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 December 31, 2002
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
-------- -------
Commission File Number 1-14343
MIDLAND CAPITAL HOLDINGS CORPORATION
(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
(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 February 14, 2003, the Issuer had
370,875 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 -
December 31, 2002 (unaudited) and June 30, 2002....................... 1
Consolidated Statements of Earnings -
Three months ended December 31, 2002 and 2001 and
Six months ended December 31, 2002 and 2001 (unaudited)............... 2
Consolidated Statements of Changes in Stockholders' Equity -
Six months ended December 31, 2002 (unaudited)........................ 3
Consolidated Statements of Cash Flows - Six months
ended December 31, 2002 and 2001 (unaudited).......................... 4
Notes to Consolidated Financial Statements............................ 5-7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................................... 8-16
Item 3. Controls and Procedures.............................................. 16
Part II. OTHER INFORMATION........................................................ 17
Index to Exhibits............................................................. 18
MIDLAND CAPITAL HOLDINGS CORPORATION
AND SUBSIDIARIES
----------------
Part I -- FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Consolidated Statements of Financial Condition
Assets December 31, June 30,
- ------
2002 2002
------------ -----------
(Unaudited)
Cash and amounts due from depository institutions $ 4,240,422 4,439,811
Interest-bearing deposits 36,837,704 28,481,627
----------- -----------
Total cash and cash equivalents 41,078,126 32,921,438
Investment securities, held to maturity (fair value:
December 31, 2002 - $5,047,675;
June 30, 2002 - $10,182,850) 5,004,748 10,026,708
Investment securities available for sale, at fair value 6,390,488 6,279,537
Mortgage-backed securities, held to maturity (fair value:
December 31, 2002 - $8,136,901;
June 30, 2002 - $10,553,233) 7,940,264 10,359,768
Loans receivable (net of allowance for loan losses:
December 31, 2002 - $379,560;
June 30, 2002 - $350,260) 92,405,539 85,346,846
Loans receivable held for sale - 739,806
Stock in Federal Home Loan Bank of Chicago 907,800 896,600
Office properties and equipment, net 2,707,902 2,816,584
Accrued interest receivable 544,344 649,856
Prepaid expenses and other assets 566,171 551,805
----------- -----------
Total assets $157,545,382 150,588,948
=========== ===========
Liabilities and Stockholders' Equity
Liabilities:
Deposits $145,323,399 138,443,669
Advance payments by borrowers for taxes and insurance 975,752 985,144
Other liabilities 504,197 763,580
----------- -----------
Total liabilities 146,803,348 140,192,393
----------- -----------
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 December 31, 2002 and June 30, 2002 3,640 3,640
Additional paid-in capital 3,276,855 3,276,855
Retained earnings - substantially restricted 7,190,121 6,917,305
Accumulated other comprehensive income, net of income taxes 271,418 198,755
----------- -----------
Total stockholders' equity 10,742,034 10,396,555
----------- -----------
Total liabilities and stockholders' equity $157,545,382 150,588,948
=========== ===========
See accompanying notes to consolidated financial statements.
-1-
MIDLAND CAPITAL HOLDINGS CORPORATION
AND SUBSIDIARIES
----------------
Consolidated Statements of Earnings
Three Months Ended Six Months Ended
December 31, December 31,
2002 2001 2002 2001
--------- --------- --------- ---------
(Unaudited) (Unaudited)
Interest income:
Interest on loans $1,455,284 1,322,298 2,937,843 2,609,939
Interest on mortgage-backed securities 119,377 238,220 258,558 507,020
Interest on investment securities 145,042 439,348 330,457 891,138
Interest on interest-bearing deposits 131,456 80,516 271,768 221,198
Dividends on FHLB stock 13,729 11,518 25,028 23,601
--------- --------- --------- ---------
Total interest income 1,864,888 2,091,900 3,823,654 4,252,896
--------- --------- --------- ---------
Interest expense:
Interest on deposits 743,802 1,024,856 1,528,935 2,189,461
--------- --------- --------- ---------
Total interest expense 743,802 1,024,856 1,528,935 2,189,461
--------- --------- --------- ---------
Net interest income before provision
for loan losses 1,121,086 1,067,044 2,294,719 2,063,435
Provision for loan losses 15,000 0 30,000 0
--------- --------- --------- ---------
Net interest income after provision
for loan losses 1,106,086 1,067,044 2,264,719 2,063,435
--------- --------- --------- ---------
Non-interest income:
Loan fees and service charges 142,838 106,965 271,788 224,923
Commission income 23,406 22,694 41,777 38,313
Profit on sale of loans 3,467 16,643 16,598 26,027
Deposit related fees 133,627 128,025 265,462 256,963
Other income 14,143 15,073 27,338 29,682
--------- --------- --------- ---------
Total non-interest income 317,481 289,400 622,963 575,908
--------- --------- --------- ---------
Non-interest expense:
Staffing costs 664,343 592,432 1,300,423 1,174,601
Advertising 14,627 17,871 29,204 31,358
Occupancy and equipment expenses 192,985 174,917 379,559 354,149
Data processing 49,322 49,789 98,960 99,025
Federal deposit insurance premiums 5,885 6,024 11,860 12,196
Other 236,873 203,020 488,876 406,806
--------- --------- --------- ---------
Total non-interest expense 1,164,035 1,044,053 2,308,882 2,078,135
--------- --------- --------- ---------
Income before income taxes 259,532 312,391 578,800 561,208
Income tax provision 88,241 106,213 196,792 190,811
--------- --------- --------- ---------
Net income $ 171,291 206,178 382,008 370,397
========= ========= ========= =========
Earnings per share (basic) $ .47 .57 1.05 1.02
========= ========= ========= =========
Earnings per share (diluted) $ .46 .56 1.04 1.01
========= ========= ========= =========
Dividends declared per common share $ .15 .12 .30 .22
========= ========= ========= =========
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 382,008 382,008
Other comprehensive income, net of tax:
Unrealized holding gain
during the period 72,663 72,663
--------- ------- ----------
Total comprehensive income 382,008 72,663 454,671
Dividends declared on common
stock ($0.30 per share) (109,192) (109,192)
----- --------- --------- ------- ----------
Balance at December 31, 2002 $3,640 3,276,855 7,190,121 271,418 10,742,034
===== ========= ========= ======= ==========
See accompanying notes to consolidated financial statements.
-3-
MIDLAND CAPITAL HOLDINGS CORPORATION
AND SUBSIDIARIES
----------------
Consolidated Statements of Cash Flows (Unaudited) Six Months Ended
December 31,
2002 2001
----------- -----------
Cash flows from operating activities:
Net income $ 382,008 370,397
Adjustments to reconcile net income to net cash from
operating activities:
Depreciation 160,349 156,907
Net amortization (accretion) on securities 11,022 (15,437)
Provision for loan losses 30,000 -
Federal Home Loan Bank stock dividend (11,200) (12,000)
Proceeds from sale of loans held for sale 1,171,806 1,861,850
Origination of loans held for sale (432,000) (1,680,800)
Profit on sale of loans (16,598) (16,643)
Decrease in accrued interest receivable 105,512 14,076
Decrease in accrued interest payable (5,582) (6,374)
Decrease in deferred income on loans (34,462) (67,503)
Increase in other assets (35,201) (10,135)
Increase (decrease) in other liabilities (253,801) 73,143
----------- -----------
Net cash provided by operating activities 1,071,853 667,481
----------- -----------------
Cash flows from investing activities:
Proceeds from repayments of mortgage backed securities,
held to maturity 2,429,587 3,415,052
Proceeds from maturities of investment securities,
held to maturity 5,000,000 5,000,000
Purchase of investment securities, available for sale - (4,998,531)
Loan disbursements (27,140,249) (19,875,580)
Loan repayments 20,086,018 11,303,698
Property and equipment expenditures (51,667) (719,988)
----------- -----------
Net cash provided by (for) investing activities 323,689 (5,875,349)
----------- -----------
Cash flows from financing activities:
Deposit receipts 219,601,715 208,019,503
Deposit withdrawals (214,179,736) (205,783,083)
Interest credited to deposit accounts 1,457,751 2,085,986
Payment of dividends (109,192) (80,074)
Increase (decrease) in advance payments by borrowers
for taxes and insurance (9,392) 30,499
----------- -----------
Net cash provided by financing activities 6,761,146 4,272,831
----------- -----------
Increase (decrease) in cash and cash equivalents 8,156,688 (935,037)
Cash and cash equivalents at beginning of period 32,921,438 20,718,671
----------- -----------
Cash and cash equivalents at end of period $ 41,078,126 19,783,634
=========== ===========
Cash paid during period for interest $ 1,534,517 2,195,835
Cash paid during period for income taxes 419,624 78,000
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 and six months ended December 31, 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 accounts and transactions have been eliminated in
consolidation.
Note C - Earnings Per Share
Earnings per share for the three month and six month periods ended December 31,
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.
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.
-5-
MIDLAND CAPITAL HOLDINGS CORPORATION
AND SUBSIDIARIES
Note E - Effect of New Accounting Pronouncements (continued)
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.
In October 2002, the FASB issued SFAS No. 147, "Acquisitions of Certain
Financial Institutions - an amendment of FASB Statements No. 72 and 144 and FASB
Interpretation No. 9". SFAS No. 72, "Accounting for Certain Acquisitions of
Banking or Thrift Institutions", and FASB Interpretation No. 9, "Applying APB
Opinions No. 16 and 17 When a Savings and Loan Association or a Similar
Institution is Acquired in a Business Combination Accounted for by the Purchase
Method," provided interpretive guidance on the application of the purchase
method to acquisitions of financial institutions. Except for a transaction
between two or more mutual enterprises, this Statement removes acquisitions of
financial institutions from the scope of both SFAS No. 72 and Interpretation 9
and requires that those transactions be accounted for in accordance with SFAS
No. 141, Business Combinations, and No. 142, Goodwill and Other Intangible
Assets. Thus, the requirement in paragraph 5 of Statement 72 to recognize (and
subsequently amortize) any excess of the fair value of liabilities assumed over
the fair value of tangible and identifiable intangible assets acquired as an
unidentifiable intangible asset no longer applies to acquisitions within the
scope of this Statement, including branch acquisitions. In addition, this
Statement amends SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets," to include in its scope long-term customer- relationship
intangible assets of financial institutions such as depositor- and borrower-
relationship intangible assets and credit cardholder intangible assets.
Consequently, those intangible assets are subject to the same undiscounted cash
flow recoverability test and impairment loss recognition and measurement
provisions that SFAS No. 144 requires for other long-lived assets that are held
and used. This statement is effective on October 1, 2002. The Company adopted
SFAS No. 147 on October 1, 2002 and upon adoption, the pronouncement did not
have a material impact on the Company's consolidated financial statements.
-6-
MIDLAND CAPITAL HOLDINGS CORPORATION
AND SUBSIDIARIES
Note E - Effect of New Accounting Pronouncements (continued)
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.
-7-
MIDLAND CAPITAL HOLDINGS CORPORATION
AND SUBSIDIARIES
Item 2. 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.
-8-
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 December 31, 2002, Midland Federal's capital ratios exceeded all of its
regulatory capital requirements with both tangible and core capital ratios of
5.83% and a risk-based capital ratio of 12.20%.
FINANCIAL CONDITION
At December 31, 2002, total assets of the Company increased by $7.0 million to
$157.6 million from $150.6 million at June 30, 2002. Loans receivable, including
loans held for sale, increased $6.3 million to $92.4 million at December 31,
2002. The Company originated $27.6 million of primarily one-to-four family fixed
rate loans during the six months ended December 31, 2002 compared to loan
originations of $21.6 million during the prior year period. Approximately, 49.6%
of the fixed rate loans originated during the six months ended December 31, 2002
had original term to maturities of 15 years or less. The higher loan origination
volume in the current six month period 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 six month
period were loan repayments of $20.1 million as well as loan sales of $1.2
million. There were no new purchases of mortgage-backed securities during the
six months ended December 31, 2002 and as a result, the balance of
mortgage-backed securities decreased by $2.4 million to $7.9 million due to
repayments and amortization. The $6.3 million increase in net loans receivable,
discussed above, was funded in part by the $2.4 million decrease in
mortgage-backed securities as well as a $6.9 million increase in deposits.
The balance of investment securities classified as held to maturity decreased by
$5.0 million to $5.0 million at December 31, 2002 due to maturities of U.S.
Agency securities. Investment securities available for sale remained stable at
$6.4 million at December 31, 2002 compared to $6.3 million at June 30, 2002.
Gross unrealized gains in the available for sale portfolio were $411,000 at
December 31, 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 December 31, 2002 was 1.75 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 $8.2 million to $41.1 million at December 31, 2002 from
$32.9 million at June 30, 2002. The increase in cash equivalents during the six
months ended December 31, 2002 was partly funded by the proceeds of $5.0 million
in maturing U.S. Agency securities, discussed above.
Non-performing assets consisted of $763,000 in non-performing loans at December
31, 2002 compared to $164,000 in non-performing loans at June 30, 2002. At
December 31, 2002 non-performing loans included one accruing $230,000 commercial
real estate loan that was 90 days or more delinquent at December 31, 2002. In
January 2003 this loan was repaid in full including all past due interest.
Non-accruing loans at December 31, 2002 consisted of $517,000 in one-to-four
family residential mortgage loans and $16,000 in non-mortgage loans. The
allowance for loan losses increased by $29,000 to $379,000 at December 31, 2002
as a result of $30,000 in loan loss provisions offset by $1,000 in net loan
charge offs during the six months ended December 31, 2002. At December 31, 2002
the Company's ratio of allowance for loan losses to non-performing loans was
49.72% 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.
-9-
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.
December 31, June 30,
2002 2002
---------- --------
(Dollars in Thousands)
Non-Accruing Loans:
One-to-four family $517 148
Multi-family -- --
Consumer 11 15
Commercial business 5 1
---- ----
Total 533 164
---- ----
Accruing loans 90 days or more overdue:
Commercial real estate 230 --
---- ----
Total 230 --
---- ----
Total non-performing loans $763 $164
---- ----
Foreclosed Assets:
One-to-four family -- --
---- ----
Total foreclosed assets -- --
---- ----
Total non-performing assets $763 $164
==== ====
Total as a percentage of total assets 0.48% 0.11%
==== ====
As of December 31, 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.
-10-
MIDLAND CAPITAL HOLDINGS CORPORATION
AND SUBSIDIARIES
FINANCIAL CONDITION (continued)
The following table sets forth an analysis of the Company's allowance for loan
losses.
Six Months Ended
December 31,
2002 2001
------- -------
(Dollars in Thousands)
Balance at beginning of period $ 350 $ 360
----- -----
Charge-offs:
One-to-four family loans -- --
Consumer loans 2 4
Commercial business loans -- 21
----- -----
Total charge-offs 2 25
----- -----
Recoveries:
One-to-four family loans 1 --
Multi-family loans -- --
Consumer loans -- --
----- -----
Total recoveries 1 --
----- -----
Net (charge-offs) recoveries (1) (25)
Additions charged to operations 30 --
----- -----
Balance at end of period $ 379 $ 335
===== =====
Ratio of net charge-offs during the period to
average loans outstanding during the period .00% .33%
Ratio of net charge-offs during the period to
average non-performing assets .10% 7.56%
Allowance for loan losses to non-performing loans 49.72% 97.76%
Allowance for loan losses to total loans 0.41% 0.43%
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 six months ended December 31, 2002 increased $6.9 million as a
result of interest credited to deposits in the amount of $1.5 million as well as
actual deposit inflows, net of withdrawals, in the amount of $5.4 million. The
net increase in savings deposits is primarily attributed to a $5.5 million
increase in certificate of deposit accounts due to aggressive pricing on time
deposits, a $1.5 million increase in passbook deposits and a $794,000 increase
in demand deposit accounts offset by a $706,000 decrease in NOW accounts and a
$152,000 decrease in money market accounts.
Stockholders' equity increased $345,000, or 3.3%, to $10.7 million at December
31, 2002 from $10.4 million at June 30, 2002. The increase in stockholders'
equity was due to net income of $382,000 and an increase in accumulated other
comprehensive income of $72,000 offset by the payment of cash dividends in the
amount of $109,000.
-11-
MIDLAND CAPITAL HOLDINGS CORPORATION
AND SUBSIDIARIES
RESULTS OF OPERATIONS
The Company had net income of $171,000 for the quarter ended December 31, 2002
compared to net income of $206,000 for the quarter ended December 31, 2001. The
decrease in net income in the current quarter is the result of a $120,000
increase in non-interest expense as well as a $15,000 provision for loan losses
offset by a $54,000 increase in net interest income, a $28,000 increase in
non-interest income and an $18,000 decrease in income taxes.
For the six months ended December 31, 2002 the Company had net income of
$382,000 compared to net income of $370,000 for the six months ended December
31, 2001. The increase in net income in the current six month period is the
result of a $231,000 increase in net interest income and a $47,000 increase in
non-interest income offset by a $230,000 increase in non-interest expense, a
$30,000 provision for loan losses and a $6,000 increase in income taxes. For a
discussion on the increases in non-interest income and non-interest expense that
occurred in both the three and six month periods ended December 31, 2002, see
"Non-Interest Income" and "Non-Interest Expense."
The increase in net-interest income in both the three and six month periods
ended December 31, 2002 was primarily the result of increases in the average
balance of net earning assets, or average interest earning assets minus average
interest bearing liabilities, that occurred in both periods. For the three
months ended December 31, 2002 the average balance of net earning assets
increased by $982,000 to $13.9 million from $12.9 million during the same period
last year, and for the six months ended December 31, 2002, the average balance
of net earning assets increased by $602,000 to $14.3 million from $13.7 million
in the prior year period. The increases in net interest income were also the
result of increases in interest rate spread that occurred in both the three
months and six months ended December 31, 2002. Interest rate spread increased to
2.82% for the three months ended December 31, 2002 from 2.80% for the three
months ended December 31, 2001. For the six months ended December 31, 2002
interest rate spread increased to 2.90% compared to 2.65% in the prior year six
month period. The increases in interest rate spread were primarily attributed to
declines in the average cost of deposits during both periods which more than
offset declines 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 $227,000, or 10.9%, for the quarter ended December 31,
2002 from the comparable year earlier period. The decrease in interest income
was the result of a decrease in the average yield earned on interest earning
assets to 5.03% for the quarter ended December 31, 2002 compared to 6.09% in the
year earlier period. The decline in the average yield earned on interest earning
assets offset a $10.8 million increase in the average outstanding balance of
interest earning assets to $148.3 million for the quarter ended December 31,
2002 from $137.5 million for the quarter ended December 31, 2001.
For the six months ended December 31, 2002, interest income decreased $429,000,
or 10.1%, from the 2001 period. The decrease in interest income for the current
six month period was the result of a decrease in the average yield earned on
interest earning assets to 5.21% compared to 6.20% for the year earlier period.
The decrease in the average yield earned on interest earning assets offset a
$9.7 million increase in the average outstanding balance of interest earning
assets to $147.0 million for the six months ended December 31, 2002 from $137.3
million for the six months ended December 31, 2001.
-12-
MIDLAND CAPITAL HOLDINGS CORPORATION
AND SUBSIDIARIES
Interest Income (continued)
Interest on loans receivable increased $133,000, or 10.1%, in the quarter ended
December 31, 2002, compared with the prior year quarter, as a result of a $15.2
million increase in the average outstanding balance of net loans receivable to
$91.4 million from $76.2 million in the 2001 quarter. The increase in the
average outstanding balance of net loans receivable offset a decrease in the
average yield earned on net loans receivable to 6.37% for the quarter ended
December 31, 2002 from 6.94% for the prior year quarter. The decrease in the
average yield earned on net loans receivable was primarily the result of
prepayments of higher yielding loans combined with increased loan origination
activity at lower mortgage interest rates.
Interest on mortgage-backed securities decreased $119,000, or 49.9%, for the
quarter ended December 31, 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 due to repayments as well as a decrease in the
average yield earned on mortgage-backed securities. For the quarter ended
December 31, 2002, the average balance of mortgage-backed securities decreased
$6.2 million to $8.5 million from $14.7 million in the prior year quarter. The
average yield earned on mortgage-backed securities also decreased to 5.63% for
the quarter ended December 31, 2002 from 6.48% for the quarter ended December
31, 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.
Interest earned on investment securities decreased $294,000, or 67.0%, for the
quarter ended December 31, 2002 from the prior year period due to an $18.9
million decrease in the average outstanding balance of investment securities to
$12.6 million from $31.5 million in the 2001 quarter. The average yield earned
on investment securities also decreased to 4.58% for the quarter ended December
31, 2002 from 5.59% in the year earlier period.
Interest earned on interest bearing deposits increased $51,000, or 63.3%, for
the quarter ended December 31, 2002 from the same quarter in 2001. The increase
in interest income is attributed to a $20.6 million increase in the average
balance of interest bearing deposits to $34.9 million from $14.3 million in the
2001 quarter. The increase in the average balance of interest bearing deposits
offset a decrease in the average yield earned on interest bearing deposits. For
the quarter ended December 31, 2002, the average yield earned on interest
bearing deposits decreased to 1.52% from 2.31% for the quarter ended December
31, 2001. The $20.6 million increase in the average balance of interest bearing
deposits was primarily funded by the $18.9 million decrease in the average
balance of investment securities, discussed above. The Company increased its
average balance of interest bearing deposits in anticipation of an increase in
economic activity and interest rates in 2003.
For the six months ended December 31, 2002 interest on loans receivable
increased $328,000 from the comparable prior year period. The increase in
interest income was primarily due to a $15.1 million increase in the average
outstanding balance of loans receivable to $89.8 million for the six months
ended December 31, 2002 from $74.7 million for the comparable prior year period.
The increase in the average outstanding balance of net loans receivable offset a
decrease in the average yield earned on net loans receivable to 6.55% for the
six months ended December 31, 2002 from 6.98% for the prior year period. The
growth in the Company's loan portfolio is attributed to direct marketing of the
Company's loan products.
-13-
MIDLAND CAPITAL HOLDINGS CORPORATION
AND SUBSIDIARIES
Interest Income (continued)
For the six months ended December 31, 2002 interest earned on mortgage backed
securities decreased $248,000 to $259,000. The decrease in interest income is
attributed to a decrease in the average outstanding balance of mortgage-backed
securities as well as a decrease in the average yield earned on mortgage-backed
securities. The average outstanding balance of mortgage-backed securities
decreased by $6.5 million to $9.0 million for the six months ended December 31,
2002 from $15.5 million in the 2001 period. The average yield earned on
mortgage-backed securities also decreased to 5.76% for the six months ended
December 31, 2002 from 6.55% for the comparable prior year period.
For the six months ended December 31, 2002 interest earned on investment
securities decreased $561,000 to $330,000 from $891,000 for the six months ended
December 31, 2001. The decrease in interest income is attributed to a decrease
in the average outstanding balance of investment securities as well as a
decrease in the average yield earned on investment securities. The average
outstanding balance of investment securities declined by $17.5 million to $13.9
million for the six months ended December 31, 2002 from $31.4 million in the
2001 period. The average yield earned on investment securities also decreased to
4.74% for the six months ended December 31, 2002 from 5.67% in the comparable
prior year period. The decrease in the average balance of investment securities
funded an increase in interest bearing deposits.
For the six months ended December 31, 2002 interest earned on interest bearing
deposits increased $51,000 from the year earlier period. The increase in
interest income was primarily due to an $18.5 million increase in the average
outstanding balance of interest bearing deposits to $33.4 million for the six
months ended December 31, 2002 from $14.9 million for the comparable prior year
period. The increase in the average outstanding balance of interest bearing
deposits offset a decrease in the average yield earned on interest bearing
deposits to 1.64% for the six months ended December 31, 2002 from 2.98% for the
prior year period.
Interest Expense
Interest expense decreased $281,000, or 27.4%, for the quarter ended December
31, 2002 compared with the prior year quarter. The decrease in interest expense
is attributable to a decrease in the average yield paid on interest costing
deposits to 2.21% for the quarter ended December 31, 2002 from 3.29% for the
quarter ended December 31, 2001. The decrease in the average yield paid on
interest costing deposits offset a $9.9 million increase in the average
outstanding balance of interest costing deposits to $134.4 million for the
quarter ended December 31, 2002 from $124.5 million for the prior year quarter.
For the six months ended December 31, 2002 interest expense decreased $661,000
to $1.5 million from $2.2 million for the prior year period. The decrease in
interest expense was the result of a decrease in the average yield paid on
interest costing deposits to 2.31% for current year period from 3.55% in the
prior year period. The decrease in the average yield paid on interest costing
deposits offset a $9.1 million increase in the average outstanding balance of
interest costing deposits to $132.7 million for the current period from $123.6
million for the year earlier period.
-14-
MIDLAND CAPITAL HOLDINGS CORPORATION
AND SUBSIDIARIES
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 $379,000, or .41% of
total loans, at December 31, 2002 compared to $350,000, or .41% of total loans,
at June 30, 2002. The $29,000 increase in the Company's allowance for loan
losses during the six months ended December 31, 2002 was the result of $30,000
in loan loss provisions offset by $1,000 in net loan charge-offs. At December
31, 2002, after consideration of the high concentration of one-to-four family
mortgage loans in the loan portfolio, peer data, current economic conditions,
trends in the portfolio, the low level of loan charge offs and the strong
housing market, the $379,000 allowance for loan losses was determined by the
Company to be sufficient to cover probable accrued losses in the loan portfolio
consistent with its policy for the establishment and maintenance of adequate
levels of loan loss reserves.
Non-Interest Income
Non-interest income increased $28,000 to $317,000 in the quarter ended December
31, 2002 from $289,000 in the quarter ended December 31, 2001. The primary
factors for the increase in non-interest income in the current quarter were a
$36,000 increase in loan fees and service charges and a $6,000 increase in
deposit related fees offset by a $13,000 decrease in profit on the sale of
loans.
For the six months ended December 31, 2002 non-interest income increased $47,000
to $623,000 from $576,000 in the prior year period. The increase in non-interest
income in the current six month period compared with the prior year period is
primarily attributed to a $47,000 increase in loan fees and service charges and
an $8,000 increase in deposit related fees offset by a $9,000 decrease in profit
on the sale of loans. The increase in loan fees and service charges in both the
three and six month periods ended December 31, 2002 is attributed to an increase
in loan origination activity compared to the prior year periods.
Non-Interest Expense
Non-interest expense increased $120,000 to $1.2 million in the quarter ended
December 31, 2002 compared to the prior year quarter. The increase in
non-interest expense is primarily the result of a $72,000 increase in staffing
costs, an $18,000 increase in office occupancy expense, a $3,000 increase in
professional fees and a $3,000 increase in computer software and support
expense, as well as $5,000 in charges from losses on demand deposit overdrafts.
The increase in staffing costs is primarily attributed to a $26,000 increase in
loan origination commissions, due to an increase in lending volume, and a
$37,000 increase in costs for employee medical and pension benefits.
For the six months ended December 31, 2002 non-interest expense increased
$231,000 to $2.3 million from $2.1 million in the prior year period. The primary
factors for the increase in non-interest expense in the current six month period
were a $126,000 increase in staffing costs, a $30,000 increase in computer
software and support expense, a $25,000 increase in office occupancy expense and
a $9,000 increase in professional fees, as well as $8,000 in charges from losses
on demand deposit overdrafts. The increase in staffing costs is primarily
attributed to a $59,000 increase in costs for employee medical and pension
benefits and a $36,000 increase in loan origination commissions, due to an
increase in lending volume.
-15-
MIDLAND CAPITAL HOLDINGS CORPORATION
AND SUBSIDIARIES
Income Taxes
Income taxes decreased $18,000 to $88,000 in the quarter ended December 31, 2002
from $106,000 for the prior year quarter as a result of the decrease in
operating income from the prior year quarter. For the six months ended December
31, 2002 income taxes increased $6,000 to $197,000 compared to $191,000 in the
prior year period. The increased income tax provision was due to the increase in
operating income as compared to the prior year period.
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 December 31, 2002 the Company had commitments to originate $2.9
million in single-family 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 December 31, 2002, the Association had tangible and core capital of $9.2
million, or 5.83% of adjusted total assets, which was approximately $6.8 million
and $4.5 million above the minimum requirements in effect on that date of 1.5%
and 3.0%, respectively, of adjusted total assets.
At December 31, 2002, the Association had total capital of $9.6 million
(including $9.2 million in core capital) and risk-weighted assets of $78.4
million, or total capital of 12.20% of risk-weighted assets. This amount was
$3.3 million above the 8.0% requirement in effect on that date.
Item 3. CONTROLS AND PROCEDURES
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's CEO and CFO
has evaluated the effectiveness of these interim disclosure controls within the
90 days prior to the filing of this report and has found them to be adequate.
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.
-16-
MIDLAND CAPITAL HOLDINGS CORPORATION
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 which 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
On October 16, 2002 the shareholders held their annual meeting to consider and
act upon the election of Mr. Michael J. Kukanza and Mr. Richard Taylor to serve
as directors for terms of three years and the ratification of the appointment of
Cobitz, VandenBerg & Fennessy as auditors for the Company for the fiscal year
ending June 30, 2003. Both of the foregoing items were approved by the
shareholders at the meeting by the following vote totals based upon 363,975
shares outstanding and entitled to vote at the meeting.
I. Election of Directors -- 344,024 shares voted, as follows: Michael J.
Kukanza: 344,024 votes FOR; -0- votes WITHHELD. Richard Taylor: 344,024
votes FOR; -0- votes WITHHELD.
II. Ratification of the appointment of Cobitz, VandenBerg & Fennessy as
auditors for the Company for the fiscal year ending June 30, 2003 --
344,024 shares voted, as follows: FOR: 343,024 AGAINST: -0- ABSTAIN: 1,000
Item 5. OTHER INFORMATION
Not applicable.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Computation of earnings per share (Exhibit 11 filed herewith).
(b) No reports on Form 8-K were filed this quarter.
-17-
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
-18-
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: February 14, 2003 BY: /s/ Paul Zogas
-------------------------------------
Paul Zogas
President, Chief Executive Officer
and Chief Financial Officer
DATE: February 14, 2003 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: February 14, 2003 BY: /s/ Paul Zogas
-------------------------------------
Paul Zogas
President and Chief Executive Officer
and Chief Financial Officer