loans charged-off (617) (621)
Recoveries 124 363
--------- ---------
Net loans charged-off ($493) ($258)
Provision for loan losses 500 300
--------- ---------
Balance, end of period $9,216 $9,209
========= =========
</TABLE>
6.Significant components of other non-interest income and other operating
expenses are set forth below:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
In thousands September 30 September 30
-------------------- --------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Other non-interest income:
Gain on sale of money order subsid -- -- $4,213 --
Gains on sales of other real estat -- $3 814 $58
Bank card Income $545 281 1,617 824
Other 1,043 685 3,008 2,137
--------- --------- --------- ---------
$1,588 $969 $9,652 $3,019
========= ========= ========= =========
</TABLE>
During the second quarter of 1998, the Company recognized $3.8 million of
previously deferred income related to the earlier sale (January, 1998) of its
money order operations and related processing agreement for money orders and
similar payment instruments of MoneyGram Payment Systems, Inc. (MoneyGram).
A gain of $436,000 was recognized in the first quarter of 1998, at the time of
sale. In May 1998, MoneyGram was acquired by Viad Corp., a company involved
in the money order business through its subsidairy, Travelers Express. Viad
Corp. and Travelers Express have notified the Company of their intention not
to follow the agreements and no longer process money orders though the Company.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
In thousands September 30 September 30
-------------------- --------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Other operating expenses:
Advertising and marketing $416 $361 $1,683 $1,243
Operating supplies 262 553 1,078 1,580
Legal and professional fees 775 335 2,453 838
Taxes - Bank, property and other 354 407 1,067 1,243
Other 1,655 800 4,183 2,549
--------- --------- --------- ---------
$3,462 $2,456 $10,464 $7,453
========= ========= ========= =========
</TABLE>
ITEM II. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This item discusses the results of operations for MidAmerica Bancorp
and its subsidiaries for the three and nine months ended September 30,
1998 and compares those periods with the same periods of the previous
year. In addition, the discussion describes the significant changes in
the financial condition of the Company that have occurred between
December 31, 1997 and September 30, 1998. This discussion should be read
in conjunction with the consolidated financial statements and
accompanying notes presented in Part I, Item 1 of this report.
RESULTS OF OPERATIONS
Net income for the nine months ended September 30, 1998 was
$15,843,000 or $1.57 per share on a diluted basis, compared to
$13,447,000 or $1.35 per share on a diluted basis for the nine months
ended September 30, 1997. Net income for the third quarter of 1998 was
$4,410,000 or $0.44 diluted net income per share. Net income for the
third quarter of 1997 was $4,325,000 or $0.43 diluted net income per
share.
Net income for the nine months ended September 30, 1998, when
compared to the same period in 1997, increased 17.8% and diluted net
income per share increased 16.3%. For the third quarter of 1998 compared
to the third quarter of 1997, net income increased 2.0% and diluted net
income per share increased 2.3%.
As discussed further herein, 1998 operating results included non-
recurring revenue of approximately $5 million for the nine months ended
September 30, 1998, which contributed $0.30 to diluted net income per
share. Further, the Company has incurred significant expenses related
to the Year 2000 computer issue, its new image campaign and legal costs,
all of which are expected to be significantly reduced by the beginning
of next year. These matters contributed $630,000 and $2.6 million to the
increased level of other operating expenses for the three and nine months
ended September 30, 1998, respectively.
Net Interest Income
Net interest income is the difference between interest earned on
earning assets and interest expensed on interest bearing liabilities.
The net interest spread is the difference between the average yield on
earning assets and the average rate on interest bearing liabilities. The
net yield on earning assets (interest margin) is net interest income
divided by average earning assets. The following table summarizes the
above for the three and nine months ended September 30, 1998 and 1997.
Three Months Ended Nine Months Ended
Dollars in thousands September 30 September 30
-------------------- --------------------
1998 1997 1998 1997
-------- -------- -------- --------
Total interest income $28,021 $26,606 $83,578 $79,617
Tax equivalent adjustment 440 454 1,340 1,327
------- ------- ------- -------
Tax equivalent interest income 28,461 27,060 84,918 80,944
Total interest expense 12,908 12,162 38,999 37,043
------- ------- ------- -------
Tax equivalent net interest income $15,553 $14,898 $45,919 $43,901
======= ======= ======= =======
Average rate on earning assets 8.45% 8.39% 8.40% 8.32%
Average rate on interest
bearing liabilities 4.74% 4.78% 4.79% 4.79%
Net interest spread, annualized 3.71% 3.61% 3.61% 3.53%
Net interest margin, annualized 4.62% 4.62% 4.54% 4.51%
Average earning assets $1,338,601 $1,283,091 $1,355,118 $1,302,325
Average interest
bearing liabilities $1,080,778 $1,009,760 $1,089,093 $1,034,803
Net interest income on a tax equivalent basis increased $655,000 or
4.4% for the quarter and $2,018,000 or 4.6% for the year-to-date,
resulting primarily from earning asset volume increases. During the
three and nine month periods of 1998, average earning assets increased
4.3% and 4.0%, respectively, compared to the prior year's periods. The
net interest margin was unchanged for the third quarter of 1998 compared
to 1997 and increased slightly for the nine month period in 1998 when
compared to 1997. Asset yields increased and liability costs remained
relatively stable.
Provision for Loan Losses
The allowance for loan losses is maintained at a level which
management believes is adequate to absorb estimated probable credit
losses. Management determines the adequacy of the allowance based upon
reviews of individual credits, evaluation of the risk characteristics of
the loan portfolio, including the impact of current economic conditions
on the borrowers' ability to repay, past collection and loss experience
and such other factors, which, in management's judgement, deserve current
recognition.
An analysis of the changes in the allowance for loan losses and
selected ratios follows:
Dollars in thousands Nine Months Ended
September 30
-----------------
1998 1997
-------- -------
Balance at January 1 $9,209 $9,167
Provision for loan losses 500 --
Loan charge-offs, net (493) (334)
Balance September 30 $9,216 $8,833
Average loans, net of unearned income $910,889 $802,393
Provision for loan losses to average loans 0.05% --
Allowance for loan losses to average loans 1.01% 1.10%
Allowance for loan losses to period-end loans 0.97% 1.06%
Non-interest Income and Other Operating Expenses
The following table sets forth the major components of non-interest income
and other operating expenses for the three and nine months ended September 30,
1998 and 1997:
Three months ended Nine months ended
In thousands September 30 September 30
---------------------- ----------------------
1998 1997 Incr 1998 1997 Incr
(Decr) (Decr)
------ ------ ------ ------ ------ ------
Non-Interest Income:
Income from trust department $643 $376 $267 $1,757 $901 $856
Service charges on
deposit accounts 1,434 1,328 106 4,041 3,743 298
Gift certificates and
money order fees 56 572 (516) 177 1,882 (1,705)
Bank card income 545 281 264 1,617 824 793
Gain on sale of money
order subsidiary -- -- -- 4,213 -- 4,213
Gain on sale of
other real estate -- 3 (3) 814 58 756
Securities gains (losses) 3 (9) 12 30 59 (29)
Other 1,043 685 358 3,008 2,137 871
------ ------ ------ ------ ------ ------
Total non-interest income $3,724 $3,236 $488 $15,657 $9,604 $6,053
====== ====== ====== ====== ====== ======
Other Operating Expenses:
Salaries and
employee benefits $7,318 $6,865 $453 $21,216 $19,437 $1,779
Occupancy expenses 794 818 (24) 2,265 2,309 (44)
Furniture and
equipment expenses 1,061 1,209 (148) 3,238 3,427 (189)
Advertising and marketing 416 361 55 1,683 1,243 440
Operating supplies 262 553 (291) 1,078 1,580 (502)
Legal and professional fees 775 335 440 2,453 838 1,615
Taxes-Bank, property
and other 354 407 (53) 1,067 1,243 (176)
Other 1,655 800 855 4,183 2,549 1,634
------ ------ ------ ------ ------ ------
Total other operating expenses $12,635 $11,348 $1,287 $37,183 $32,626 $4,557
====== ====== ====== ====== ====== ======
Non-interest income for the nine months ended September 30, 1998,
includes a one-time gain of $4.2 million from the sale of the money order
subsidiary and gains on sales of other real estate of $814,000. The
remaining components of non-interest income increased by $500,000 or 15%
for the quarter and $1.1 million or 11% for the year-to-date period.
These increases were driven by sustainable core sources of revenue.
Trust income, benefiting from an increased level of assets under
management, increased 71% for the third quarter and 95% for the year-to-
date. Deposit fees continued to show steady gains of 8% for the quarter
and nine months, as the retail customer base continues to expand. Bank
card fees and merchant fees increased $793,000 or 96% for the nine-month
period ended September 30, 1998, and increased 94% for the third quarter,
as the retail card base expanded and the merchant business was expanded
to the gift certificate subsidiary's mall agent base. The decline in
gift certificate and money order fees is partially offset with processing
income from the purchaser of the money order subsidiary (included in
other non-interest income) and expense reductions.
Other operating expenses increased $1.3 million or 11% and $4.6
million or 14%, for the quarter and year-to-date periods, respectively.
These increases are significantly impacted by expenses attributed to
three major areas; incremental expenses associated with the Company's
Year 2000 project, the Company's new image campaign and legal costs
associated with intensive discovery efforts in one ongoing litigation
matter which is discussed more fully in the Company's 1997 Annual Report
on Form 10-K. These matters contributed $630,000 and $2.6 million to the
increased level of other operating expenses for the three and nine months
ended September 30, 1998. Excluding these matters, other operating
expenses, increased 5.8% for the third quarter and 5.9% for the nine
month period. An increase in salaries and employee benefits caused a
substantial portion of this remaining increase and is attributable
primarily to annual compensation increases. The level of full-time-
equivalent employees on a year-to-date basis averaged 621 in both 1998
and 1997.
Income Taxes
The Company had income tax expense of $1,792,000 for the third
quarter of 1998 compared to $2,007,000 for the same period in 1997. The
year-to-date tax expense and effective tax rate were $6,710,000 and 29.8%
for 1998, respectively and $6,105,000 and 31.2% for 1997, respectively.
The decrease in the effective rate is attributable to an increased level
of tax free income resulting from an increase in tax free securities, and
tax credits related to low income housing interests.
FINANCIAL CONDITION
Total Assets
Total actual assets decreased approximately $103 million from
December 31, 1997 to September 30, 1998, due to seasonal increases at the
end of the year. Average assets increased $22 million or 1.6% to
$1,415,485,000 for the third quarter of 1998 compared to the last quarter
of 1997. During the three and nine month periods ended September 30,
1998, average earning assets increased approximately $56 million and $53
million respectively, compared to the prior year periods. Average
earning asset growth was funded primarily from increases in average
retail deposit products during the periods. For the nine months ended
September 30, 1998 compared to the first nine months of 1997, average
asset growth included increases in average commercial loans of $65
million, increases in average retail loans of $43 million, and decreases
in the average securities portfolio of $45 million. For the third
quarter of 1998 compared to 1997, average retail loans increased $50
million, average commercial loans increased $70 million and the
securities portfolio's average declined $59 million. The retail loan
growth is primarily related to the Company's indirect automobile lending
activities started in late 1997.
Nonperforming Loans and Assets
A summary of non-performing loans and assets follows:
Dollars in thousands September 30, December 31,
1998 1997
------------ -----------
Loans accounted for on a non-
accrual basis $1,793 $1,678
Loans contractually past due
ninety days or more as to
interest or principal
payments 1,465 788
------- -------
Total non-performing loans 3,258 2,466
Other real estate held for sale 14,655 16,186
------- -------
Total non-performing assets $17,913 $18,652
======= =======
Non-performing loans to total
loans .34% .28%
Non-performing assets to total
assets 1.27% 1.24%
Allowance for loan losses to
non-performing loans 283% 373%
Loans classified as impaired at September 30, 1998 aggregated
$2,617,000 and included all non-accrual loans. At December 31, 1997,
impaired loans aggregated $1,680,000.
The Company considers the level of non-performing loans in its
evaluation of the adequacy of the allowance for loan losses.
Other real estate aggregated $14.6 million at September 30, 1998 and
was principally comprised of properties acquired in settlement of problem
real estate development loans in April 1996, and a completed condominium
project acquired in settlement of loans in November 1997. The carrying
value of real estate development property has been substantially reduced
through sales from the original carrying value of $15.2 million to $4.8
million at September 30, 1998. The condominium project involves 32 (44
originally) completed and readily marketable units and 7.5 acres of
adjacent developed land. This riverfront development has a carrying
value of $8.2 million. Management intends to continue to provide for the
orderly development and marketing of these properties in a manner
designed to maximize the value thereof to the Company.
LIQUIDITY
Liquidity represents the Company's ability to generate cash or
otherwise obtain funds at a reasonable price to satisfy commitments to
borrowers as well as demands of depositors. The loan and securities
portfolios are managed to provide liquidity through maturity or payments
related to such assets.
The parent Company's liquidity depends primarily on the dividends
paid to it as the sole shareholder of Bank of Louisville.
CAPITAL RESOURCES
At September 30, 1998, shareholders' equity totaled $165,454,000,
an increase of $9.7 million since December 31, 1997. Since December 31,
1997, the Company's available for sale securities portfolio had
unrealized losses, net of taxes, that decreased shareholders' equity $.7
million.
The Company's capital ratios exceed minimum regulatory requirements
and are as follows:
Company Company
September December Minimum
30, 1998 31, 1997 Required
--------- -------- ---------
Leverage Ratio 11.6% 11.1% 4.00%
Tier 1 risk based capital ratio 14.9% 13.8% 4.00%
Total risk based capital ratio 15.8% 14.7% 8.00%
YEAR 2000
Many computer systems (including those in non-information technology
equipment and systems) currently record years in a two-digit format. If not
addressed, such computer systems will be unable to properly interpret dates
beyond the year 1999, which could lead to business disruptions in the U.S. and
internationally (the "Year 2000" issue). The potential costs and uncertainties
associated with the Year 2000 issue will depend on a number of factors,
including software, hardware and the nature of the industry in which a company
operates. Additionally, companies must coordinate with other entities with
which they electronically interact.
During 1998, the Company has continued with its organization-wide program
of preparing its systems for Year 2000 compliance. The Company has developed
detailed plans to address the possible exposures related to the impact on its
computer systems of the Year 2000. The Company has a formal Millennium Program
Office, executive level sponsors, and several steering committees represented
by all of the business units of the Company. A committee of the Board of
Directors oversees the program.
The Company has been reviewing its systems and programs to identify those
that contain two- digit year codes, and is in the process of upgrading its
infrastructure and corporate facilities to achieve Year 2000 compliance. In
addition, the Company is actively working with its major external
counterparties and suppliers to assess their compliance and remediation
efforts and the Company's exposure to them. In addressing the Year 2000 issue,
the Company has identified the following phases. In the Awareness phase, the
Company defined the Year 2000 issue and obtained executive level support and
funding. In the Assessment phase, the Company collected a comprehensive list
of items that may be affected by Year 2000 compliance issues. Such items
include facilities and related non-information technology systems (embedded
technology), computer systems, hardware, and services and products provided by
third parties. The Company then evaluated the items identified in the
Assessment phase to determine which will function properly with the change to
the new century, and ranked items which will need to be remediated based on
their potential impact to the Company. The Renovation phase includes an
analysis of the items that are affected by Year 2000, the identification of
problem areas and the repair of non-compliant items. The Validation phase
includes a thorough testing of repairs, including present and forward date
testing which simulates dates in the Year 2000. The Implementation phase
consists of placing all items that have been remediated and successfully
tested into production.
As of September 30, 1998, the Company had completed the Awareness phase,
and was virtually finished with the Assessment phase. Renovation was 85%
complete on Information Technology systems and well underway on non-IT
systems. As of September 30, 1998, the Company was also conducting the
procedures associated with the Validation and Implementation phases. The
Company expects to complete all but the Implementation phases with respect to
its mission critical applications by March 31, 1999, with the Implementation
phase completed by September 30, 1999.
MISSION CRITICAL APPLICATION SUMMARY
Percent of Applications Year 2000 Compliant
Category 9-30-98 (Actual) 12-31-98 (Est.) 3-31-99 (Est.)
Mainframe Applications 0% 20% 100%
Distributed Applications 67% 67% 100%
PC Applications 29% 57% 100%
The Company has reviewed Year 2000 issues with its major business
relationships, counterparties, intermediaries and vendors with whom it has
important financial and operational relationships to determine the extent to
which they are vulnerable to Year 2000 issues. Based on this review (and
assuming the accuracy of the responses and representations), as of September
30, 1998, the Company does not expect any material adverse impact from
third-party Year 2000 non-compliance. In addition, the Company has been
communicating with its customer base and plans additional communication as
necessary.
The Company has incurred internal staff costs as well as consulting, new
hardware and software expenses, and other expenses related to this program. A
significant portion of these costs are not incremental costs to the Company,
but rather represent the redeployment of existing information technology and
business unit resources. A summary of cost incurred on the project through
September 30, 1998 and estimated future cost is set forth below.
Cost Incurred
Through Estimated
In thousands September 30, 1998 Future Costs Total
------------------ ------------ -----
IT Personnel Resources $1,023 $2,105 $3,128
Business Unit Personnel Resources 198 575 773
External Contractors / Consultants 68 205 273
Replacement Software 246 145 391
Replacement / Upgrade Hardware 924 347 1,271
Other Costs 23 43 66
------ ------ ------
$2,482 $3,420 $5,902
====== ====== ======
Portions of the above costs relate to capital items that are depreciated
over their useful lives. Accordingly, the above cost summary is not
representive of amounts being expensed. For the nine months ended September
30, 1998, $1.4 million of the Year 2000 costs have been expensed, including
$150,000 of depreciation and $760,000 of costs for time spent by existing
personnel devoted to this program.
Although the Company does not presently anticipate a material business
interruption as a result of the Year 2000 issue, there are many risks
associated with the Year 2000 issue, including the possibility of a failure of
the Company's computer and non-information technology systems. Such failures
could have a material adverse effect on the Company and may cause systems
malfunctions, incorrect or incomplete transaction processing, the inability to
reconcile accounting books and records, and the inability to reconcile
balances with counterparties. In addition, even if the Company successfully
remediates its Year 2000 issues, it can be materially and adversely affected
by failures of third parties to remediate their own Year 2000 issues. The
failure of third parties with which the Company has financial or operational
relationships such as securities exchanges, clearing organizations,
depositories, regulatory agencies, banks, clients, counterparties, vendors and
utilities, to remediate their computer and non-information technology systems
issues in a timely manner could result in a material financial risk to the
Company. If the above mentioned risks are not remedied, the Company may
experience business interruption, financial loss, regulatory actions, damage
to the Company's franchise and legal liability. The Company has business
continuity plans in place that cover its current worldwide operations, and
Year 2000 specific contingency planning has begun. The Company intends to
document Year 2000 specific contingency plans during 1999 as part of its Year
2000 risk mitigation efforts.
RECENTLY ISSUED ACCOUNTING STANDARD
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" (Statement 133) was
issued by the Financial Accounting Standards Board in June 1998.
Statement 133 standardizes the accounting for derivative instruments.
Statement 133 currently applies to the Company's interest rate swap
contracts. Under the standard, entities are required to carry all
derivative instruments on the balance sheet at fair value. The
accounting for changes in the fair value (i.e. gains or losses) of a
derivative instrument depends on whether it has been designated and
qualifies as part of a hedging relationship and, if so on the reason
for holding it. If certain conditions are met, entities may elect to
designate a derivative instrument as a hedge of exposures to changes
in fair value, cash flows, or foreign currencies. If the hedged
exposure is a fair value exposure, the gain or loss on the derivative
instrument is recognized in earnings in the period of change together
with the offsetting loss or gain on the hedged item attributable to
the risk being hedged. If the hedged exposure is a cash flow
exposure, the effective portion of the gain or loss on the derivative
instrument is reported initially as a component of other comprehensive
income (outside earnings) and subsequently reclassified into earnings
when the forecasted transaction affects earnings. Any amounts
excluded from the assessment of hedge effectiveness as well as the
ineffective portion of the gain or loss is reported in earnings
immediately. Accounting for foreign currency hedges is similar to the
accounting for fair value and cash flow hedges. If the derivative
instrument is not designated as a hedge, the gain or loss is
recognized in earnings in the period of change.
The Company is in the process of determining the impact that
Statement 133 will have on its financial statements and believes that
such determination will not be meaningful until closer to the date of
initial adoption (January 1, 2000). It can not be determined
presently whether the Company will have any significant derivative
instruments on the date of initial adoption. Depending on asset /
liability management issues, the market interest rate situation and
other relevant internal and external factors, the Company's current
interest rate swap positions may be increased or reduced by the time
that Statement 133 is adopted.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's September 30, 1998 analysis of the impact of changes
in interest rates on net interest income over the next 12 months
indicates a favorable impact in a declining interest rate environment,
which is consistent with the Company's liability-sensitive gap
position at the one year repricing period. The table below
illustrates the simulation analysis of the impact of a 50 or 100 basis
point upward or downward movement in interest rates. The impact of
the rate movement was simulated as if rates changed immediately from
September 30, 1998 levels, and remained constant at those levels
thereafter.
Movement in interest
rates from September 30, 1998, rates
------------------------------------
Increase Decrease
+50bp +100bp -50bp -100bp
------ ------ ------ ------
Net interest income increase
(decrease) (in 1000's) $ (242) $ (222) $1025 $ 1508
Net income per share increase
(decrease) $(0.02) $(0.02) $0.07 $ 0.10
Forward Looking Statements
The statements contained in this filing that are not purely historical are
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including
statements regarding the Company's expectations, hopes, beliefs, intentions or
strategies regarding the future. All forward-looking statements included in
this document are based on information available to the Company on the date
hereof, and the Company assumes no obligation to update any such
forward-looking statement. It is important to note that the Company's actual
results could differ materially from those in such forward-looking statements.
Factors that could cause actual results to differ materially from those
projected include, among others, the effects of Year 2000 software failures;
its customer concentration; cyclicality; fluctuation of interest rates; risk
of business interruption; adequacy of the allowance for loan losses;
valuation of other real estate; dependence on key personnel; and government
regulation.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
Mid-America Bancorp
(Registrant)
Date: November 12,1998 By:/s/Steven Small
Steven Small
Executive Vice President and
Chief Financial Officer
Date: November 12,1998 By:/s/R.K. Guillaume
R.K. Guillaume
Chief Executive Officer
INDEX TO EXHIBITS
27 Financial Data Schedule
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<PERIOD-END> SEP-30-1997
<PERIOD-TYPE> 9-MOS
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