UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 1-14343
MIDLAND CAPITAL HOLDINGS CORPORATION
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(Name of Small Business Issuer in its Charter)
Delaware 36-4238089
- ------------------------------- ----------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
8929 S. Harlem Avenue, Bridgeview, Illinois 60455
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(Address of Principal Executive Offices) (Zip Code)
Issuer's telephone number, including area code: (708) 598-9400
-----------------------
Check whether the Issuer (1) has filed all reports required to be filed by
Section 13 or 15 (d) of the Exchange Act during the past 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 [ ]
Transitional Small Business Disclosure Format. Yes [ ] No [X]
Indicate the number of shares of each of the Issuer's classes of common
stock as of the latest practicable date:
Common Stock, par value $.01
----------------------------
(Title of Class)
As of November 14, 2002, the Issuer had
363,975 shares of Common Stock issued and outstanding.
MIDLAND CAPITAL HOLDINGS CORPORATION
Part I. FINANCIAL INFORMATION PAGE
----
Item 1. Financial Statements
Consolidated Statements of Financial Condition -
September 30, 2002 (unaudited) and June 30, 2002..................... 1
Consolidated Statements of Earnings - Three Months
Ended September 30, 2002 and 2001 (unaudited)........................ 2
Consolidated Statements of Changes in Stockholders' Equity -
Three Months Ended September 30, 2002 (unaudited).................... 3
Consolidated Statements of Cash Flows - Three Months
Ended September 30, 2002 and 2001 (unaudited)........................ 4
Notes to Consolidated Financial Statements........................... 5-6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................................. 7-13
Part II. OTHER INFORMATION........................................................ 14
Index to Exhibits............................................................. 15
MIDLAND CAPITAL HOLDINGS CORPORATION
AND SUBSIDIARIES
Part I -- FINANCIAL INFORMATION
Consolidated Statements of Financial Condition
Assets September 30, June 30,
- ------ 2002 2002
---- ----
(Unaudited)
Cash and amounts due from depository institutions $ 3,349,334 4,439,811
Interest-bearing deposits 34,279,366 28,481,627
------------ -----------
Total cash and cash equivalents 37,628,700 32,921,438
Investment securities, held to maturity (fair value:
September 30, 2002 - $7,611,725;
June 30, 2002 - $10,182,850) 7,515,602 10,026,708
Investment securities available for sale, at fair value 6,417,812 6,279,537
Mortgage-backed securities, held to maturity (fair value:
September 30, 2002 - $9,414,096;
June 30, 2002 - $10,553,233) 9,167,242 10,359,768
Loans receivable (net of allowance for loan losses:
September 30, 2002 - $366,410;
June 30, 2002 - $350,260) 90,370,998 85,346,846
Loans receivable held for sale 107,000 739,806
Stock in Federal Home Loan Bank of Chicago 896,600 896,600
Office properties and equipment, net 2,775,299 2,816,584
Accrued interest receivable 626,125 649,856
Prepaid expenses and other assets 469,475 551,805
------------ -----------
Total assets $155,974,853 150,588,948
============ ===========
Liabilities and Stockholders' Equity
- ------------------------------------
Liabilities:
Deposits $143,314,285 138,443,669
Advance payments by borrowers for taxes and insurance 1,342,641 985,144
Other liabilities 674,271 763,580
------------ -----------
Total liabilities 145,331,197 140,192,393
============ ===========
Stockholders' equity:
Preferred stock, $.01 par value:
authorized 50,000 shares; none outstanding -- --
Common stock, $.01 par value: authorized 600,000
shares; issued and outstanding 363,975 shares
at September 30, 2002 and June 30, 2002 3,640 3,640
Additional paid-in capital 3,276,855 3,276,855
Retained earnings - substantially restricted 7,073,426 6,917,305
Accumulated other comprehensive income, net of income taxes 289,735 198,755
------------ -----------
Total stockholders' equity 10,643,656 10,396,555
------------ -----------
Total liabilities and stockholders' equity $155,974,853 150,588,948
============ ===========
See accompanying notes to consolidated financial statements.
-1-
MIDLAND CAPITAL HOLDINGS CORPORATION
AND SUBSIDIARIES
----------------
Consolidated Statements of Earnings (Unaudited)
Three Months Ended
September 30,
2002 2001
---- ----
Interest income:
Interest on loans $1,482,560 1,287,641
Interest on mortgage-backed securities 139,181 268,799
Interest on investment securities 185,415 451,791
Interest on interest-bearing deposits 140,312 140,681
Dividends on FHLB stock 11,299 12,084
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Total interest income 1,958,767 2,160,996
---------- ---------
Interest expense:
Interest on deposits 785,134 1,164,605
---------- ---------
Total interest expense 785,134 1,164,605
---------- ---------
Net interest income before provision for loan losses 1,173,633 996,391
Provision for loan losses 15,000 0
---------- ---------
Net interest income after provision for loan losses 1,158,633 996,391
---------- ---------
Non-interest income:
Loan fees and service charges 128,950 117,957
Commission income 18,371 15,619
Profit on sale of loans 13,131 9,384
Deposit related fees 131,835 128,938
Other income 13,195 14,610
---------- ---------
Total non-interest income 305,482 286,508
---------- ---------
Non-interest expense:
Staffing costs 636,079 582,169
Advertising 14,578 13,487
Occupancy and equipment expenses 186,574 179,232
Data processing 49,638 49,236
Federal deposit insurance premiums 5,975 6,172
Other 252,003 203,786
---------- ---------
Total non-interest expense 1,144,847 1,034,082
---------- ---------
Income before income taxes 319,268 248,817
Income tax provision 108,551 84,598
---------- ---------
Net income $ 210,717 164,219
========== =======
Earnings per share (basic) $ 0.58 0.45
========== =======
Earnings per share (diluted) $ 0.57 0.45
========== =======
Dividends declared per common share $ 0.15 0.10
========== =======
See accompanying notes to consolidated financial statements.
-2-
MIDLAND CAPITAL HOLDINGS CORPORATION
AND SUBSIDIARIES
----------------
Consolidated Statements of Changes in Stockholders' Equity (Unaudited)
Accumulated
Additional Other
Common Paid-In Retained Comprehensive
Stock Capital Earnings Income Total
----- ------- -------- ------ -----
Balance at June 30, 2002 $ 3,640 3,276,855 6,917,305 198,755 10,396,555
Comprehensive Income:
Net Income 210,717 210,717
Other comprehensive
income, net of tax:
Unrealized holding gain
during the period 90,980 90,980
--------- ------- ----------
Total comprehensive income 210,717 90,980 301,697
Dividends declared on common
stock ($0.15 per share) (54,596) (54,596)
---------- --------- --------- ------- ----------
Balance at September 30, 2002 $ 3,640 3,276,855 7,073,426 289,735 10,643,656
========== ========= ========= ======= ==========
See accompanying notes to consolidated financial statements.
-3-
MIDLAND CAPITAL HOLDINGS CORPORATION
AND SUBSIDIARIES
----------------
Consolidated Statements of Cash Flows (Unaudited)
Three Months Ended
September 30,
2002 2001
---- ----
Cash flows from operating activities:
Net income $ 210,717 164,219
Adjustments to reconcile net income to net cash from
operating activities:
Depreciation 78,950 78,523
Amortization of premiums and discounts on securities 5,356 (8,240)
Provision for loan losses 15,000 --
Proceeds from sale of loans held for sale 929,225 684,226
Origination of loans held for sale (296,419) (725,300)
Profit on sale of loans (13,131) (9,384)
Decrease in accrued interest receivable 23,731 90,692
Decrease in accrued interest payable (1,683) (1,892)
Decrease in deferred income on loans (21,162) (40,056)
Decrease (increase) in other assets 48,593 (98,880)
(Decrease) increase in other liabilities (87,626) 18,775
------------- ----------
Net cash provided by operating activities 891,551 152,683
------------- ----------
Cash flows from investing activities:
Proceeds from repayments of mortgage-backed securities,
held to maturity 1,197,849 1,632,229
Purchase of investment securities, available for sale -- (2,503,906)
Proceeds from maturities of investment securities,
held to maturity 2,500,000 2,500,000
Loan disbursements (12,099,733) (10,974,475)
Loan repayments 7,081,743 4,340,887
Property and equipment expenditures (37,665) (10,607)
------------- ----------
Net cash provided for investing activities (1,357,806) (5,015,872)
------------- ----------
Cash flows from financing activities:
Deposit account receipts 113,294,621 107,089,347
Deposit account withdrawals (109,174,507) (105,451,033)
Interest credited to deposit accounts 750,502 1,107,807
Payment of dividends (54,596) (36,397)
Increase in advance payments by borrowers
for taxes and insurance 357,497 376,415
------------- ----------
Net cash provided by financing activities 5,173,517 3,086,139
------------- ----------
Increase (decrease) in cash and cash equivalents 4,707,262 (1,777,050)
Cash and cash equivalents at beginning of period 32,921,438 20,718,671
------------- ----------
Cash and cash equivalents at end of period $ 37,628,700 18,941,621
============= ==========
Cash paid during the period for:
Interest $ 786,817 1,166,497
Income taxes 255,525 5,654
============= ==========
See accompanying notes to consolidated financial statements.
-4-
MIDLAND CAPITAL HOLDINGS CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note A - Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared
in accordance with instructions to Form 10-QSB and therefore, do not include
information or footnotes necessary for fair presentation of financial condition,
results of operations and changes in financial position in conformity with
generally accepted accounting principles. However, in the opinion of management,
all adjustments (which are normal and recurring in nature) necessary for a fair
presentation have been included. The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
The results of operations for the three months ended September 30, 2002 are not
necessarily indicative of the results that may be expected for the entire year.
Note B - Principles of Consolidation
The accompanying unaudited consolidated financial statements include the
accounts of Midland Capital Holdings Corporation (the "Company") and its
wholly-owned subsidiary, Midland Federal Savings and Loan Association (the
"Association") and the Association's wholly-owned subsidiaries, Midland Service
Corporation, MS Insurance Agency, Inc. and Bridgeview Development Company. All
significant intercompany balances and transactions have been eliminated in
consolidation.
Note C - Earnings Per Share
Earnings per share for the three month periods ended September 30, 2002 and 2001
were determined by dividing net income for the period by the weighted average
number of shares of common stock outstanding (see Exhibit 11 attached). Stock
options are regarded as common stock equivalents and are therefore considered in
diluted earnings per share calculations. Common stock equivalents are computed
using the treasury stock method.
Note D - Industry Segments
The Company operates principally in the thrift industry through its subsidiary
savings and loan. As such, substantially all of the Company's revenues, net
income, identifiable assets and capital expenditures are related to thrift
operations.
Note E - Effect of New Accounting Pronouncements
In June 2001, the FASB issued SFAS No. 143 "Accounting for Asset Retirement
Obligations". SFAS No. 143 addresses the financial accounting and reporting for
obligations related to the retirement of tangible long-lived assets and the
related asset retirement costs. SFAS No. 143 is effective for financial
statements issued for fiscal years beginning after June 15, 2002. The Company
adopted SFAS No. 143 on July 1, 2002 and upon adoption, this pronouncement did
not have a material impact on the Company's consolidated financial statements.
-5-
MIDLAND CAPITAL HOLDINGS CORPORATION
AND SUBSIDIARIES
Note E - Effect of New Accounting Pronouncements (continued)
In August 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment and
Disposal of Long-Term Assets". This statement supercedes SFAS No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of" as well as the accounting and reporting of the Accounting
Principles Board (APB) Opinion No. 30, "Reporting the Results of Operations -
Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions". This statement
eliminates the allocation of goodwill to long-lived assets to be tested for
impairment and details both a probability-weighted and "primary-asset" approach
to estimate cash flows in testing for impairment for long-lived assets. SFAS No.
144 is effective for financial statement issued for fiscal years beginning after
December 15, 2001. The Company adopted SFAS No. 144 on July 1, 2002 and upon
adoption, this pronouncement did not have a material impact on the Company's
consolidated financial statements.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections".
This Statement rescinds SFAS No. 4, "Reporting Gains and Losses from
Extinguishment of Debt," and an amendment of that Statement, SFAS No. 64
"Extinguishment of Debt Made to Satisfy Sinking-Fund Requirements". This
Statement also rescinds SFAS No. 44 "Accounting for Intangible Assets of Motor
Carriers". This Statement amended SFAS No. 13, "Accounting for Leases," to
eliminate an inconsistency between the required accounting for sale-leaseback
transactions and the required accounting for certain lease modifications that
have economic effects that are similar to sale-leaseback transactions. This
Statement also amends other existing authoritative pronouncements to make
various technical corrections, clarify meanings, or describe their applicability
under changed conditions. This Statement is effective for fiscal years beginning
after May 15, 2002. The Company adopted SFAS No. 145 on July 1, 2002 and upon
adoption, this pronouncement did not have a material impact on the Company's
consolidated financial statements.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities". This Statement addresses financial accounting
and reporting for costs associated with exit or disposal activities and
nullifies Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)". This Statement
is effective for exit or disposal activities that are initiated after December
31, 2002. Adoption of this statement is not expected to have a material effect
on the Company's consolidated financial statements.
The foregoing does not constitute a comprehensive summary of all material
changes or developments affecting the manner in which the Company keeps its
books and records and performs its financial accounting responsibilities. It is
intended only as a particular interest to financial institutions.
-6-
MIDLAND CAPITAL HOLDINGS CORPORATION
AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
FORWARD-LOOKING STATEMENTS
When used in this Form 10-QSB and in future filings by the Company with the
Securities and Exchange Commission, in the Company's press releases or other
public or shareholder communications, or in oral statements made with the
approval of an authorized executive officer, the words or phrases "would be",
"will allow", "intends to", "will likely result", "are expected to", "will
continue", "is anticipated", "estimate", "project" or similar expressions are
intended to identify "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. Such statements are subject to
risks and uncertainties, including but not limited to changes in economic
conditions and real estate values in the Company's market area, changes in
policies by regulatory agencies, fluctuations in interest rates, demand for
loans in the Company's market area and competition, all or some of which could
cause actual results to differ materially from historical earnings and those
presently anticipated or projected.
The Company wishes to caution readers not to place undue reliance on any such
forward-looking statements, which speak only as of the date made, and advises
readers that various factors, including regional and national economic
conditions, substantial changes in levels of market interest rates, credit and
other risks of lending and investment activities and competitive and regulatory
factors, could affect the Company's financial performance and could cause the
Company's actual results for future periods to differ materially from those
anticipated or projected.
The Company does not undertake, and specifically disclaims any obligation, to
update any forward-looking statements to reflect occurrences or unanticipated
events or circumstances after the date of such statements.
GENERAL
Midland Capital Holdings Corporation (the "Company") is a Delaware corporation
that was organized in 1998 by Midland Federal Savings and Loan Association (the
"Association" or "Midland Federal") for the purpose of becoming a thrift
institution holding company. The Company and the Association are headquartered
in Bridgeview, Illinois. The Association began operations in 1914 as a
state-chartered mutual savings institution. In 1982, the Association became a
federal mutual savings and loan association. On June 30, 1993, the Association
completed a conversion to the stock form of organization. In that conversion,
the Association issued 345,000 shares of common stock, raising net proceeds of
approximately $3.1 million. On July 23, 1998, the Association became a
wholly-owned subsidiary of the Company by reorganizing the Association into a
holding company form of organization. Each outstanding share of common stock of
the Association became one share of common stock of the Company.
The principal asset of the Company is the outstanding stock of the Association.
The Company presently has no separate operations and its business consists only
of the business of the Association and its subsidiaries. Midland Federal has
been principally engaged in the business of attracting deposits from the general
public and using such deposits to originate residential mortgage loans, and to a
lesser extent, consumer, multi-family and other loans in its primary market
area. The Association also has made substantial investments in mortgage-backed
securities, investment securities and liquid assets. Midland Federal also
operates a wholly-owned subsidiary, Midland Service Corporation that owns and
operates MS Insurance Agency, Inc., a full service retail insurance agency.
-7-
MIDLAND CAPITAL HOLDINGS CORPORATION
AND SUBSIDIARIES
GENERAL (continued)
The Association's primary market area consists of Southwest Chicago, and the
southwest suburban communities of Bridgeview, Oak Lawn, Palos Hills, Hickory
Hills, Justice, Burbank, Chicago Ridge, Homer Glen, Lockport, Orland Park and
Lemont. The Company serves these communities through its main office in
Bridgeview, two branch banking offices in southwest Chicago and a third branch
banking office in Homer Glen, Illinois. The Association's deposits are insured
up to applicable limits by the Federal Deposit Insurance Corporation ("FDIC").
At September 30, 2002, Midland Federal's capital ratios exceeded all of its
regulatory capital requirements with both tangible and core capital ratios of
5.85% and a risk-based capital ratio of 12.32%.
FINANCIAL CONDITION
At September 30, 2002, total assets of the Company increased by $5.4 million to
$156.0 million from $150.6 million at June 30, 2002. Loans receivable, including
loans available for sale, increased $4.4 million to $90.5 million at September
30, 2002. The Company originated $12.4 million of primarily fixed rate loans
during the quarter ended September 30, 2002 compared to loan originations of
$11.7 million during the prior year quarter. The higher loan origination volume
in the current quarter was due in part to an increase in mortgage refinancing
activity as a result of the decline in interest rates that began in January
2001. Offsetting loan originations in the current quarter were loan repayments
of $7.1 million as well as loan sales of $929,000. There were no new purchases
of mortgage-backed securities during the quarter ended September 30, 2002 and as
a result, the balance of mortgage-backed securities decreased by $1.2 million to
$9.2 million due to repayments and amortization. The $4.4 million increase in
net loans receivable, discussed above, was funded in part by the $1.2 million
decrease in mortgage-backed securities as well as a $4.9 million increase in
deposits.
The balance of investment securities classified as held to maturity decreased by
$2.5 million to $7.5 million at September 30, 2002 due to maturities of U.S.
Agency securities. Investment securities available for sale remained stable at
$6.4 million at September 30, 2002 compared to $6.3 million at June 30, 2002.
Gross unrealized gains in the available for sale portfolio were $439,000 at
September 30, 2002 compared to gross unrealized gains of $301,000 at June 30,
2002, reflecting the positive impact of lower interest rates. The weighted
average remaining term to maturity of the Company's total investment securities
portfolio at September 30, 2002 was 1.7 years.
In anticipation of an increase in economic activity and upward pressure on
interest rates in fiscal 2003, the Company increased the balance of cash and
cash equivalents by $4.7 million to $37.6 million at September 30, 2002 from
$32.9 million at June 30, 2002. The increase in cash equivalents during the
quarter ended September 30, 2002 was partly funded by the proceeds of $2.5
million in maturing U.S. Agency securities, discussed above.
Non-performing assets consisted of $648,000 in non-accruing loans at September
30, 2002 compared to $164,000 at June 30, 2002. The allowance for loan losses
increased by $16,000 to $366,000 at September 30, 2002 as a result of $15,000 in
loan loss provisions and $1,000 in recoveries during the quarter ended September
30, 2002. Non-accruing loans at September 30, 2002 consisted of $620,000 in
one-to-four family residential mortgage loans and $28,000 in non-mortgage loans.
At September 30, 2002 the Company's ratio of allowance for loan losses to
non-performing loans was 56.47% compared to 213.29% at June 30, 2002. Management
believes that the current allowance for loan losses is adequate to cover
probable accrued losses in the portfolio.
-8-
MIDLAND CAPITAL HOLDINGS CORPORATION
AND SUBSIDIARIES
FINANCIAL CONDITION (continued)
The following table sets forth the amounts and categories of non-performing
assets in the Company's portfolio. Loans are placed on non-accrual status when
the collection of principal and/or interest becomes doubtful, generally when the
loan is delinquent 90 days or more. Foreclosed assets, if any, include assets
acquired in settlement of loans.
September 30, June 30,
2002 2002
---- ----
(Dollars in Thousands)
Non-Accruing Loans:
One-to-four family $620 $148
Multi-family -- --
Consumer 24 15
Commercial business 4 1
---- ----
Total non-performing loans $648 $164
---- ----
Foreclosed Assets:
One-to-four family -- --
---- ----
Total foreclosed assets -- --
---- ----
Total non-performing assets $648 $164
==== ====
Total as a percentage of total assets 0.42% 0.11%
==== ====
As of September 30, 2002, there were no loans not included in the above table
where known information about the possible credit problems of borrowers caused
management to have serious doubts as to the ability of the borrower to comply
with present loan repayment terms and which may result in disclosure of such
loans in the future.
-9-
MIDLAND CAPITAL HOLDINGS CORPORATION
AND SUBSIDIARIES
FINANCIAL CONDITION (continued)
The following table sets forth an analysis of the Company's allowance for loan
losses.
Three Months Ended
September 30,
2002 2001
---- ----
(Dollars in Thousands)
Balance at beginning of period $350 $ 360
Charge-offs:
One-to-four family loans -- --
Consumer loans -- --
Commercial business loans -- --
---- -------
Total charge-offs -- --
---- -------
Recoveries:
One-to-four family loans 1 --
Multi-family loans -- --
Consumer loans -- --
---- -------
Total recoveries 1 --
---- -------
Net (charge-offs) recoveries 1 --
Additions charged to operations 15 --
---- -------
Balance at end of period $366 $ 360
==== =======
Ratio of net charge-offs during the period to
average loans outstanding during the period --% --%
Ratio of net charge-offs during the period to
average non-performing assets --% --%
Allowance for loan losses to non-performing loans 56.47% 108.61%
Allowance for loan losses to total loans 0.40% 0.48%
The Company was aware of no regulatory directives or suggestions that the
Association make additional provisions for losses on loans. Although the Company
believes its allowance for loan losses is at a level that it considers to be
adequate to provide for possible accrued losses in the portfolio, there can be
no assurance that such losses will not exceed the estimated amounts.
Deposits for the quarter ended September 30, 2002 increased $4.9 million as a
result of interest credited to deposits in the amount of $751,000 as well as
actual deposit inflows, net of withdrawals, in the amount of $4.1 million. The
net increase in savings deposits is primarily attributed to a $4.7 million
increase in certificate of deposit accounts, a $226,000 increase in demand
deposit accounts, an $88,000 increase in passbook deposits and a $14,000
increase in NOW accounts offset by a $117,000 decrease in money market accounts.
Stockholders' equity increased $247,000, or 2.4%, to $10.6 million at September
30, 2002 from $10.4 million at June 30, 2002. The increase in stockholders'
equity was due to net income of $211,000 and an increase in accumulated other
comprehensive income of $91,000 offset by the payment of cash dividends in the
amount of $55,000.
-10-
MIDLAND CAPITAL HOLDINGS CORPORATION
AND SUBSIDIARIES
RESULTS OF OPERATIONS
The Company had net income of $211,000 for the quarter ended September 30, 2002
compared to net income of $164,000 for the quarter ended September 30, 2001. The
increase in net income in the current quarter is the result of a $177,000
increase in net interest income and a $19,000 increase in non-interest income
offset by a $110,000 increase in non-interest expense, a $15,000 increase in
provision for loan losses and a $24,000 increase in income taxes. For a
discussion on the increases in both non-interest income and non-interest
expense, respectively, see "Non-Interest Income" and "Non-Interest Expense."
The increase in net interest income was primarily the result of increases in
interest rate spread and net interest margin. For the quarter ended September
30, 2002, interest rate spread and net interest margin increased to 2.98% and
3.22%, respectively, from 2.51% and 2.91% in the prior year quarter. The
increases in both interest rate spread and net interest margin were primarily
attributed to a decline in the average cost of deposits which more than offset a
decline in the average yield earned on interest earning assets as interest
costing deposits re-priced more quickly than interest earning assets during a
period of declining market interest rates.
Interest Income
Interest income decreased $202,000, or 9.4%, for the quarter ended September 30,
2002 as compared to the same period last year. The decrease in interest income
is primarily attributed to a decrease in the average yield earned on interest
earning assets to 5.38% for the quarter ended September 30, 2002 from 6.30% in
the prior year quarter. The decrease in the average yield earned on interest
earning assets offset an $8.5 million increase in the average balance of
interest earning assets to $145.7 million for the quarter ended September 30,
2002 compared to $137.2 million for the quarter ended September 30, 2001.
Interest on loans receivable increased $195,000, or 15.1%, for the quarter ended
September 30, 2002 from the comparable quarter in 2001. The increase in interest
income was primarily attributed to a $15.0 million increase in the average
outstanding balance of net loans receivable to $88.3 million for the quarter
ended September 30, 2001 from $73.3 million for the quarter ended September 30,
2001. The increase in the average outstanding balance of net loans receivable
offset a decrease in the average yield earned on loans receivable to 6.72% for
the quarter ended September 30, 2002 compared to 7.03% for the quarter ended
September 30, 2001.
Interest on mortgage-backed securities decreased $130,000, or 48.2%, for the
quarter ended September 30, 2002 from the comparable quarter in 2001. The
decrease in interest income is attributed to a decrease in the average balance
of mortgage-backed securities as well as a decrease in the average yield earned
on mortgage-backed securities in the quarter ended September 30, 2002 as
compared with the same period last year. For the quarter ended September 30,
2002, the average balance of mortgage-backed securities decreased $6.7 million
to $9.5 million from $16.2 million in the prior year quarter. The average yield
earned on mortgage-backed securities also decreased to 5.88% for the quarter
ended September 30, 2002 from 6.62% for the quarter ended September 30, 2001.
The decrease in the average yield earned on mortgage-backed securities was
primarily the result of a decrease in the yield earned on the Company's balance
of adjustable rate mortgage-backed securities, which re-priced at lower yields
as market interest rates decreased between the two quarterly periods.
-11-
MIDLAND CAPITAL HOLDINGS CORPORATION
AND SUBSIDIARIES
Interest Income (continued)
Interest earned on investment securities decreased $266,000, or 59.0%, for the
quarter ended September 30, 2002 from the quarter ended September 30, 2001. The
decrease in interest income is primarily attributed to a $16.3 million decrease
in the average outstanding balance of investment securities to $15.1 million for
the quarter ended September 30, 2002 from $31.4 million in the prior year
quarter. The average yield earned on investment securities also decreased to
4.89% for the quarter ended September 30, 2002 compared to 5.75% for the quarter
ended September 30, 2001.
Interest earned on interest bearing deposits remained stable at $140,000 for the
quarter ended September 30, 2002 compared with the same quarter in 2001 as an
increase in the average outstanding balance offset a decrease in the average
yield earned on interest bearing deposits. The average outstanding balance of
interest bearing deposits increased by $16.5 million to $31.9 million for the
quarter ended September 30, 2002 from $15.4 million for the prior year quarter.
The average yield earned on interest bearing deposits decreased to 1.76% for the
quarter ended September 30, 2002 from 3.65% for the quarter ended September 30,
2001. The $16.5 million increase in interest bearing deposits was funded by the
$16.3 million decrease in the Company's investment securities portfolio,
discussed above.
Interest Expense
Interest expense decreased $379,000, or 32.6%, for the quarter ended September
30, 2002 compared with the prior year quarter. The decrease in interest expense
is attributable to a decrease in the average cost paid on interest costing
deposits to 2.40% for the quarter ended September 30, 2002 from 3.80% for the
quarter ended September 30, 2001. The decrease in the average cost paid on
interest costing deposits was partially offset by an $8.3 million increase in
the average outstanding balance of interest costing deposits to $131.0 million
for the quarter ended September 30, 2002 from $122.7 million for the prior year
quarter.
Provisions for Losses on Loans
The Company maintains an allowance for loan losses based upon management's
periodic evaluation of probable accrued losses in the portfolio based on known
and inherent risks in the loan portfolio, the Company's past loan loss
experience, adverse situations that may affect borrowers' ability to repay
loans, estimated value of the underlying collateral and current and expected
market conditions. The allowance for loan loses totaled $366,000, or .40% of
total loans, at September 30, 2002 compared to $350,000, or .41% of total loans,
at June 30, 2002. The $16,000 increase in the Company's allowance for loan
losses during the current quarter was the result of $1,000 in recoveries and
$15,000 in loan loss provisions. The Company incurred no loan charge-offs during
the quarter ended September 30, 2002. At September 30, 2002, after consideration
of the high concentration of one-to-four family mortgage loans in the loan
portfolio, the absence of any loan charge offs and the strong housing market,
the $366,000 allowance for loan losses was determined by the Company to be
consistent with its policy for the establishment and maintenance of adequate
levels of loan loss reserves.
Non-Interest Income
Non-interest income increased $19,000 to $305,000 in the quarter ended September
30, 2002 as compared to the prior year quarter. The primary factors for the
increase in non-interest income in the current quarter were an $11,000 increase
in loan fees and service charges, a $4,000 increase in profit on the sale of
loans, a $3,000 increase in deposit related fees and a $3,000 increase in
commission income. The increase in loan fees and service charges in the current
quarter is attributed to an increase in loan origination activity compared to
the prior year quarter, as loan originations increased to $12.4 million from
$11.7 million, while loan sales amounted to $929,000 during the current quarter
compared to $684,000 in the prior year quarter.
-12-
MIDLAND CAPITAL HOLDINGS CORPORATION
AND SUBSIDIARIES
Non-Interest Expense
Non-interest expense increased $110,000 to $1.1 million in the quarter ended
September 30, 2002 as compared to the prior year quarter. The increase in
non-interest expense is primarily the result of a $54,000 increase in staffing
costs, a $27,000 increase in computer software and support expense, a $7,000
increase in office occupancy expense and a $6,000 increase in professional fees.
The increase in staffing costs is primarily attributed to a $22,000 increase in
the cost of employee benefits and a $10,000 increase in loan origination
commissions, due to an increase in lending volume. The increase in computer
software and support expense is primarily attributed to the conversion to a new
computer network operating system during the current quarter.
Income Taxes
Income taxes increased $24,000 to $109,000 in the quarter ended September 30,
2002 from $85,000 for the same period last year. The increased income tax
provision was due primarily to the increase in operating income in the quarter
ended September 30, 2002 as compared to the quarter ended September 30, 2001.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of funds are deposits, loan and mortgage backed
securities repayments, proceeds from the maturities of investment securities and
other funds provided by operations. The Company maintains investments in liquid
assets based upon management's assessment of (i) the Company's need for funds,
(ii) expected deposit flows, (iii) the yields available on short-term liquid
assets and (iv) the objectives of the Company's asset/liability management
program. At September 30, 2002 the Company had commitments to originate $6.7
million in single-family mortgage loans and commitments to sell $107,000 in
loans.
The Company uses its capital resources principally to meet its ongoing
commitments to fund maturing certificate of deposits and deposit withdrawals,
fund existing and continuing loan commitments, maintain its liquidity and meet
operating expenses. The Company considers its liquidity and capital reserves
sufficient to meet its outstanding short and long-term needs. The Company
expects to be able to fund or refinance, on a timely basis, its material
commitments and long-term liabilities.
At September 30, 2002, the Association had tangible and core capital of $9.1
million, or 5.85% of adjusted total assets, which was approximately $6.8 million
and $4.4 million above the minimum requirements in effect on that date of 1.5%
and 3.0%, respectively, of adjusted total assets.
At September 30, 2002, the Association had total capital of $9.5 million
(including $9.1 million in core capital) and risk-weighted assets of $76.5
million, or total capital of 12.38% of risk-weighted assets. This amount was
$3.4 million above the 8.0% requirement in effect on that date.
DISCLOSURE AND INTERNAL CONTROLS
The Company has adopted interim disclosure controls and procedures designed to
facilitate the Company's financial reporting. The interim disclosure controls
currently consist of communications between the Chief Executive Officer and each
department head to identify any new transactions, events, trends, risks or
contingencies which may be material to the Company's operations. The Company's
independent auditors meet with the Chief Executive Officer on a quarterly basis,
and with the Audit Committee when requested, to identify and discuss the
Company's material accounting policies and disclosure. The Company has evaluated
the effectiveness of these interim disclosure controls within the 90 days prior
to the filing of this report. The Company maintains internal controls and has
evaluated such controls within 90 day of the filing of this report. There have
not been any significant changes in such internal controls subsequent to the
date of their evaluation.
-13-
MIDLAND CAPITAL HOLDINGS CORPORATION AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
From time to time, the Association is a party to legal proceedings wherein it
enforces its security interest or is a defendant to certain lawsuits arising out
of the ordinary course of its business. Neither the Company nor the Association
believes that it is a party to any legal proceedings that, if adversely
determined, would have a material adverse effect on its financial condition at
this time.
Item 2. CHANGES IN SECURITIES
Not applicable.
Item 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
Item 5. OTHER INFORMATION
Not applicable.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
See Exhibit Index.
(b) No reports on Form 8-K were filed the quarter ended September 30, 2002.
-14-
INDEX TO EXHIBITS
Exhibit
Number Description
- ------ -----------
11 Computation of Per Share Earnings
99 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of THE SARBANES-OXLEY ACT OF 2002
-15-
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities and
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
MIDLAND CAPITAL HOLDINGS CORPORATION
Registrant
DATE: November 14, 2002 BY: /s/ Paul Zogas
------------------------------------------------
Paul Zogas
President, Chief Executive Officer
and Chief Financial Officer
DATE: November 14, 2002 BY: /s/ Charles Zogas
------------------------------------------------
Charles Zogas
Executive Vice President and
Chief Operating Officer
MIDLAND CAPITAL HOLDINGS CORPORATION
CHIEF EXECUTIVE AND FINANCIAL OFFICER CERTIFICATION
I, Paul Zogas, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Midland Capital
Holdings Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which statements were
made, not misleading with respect to the period covered by this quarterly
report.
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, base on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002 BY: /s/ Paul Zogas
------------------------------------------------
Paul Zogas
President and Chief Executive Officer
and Chief Financial Officer