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, 1998
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 12, 1999, the Issuer had
363,975 shares of Common Stock issued and outstanding.
MIDLAND CAPITAL HOLDINGS CORPORATION
Part I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Consolidated Statements of Financial Condition -
December 31, 1998 (unaudited) and June 30, 1998.............. 1
Consolidated Statements of Earnings -
Three months ended December 31, 1998 and 1997 and
Six months ended December 31, 1998 and 1997 (unaudited)...... 2
Consolidated Statements of Changes in Stockholders' Equity -
Six months ended December 31, 1998 (unaudited)............... 3
Consolidated Statements of Cash Flows - Six months
ended December 31, 1998 and 1997 (unaudited)................. 4
Notes to Consolidated Financial Statements................... 5-6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................... 7-13
Part II. OTHER INFORMATION................................................ 14
MIDLAND CAPITAL HOLDINGS CORPORATION
AND SUBSIDIARIES
Part I ~ FINANCIAL INFORMATION
Consolidated Statements of Financial Condition
Assets December 31, June 30,
1998 1998
------------- -----------
(Unaudited)
Cash and amounts due from
depository institutions $ 3,713,123 2,656,448
Interest-bearing deposits 28,888,367 29,337,747
------------- -----------
Total cash and cash equivalents 32,601,490 31,994,195
Investment securities, held to maturity (fair value:
December 31, 1998 - $20,128,876;
June 30, 1998 - $20,030,469) 19,993,502 19,989,055
Investment securities available for sale, at fair value 1,238,750 1,195,938
Mortgage-backed securities, held to maturity (fair value:
December 31, 1998 - $19,139,336;
June 30, 1998 - $21,128,839) 18,863,062 20,844,623
Loans receivable (net of allowance for loan losses:
December 31, 1998 - $394,804;
June 30, 1998 - $393,884) 46,443,903 38,513,121
Loans receivable, held for sale 490,800 659,450
Real estate owned, net 601,372 746,522
Stock in Federal Home Loan Bank of Chicago 571,800 554,000
Office properties and equipment, net 1,761,712 1,567,285
Accrued interest receivable 608,044 619,464
Prepaid expenses and other assets 832,502 689,727
------------- -----------
Total assets $ 124,006,937 117,373,380
============= ===========
Liabilities and Stockholders' Equity
Liabilities:
Deposits $ 113,899,680 107,761,846
Advance payments by borrowers for taxes and insurance 506,141 447,668
Other liabilities 611,034 396,229
------------- -----------
Total liabilities 115,016,855 108,605,743
------------- -----------
Stockholders' equity:
Preferred stock, $.01 par value:
authorized 1,000,000 shares; none outstanding -- --
Common stock, $.01 par value: authorized 5,000,000
shares; issued and outstanding 363,975 shares
at December 31, 1998 and June 30, 1998 3,640 3,640
Additional paid-in capital 3,271,315 3,266,315
Retained earnings - substantially restricted 5,603,353 5,430,065
Accumulated other comprehensive income, net of income taxes 173,039 145,099
Common stock awarded by Bank Incentive Plan (61,265) (77,482)
------------- -----------
Total stockholders' equity 8,990,082 8,767,637
------------- -----------
Total liabilities and stockholders' equity $ 124,006,937 117,373,380
============= ===========
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,
1998 1997 1998 1997
----------- ------- --------- ---------
(Unaudited) (Unaudited)
Interest income:
Interest on loans $ 835,645 692,302 1,634,773 1,372,856
Interest on mortgage-backed securities 321,627 400,503 665,231 808,556
Interest on investment securities 302,718 310,964 611,926 622,254
Interest on interest-bearing deposits 358,738 326,376 747,972 671,848
Dividends on FHLB stock 9,374 9,775 18,625 19,200
----------- --------- --------- ---------
Total interest income 1,828,102 1,739,920 3,678,527 3,494,714
----------- --------- --------- ---------
Interest expense:
Interest on deposits 1,064,614 958,214 2,124,389 1,929,024
----------- --------- --------- ---------
Total interest expense 1,064,614 958,214 2,124,389 1,929,024
----------- --------- --------- ---------
Net interest income 763,488 781,706 1,554,138 1,565,690
----------- --------- --------- ---------
Non-interest income:
Loan fees and service charges 88,013 51,722 185,426 95,642
Commission income 19,165 21,577 61,386 62,686
Profit on sale of loans 9,438 7,387 26,491 12,772
Profit (loss) on sale of REO (2,375) 0 9,903 0
Deposit related fees 122,136 160,687 264,403 314,355
Other income 39,117 33,055 73,999 69,085
----------- --------- --------- ---------
Total non-interest income 275,494 274,428 621,608 554,540
----------- --------- --------- ---------
Non-interest expense:
Staffing costs 518,887 430,571 1,008,095 866,272
Advertising 17,249 24,075 36,650 41,229
Occupancy and equipment expenses 111,371 116,076 234,984 229,796
Data processing 46,450 36,177 110,084 74,951
Federal deposit insurance premiums 15,489 16,052 30,815 32,142
Provision for loss on REO 1,528 0 1,528 0
Other 197,950 175,571 407,521 344,832
----------- --------- --------- ---------
Total non-interest expense 908,924 798,522 1,829,677 1,589,222
----------- --------- --------- ---------
Income before income taxes 130,058 257,612 346,069 531,008
Income tax provision 44,731 87,598 118,185 180,563
----------- --------- --------- ---------
Net income $ 85,327 170,014 227,884 350,445
=========== ========= ======= =======
Earnings per share (basic) $ 0.24 0.49 .63 1.01
=========== ========= ======= =======
Earnings per share (diluted) $ 0.23 0.47 .62 .98
=========== ========= ======= =======
Dividends declared per common share $ 0.075 0.075 0.15 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 Common
Additional Other stock
Common Paid-In Retained Comprehensive awarded
Stock Capital Earnings Income by BIP Total
---------- ---------- ---------- ---------- ---------- ----------
Balance at June 30, 1998 $ 3,640 3,266,315 5,430,065 145,099 (77,482) 8,767,637
Comprehensive Income:
Net Income 227,884 227,884
Other comprehensive
income, net of tax:
Unrealized holding gain
during the period 27,940 27,940
---------- --------- ---------
Total comprehensive income 227,884 27,940 255,824
Tax benefit related to
employee stock plan 5,000 5,000
Amoritzation of award of
BIP stock 16,217 16,217
Dividends declared on
common stock ($0.15
per share) (54,596) (54,596)
---------- ---------- ---------- ---------- ---------- ----------
Balance at
December 31, 1998 $ 3,640 3,271,315 5,603,353 173,039 (61,265) 8,990,082
========== ========= ========= ======= ======= =========
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,
1998 1997
------------ -------------
Cash flows from operating activities:
Net income $ 227,884 350,445
Adjustments to reconcile net income to net cash from
operating activities:
Depreciation 79,420 70,760
Amortization of premiums and discounts on securities 4,638 15,087
Amortization of cost of stock benefit plan 16,217 16,218
Profit on sale of real estate owned (9,903) 0
Provision for loss on real estate owned 1,528 0
Proceeds from sale of loans held for sale 3,216,475 962,022
Origination of loans held for sale (3,047,825) (977,872)
Profit on sale of loans (26,491) (12,772)
Decrease in accrued interest receivable 11,420 9,171
Increase (decrease) in accrued interest payable 2,844 (11,569)
Decrease in deferred income on loans (73,332) (25,860)
(Increase) decrease in other assets (125,677) 95,960
Increase in other liabilities 211,961 13,371
------------ -------------
Net cash provided by operating activities 489,159 504,961
------------ -------------
Cash flows from investing activities:
Purchase of mortgage backed securities, held to maturity (1,101,593) (4,610,445)
Proceeds from repayments of mortgage backed securities,
held to maturity 3,073,390 3,171,564
Purchase of investment securities, held to maturity (4,999,800) (4,990,800)
Proceeds from maturities of investment securities,
held to maturity 5,000,000 5,000,000
Purchase of Federal Home Loan Bank stock (17,800) 0
Loan disbursements (13,662,091) (4,438,764)
Loan repayments 5,804,641 4,127,966
Proceeds from sale of real estate owned 153,525 0
Property and equipment expenditures (273,847) (56,372)
------------ -------------
Net cash provided for investing activities (6,023,575) (1,796,851)
------------ -------------
Cash flows from financing activities:
Deposit receipts 193,917,682 174,217,414
Deposit withdrawals (189,781,894) (178,886,987)
Interest credited to deposit accounts 2,002,046 1,836,258
Payment of dividends (54,596) (52,009)
Increase (decrease) in advance payments by borrowers
for taxes and insurance 58,473 (5,440)
------------ -------------
Net cash provided for financing activities 6,141,711 (2,890,764)
------------ -------------
Increase (decrease) in cash and cash equivalents 607,295 (4,182,654)
Cash and cash equivalents at beginning of period 31,994,195 30,902,575
------------ -------------
Cash and cash equivalents at end of period $ 32,601,490 26,719,921
============ ==========
Cash paid during period for interest $ 2,121,545 1,940,593
Cash paid during period for income taxes 102,260 89,000
Non-cash investing activities:
Transfer of loans to real estate owned $ 0 58,022
============ ==========
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,
1998 are not necessarily indicative of the results which 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 subsidiaries, Midland Federal Savings and Loan Association (the
"Association"), Midland Service Corporation, MS Insurance Agency, Inc. and
Bridgeview Development Company. All significant intercompany accounts and
transactions have been eliminated in consolidation.
Note C - Stock Conversion
In January, 1993, the Association's Board of Directors approved a plan to
voluntarily convert the Association from a federal mutual savings and loan
association to a federal stock savings and loan association. The stock offering
of Midland Federal Savings and Loan Association was closed on June 30, 1993 with
the sale of 345,000 shares of $.01 par value common stock at $10.00 per share.
Note D ~ Holding Company Reorganization
On March 19, 1998 the Board of Directors of the Association adopted a proposal
to reorganize the Association into a holding company form of organization in
accordance with a Merger Agreement and Plan of Reorganization (the
"Reorganization"). The Reorganization was approved by the Association's
shareholders on July 15, 1998 and became effective on July 23, 1998. As a result
of the Reorganization, the Association became a wholly owned subsidiary of
Midland Capital Holdings Corporation, a newly formed Delaware Corporation, and
each outstanding share of common stock of the Association became, by operation
of law, one share of common stock of Midland Capital Holdings Corporation.
Midland Capital Holdings Corporation operates as a unitary thrift holding
company.
Note E - Earnings Per Share
Earnings per share for the three month and six month periods ended December 31,
1998 and 1997 were determined by dividing net income for the period by the
weighted average number of both basic and diluted shares of common stock and
common stock equivalents 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.
-5-
MIDLAND CAPITAL HOLDINGS CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
Note F - Effect of New Accounting Standards
In February 1998, the FASB issued Statement of Financial Accounting Standards
No. 132 ("SFAS 132"), entitled "Employers' Disclosure about Pensions and Other
Post-retirement Benefits". SFAS 132 alters current disclosure requirements
regarding pensions and other post-retirement benefits in the financial
statements of employers who sponsor such benefit plans. The revised disclosure
requirements are designed to provide additional information to assist readers in
evaluating future costs related to such plans. Additionally, the revised
disclosures are designed to provide changes in the components of pension and
benefit costs in addition to the year end components of those factors in the
resulting asset or liability related to such plans. The statement is effective
for fiscal years beginning after December 15, 1997 with earlier application
available. Management does not believe that adoption of SFAS 132 will have a
material impact on the Company's consolidated financial condition or results of
operations.
In June 1998, the FASB issued Statement of Financial Accounting Standards No.
133 ("SFAS 133"), entitled "Accounting for Derivative Instruments and for
Hedging Activities". SFAS 133 provides a comprehensive and consistent standard
for the recognition and measurement of derivatives and hedging activities. The
statement requires all derivatives to be recorded on the balance sheet at fair
value and establishes special accounting for the following three different types
of hedges: hedges of changes in the fair value of assets, liabilities or firm
commitments (referred to as fair value hedges); hedges of the variable cash
flows of forecasted transactions (cash flow hedges); and hedges of foreign
currency exposures of net investments in foreign operations. Though the
accounting treatment and criteria for each of the three types of hedges is
unique, they all result in recognizing offsetting changes in value or cash flows
of both the hedge and the hedged item in earnings in the same period. Changes in
the fair value of derivatives that do not meet the criteria of one of these
three categories of hedges are included in earnings in the period of the change.
SFAS 133 is effective for years beginning after June 15, 1999, but companies can
early adopt as of the beginning of any fiscal quarter that begins after June
1998. Management does not expect the adoption of this statement to have a
material impact on the Company's consolidated financial condition or results of
operations.
In October 1998, the FASB issued Statement of Financial Accounting Standards No.
134 ("SFAS 134"), entitled "Accounting for Mortgage-Backed Securities Retained
after the Securitization of Mortgage Loans Held for Sale by a Mortgage Banking
Enterprise. SFAS 134 is effective for the first fiscal quarter after December
15, 1998. This statement amends SFAS No. 65 "Accounting for Certain Mortgage
Banking Activities." This statement revises the accounting for retained
securities and beneficial interests. Management does not believe that adoption
of SFAS No. 134 will have a material impact on the Company's consolidated
financial condition or results of operations.
The foregoing does not constitute a comprehensive summary of all material
changes or development affecting the manner in which the Company keeps its books
and records and performs its financial accounting responsibilities. It is
untended only as a summary of some of the recent pronouncements made by the FASB
which are of particular interest to financial institutions.
-6-
MIDLAND CAPITAL HOLDINGS CORPORATION
AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
Midland Capital Holdings Corporation (the "Company") is a Delaware corporation
which 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. 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.
All references to the Company, unless otherwise indicated, at or before July 23,
1998 refer to the Association. 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.
The Association's primary market area consists of Southwest Chicago, and the
southwest suburban communities of Bridgeview, Oak Lawn, Palos Hills, Hickory
Hills, Burbank and Justice which it serves through its main office in Bridgeview
and two branch banking offices in southwest Chicago. A fourth banking facility
is currently under development by the Association in Homer Township, Illinois, a
southwest suburb of Chicago. The Homer Township office will be a full-service
branch banking facility and is anticipated to be opened for business during the
first quarter of calendar 1999. The Association's deposits are insured up to
applicable limits by the Federal Deposit Insurance Corporation ("FDIC"). At
December 31, 1998 Midland Federal had tangible and core capital of $8.1 million,
which capital levels exceeded all of its fully phased-in regulatory capital
requirements.
FINANCIAL CONDITION
During the six months ended December 31, 1998, total assets of the Company
increased by $6.6 million to $124.0 million from $117.4 million at June 30,
1998. Net loans receivable and loans available for sale increased $7.7 million
to $46.9 million at December 31, 1998 as loan disbursements of $16.7 million
more than offset loan repayments of $5.8 million and loan sales of $3.2 million.
The increase in net loans receivable was primarily funded by an increase in
deposits in the amount of $6.1 million to $113.9 million at December 31, 1998.
The balance of mortgage-backed securities decreased by $2.0 million to $18.9
million due to repayments of mortgage-backed securities in the amount of $3.1
million, which exceeded purchases of mortgage-backed securities in the amount of
$1.1 million during the six months ended December 31, 1998. The balance of
investment securities remained stable at $21.2 million at December 31, 1998. The
weighted average remaining maturity of the Company's investment securities
portfolio at December 31, 1998 was 1.8 years.
-7-
MIDLAND CAPITAL HOLDINGS CORPORATION
AND SUBSIDIARIES
FINANCIAL CONDITION (continued)
As discussed above, deposits for the six months ended December 31, 1998
increased $6.1 million as deposit activity of $193.9 million and interest
credited to deposits in the amount of $1.0 million exceeded withdrawal activity
of $189.8 million. The net increase in savings deposits is attributed to a $3.2
million increase in certificate of deposit accounts, a $2.3 million increase in
transaction deposits including money market accounts and a $655,000 increase in
passbook accounts. The net increase in savings deposits is attributed to more
aggressive pricing and promotion of certificate of deposit rates.
Stockholders' equity for the six months ended December 31, 1998 increased
$222,000 to $9.0 million. The increase in stockholders' equity was primarily the
result of earnings in the amount of $228,000, a $16,000 reduction in the
unamortized cost of the Association's Bank Incentive Plan and a $28,000 positive
market adjustment from securities available for sale, net of income taxes,
offset by dividends paid on common stock in the amount of $55,000.
RESULTS OF OPERATIONS
The Company had net income of $85,000 for the quarter ended December 31, 1998
compared to net income of $170,000 for the quarter ended December 31, 1997. The
decline in net income in the current quarter is the result of a $19,000 decrease
in net interest income and a $110,000 increase in non-interest expense offset by
a $1,000 increase in non-interest income and a $43,000 decrease in income taxes.
Net interest income decreased $19,000 to $763,000 in the quarter ended December
31, 1998 from $782,000 during the prior year quarter as decreases in both net
interest margin and interest rate spread offset increases in the average balance
of interest earning assets. For the quarter ended December 31, 1998 the
Company's net interest margin and interest rate spread both decreased to 2.67%
and 2.60%, respectively, from 3.04% and 2.96%, respectively, for the quarter
ended December 31, 1997. The average balance of interest earning assets
increased $11.7 million to $114.5 million for the quarter ended December 31,
1998 from $102.8 million in the prior year quarter. The ratio of average
interest earning assets to average interest bearing liabilities also increased
to 110.43% in the quarter ended December 31, 1998 from 110.07% in the prior year
quarter.
For the six months ended December 31, 1998 the Company had net income of
$228,000 compared to net income of $350,000 for the six months ended December
31, 1997. The decline in net income in the current six month period is the
result of a $12,000 decrease in net interest income and a $240,000 increase in
non-interest expense offset by a $67,000 increase in non-interest income and a
$63,000 decrease in income taxes. The decrease in net interest income in the
current six month period is attributed to decreases in both net interest margin
and interest rate spread. Interest rate spread and net interest margin decreased
to 2.73% and 2.64%, respectively from 3.03% and 2.95%, respectively, in the
prior year period. The declines in both net interest margin and interest rate
spread offset a $10.4 million increase in the average balance of interest
earning assets to $113.7 million for the six months ended December 31, 1998. The
ratio of average interest earning assets to average interest bearing liabilities
also increased to 110.85% from 109.94% in the prior year period.
-8-
MIDLAND CAPITAL HOLDINGS CORPORATION
AND SUBSIDIARIES
Interest Income
Interest income increased $88,000, or 5.1%, for the quarter ended December 31,
1998 from the comparable prior year quarter. An increase in the average balance
of interest earning assets to $114.5 million for the quarter ended December 31,
1998 from $102.8 million for the quarter ended December 31, 1997 was partially
offset by a decrease in the average yield earned on interest earning assets to
6.39% for the quarter ended December 31, 1998 compared to 6.77% for the quarter
ended December 31, 1997.
For the six months ended December 31, 1998 interest income increased $184,000 or
5.3% from the comparable prior year period as the result of a $10.4 million
increase in the average outstanding balance of interest earning assets to $113.7
million from the prior year period. The increase in the average outstanding
balance of interest earning assets was offset by a decrease in the average yield
earned on interest earning assets to 6.47% from 6.76% in the prior year period.
Interest on loans receivable increased $144,000, or 20.7%, as a result of an
increase in the average outstanding balance of net loans receivable to $45.0
million for the quarter ended December 31, 1998 from $33.8 million for the
quarter ended December 31, 1997. The increase in the average outstanding balance
of net loans receivable offset a decrease in the average yield earned on loans
receivable to 7.43% for the quarter ended December 31, 1998 from 8.19% for the
quarter ended December 31, 1997. The decline in average yield is primarily due
to increased refinance activity on loans due to the continued decline in
interest rates.
Interest on mortgage backed securities decreased $79,000, or 19.7%, as a result
of a $4.6 million reduction in the average balance of mortgage backed securities
outstanding to $19.3 million for the quarter ended December 31, 1998 from $23.9
million for the quarter ended December 31, 1997. The average yield earned on
mortgage backed securities also decreased slightly to 6.67% for the quarter
ended December 31, 1998 from 6.71% for the quarter ended December 31, 1997.
Interest earned on investment securities decreased $8,000, or 2.7%, due to a
decrease in the average yield on investment securities to 5.70% for the quarter
ended December 31, 1998 from 5.88% for the quarter ended December 31, 1997. The
average balance of investment securities remained stable for the quarter ended
December 31, 1998 as compared with the prior year quarter.
Interest earned on interest bearing deposits increased $32,000, or 9.9%, as a
result of an increase in the average outstanding balance of interest bearing
deposits to $28.5 million for the quarter ended December 31, 1998 compared to
$23.4 million for the quarter ended December 31, 1997. The increase in the
average balance of interest bearing deposits was partially offset by a decrease
in the average yield earned on interest bearing deposits to 5.04% for the
quarter ended December 31, 1998 from 5.57% for the quarter ended December 31,
1997.
For the six months ended December 31, 1998 interest on loans receivable
increased $262,000 from the comparable prior year period. The increase in
interest on loans receivable was due to an $9.9 million increase in the average
outstanding balance of loans receivable to $43.4 million from $33.5 million for
the six months ended December 31, 1997. The $9.9 million increase in the average
outstanding balance of loans receivable offset a decrease in the average yield
earned on loans receivable to 7.54% for the six months ended December 31, 1998
from 8.20% for the prior year period. The growth in the Company's loan portfolio
is attributed to aggressive pricing and direct marketing of the Company's loan
products.
-9-
MIDLAND CAPITAL HOLDINGS CORPORATION
AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Interest Income (continued)
For the six months ended December 31, 1998 interest earned on mortgage backed
securities decreased $144,000 to $665,000 from $809,000 for the six months ended
December 31, 1997. The primary factor for the decrease in interest on mortgage
backed securities was a $4.2 million decrease in the average outstanding balance
of mortgage backed securities to $19.9 million for the six months ended December
31, 1998 from $24.1 million for the six months ended December 31, 1997 as well
as a decrease in the average yield earned on mortgage backed securities to 6.67%
for the six months ended December 31, 1998 from 6.71% for the six months ended
December 31, 1997. Proceeds from repayments of mortgage backed securities were
used to partially fund the increased loan demand, discussed above.
For the six months ended December 31, 1998 interest earned on investment
securities decreased $10,000 to $612,000 from $622,000 for the six months ended
December 31, 1997. The primary factor for the decrease in interest earned on
investment securities was a decrease in the average yield earned on investment
securities to 5.76% for the six months ended December 31, 1998 from 5.89% for
the six months ended December 31, 1997. The decrease in the average yield on the
Association's investment securities was the result of lower reinvestment yields
on maturing investment securities despite the same original terms to maturity.
The average balance of investment securities remained constant at $21.2 million
for both the six months ended December 31, 1998 and 1997.
For the six months ended December 31, 1998 interest earned on interest bearing
deposits increased $76,000 to $748,000 from $672,000 for the six months ended
December 31, 1997. The increase in interest income is primarily attributed to a
$4.5 million increase in the average outstanding balance of interest bearing
deposits to $28.6 million for the six months ended December 31, 1998 from $24.1
million for the six months ended December 31, 1997. The increase in the average
outstanding balance of interest bearing deposits more than offset a decrease in
the average yield earned on interest bearing deposits to 5.24% for the six
months ended December 31, 1998 from 5.58% in the year earlier period. The
decrease in the average yield on interest bearing deposits reflected the
decrease in short-term market interest rates that occurred between the two
periods. The Company has historically maintained a relatively high level of cash
equivalents and other short term investments in an attempt to control interest
rate risk.
Interest Expense
Interest expense increased $107,000, or 11.1%, due to a $10.3 million increase
in the average balance of interest costing deposits to $103.7 million for the
quarter ended December 31, 1998 from $93.4 million in the quarter ended December
31, 1997. The average yield paid on interest costing deposits also increased
slightly to 4.11% for the quarter ended December 31, 1998 from 4.10% for the
quarter ended December 31, 1997.
For the six months ended December 31, 1998 interest expense increased $195,000
from the prior year period. This increase in interest expense in the current six
month period was the result of an $8.6 million increase in the average
outstanding balance of interest costing deposits to $102.6 million for the six
months ended December 31, 1998 from $94.0 million for the six months ended
December 31, 1997 as well as an increase in the average yield paid on interest
costing deposits to 4.14% for the six months ended December 31, 1998 from 4.10%
for the prior year period. The increase in the average yield paid on interest
costing deposits is the result of deposit growth that was primarily concentrated
in certificate of deposit accounts, which accounts are generally higher costing
than either passbook or transaction deposits.
-10-
MIDLAND CAPITAL HOLDINGS
CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Provisions for Losses on Loans
The Company maintains an allowance for loan losses based upon management's
periodic evaluation of 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 Company made no provisions for
loan losses out of income in either period based upon the absence of any
specific asset quality problems, the current level of general loan loss reserves
and management's assessment of the inherent risk in the loan portfolio.
Non-performing loans, net of specific reserves, totaled $261,000 at December 31,
1998 and consisted of $219,000 in three single family residential mortgage
loans, $37,000 in one multi-family residential mortgage loan and $5,000 in
consumer loans. General loan loss reserves totaled $168,000 or 64.37% of net
non-performing loans at December 31, 1998. At December 31, 1998, 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 which it considers to be adequate to
provide for potential losses, there can be no assurance that such losses will
not exceed the estimated amounts.
Non-Interest Income
Non-interest income remained stable at $275,000 for the quarters ended December
31, 1998 and 1997. During the quarter ended December 31, 1998 loan fees and
service charges increased $36,000, which is primarily attributed to increased
loan origination activity. Deposit related fees decreased $39,000 in the quarter
ended December 31, 1998 to $122,000. During the current quarter, Midland Federal
converted its on-line customer account data processing, as well as certain
other critical data processing and computer systems, to a new service provider
(the "conversion".) The conversion process included system changes in the
processing of demand deposit in-clearings which changes took longer to implement
than had been anticipated resulting in some lost fee income associated with
demand deposit activity. However, any reduction in fee income associated with
the implementation of these critical data processing systems was a one time
event related to the conversion process.
For the six months ended December 31, 1998 non-interest income increased $67,000
to $622,000 from $555,000 in the year earlier period. The increase in
non-interest income in the current six month period is primarily attributed to a
$90,000 increase in loan fees and service charges and a $14,000 increase in
profit on the sale of loans offset by a $50,000 decrease in deposit related
fees, compared with the prior year period.
Non-Interest Expense
Non-interest expense increased $110,000 to $909,000 in the quarter ended
December 31, 1998 from $799,000 in the 1997 quarter. The increase in
non-interest expense is primarily the result of an $88,000 increase in staffing
costs, a $17,000 increase in computer software and support expense and a $10,000
increase in data processing costs. For the six months ended December 31, 1998
non-interest expense increased $241,000 to $1.8 million from $1.6 million in the
prior year period. The primary factors for the increase in non-interest expense
in the current six month period were a $142,000 increase in staffing costs, a
$35,000 increase in data processing costs and a $29,000 increase in computer
software and support expenses, compared with the prior year period.
-11-
MIDLAND CAPITAL HOLDINGS CORPORATION
AND SUBSIDIARIES
Non-Interest Expense (continued)
For the six months ended December 31, 1998 non-interest expense increased
$241,000 to $1.8 million from $1.6 million in the prior year period. The primary
factors for the increase in non-interest expense in the current six month period
were a $142,000 increase in staffing costs, a $35,000 increase in data
processing costs and a $29,000 increase in computer software and support
expenses, compared with the prior year period.
The increase in staffing costs in both the three and six month periods ended
December 31, 1998 is primarily attributed to an increase in commissions paid to
staff loan originators as a result of increased loan origination activity, as
discussed above. The increases in computer software and support expense and data
processing costs in both the three and six month periods ended December 31, 1998
are the result of costs associated with the conversion of the Company's on-line
data processing systems to another service provider, as discussed above.
Income Taxes
Income taxes decreased to $45,000 in the quarter ended December 31, 1998 from
$88,000 for the prior year quarter. For the six months ended December 31, 1998
income taxes decreased to $118,000 compared to $181,000 in the prior year
period. The decreased income tax provision was due primarily to the decrease in
operating income in both periods as compared to the prior year periods.
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. In addition, the Association may borrow
funds from the FHLB of Chicago. 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. The OTS requires members of the FHLB system to maintain minimum levels
of liquid assets. OTS regulations currently require the Association to maintain
an average daily balance of liquid assets equal to at least 4% of the sum of its
average daily balance of net withdrawable deposit accounts and borrowings
payable in one year or less. At December 31, 1998, the Association's regulatory
liquidity ratio was 53.0%. At such date, the Company had commitments to
originate $3.3 million in loans, to sell $491,000 in loans, no commitments to
purchase loans and no commitments to either purchase or sell securities.
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, 1998 the Association had tangible and core capital of $8.1
million, or 6.6% of adjusted total assets, which was approximately $6.3 million
and $4.4 million above the minimum requirements in effect on that date of 1.5%
and 3.0%, respectively, of adjusted total assets.
At December 31, 1998 the Association had total capital of $8.3 million
(including $8.1 million in core capital) and risk-weighted assets of $41.0
million, or total capital of 20.1% of risk-weighted assets. This amount was $5.0
million above the 8.0% requirement in effect on that date.
-12-
MIDLAND CAPITAL
HOLDINGS CORPORATION AND SUBSIDIARIES
RECENT DEVELOPMENTS
The Company is currently developing Midland Federal's fourth banking facility in
Homer Township, Will County, Illinois, a southwest suburb of Chicago. Midland
Federal has entered into a long term retail lease for the Homer Township office
premises including a lease of contiguous vacant land for a drive-up facility,
parking and/or future expansion. The Homer Township office will offer
full-service branch banking and is anticipated to be open for business during
the first quarter of calendar 1999.
Forward Looking Statements
When used in this Form 10-QSB and in future filings by the Company with the
Securities and Exchange Commission (the "SEC"), in the Company's press releases
or other public or shareholder communications, and in oral statements made with
the approval of an authorized executive officer, the words or phrases "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 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
are subject to the above-stated qualifications in any event. The Company wishes
to advise readers that the factors listed above could affect the Company's
financial performance and could cause the Company's actual results for future
periods to differ materially from any opinions or statements expressed with
respect to future periods in any current statements.
Impact of the Year 2000
All of the Company's data processing functions are performed by the Association
or outside vendors. The Association has conducted a comprehensive review of its
computer systems to identify applications that could be affected by the Year
2000 issue and has developed an implementation plan to address the issue. The
Association is in contact with vendors and providers of critical systems to
determine their progress in bringing such systems into Year 2000 compliance. The
Association converted its on-line customer account data processing, as well as
certain other critical data processing and computer systems, to a new service
provider in October 1998, as part of its plan to address Year 2000 issues. The
Company estimates that it has spent approximately $225,000 in the current fiscal
yera on computer system upgrades related to either the conversion or Year 2000
issues. The Company estimates that future expenditures to address Year 2000
issues will be approximately $25,000 for additional computer system upgrades.
Year 2000 testing of the Association's on-line customer account data processing
system is in process. Year 2000 testing for the Association's on-line data
processing system, as well as other mission critical data processing systems, is
anticipated to be completed by March 31, 1999.
-13-
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 21, 1998 the shareholders held their annual meeting to consider and
act upon the election of Mr. Jonas Vaznelis and Mr. Paul 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, 1999.
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 - 325,091 shares voted, as follows:
Jonas Vaznelis: 325,091 votes FOR; -0- votes withheld.
Paul Zogas: 325,091 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, 1999 - 325,091 shares voted,
as follows:
FOR: 325,091
AGAINST: -0-
ABSTAIN: -0-
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) Financial data schedule (Exhibit 27 filed herewith).
(c) No reports on Form 8-K were filed this quarter.
-14-
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 12, 1999 BY: /s/ Paul Zogas
-------------------------------------
Paul Zogas
President, Chief Executive Officer
and Chief Financial Officer
DATE: February 12, 1999 BY: /s/ Charles Zogas
-------------------------------------
Charles Zogas
Executive Vice President and
Chief Operating Officer