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 March 31, 1999
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 May 13, 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 -
March 31, 1999 (unaudited) and June 30, 1998.................... 1
Consolidated Statements of Earnings -
Three months ended March 31, 1999 and 1998 and
Nine months ended March 31, 1999 and 1998 (unaudited)........... 2
Consolidated Statements of Changes in Stockholders' Equity -
Nine months ended March 31, 1999 (unaudited).................... 3
Consolidated Statements of Cash Flows - Nine months
ended March 31, 1999 and 1998 (unaudited)....................... 4
Notes to Consolidated Financial Statements.................... 5-6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................... 7-14
Part II. OTHER INFORMATION.................................................15
MIDLAND
CAPITAL HOLDINGS CORPORATION
AND SUBSIDIARIES
Part I ~ FINANCIAL INFORMATION
Consolidated Statements of Financial Condition
Assets March 31, June 30,
1999 1998
--------------- ----------
(Unaudited)
Cash and amounts due from
depository institutions $ 2,842,806 2,656,448
Interest-bearing deposits 28,248,633 29,337,747
------------ ----------
Total cash and cash equivalents 31,091,439 31,994,195
Investment securities, held to maturity (fair value:
March 31, 1999 - $20,037,500;
June 30, 1998 - $20,030,469) 19,995,153 19,989,055
Investment securities available for sale, at fair value 1,175,000 1,195,938
Mortgage-backed securities, held to maturity (fair value:
March 31, 1999 - $17,221,839;
June 30, 1998 - $21,128,839) 17,045,549 20,844,623
Loans receivable (net of allowance for loan losses:
March 31, 1999 - $395,527;
June 30, 1998 - $393,884) 49,131,059 38,513,121
Loans receivable, held for sale 306,450 659,450
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 1,793,748 1,567,285
Accrued interest receivable 608,125 619,464
Prepaid expenses and other assets 1,329,532 689,727
------------ -----------
Total assets $123,649,227 117,373,380
============ ===========
Liabilities and Stockholders' Equity
Liabilities:
Deposits $113,951,250 107,761,846
Advance payments by borrowers for taxes and insurance 266,493 447,668
Other liabilities 388,244 396,229
----------- -----------
Total liabilities 114,605,987 108,605,743
----------- -----------
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 March 31, 1999 and June 30, 1998 3,640 3,640
Additional paid-in capital 3,271,315 3,266,315
Retained earnings - substantially restricted 5,690,635 5,430,065
Accumulated other comprehensive income, net of income taxes 130,806 145,099
Common stock awarded by Bank Incentive Plan (53,156) (77,482)
------------ -----------
Total stockholders' equity 9,043,240 8,767,637
------------ -----------
Total liabilities and stockholders' equity $123,649,227 117,373,380
============ ===========
See accompanying notes to consolidated financial statements.
-1-
MIDLAND CAPITAL HOLDINGS CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Earnings
Three Months Ended Nine Months Ended
March 31, March 31,
1999 1998 1999 1998
_________ _________ _________ _________
(Unaudited) (Unaudited)
Interest income:
Interest on loans .................... $ 895,134 691,050 2,529,907 2,063,906
Interest on mortgage-backed securities 286,659 384,903 951,890 1,193,458
Interest on investment securities .... 296,586 312,171 908,512 934,426
Interest on interest-bearing deposits 329,376 337,061 1,077,348 1,008,909
Dividends on FHLB stock .............. 8,812 9,050 27,437 28,250
--------- --------- --------- ---------
Total interest income .................. 1,816,567 1,734,235 5,495,094 5,228,949
--------- --------- --------- ---------
Interest expense:
Interest on deposits ................. 1,026,410 939,208 3,150,800 2,868,232
--------- --------- --------- ---------
Total interest expense ................. 1,026,410 939,208 3,150,800 2,868,232
--------- --------- --------- ---------
Net interest income .................... 790,157 795,027 2,344,294 2,360,717
--------- --------- --------- ---------
Non-interest income:
Loan fees and service charges ........ 72,888 54,721 258,314 150,364
Commission income .................... 29,008 16,010 90,394 78,695
Profit on sale of loans .............. 12,799 3,294 39,290 16,065
Profit on sale of REO ................ 0 0 9,903 0
Deposit related fees ................. 135,510 144,085 399,913 458,441
Other income ......................... 51,580 44,370 125,580 113,455
--------- --------- --------- ---------
Total non-interest income .............. 301,785 262,480 923,394 817,020
--------- --------- --------- ---------
Non-interest expense:
Staffing costs ....................... 492,742 439,381 1,500,836 1,305,653
Advertising .......................... 17,559 25,428 54,208 66,656
Occupancy and equipment expenses ..... 152,349 124,279 387,334 354,076
Data processing ...................... 47,405 41,039 157,489 115,990
Federal deposit insurance premiums ... 16,709 15,609 47,524 47,751
Provision for loss on REO ............ 0 0 1,528 0
Other ................................ 191,554 188,656 599,076 533,488
Total non-interest expense ............. 918,318 834,392 2,747,995 2,423,614
--------- --------- --------- ---------
Income before income taxes ............. 173,624 223,115 519,693 754,123
Income tax provision ................... 59,043 75,869 177,228 256,432
--------- --------- --------- ---------
Net income ............................. $ 114,581 147,246 342,465 497,691
========= ========= ========= =========
Earnings per share (basic) ............. $ 0.31 0.41 .94 1.41
========= ========= ========= =========
Earnings per share (diluted) ........... $ 0.31 0.40 .93 1.40
========= ========= ========= =========
Dividends declared per common share .... $ 0.075 0.075 0.225 0.225
========= ========= ========= =========
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 342,465 342,465
Other comprehensive
income, net of tax:
Unrealized holding loss
during the period (14,293) (14,293)
------- -------- -------
Total comprehensive income 342,465 (14,293) 328,172
Tax benefit related to
employee stock plan 5,000 5,000
Amoritzation of award of
BIP stock 24,326 24,326
Dividends declared on
common stock ($0.225
per share) (81,895) (81,895)
------ --------- --------- -------- -------- ---------
Balance at March 31, 1999 $3,640 3,271,315 5,690,635 130,806 (53,156) 9,043,240
====== ========= ========= ======== ======= =========
-3-
MIDLAND CAPITAL HOLDINGS CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited) Nine Months Ended
March 31,
1999 1998
----------- -----------
>
Cash flows from operating activities:
Net income ............................................... $ 342,465 497,691
Adjustments to reconcile net income to net cash from
operating activities:
Depreciation ........................................... 127,450 109,117
Amortization of premiums and discounts on securities ... 4,999 20,622
Amortization of cost of stock benefit plan ............. 24,326 24,326
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 .............. 4,158,025 1,404,400
Origination of loans held for sale ..................... (3,805,025) (1,599,850)
Profit on sale of loans ................................ (39,290) (16,065)
Decrease (increase) in accrued interest receivable ..... 11,339 (3,052)
Increase in accrued interest payable ................... 3,601 2,913
Decrease in deferred income on loans ................... (108,567) (47,329)
(Increase) decrease in other assets .................... (586,509) 34,076
(Decrease) increase in other liabilities ............... (11,586) 23,850
--------- ---------
Net cash provided by operating activities ................ 112,853 450,699
--------- ---------
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 ..................................... 4,888,227 4,169,984
Purchase of investment securities, held to maturity .... (7,499,375) (7,489,050)
Proceeds from maturities of investment securities,
held to maturity ..................................... 7,500,000 7,500,000
Purchase of Federal Home Loan Bank stock ............... (17,800) 0
Loan disbursements ..................................... (19,455,588) (7,773,613)
Loan repayments ........................................ 8,944,574 6,237,916
Proceeds from sale of real estate owned ................ 153,525 0
Property and equipment expenditures .................... (353,913) (94,807)
--------- ---------
Net cash provided for investing activities ............... (6,941,943) (2,060,015)
--------- ---------
Cash flows from financing activities:
Proceeds from exercise of stock options ................ 0 189,750
Deposit receipts ....................................... 284,720,430 262,733,930
Deposit withdrawals .................................... (281,504,909) (266,404,533)
Interest credited to deposit accounts .................. 2,973,883 2,711,434
Payment of dividends ................................... (81,895) (79,307)
Decrease in advance payments by borrowers
for taxes and insurance .............................. (181,175) (168,337)
--------- ---------
Net cash provided for financing activities ............... 5,926,334 (1,017,063)
--------- ---------
Decrease in cash and cash equivalents .................... (902,756) (2,626,379)
Cash and cash equivalents at beginning of period ......... 31,994,195 30,902,575
---------- ----------
Cash and cash equivalents at end of period ............... $ 31,091,439 28,276,196
========== ==========
Cash paid during period for interest ..................... $ 3,147,199 2,865,319
Cash paid during period for income taxes ................. 120,260 164,000
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 nine months ended March 31, 1999 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 nine month periods ended March 31,
1999 and 1998 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. In April 1999, the
Association opened a full-service branch banking facility located in Homer
Township, Illinois, a southwest suburb of Chicago. The primary market area of
the Association's Homer Township facility are the communities of Lockport,
Lemont and Orland Park. The Association's deposits are insured up to applicable
limits by the Federal Deposit Insurance Corporation ("FDIC"). At March 31, 1999
Midland Federal had tangible and core capital of $8.2 million, which capital
levels exceeded all of its fully phased-in regulatory capital requirements.
FINANCIAL CONDITION
During the nine months ended March 31, 1999, total assets of the Company
increased by $6.2 million to $123.6 million from $117.4 million at June 30,
1998. Net loans receivable and loans available for sale increased $10.3 million
to $49.4 million at March 31, 1999 as loan disbursements of $23.3 million more
than offset loan repayments of $8.9 million and loan sales of $4.2 million. The
$10.3 million increase in net loans receivable was primarily funded by a $6.2
million increase in deposits to $114.0 million at March 31, 1999. Mortgage
backed securities declined by $3.8 million due to repayments in the amount of
$4.9 million, which exceeded purchases of mortgage-backed securities in the
amount of $1.1 million during the nine months ended March 31, 1999. The balance
of investment securities remained stable at $21.2 million at March 31, 1999. The
weighted average remaining maturity of the Company's investment securities
portfolio at March 31, 1999 was 1.8 years.
-7-
MIDLAND CAPITAL HOLDINGS CORPORATION
AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
FINANCIAL CONDITION (continued)
As discussed above, deposits for the nine months ended March 31, 1999 increased
by $6.2 million as deposit activity of $284.7 million and interest credited to
deposits in the amount of $3.0 million exceeded withdrawal activity of $281.5
million. The net increase in savings deposits is attributed to a $2.5 million
increase in certificate of deposit accounts, a $2.3 million increase in
transaction deposits including money market accounts and a $1.4 million 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 nine months ended March 31, 1999 increased $276,000
to $9.0 million. The increase in stockholders' equity was primarily the result
of earnings in the amount of $342,000 and a $24,000 reduction in the unamortized
cost of the Association's Bank Incentive Plan, offset by a $14,000 market
adjustment from securities available for sale, net of income taxes, and
dividends paid on common stock in the amount of $82,000.
RESULTS OF OPERATIONS
The Company had net income of $115,000 for the quarter ended March 31, 1999
compared to net income of $147,000 for the quarter ended March 31, 1998. The
decline in net income in the current quarter is the result of a $5,000 decrease
in net interest income and an $84,000 increase in non-interest expense offset by
a $40,000 increase in non-interest income and a $17,000 decrease in income
taxes. Net interest income decreased $5,000 to $790,000 in the quarter ended
March 31, 1999 from $795,000 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 March 31, 1999 the
Company's net interest margin and interest rate spread both decreased to 2.72%
and 2.65%, respectively, from 3.07% and 2.99%, respectively, for the quarter
ended March 31, 1998. The average balance of interest earning assets increased
$12.5 million to $116.1 million for the quarter ended March 31, 1999 from $103.6
million in the prior year quarter. The ratio of average interest earning assets
to average interest bearing liabilities also increased to 110.65% in the quarter
ended March 31, 1999 from 110.50% in the prior year quarter.
For the nine months ended March 31, 1999 the Company had net income of $342,000
compared to net income of $498,000 for the nine months ended March 31, 1998. The
decline in net income in the current nine month period is the result of a
$16,000 decrease in net interest income and a $324,000 increase in non-interest
expense offset by a $106,000 increase in non-interest income and a $79,000
decrease in income taxes. The decrease in net interest income in the current
nine month period is attributed to decreases in both net interest margin and
interest rate spread. Net interest margin and interest rate spread decreased to
2.73% and 2.64%, respectively from 3.04% and 2.97%, respectively, in the prior
year period. The declines in both net interest margin and interest rate spread
offset an $11.1 million increase in the average balance of interest earning
assets to $114.5 million for the nine months ended March 31, 1999. The ratio of
average interest earning assets to average interest bearing liabilities also
increased to 110.65% from 110.12% in the prior year period.
-8-
MIDLAND CAPITAL HOLDINGS CORPORATION
AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Interest Income
Interest income increased $82,000, or 4.7%, for the quarter ended March 31, 1999
from the comparable prior year quarter. An increase in the average balance of
interest earning assets to $116.1 million for the quarter ended March 31, 1999
from $103.6 million for the quarter ended March 31, 1998 was partially offset by
a decrease in the average yield earned on interest earning assets to 6.26% for
the quarter ended March 31, 1999 compared to 6.70% for the quarter ended March
31, 1998.
For the nine months ended March 31, 1999 interest income increased $266,000 or
5.1% from the comparable prior year period as the result of an $11.1 million
increase in the average outstanding balance of interest earning assets to $114.5
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 6.40% from 6.74% in the prior year period.
Interest on loans receivable increased $204,000, or 29.5%, as a result of an
increase in the average outstanding balance of net loans receivable to $48.6
million for the quarter ended March 31, 1999 from $34.1 million for the quarter
ended March 31, 1998. The increase in the average outstanding balance of net
loans receivable offset a decrease in the average yield earned on loans
receivable to 7.37% for the quarter ended March 31, 1999 from 8.10% for the
quarter ended March 31, 1998. 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 $98,000, or 25.5%, as a result
of a $5.1 million reduction in the average balance of mortgage backed securities
outstanding to $17.6 million for the quarter ended March 31, 1999 from $22.7
million for the quarter ended March 31, 1998. The average yield earned on
mortgage backed securities also decreased to 6.51% for the quarter ended March
31, 1999 from 6.78% for the quarter ended March 31, 1998.
Interest earned on investment securities decreased $16,000, or 5.0%, due to a
decrease in the average yield on investment securities to 5.60% for the quarter
ended March 31, 1999 from 5.90% for the quarter ended March 31, 1998. The
average balance of investment securities remained stable at $21.2 million for
the quarter ended March 31, 1999 as compared with the prior year quarter.
Interest earned on interest bearing deposits decreased $8,000, or 2.3%, as a
result of a decrease in the average yield earned on interest bearing deposits to
4.69% for the quarter ended March 31, 1999 from 5.39% for the quarter ended
March 31, 1998. The decrease in the average yield earned on interest bearing
deposits was partially offset by an increase in the average outstanding balance
of interest bearing deposits to $28.4 million for the quarter ended March 31,
1999 compared to $25.0 million for the quarter ended March 31, 1998.
-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 nine months ended March 31, 1999 interest on loans receivable increased
$466,000 from the comparable prior year period. The increase in interest on
loans receivable was due to an $11.4 million increase in the average outstanding
balance of loans receivable to $45.1 million from $33.7 million for the nine
months ended March 31, 1998. The $11.4 million increase in the average
outstanding balance of loans receivable offset a decrease in the average yield
earned on loans receivable to 7.48% for the nine months ended March 31, 1999
from 8.16% 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.
For the nine months ended March 31, 1999 interest earned on mortgage backed
securities decreased $242,000 to $952,000 from $1.2 million for the nine months
ended March 31, 1998. The primary factor for the decrease in interest on
mortgage backed securities was a $4.4 million decrease in the average
outstanding balance of mortgage backed securities as well as a decline in the
average yield earned on mortgage backed securities. During the nine months ended
March 31, 1999 the average outstanding balance of mortgage backed securities
declined to $19.2 million from $23.6 million for the nine months ended March 31,
1998. The average yield earned on mortgage backed securities also declined to
6.62% for the nine months ended March 31, 1999 from 6.73% for the nine months
ended March 31, 1998. Proceeds from repayments of mortgage backed securities
were used to partially fund the increased loan demand, discussed above.
For the nine months ended March 31, 1999 interest earned on investment
securities decreased $26,000 to $908,000 from $934,000 for the nine months ended
March 31, 1998. The primary factor for the decrease in interest earned on
investment securities was a decrease in the average yield earned on investment
securities to 5.71% for the nine months ended March 31, 1999 from 5.90% for the
nine months ended March 31, 1998. 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 nine months ended March 31, 1999 and 1998.
For the nine months ended March 31, 1999 interest earned on interest bearing
deposits increased $68,000 to $1.1 million from $1.0 million for the nine months
ended March 31, 1998. The increase in interest income is primarily attributed to
a $4.0 million increase in the average outstanding balance of interest bearing
deposits to $28.4 million for the nine months ended March 31, 1999 from $24.4
million for the nine months ended March 31, 1998. 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 5.05% for the nine
months ended March 31, 1999 from 5.52% 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.
-10-
MIDLAND CAPITAL HOLDINGS CORPORATION
AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Interest Expense
Interest expense increased $87,000, or 9.3%, due to a $11.1 million increase in
the average balance of interest costing deposits to $104.9 million for the
quarter ended March 31, 1999 from $93.8 million in the quarter ended March 31,
1998. The increase in the average balance of interest costing deposits more than
offset a decrease in the average yield paid on interest costing deposits to
3.91% for the quarter ended March 31, 1999 from 4.01% for the quarter ended
March 31, 1998.
For the nine months ended March 31, 1999 interest expense increased $283,000
from the prior year period. The increase in interest expense in the current nine
month period was the result of a $9.4 million increase in the average
outstanding balance of interest costing deposits to $103.4 million during the
nine months ended March 31, 1999 from $93.9 million in the nine months ended
March 31, 1998. The average yield paid on interest costing deposits remained
stable at 4.07% for both the nine month periods ended March 31, 1999 and March
31, 1998, respectively.
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 $295,000 at March 31,
1999 and consisted of $242,000 in four single family residential mortgage loans,
$38,000 in one multi-family residential mortgage loan and $15,000 in consumer
loans. General loan loss reserves totaled $165,000 or 56.13% of net
non-performing loans at March 31, 1999. At March 31, 1999, 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
potential losses, there can be no assurance that such losses will not exceed the
estimated amounts.
Non-Interest Income
Non-interest income increased $40,000 to $302,000 in the quarter ended March 31,
1999 compared with $262,000 in the year earlier period. The increase in
non-interest income in the current quarter was primarily the result of an
$18,000 increase in loan fees and service charges, a $13,000 increase in
commission income and a $10,000 increase in profit on the sale of loans compared
with the prior year period. The increase in loan fees and service charges in the
quarter ended March 31, 1999 is primarily attributed to increased loan
origination activity. The increases in non-interest income were offset by a
$9,000 reduction in deposit related fees in the quarter ended March 31, 1999
compared with the prior year period.
-11-
MIDLAND CAPITAL HOLDINGS CORPORATION
AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Non-Interest Income (continued)
For the nine months ended March 31, 1999, non-interest income increased $106,000
to $923,000 from $817,000 in the prior year period. The increase in non-interest
income in the current nine month period is primarily attributed to a $108,000
increase in loan fees and service charges, a $23,000 increase in profit on the
sale of loans and a $12,000 increase in commission income, offset by a $59,000
decrease in deposit related fees. The decrease in deposit related fees during
the current nine month period is primarily attributed to the implementation of
system changes in the processing of demand deposit in-clearings related to the
conversion of the Association's customer account data processing systems to a
new service provider in October 1998. These critical data processing system
changes took longer to implement than had been anticipated resulting in some
lost fee income associated with demand deposit activity. The reduction in fee
income associated with these changes is believed to be an isolated event that is
not anticipated to reoccur.
Non-Interest Expense
Non-interest expense increased $84,000 to $918,000 in the quarter ended March
31, 1999 compared to $834,000 in the prior year quarter. The increase in
non-interest expense in the current quarter is primarily the result of a $53,000
increase in staffing costs, a $28,000 increase in occupancy and equipment
expense, an $8,000 increase in computer software and support expense and a
$6,000 increase in data processing costs. These increases in non-interest
expense in the current quarter were offset by reductions in advertising expense
and real estate owned expense in the amounts of $8,000 and $6,000, respectively,
compared with the prior year period.
For the nine months ended March 31, 1999 non-interest expense increased $324,000
to $2.7 million from $2.4 million in the prior year period. The primary factors
for the increase in non-interest expense in the current nine month period were a
$195,000 increase in staffing costs, a $41,000 increase in data processing fees,
a $37,000 increase in computer software and support expense and a $33,000
increase in occupancy and equipment expense. Advertising expense declined by
$12,000 in the current nine month period compared with the prior year period.
The increase in staffing costs in both the three and nine month periods ended
March 31, 1999 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 nine month periods ended March 31, 1999
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 $59,000 in the quarter ended March 31, 1999 from
$76,000 for the prior year quarter. For the nine months ended March 31, 1999
income taxes decreased to $177,000 compared to $256,000 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.
-12-
MIDLAND CAPITAL HOLDINGS CORPORATION
AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
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 March 31, 1999, the Association's regulatory
liquidity ratio was 49.8%. At such date, the Company had commitments to
originate $1.2 million in loans, to sell $306,000 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 March 31, 1999 the Association had tangible and core capital of $8.2 million,
or 6.7% of adjusted total assets, which was approximately $6.3 million and $4.5
million above the minimum requirements in effect on that date of 1.5% and 3.0%,
respectively, of adjusted total assets.
At March 31, 1999 the Association had total capital of $8.3 million (including
$8.2 million in core capital) and risk-weighted assets of $41.0 million, or
total capital of 20.3% of risk-weighted assets. This amount was $5.1 million
above the 8.0% requirement in effect on that date.
-13-
MIDLAND CAPITAL HOLDINGS CORPORATION
AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
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.
RECENT DEVELOPMENTS
In April 1999 the Company opened a full service branch 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 land for a drive-up facility, parking and/or
future expansion.
IMPACT OF THE YEAR 2000
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 $250,000 in the current fiscal
year 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 $20,000 for additional computer system upgrades.
Year 2000 testing of the Association's on-line customer account data processing
system was completed by March 31, 1999. Completion of Year 2000 testing of the
Association's other mission critical data processing systems is anticipated by
June 30, 1999. The Company is currently developing a Year 2000 Contingency Plan,
which Plan is anticipated to be in place by June 30, 1999.
-14-
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
Not applicable.
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.
-15-
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities and
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
MIDLAND CAPITAL HOLDINGS CORPORATION
Registrant
DATE: May 13, 1999 BY: /s/ Paul Zogas
-------------------------------------
Paul Zogas
President, Chief Executive Officer
and Chief Financial Officer
DATE: May 13, 1999 BY: /s/ Charles Zogas
-------------------------------------
Charles Zogas
Executive Vice President and
Chief Operating Officer
MIDLAND CAPITAL HOLDINGS CORPORATION
EXHIBIT 11 - STATEMENT REGARDING COMPUTATION OF EARNINGS PER SHARE
Three months ended Nine months ended
March 31, 1999 March 31, 1999
------------------- ------------------
Net Income $114,581 $342,465
======== ========
Weighted average common shares outstanding
for basic computation 363,975 363,975
======== ========
Basic earnings per share $ 0.31 $ .94
======== ========
Weighted average common shares outstanding
for basic computation 363,975 363,975
Common stock equivalents due to dilutive effect of
stock options 4,406 4,730
-------- ---------
Weighted average common shares and equivalents
Outstanding for diluted computation 368,381 368,705
======== ========
Diluted earnings per share $ 0.31 $ .93
======== ========