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, 2003
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 November 14, 2003, the Issuer had
372,600 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, 2003 (unaudited) and June 30, 2003 ........... 1
Consolidated Statements of Earnings - Three Months
Ended September 30, 2003 and 2002 (unaudited) .............. 2
Consolidated Statements of Changes in Stockholders' Equity -
Three Months Ended September 30, 2003 (unaudited) .......... 3
Consolidated Statements of Cash Flows - Three Months
Ended September 30, 2003 and 2002 (unaudited) .............. 4
Notes to Consolidated Financial Statements ................. 5-6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ........................ 7-14
Item 3. Controls and Procedures .................................... 14
Part II. OTHER INFORMATION ............................................. 15
Index to Exhibits .................................................. 16
MIDLAND CAPITAL HOLDINGS CORPORATION
AND SUBSIDIARIES
Part I -- FINANCIAL INFORMATION
Consolidated Statements of Financial Condition
Assets September 30, June 30,
2003 2003
------------ -----------
(Unaudited)
Cash and amounts due from depository institutions $ 4,770,530 3,742,724
Interest-bearing deposits 47,083,737 45,678,341
------------ -----------
Total cash and cash equivalents 51,854,267 49,421,065
Investment securities available for sale, at fair value 3,811,875 6,388,900
Mortgage-backed securities, held to maturity (fair value:
September 30, 2003 - $5,121,148;
June 30, 2003 - $6,425,722) 5,012,968 6,272,466
Loans receivable (net of allowance for loan losses:
September 30, 2003 - $424,207;
June 30, 2003 - $409,560) 91,831,855 92,932,253
Loans receivable held for sale 330,850 367,300
Stock in Federal Home Loan Bank of Chicago 1,012,000 996,200
Office properties and equipment, net 2,537,284 2,607,389
Accrued interest receivable 418,940 448,762
Prepaid expenses and other assets 713,779 542,049
------------ -----------
Total assets $157,523,818 159,976,384
============ ===========
Liabilities and Stockholders' Equity
Liabilities:
Deposits $145,062,610 147,489,604
Advance payments by borrowers for taxes and insurance 300,298 998,779
Other liabilities 672,511 431,854
------------ -----------
Total liabilities 146,035,419 148,920,237
------------ -----------
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 372,600 shares
at September 30, 2003 and June 30, 2003 3,726 3,726
Additional paid-in capital 3,395,580 3,395,580
Retained earnings - substantially restricted 7,870,569 7,387,034
Accumulated other comprehensive income, net of income taxes 218,524 269,807
------------ -----------
Total stockholders' equity 11,488,399 11,056,147
------------ -----------
Total liabilities and stockholders' equity $157,523,818 159,976,384
============ ===========
See accompanying notes to consolidated financial statements.
-1-
MIDLAND CAPITAL HOLDINGS CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Earnings (Unaudited)
Three Months Ended
September 30,
2003 2002
---------- ---------
Interest income:
Interest on loans $1,516,732 1,482,560
Interest on mortgage-backed securities 70,445 139,181
Interest on investment securities 51,180 185,415
Interest on interest-bearing deposits 110,589 140,312
Dividends on FHLB stock 15,881 11,299
---------- ---------
Total interest income 1,764,827 1,958,767
---------- ---------
Interest expense:
Interest on deposits 490,728 785,134
---------- ---------
Total interest expense 490,728 785,134
---------- ---------
Net interest income before provision for loan losses 1,274,099 1,173,633
Provision for loan losses 15,000 15,000
---------- ---------
Net interest income after provision for loan losses 1,259,099 1,158,633
---------- ---------
Non-interest income:
Loan fees and service charges 174,492 128,950
Commission income 18,003 18,371
Gain on sale of loans 8,598 13,131
Deposit related fees 126,834 131,835
Gain on satisfaction of foreclosure judgments 433,285 --
Other income 29,696 13,195
---------- ---------
Total non-interest income 790,908 305,482
---------- ---------
Non-interest expense:
Staffing costs 710,646 636,079
Advertising 17,907 14,578
Occupancy and equipment expenses 198,106 186,574
Data processing 52,619 49,638
Federal deposit insurance premiums 5,851 5,975
Other 236,276 252,003
---------- ---------
Total non-interest expense 1,221,405 1,144,847
---------- ---------
Income before income taxes 828,602 319,268
Income tax provision 281,725 108,551
---------- ---------
Net income $ 546,877 210,717
========== =========
Earnings per share (basic) $ 1.47 0.58
========== =========
Earnings per share (diluted) $ 1.47 0.57
========== =========
Dividends declared per common share $ 0.17 0.15
========== =========
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, 2003 $3,726 3,395,580 7,387,034 269,807 11,056,147
------ --------- --------- ------- ----------
Comprehensive Income:
Net Income 546,877 546,877
Other comprehensive
income, net of tax:
Unrealized holding loss
during the period (51,283) (51,283)
--------- ------- ----------
Total comprehensive income 546,877 (51,283) 495,594
Dividends declared on common
stock ($0.17 per share) (63,342) (63,342)
------ --------- --------- ------- ----------
Balance at September 30, 2003 $3,726 3,395,580 7,870,569 218,524 11,488,399
====== ========= ========= ======= ==========
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,
2003 2002
------------- ------------
Cash flows from operating activities:
Net income $ 546,877 210,717
Adjustments to reconcile net income to net cash from
operating activities:
Depreciation 75,989 78,950
Net amortization (accretion) on securities (3,405) 5,356
Federal Home Loan Bank stock dividend (15,800) --
Provision for loan losses 15,000 15,000
Proceeds from sale of loans held for sale 611,900 929,225
Origination of loans held for sale (575,450) (296,419)
Gain on sale of loans (8,598) (13,131)
Decrease in accrued interest receivable 29,822 23,731
Decrease in accrued interest payable (3,478) (1,683)
Decrease in deferred income on loans (239,659) (21,162)
(Increase) decrease in other assets (136,714) 48,593
Increase (decrease) in other liabilities 244,135 (87,626)
------------- ------------
Net cash provided by operating activities 540,619 891,551
------------- ------------
Cash flows from investing activities:
Proceeds from repayments of mortgage-backed securities,
held to maturity 1,262,227 1,197,849
Proceeds from maturities of investment securities,
held to maturity -- 2,500,000
Proceeds from maturities of investment securities,
available for sale 2,500,000 --
Loan disbursements (18,372,662) (12,099,733)
Loan repayments 19,697,719 7,081,743
Property and equipment expenditures (5,884) (37,665)
------------- ------------
Net cash provided by (for) investing activities 5,081,400 (1,357,806)
------------- ------------
Cash flows from financing activities:
Deposit account receipts 108,345,224 113,294,621
Deposit account withdrawals (111,238,206) (109,174,507)
Interest credited to deposit accounts 465,988 750,502
Payment of dividends (63,342) (54,596)
(Decrease) increase in advance payments by borrowers
for taxes and insurance (698,481) 357,497
------------- ------------
Net cash provided (for) by financing activities (3,188,817) 5,173,517
------------- ------------
Net change in cash and cash equivalents 2,433,202 4,707,262
Cash and cash equivalents at beginning of period 49,421,065 32,921,438
------------- ------------
Cash and cash equivalents at end of period $ 51,854,267 37,628,700
============= ============
Cash paid during the period for:
Interest $ 494,206 786,817
Income taxes 12,538 255,525
============= ============
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
accounting principles generally accepted in the United States of America.
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 accounting principles
generally accepted in the United States of America 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, 2003 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, 2003 and 2002
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 September 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 did not have a material effect on the
Company's consolidated financial statements.
-5-
Note E - Effect of New Accounting Pronouncements (continued)
In January 2003, the FASB issued Interpretation No. 46 "Consolidation of
Variable Interest Entities", which provides new accounting guidance on when to
consolidate a variable interest entity. A variable interest entity exists when
either the total equity investment at risk is not sufficient to permit the
entity to finance its activities by itself, or the equity investors lack one of
three characteristics associated with owning a controlling financial interest.
Those characteristics include the direct or indirect ability to make decisions
about an entity's activities through voting rights or similar rights, the
obligation to absorb the expected loss of an entity if they occur, and the right
to receive the expected residual return of the entity if they occur. The Company
does not expect that the adoption of this Interpretation will have a material
impact on its consolidated financial statements.
In April 2003, the FASB issued SFAS No. 149 "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities". The Statement amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative hedging activities under SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities". In general, this Statement
should be applied prospectively. The Company does not expect that the
application of this Statement will materially impact its consolidated financial
statements.
In May 2003, the FASB issued SFAS No. 150 "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity". This Statement
established standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. This
Statement is effective for financial statements entered into or modified after
May 31, 2003, and otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003. Adoption of this Statement did not 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 for the purpose of becoming the thrift holding company for
Midland Federal Savings and Loan Association (the "Association" or "Midland
Federal"). The Association converted from a federal mutual savings and loan
association to a federal stock savings and loan association on June 30, 1993
(the "Conversion"). In the Conversion, 345,000 shares of common stock, par value
of $.01 per share, of the Association were sold in an initial public offering
for an aggregate consideration of $3.45 million. On July 23, 1998, as a result
of a reorganization, the Association became a wholly owned subsidiary of the
Company, and each outstanding share of common stock of the Association became,
by operation of law, one share of common stock of the Company. At June 30, 2003
there were 372,600 shares of the Company's common stock outstanding.
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, 2003, Midland Federal's capital ratios exceeded all of its
regulatory capital requirements with both tangible and core capital ratios of
6.34% and a risk-based capital ratio of 12.91%.
FINANCIAL CONDITION
At September 30, 2003, total assets of the Company decreased by $2.5 million to
$157.5 million from $160.0 million at June 30, 2003. Loans receivable, including
loans available for sale, decreased $1.1 million to $92.2 million at September
30, 2003. The Company originated $18.9 million of primarily fixed rate loans
during the quarter ended September 30, 2003 compared to loan originations of
$12.4 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 $19.7 million as well as loan sales of $612,000. There were no new purchases
of mortgage-backed securities during the quarter ended September 30, 2003 and as
a result, the balance of mortgage-backed securities decreased by $1.3 million to
$5.0 million due to repayments and amortization.
The balance of investment securities available for sale decreased $2.6 million
to $3.8 million at September 30, 2003 compared to $6.4 million at June 30, 2003
due to the maturity of a $2.5 million security. Gross unrealized gains in the
available for sale portfolio were $331,000 at September 30, 2003 compared to
gross unrealized gains of $409,000 at June 30, 2003, reflecting the negative
impact of higher interest rates. The weighted average remaining term to maturity
of the Company's total investment securities portfolio at September 30, 2003 was
4.0 years.
In response to the increase in economic activity and in anticipation of upward
pressure on interest rates in fiscal 2004, the Company increased the balance of
cash and cash equivalents by $2.4 million to $51.9 million at September 30, 2003
from $49.4 million at June 30, 2003. The increase in cash equivalents during the
quarter ended September 30, 2003 was partly funded by the proceeds of $2.5
million in maturing U.S. Agency securities, discussed above.
Non-performing assets consisted of $410,000 in non-accruing loans at September
30, 2003 compared to $483,000 at June 30, 2003. The allowance for loan losses
increased during the current quarter by $15,000 to $424,000, or 0.46% of total
loans, at September 30, 2003. The $14,000 increase in the allowance for loan
losses was the result of $15,000 in loan loss provisions net of $1,000 in charge
offs during the quarter ended September 30, 2003. Non-accruing loans at
September 30, 2003 consisted of $399,000 in one-to-four family residential
mortgage loans and $11,000 in non-mortgage loans. At September 30, 2003 the
Company's ratio of allowance for loan losses to non-performing loans was 103.35%
compared to 84.80% at June 30, 2003. 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,
2003 2003
------------- --------
(Dollars in Thousands)
Non-Accruing Loans:
One-to-four family $399 $472
Multi-family -- --
Consumer 11 10
Commercial business -- --
---- ----
Total non-performing loans $410 $482
---- ----
Foreclosed Assets:
One-to-four family -- --
---- ----
Total foreclosed assets -- --
---- ----
Total non-performing assets $410 $482
==== ====
Total as a percentage of total assets 0.26% 0.30%
==== ====
As of September 30, 2003, 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,
2003 2002
------- ------
(Dollars in Thousands)
Balance at beginning of period $ 410 $ 350
------- ------
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) 1
Additions charged to operations 15 15
------- ------
Balance at end of period $ 424 $ 366
======= ======
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 103.35% 56.47%
Allowance for loan losses to total loans 0.46% 0.40%
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, 2003 decreased $2.4 million as a
result of net withdrawals in the amount of $2.9 million offset by interest
credited to deposits in the amount of $466,000. The net decrease in savings
deposits is attributable to a $1.4 million decrease in certificate of deposit
accounts, a $1.1 million decrease in passbook deposits, a $420,000 decrease in
money market accounts and a $210,000 decrease in NOW accounts offset by a
$710,000 increase in demand deposit accounts.
Stockholders' equity increased $432,000, or 3.9%, to $11.5 million at September
30, 2003 from $11.1 million at June 30, 2003. The increase in stockholders'
equity was due to net income of $547,000 offset by a decrease in accumulated
other comprehensive income of $51,000 and the payment of cash dividends in the
amount of $64,000.
-10-
MIDLAND CAPITAL HOLDINGS CORPORATION
AND SUBSIDIARIES
RESULTS OF OPERATIONS
Net income for the quarter ended September 30, 2003 was $547,000 compared to net
income of $211,000 for the quarter ended September 30, 2002. The increase in net
income in the current quarter was the result of a $100,000 increase in net
interest income and a $485,000 increase in non-interest income. Net income was
decreased in the current quarter due to a $76,000 increase in non-interest
expense and a $173,000 increase in income taxes. The increase in net interest
income was primarily the result of the collection of non-accruing loan interest
during the current period in the amount of $216,000 due to a loan workout
agreement that was paid in full during the quarter ended September 30, 2003. Net
interest income in the prior year quarter also included the collection of
non-accruing loan interest in the amount of $36,000 under the same loan workout
agreement. For a discussion on the increases in both non-interest income and
non-interest expense, respectively, see "Non-Interest Income" and "Non-Interest
Expense."
Net of the collection of non-accruing loan interest in both periods, discussed
above, the Company's interest rate spread decreased to 2.67% for the three
months ended September 30, 2003 from 2.89% for the prior year period. Interest
rate spread declined in the three month period ended September 30, 2003 compared
with the prior year period as a result of high mortgage refinancing activity at
lower market interest rates, lower investment yields on the Company's investment
securities as well as an increase in cash. The decrease in interest rate spread
was partially offset by an increase in the average balance of net earning assets
(average interest earning assets minus average interest bearing liabilities).
The average balance of net earning assets in the three month period ended
September 30, 2003 increased by $1.1 million to $15.8 million compared with the
prior year period.
Interest Income
Interest income decreased $194,000, or 9.9%, for the quarter ended September 30,
2003 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. Net of the collection of non-accruing loan interest in both
periods, discussed above, the average yield on interest earning assets decreased
to 4.13% for the quarter ended September 30, 2003 from 5.28% in the prior year
quarter. The decrease in the average yield earned on interest earning assets
offset a $4.3 million increase in the average balance of interest earning assets
to $150.0 million for the quarter ended September 30, 2003 compared to $145.7
million for the quarter ended September 30, 2002.
Interest on loans receivable increased $34,000, or 2.3%, for the quarter ended
September 30, 2003 from the comparable quarter in 2002. The increase in interest
income was primarily attributed to the $216,000 collection of non-accruing loan
interest, discussed above, as compared to the $36,000 collection of non-accruing
loan interest in the prior year period, under the same loan workout agreement.
Net of the collection of non-accruing loan interest in both periods, the average
yield earned on loans receivable decreased to 5.65% for the quarter ended
September 30, 2003 as compared to 6.56% for the quarter ended September 30,
2002. The decrease in the average yield on loans receivable was offset by a $3.7
million increase in the average outstanding balance of net loans receivable to
$92.0 million for the quarter ended September 30, 2003 from $88.3 million for
the quarter ended September 30, 2002.
-11-
MIDLAND CAPITAL HOLDINGS CORPORATION
AND SUBSIDIARIES
Interest Income (continued)
Interest on mortgage-backed securities decreased $69,000, or 49.4%, for the
quarter ended September 30, 2003 from the comparable quarter in 2002. 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, 2003 as
compared with the same period last year. For the quarter ended September 30,
2003, the average balance of mortgage-backed securities decreased $4.0 million
to $5.5 million from $9.5 million in the prior year quarter. The average yield
earned on mortgage-backed securities also decreased to 5.14% for the quarter
ended September 30, 2003 from 5.88% for the quarter ended September 30, 2002.
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 $134,000, or 72.4%, for the
quarter ended September 30, 2003 from the prior year period due to a $10.1
million decrease in the average outstanding balance of investment securities to
$5.0 million from $15.1 million in the 2002 quarter. The average yield earned on
investment securities also decreased to 4.08% for the quarter ended September
30, 2003 from 4.89% in the year earlier period.
Interest earned on interest bearing deposits decreased $30,000, or 21.2%, for
the quarter ended September 30, 2003 from the same quarter in 2002. The decrease
in interest income is attributed to a decrease in the average yield earned on
interest bearing deposits. For the quarter ended September 30, 2003, the average
yield earned on interest bearing deposits decreased to 0.95% from 1.76% for the
quarter ended September 30, 2002. The decrease in the average yield on interest
bearing deposits offset a $14.5 million increase in the average balance of
interest bearing deposits to $46.4 million from $31.9 million in the 2002
quarter. The $14.5 million increase in the average balance of interest bearing
deposits was primarily funded by the $10.1 million decrease in the average
balance of investment securities and the $4.0 million decrease in the average
balance of mortgage-backed securities, discussed above. The Company increased
the average balance of interest bearing deposits in response to an increase in
economic activity and in anticipation of upward pressure on interest rates in
2004.
Interest Expense
Interest expense decreased $294,000, or 37.5%, for the quarter ended September
30, 2003 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 1.46% for the quarter ended September 30, 2003 from 2.40% for the
quarter ended September 30, 2002. The decrease in the average yield paid on
interest costing deposits offset a $3.2 million increase in the average
outstanding balance of interest costing deposits to $134.2 million for the
quarter ended September 30, 2003 from $131.0 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 $424,000, or .46% of
total loans, at September 30, 2003 compared to $410,000, or .44% of total loans,
at June 30, 2003. The $14,000 increase in the Company's allowance for loan
losses during the current quarter was the result of $15,000 in loan loss
provisions net of $1,000 in charge offs.
-12-
MIDLAND CAPITAL HOLDINGS CORPORATION
AND SUBSIDIARIES
Provisions for Losses on Loans (continued)
At September 30, 2003, 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 $424,000 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 $485,000 to $791,000 in the quarter ended
September 30, 2003 as compared to the prior year quarter. The primary factors
for the increase in non-interest income in the current quarter were a $433,000
gain on the satisfaction of foreclosure judgments and a $46,000 increase in loan
fees and service charges offset by a $5,000 decrease in gain on the sale of
loans and a $5,000 decrease in deposit related fees. The $433,000 gain on the
satisfaction of foreclosure judgments is the result of the payment in full of
the loan workout agreement, discussed above. 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 $18.9 million from $12.4 million.
Non-Interest Expense
Non-interest expense increased $76,000 to $1.2 million in the quarter ended
September 30, 2003 as compared to the prior year quarter. The increase in
non-interest expense is primarily the result of a $75,000 increase in staffing
costs, a $12,000 increase in office occupancy expense, a $10,000 increase in
professional fees and a $3,000 increase in advertising expense offset by a
$26,000 decrease in computer software and support expense. The increase in
staffing costs is primarily attributed to a $31,000 increase in loan origination
commissions, due to an increase in lending volume, a $21,000 increase in the
cost of employee benefits and a $3,000 increase in bonus compensation expense.
Income Taxes
Income taxes increased $173,000 to $282,000 in the quarter ended September 30,
2003 from $109,000 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, 2003 as compared to the quarter ended September 30, 2002.
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, 2003 the Company had commitments to originate $5.4
million in single-family mortgage loans and commitments to sell $331,000 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.
-13-
MIDLAND CAPITAL HOLDINGS CORPORATION
AND SUBSIDIARIES
LIQUIDITY AND CAPITAL RESOURCES (continued)
At September 30, 2003, the Association had tangible and core capital of $10.0
million, or 6.34% of adjusted total assets, which was approximately $7.6 million
and $5.3 million above the minimum requirements in effect on that date of 1.5%
and 3.0%, respectively, of adjusted total assets.
At September 30, 2003, the Association had total capital of $10.4 million
(including $10.0 million in core capital) and risk-weighted assets of $80.5
million, or total capital of 12.91% of risk-weighted assets. This amount was
$4.0 million above the 8.0% requirement in effect on that date.
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 and Financial
Officer and each department head to identify any new transactions, events,
trends, risks or contingencies which may be material to the Company's
operations. In addition, the Chief Executive and Financial Officer and the
Company's independent auditors also meet on a quarterly basis and discuss the
Company's material accounting policies. The Company's Chief Executive and
Financial Officer has evaluated the effectiveness of these interim disclosure
controls as of the end of the period covered by this report and found them to be
adequate.
The Company maintains internal control over financial reporting. There have not
been any significant changes in such internal control over financial reporting
in the last quarter that has materially affected, or is reasonably likely to
materially affect, the Company's internal controls over financial reporting.
-14-
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 AND USE OF PROCEEDS
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) Reports on Form 8-K:
On July 25, 2003, the Company filed a report on Form 8-K attaching a press
release announcing its fiscal fourth quarter earnings and declaring an increase
in its regular dividend. No other reports on Form 8-K have been filed during the
three month period ended September 30, 2003.
-15-
INDEX TO EXHIBITS
Exhibit
Number Description
- ------- -----------
11 Computation of Per Share Earnings
31.1 Rule 13a-14(a)/15d-14(a) Certification
32.1 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
-16-
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, 2003 BY: /s/ Paul Zogas
------------------------------------
Paul Zogas
President, Chief Executive Officer
and Chief Financial Officer
DATE: November 14, 2003 BY: /s/ Charles Zogas
------------------------------------
Charles Zogas
Executive Vice President and
Chief Operating Officer