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, 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 February 13, 2004, 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 -
December 31, 2003 (unaudited) and June 30, 2003............... 1
Consolidated Statements of Earnings -
Three months ended December 31, 2003 and 2002 and
Six months ended December 31, 2003 and 2002 (unaudited)....... 2
Consolidated Statements of Changes in Stockholders' Equity -
Six months ended December 31, 2003 (unaudited)................ 3
Consolidated Statements of Cash Flows - Six months
ended December 31, 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........................... 7-15
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,
2003 2003
------------ -----------
(Unaudited)
Cash and amounts due from depository institutions $ 4,548,471 3,742,724
Interest-bearing deposits 47,163,186 45,678,341
------------ -----------
Total cash and cash equivalents 51,711,657 49,421,065
Investment securities available for sale, at fair value 1,274,375 6,388,900
Mortgage-backed securities, held to maturity (fair value:
December 31, 2003 - $4,239,312;
June 30, 2003 - $6,425,722) 4,181,239 6,272,466
Loans receivable (net of allowance for loan losses:
December 31, 2003 - $429,472;
June 30, 2003 - $409,560) 93,870,050 92,932,253
Loans receivable held for sale 263,311 367,300
Stock in Federal Home Loan Bank of Chicago 1,029,700 996,200
Office properties and equipment, net 2,468,005 2,607,389
Accrued interest receivable 354,855 448,762
Prepaid expenses and other assets 655,981 542,049
------------ -----------
Total assets $155,809,173 159,976,384
============ ===========
Liabilities and Stockholders' Equity
- ------------------------------------
Liabilities:
Deposits $143,029,005 147,489,604
Advance payments by borrowers for taxes and insurance 864,828 998,779
Other liabilities 397,696 431,854
------------ -----------
Total liabilities 144,291,529 148,920,237
------------ -----------
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 December 31, 2003 and June 30, 2003 3,726 3,726
Additional paid-in capital 3,395,580 3,395,580
Retained earnings - substantially restricted 7,924,948 7,387,034
Accumulated other comprehensive income, net of income taxes 193,390 269,807
------------ -----------
Total stockholders' equity 11,517,644 11,056,147
------------ -----------
Total liabilities and stockholders' equity $155,809,173 159,976,384
============ ===========
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,
2003 2002 2003 2002
---------- --------- --------- ----------
(Unaudited) (Unaudited)
Interest income:
Interest on loans $1,326,592 1,455,284 2,843,324 2,937,843
Interest on mortgage-backed securities 49,584 119,377 120,029 258,558
Interest on investment securities 29,099 145,042 80,278 330,457
Interest on interest-bearing deposits 114,681 131,456 225,270 271,768
Dividends on FHLB stock 17,719 13,729 33,600 25,028
---------- --------- --------- ----------
Total interest income 1,537,675 1,864,888 3,302,501 3,823,654
---------- --------- --------- ----------
Interest expense:
Interest on deposits 457,903 743,802 948,630 1,528,935
---------- --------- --------- ----------
Total interest expense 457,903 743,802 948,630 1,528,935
---------- --------- --------- ----------
Net interest income before provision
for loan losses 1,079,772 1,121,086 2,353,871 2,294,719
Provision for loan losses 15,000 15,000 30,000 30,000
---------- --------- --------- ----------
Net interest income after provision
for loan losses 1,064,772 1,106,086 2,323,871 2,264,719
---------- --------- --------- ----------
Non-interest income:
Loan fees and service charges 99,610 142,838 274,102 271,788
Commission income 19,623 23,406 37,626 41,777
Profit on sale of loans 2,515 3,467 11,112 16,598
Deposit related fees 123,403 133,627 250,237 265,462
Gain on satisfaction of
foreclosure judgments -- -- 433,285 --
Other income 15,180 14,143 44,877 27,338
---------- --------- --------- ----------
Total non-interest income 260,331 317,481 1,051,239 622,963
---------- --------- --------- ----------
Non-interest expense:
Staffing costs 653,371 664,343 1,364,017 1,300,423
Advertising 19,071 14,627 36,979 29,204
Occupancy and equipment expenses 186,668 192,985 384,773 379,559
Data processing 51,155 49,322 103,774 98,960
Federal deposit insurance premiums 5,592 5,885 11,443 11,860
Other 230,881 236,873 467,157 488,876
---------- --------- --------- ----------
Total non-interest expense 1,146,738 1,164,035 2,368,143 2,308,882
---------- --------- --------- ----------
Income before income taxes 178,365 259,532 1,006,967 578,800
Income tax provision 60,644 88,241 342,369 196,792
---------- --------- --------- ----------
Net income $ 117,721 171,291 664,598 382,008
========== ========= ========= ==========
Earnings per share (basic) $ .32 .47 1.78 1.05
========== ========= ========= ==========
Earnings per share (diluted) $ .32 .46 1.78 1.04
========== ========= ========= ==========
Dividends declared per common share $ .17 .15 .34 .30
========== ========= ========= ==========
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 664,598 664,598
Other comprehensive
income, net of tax:
Unrealized holding loss
during the period (76,417) (76,417)
--------- ---------- ---------
Total comprehensive income 664,598 (76,417) 588,181
Dividends declared on common
stock ($0.34 per share) (126,684) (126,684)
-------- --------- --------- ---------- ----------
Balance at December 31, 2003 $3,726 3,395,580 7,924,948 193,390 11,517,644
======== ========= ========= ========== ==========
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,
2003 2002
------------- -----------
Cash flows from operating activities:
Net income $ 664,598 382,008
Adjustments to reconcile net income to net cash from
operating activities:
Depreciation 148,627 160,349
Net (accretion) amortization on securities (6,040) 11,022
Provision for loan losses 30,000 30,000
Federal Home Loan Bank stock dividend (33,500) (11,200)
Proceeds from sale of loans held for sale 791,450 1,171,806
Origination of loans held for sale (687,461) (432,000)
Profit on sale of loans (11,112) (16,598)
Decrease in accrued interest receivable 93,908 105,512
Decrease in accrued interest payable (4,042) (5,582)
Decrease in deferred income on loans (246,000) (34,462)
Increase in other assets (63,454) (35,201)
Decrease in other liabilities (30,117) (253,801)
------------- -----------
Net cash provided by operating activities 646,857 1,071,853
------------- -----------
Cash flows from investing activities:
Proceeds from repayments of mortgage backed securities,
held to maturity 2,096,007 2,429,587
Proceeds from maturities of investment securities,
held to maturity - 5,000,000
Proceeds from maturities of investment securities,
available for sale 5,000,000 -
Loan disbursements (28,310,353) (27,140,249)
Loan repayments 27,588,556 20,086,018
Property and equipment expenditures (9,243) (51,667)
------------- -----------
Net cash provided by investing activities 6,364,967 323,689
------------- -----------
Cash flows from financing activities:
Deposit account receipts 202,464,941 219,601,715
Deposit account withdrawals (207,823,360) (214,179,736)
Interest credited to deposit accounts 897,821 1,457,751
Payment of dividends (126,684) (109,192)
Decrease in advance payments by borrowers
for taxes and insurance (133,950) (9,392)
------------- -----------
Net cash provided (for) by financing activities (4,721,232) 6,761,146
Net change in cash and cash equivalents 2,290,592 8,156,688
Cash and cash equivalents at beginning of period 49,421,065 32,921,438
------------- -----------
Cash and cash equivalents at end of period $ 51,711,657 41,078,126
============= ===========
Cash paid during the period for:
Interest $ 952,672 1,534,517
Income taxes 327,390 419,624
============= ===========
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 and six months ended December 31,
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 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,
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 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.
5
Note E - Effect of New Accounting Pronouncements (continued)
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
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 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 December 31,
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 December 31, 2003, Midland Federal's capital ratios exceeded all of its
regulatory capital requirements with both tangible and core capital ratios of
6.50% and a risk-based capital ratio of 13.00%.
FINANCIAL CONDITION
At December 31, 2003, total assets of the Company decreased by $4.2 million to
$155.8 million from $160.0 million at June 30, 2003. Loans receivable, including
loans held for sale, increased $834,000 to $94.1 million at December 31, 2003.
The Company originated $29.0 million of primarily fixed rate loans during the
six months ended December 31, 2003 compared to loan originations of $27.6
million during the prior year period. The higher loan origination volume in the
current six month period was concentrated in the quarter ended September 30,
2003 and offset lower loan origination volumes in the quarter ended December 31,
2003 as interest rates increased during the current six month period. Offsetting
loan originations in the current period were loan repayments of $27.6 million as
well as loan sales of $791,000. There were no new purchases of mortgage-backed
securities during the six months ended December 31, 2003 and the balance of
mortgage-backed securities decreased by $2.1 million to $4.2 million due to
repayments and amortization.
The balance of investment securities available for sale decreased $5.1 million
to $1.3 million at December 31, 2003 compared to $6.4 million at June 30, 2003
due to the maturity of $5.0 million in securities. Gross unrealized gains in the
available for sale portfolio were $293,000 at December 31, 2003 compared to
gross unrealized gains of $409,000 at June 30, 2003, reflecting the negative
impact of higher interest rates and to a lesser extent the maturity of $5.0
million of investment securities available for sale. The weighted average
remaining term to maturity of the Company's total investment securities
portfolio at December 31, 2003 was 13.2 years.
In response to the increase in economic activity and in anticipation of upward
pressure on interest rates in 2004, the Company increased the balance of cash
and cash equivalents by $2.3 million to $51.7 million at December 31, 2003 from
$49.4 million at June 30, 2003.
Non-performing assets consisted of $485,000 in non-accruing loans at December
31, 2003 compared to $482,000 at June 30, 2003. Non-accruing loans at December
31, 2003 consisted of $475,000 in one-to-four family residential mortgage loans
and $10,000 in non-mortgage loans. The allowance for loan losses increased by
$20,000 to $430,000 at December 31, 2003 as a result of $30,000 in loan loss
provision offset by $10,000 in net loan charge offs during the six months ended
December 31, 2003. At December 31, 2003 the Company's ratio of allowance for
loan losses to non-performing loans was 88.48% 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.
December 31, June 30,
2003 2003
(Dollars in Thousands)
Non-Accruing Loans:
One-to-four family $ 475 $ 472
Multi-family -- --
Consumer 10 10
Commercial business -- --
----- -----
Total non-performing loans $ 485 $ 482
----- -----
Foreclosed Assets:
One-to-four family -- --
----- -----
Total foreclosed assets -- --
----- -----
Total non-performing assets $ 485 $ 482
===== =====
Total as a percentage of total assets 0.31% 0.30%
===== =====
As of December 31, 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.
Six Months Ended
December 31,
2003 2002
---------- ----------
(Dollars in Thousands)
Balance at beginning of period $ 410 $ 350
----- -----
Charge-offs:
One-to-four family loans -- --
Consumer loans 10 2
Commercial business loans -- --
----- -----
Total charge-offs 10 2
----- -----
Recoveries:
One-to-four family loans -- 1
Multi-family loans -- --
Consumer loans -- --
----- -----
Total recoveries -- 1
----- -----
Net (charge-offs) recoveries (10) (1)
Additions charged to operations 30 30
----- -----
Balance at end of period $ 430 $ 379
===== =====
Ratio of net charge-offs during the period to
average loans outstanding during the period .01% .00%
Ratio of net charge-offs during the period to
average non-performing assets 2.25% .10%
Allowance for loan losses to non-performing loans 88.48% 49.72%
Allowance for loan losses to total loans 0.45% 0.41%
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 probable 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, 2003 decreased $4.5 million as a
result of withdrawals, net of deposits, in the amount of $5.4 million offset by
interest credited to deposits in the amount of $898,000. The net decrease in
savings deposits is primarily attributed to a $3.4 million decrease in
certificate of deposit accounts, a $1.4 million decrease in NOW accounts and a
$173,000 decrease in passbook deposits offset by a $283,000 increase in money
market accounts and a $141,000 increase in demand deposit accounts. The decrease
in certificate of deposit accounts is primarily attributed to increased
competition for such deposits as well as management's view that current asset
yields did not justify aggressive deposit pricing.
10
MIDLAND CAPITAL HOLDINGS CORPORATION
AND SUBSIDIARIES
FINANCIAL CONDITION (continued)
Stockholders' equity increased $461,000, or 4.2%, to $11.52 million at December
31, 2003 from $11.06 million at June 30, 2003. The increase in stockholders'
equity was due to net income of $665,000 offset by a decrease in accumulated
other comprehensive income of $77,000 and the payment of cash dividends in the
amount of $127,000.
RESULTS OF OPERATIONS
The Company had net income of $118,000 for the quarter ended December 31, 2003
compared to net income of $171,000 for the quarter ended December 31, 2002. The
decrease in net income in the current quarter is the result of a $41,000
decrease in net interest income and a $57,000 decrease in non-interest income
offset by a $17,000 decrease in non-interest expense and a $28,000 decrease in
income taxes.
For the six months ended December 31, 2003 the Company had net income of
$665,000 compared to net income of $382,000 for the six months ended December
31, 2002. The increase in net income in the current six month period is the
result of a $59,000 increase in net interest income and a $428,000 increase in
non-interest income which offset a $59,000 increase in non-interest expense and
a $145,000 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 period also included the collection of non-accruing
loan interest in the amount of $42,000 under the same loan workout agreement.
The increase in non-interest income in the current six month period was also
primarily due to payments on the loan workout agreement, discussed above. 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 the prior year period,
discussed above, the Company's interest rate spread decreased to 2.75% for the
quarter ended December 31, 2003 from 2.80% for the prior year quarter. 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 quarter ended December 31, 2003 increased by $2.5 million to $16.4
million compared with the prior year period.
For the six months ended December 31, 2003, net of the collection of
non-accruing loan interest in both periods, discussed above, interest rate
spread decreased to 2.71% compared to 2.84% in the prior year six month period.
Interest rate spread declined in both the three and six months ended December
31, 2003 compared with the prior year periods as a result of high mortgage
refinancing activity at lower market interest rates and lower investment yields
on the Company's investment securities. The average balance of net earning
assets in the six months ended December 31, 2003 increased by $1.8 million to
$16.1 million compared with the prior year period.
Interest Income
Interest income decreased $327,000, or 17.5%, for the quarter ended December 31,
2003 compared with the prior year quarter ($321,000 net of the collection of
non-accruing loan interest in the prior year period). The decrease in interest
income was the result of a decrease in the average yield earned on interest
earning assets to 4.13% for the quarter ended December 31, 2003 compared to
5.02% in the year earlier period, net of the collection of non-accruing loan
interest, discussed above. The average outstanding balance of interest earning
assets increased $458,000 to $148.8 million for the quarter ended December 31,
2003 as compared with the prior year period.
11
MIDLAND CAPITAL HOLDINGS CORPORATION
AND SUBSIDIARIES
Interest Income (continued)
For the six months ended December 31, 2003, interest income decreased $521,000,
or 13.6%, from the 2002 period ($695,000 net of the collection of non-accruing
loan interest in both periods). 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. 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% compared to 5.15% for the year earlier period. The decrease
in the average yield earned on interest earning assets offset a $2.4 million
increase in the average outstanding balance of interest earning assets to $149.4
million for the six months ended December 31, 2003 from $147.0 million for the
six months ended December 31, 2002.
Interest on loans receivable decreased $129,000, or 8.8%, in the quarter ended
December 31, 2003, compared with the prior year quarter ($123,000 net of the
collection of non-accruing loan interest in the prior year period), as a result
of a decrease in the average yield earned on net loans receivable. Net of the
collection of non-accruing loan interest in the prior year period, the average
yield earned on loans receivable decreased to 5.68% for the quarter ended
December 31, 2003 as compared to 6.34% 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. The decrease in the average yield on
loans receivable was offset in part by a $2.1 million increase in the average
outstanding balance of net loans receivable to $93.5 million for the quarter
ended December 31, 2003 from $91.4 million for the prior year quarter.
Interest on mortgage-backed securities decreased $70,000, or 58.5%, for the
quarter ended December 31, 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 due to repayments as well as a decrease in the
average yield earned on mortgage-backed securities. For the quarter ended
December 31, 2003, the average balance of mortgage-backed securities decreased
$4.2 million to $4.3 million from $8.5 million in the prior year quarter. The
average yield earned on mortgage-backed securities also decreased to 4.63% for
the quarter ended December 31, 2003 from 5.63% for the quarter ended December
31, 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 $116,000, or 79.9%, for the
quarter ended December 31, 2003 from the prior year period due to a $10.1
million decrease in the average outstanding balance of investment securities to
$2.5 million from $12.6 million in the 2002 quarter. The average yield earned on
investment securities increased to 4.92% for the quarter ended December 31, 2003
from 4.58% in the year earlier period as lower yielding securities within the
investment securities portfolio matured and were not replaced.
12
MIDLAND CAPITAL HOLDINGS CORPORATION
AND SUBSIDIARIES
Interest Income (continued)
Interest earned on interest bearing deposits decreased $17,000, or 12.8%, for
the quarter ended December 31, 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 December 31, 2003, the average
yield earned on interest bearing deposits decreased to 0.97% from 1.52% for the
quarter ended December 31, 2002. The decrease in the average yield earned on
interest bearing deposits was offset by a $12.6 million increase in the average
balance of interest bearing deposits to $47.5 million from $34.9 million in the
2002 quarter. The $12.6 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, discussed above. The Company increased
its average balance of interest bearing deposits in anticipation of an increase
in economic activity and interest rates in 2004.
For the six months ended December 31, 2003 interest on loans receivable
decreased $95,000, or 3.2%, compared with the prior year period ($268,000 net of
the collection of non-accruing loan interest in both periods), as a result of a
decrease in the average yield earned on net loans receivable. Net of the
collection of non-accruing loan interest in both periods, discussed above, the
average yield earned on loans receivable decreased to 5.67% for the six months
ended December 31, 2003 as compared to 6.45% for the prior year period. The
decrease in the average yield on loans receivable was offset in part by a $2.9
million increase in the average outstanding balance of net loans receivable to
$92.8 million for the six months ended December 31, 2003.
For the six months ended December 31, 2003 interest earned on mortgage backed
securities decreased $139,000 to $225,000. 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 $4.1 million to $4.9 million for the six months ended December 31,
2003 from $9.0 million in the 2002 period. The average yield earned on
mortgage-backed securities also decreased to 4.89% for the six months ended
December 31, 2003 from 5.76% for the comparable prior year period.
For the six months ended December 31, 2003 interest earned on investment
securities decreased $250,000 to $80,000 from $330,000 for the six months ended
December 31, 2002. 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 $10.1 million to $3.8
million for the six months ended December 31, 2003 from $13.9 million in the
2002 period. The average yield earned on investment securities also decreased to
4.50% for the six months ended December 31, 2003 from 4.74% in the comparable
prior year period.
For the six months ended December 31, 2003 interest earned on interest bearing
deposits decreased $46,000 from the year earlier period. The decrease in
interest income was primarily due to a decrease in the average yield earned on
interest bearing deposits to 0.96% for the six months ended December 31, 2003
from 1.64% for the prior year period. The decrease in the average yield earned
on interest bearing deposits was offset by a $13.5 million increase in the
average outstanding balance of interest bearing deposits to $46.9 million for
the six months ended December 31, 2003 from $33.4 million for the comparable
prior year period.
13
MIDLAND CAPITAL HOLDINGS CORPORATION
AND SUBSIDIARIES
Interest Expense
Interest expense decreased $286,000, or 38.4%, for the quarter ended December
31, 2003 compared with the prior year quarter. The decrease in interest expense
is primarily attributable to a decrease in the average yield paid on interest
costing deposits to 1.38% for the quarter ended December 31, 2003 from 2.21% for
the quarter ended December 31, 2002. The average outstanding balance of interest
costing deposits also decreased by $2.1 million to $132.3 million for the
quarter ended December 31, 2003 from $134.4 million for the prior year quarter.
For the six months ended December 31, 2003 interest expense decreased $580,000
to $949,000 from $1.5 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 1.42% for current year period from 2.31% in the
prior year period. The decrease in the average yield paid on interest costing
deposits offset a $566,000 increase in the average outstanding balance of
interest costing deposits to $133.3 million for the current period from $132.7
million for the year earlier period.
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 $430,000, or .45% of
total loans, at December 31, 2003 compared to $410,000, or .44% of total loans,
at June 30, 2003. The $20,000 increase in the Company's allowance for loan
losses during the current six month period was the result of $30,000 in loan
loss provisions net of $10,000 in charge offs. At December 31, 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
$430,000 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 decreased $57,000 to $260,000 in the quarter ended December
31, 2003 from $317,000 in the quarter ended December 31, 2002. The primary
factors for the decrease in non-interest income in the current quarter were a
$43,000 decrease in loan fees and service charges, a $10,000 decrease in deposit
related fees and a $4,000 decrease in commission income. The decrease in loan
fees and service charges is attributed to a decrease in loan origination
activity as loan originations decreased to $10.1 million in the current quarter
from $15.2 million in the prior year quarter.
For the six months ended December 31, 2003 non-interest income increased
$428,000 to $1.05 million from $623,000 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 $433,000 gain on the satisfaction of
foreclosure judgments resulting from the payment in full of the loan workout
agreement, discussed above. Non-interest income decreased in the six months
ended December 31, 2003 due to a $15,000 decrease in deposit related fees, a
$5,000 decrease in profit on the sale of loans and a $4,000 decrease in
commission income.
14
MIDLAND CAPITAL HOLDINGS CORPORATION
AND SUBSIDIARIES
Non-Interest Expense
Non-interest expense decreased $17,000 to $1.15 million in the quarter ended
December 31, 2003 compared to the prior year quarter. The decrease in
non-interest expense is primarily the result of an $11,000 decrease in staffing
costs, a $6,000 decrease in office occupancy expense, a $4,000 decrease in
professional fees and a $4,000 decrease in computer software and support
expense. The decrease in staffing costs is primarily attributed to a $23,000
decrease in loan origination commissions, due to a decrease in lending volume,
offset by a $13,000 increase in costs for employee medical and pension benefits.
For the six months ended December 31, 2003 non-interest expense increased
$59,000 to $2.37 million from $2.31 million in the prior year period. The
primary factors for the increase in non-interest expense in the current six
month period were a $64,000 increase in staffing costs, an 8,000 increase in
advertising expense, a $6,000 increase in professional fees, a $5,000 increase
in office occupancy expense and a $5,000 increase in data processing fees.
Non-interest expense was decreased in the six months ended December 31, 2003 as
a result of a $30,000 decrease in computer software and support expense. The
increase in staffing costs is primarily attributed to a $34,000 increase in
costs for employee medical and pension benefits and an $8,000 increase in loan
origination commissions compared with the prior year period.
Income Taxes
Income taxes decreased $27,000 to $61,000 in the quarter ended December 31, 2003
from $88,000 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, 2003
income taxes increased $145,000 to $342,000 compared to $197,000 in the prior
year period. The effective income tax rate in all periods presented was 34.0%.
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, 2003 the Company had commitments to originate $2.0
million in loans, all of which were one-to-four 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, 2003, the Association had tangible and core capital of $10.1
million, or 6.50% of adjusted total assets, which was approximately $7.8 million
and $5.4 million above the minimum requirements in effect on that date of 1.5%
and 3.0%, respectively, of adjusted total assets.
At December 31, 2003, the Association had total capital of $10.5 million
(including $10.1 million in core capital) and risk-weighted assets of $82.0
million, or total capital of 13.00% of risk-weighted assets. This amount was
$4.0 million above the 8.0% requirement in effect on that date.
15
MIDLAND CAPITAL HOLDINGS CORPORATION
AND SUBSIDIARIES
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 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. Finally, the Chief Executive and
Financial Officer and certain of the Company's other Officers meet on a regular
basis to review the Company's financial statements and certain documents related
to material transactions. 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.
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 22, 2003 the shareholders held their annual meeting to consider and
act upon the election of Mr. Algerd Brazis and Mr. Charles Zogas 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, 2004. Both of the foregoing items were approved by the
shareholders at the meeting by the following vote totals based upon 372,600
shares outstanding and entitled to vote at the meeting.
I. Election of Directors -- 352,899 shares voted, as follows:
Algerd Brazis: 349,799 votes FOR; 3,100 votes WITHHELD.
Charles Zogas: 349,799 votes FOR; 3,100 votes WITHHELD.
II. Ratification of the appointment of Cobitz, VandenBerg & Fennessy as
auditors for the Company for the fiscal year ending June 30, 2004 --
344,024 shares voted, as follows:
FOR: 352,799
AGAINST: -0-
ABSTAIN: 100
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 October 31, 2003, the Company filed a report on Form 8-K attaching a
press release announcing its fiscal first quarter earnings and declaring its
regular cash dividend. No other reports on Form 8-K have been filed during the
three month period ended December 31, 2003.
17
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
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 13, 2004 BY: /s/ Paul Zogas
------------------------------------------------
Paul Zogas
President, Chief Executive Officer
and Chief Financial Officer
DATE: February 13, 2004 BY: /s/ Charles Zogas
------------------------------------------------
Charles Zogas
Executive Vice President and
Chief Operating Officer
19