UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20519
FORM 10-Q
(Mark One)
[ X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
-------------
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: 0-23620
-------
Mid Continent Bancshares, Inc.
----------------------------------------------------
Exact name of registrant as specified in its charter
Kansas 48-1146797
- - ------------------------------- -----------------------------
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Employer Identification No.)
124 West Central, El Dorado, Kansas 67042
- - ------------------------------------------ ----------
(Address of principal executive offices) (Zip Code)
(316) 321-2700
----------------------------------------------------
(Registrant's telephone number, including area code)
N/A
- - --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for short period that the registrant was required to
file such reports), and (2) has been subject to such filing requirements for the
past 90 days. [ x ] Yes [ ] No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the Issuer's classes of
common stock, as of the latest practicable date.
Date: August 2, 1996
Class: $0.10 par value, common stock
Outstanding: 2,031,750 shares
1
MID CONTINENT BANCSHARES, INC.
INDEX
Page Number
PART I - CONSOLIDATED FINANCIAL INFORMATION
Consolidated Balance Sheets as of June 30, 1996 (Unaudited)
and September 30, 1995 3-4
Consolidated Statements of Income for the Three and Nine Months
Ended June 30, 1996 and 1995 (Unaudited) 5
Consolidated Statements of Stockholders' Equity for the
Nine Months Ended June 30, 1996 (Unaudited) 6
Consolidated Statements of Cash Flows for the Nine Months
Ended June 30, 1996 and 1995 (Unaudited) 7-8
Notes to Consolidated Financial Statements (Unaudited) 9-14
Management's Discussion and Analysis of Financial
Condition and Results of Operations 15-22
PART II - OTHER INFORMATION 23
SIGNATURES 24
2
MID CONTINENT BANCSHARES, INC.
PART I
MID CONTINENT BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
September 30, June 30,
1995 1996
(Unaudited)
----------------------------
(Dollars in Thousands)
ASSETS
Cash and cash equivalents:
Cash and amounts due from depository institutions $ 1,187 $ 897
Interest bearing deposits in other banks 4,490 4,831
----------------------------
Total cash and cash equivalents 5,677 5,728
Investment securities 54,243 86,187
Capital stock of Federal Home Loan Bank, at cost 2,206 2,825
Mortgage-related securities 40,004 35,989
Loans held for sale, at lower of cost or market value 22,108 13,869
Loans receivable (net of allowance for loan losses
of $423 and $381) 124,796 144,961
Premises and equipment, (net of accumulated
depreciation of $3,192 and $3,411) 4,757 5,794
Real estate owned (net of allowance for losses of
$51 and $34) 187 20
Accrued interest receivable 2,219 2,903
Excess of cost over fair value of assets acquired
(net of accumulated amortization of $994 and $1,041) 83 36
Mortgage servicing rights, net 11,625 12,230
Other assets 3,018 3,217
----------------------------
Total assets $270,923 $313,759
============================
See notes to consolidated financial statements. (continued)
4
MID CONTINENT BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
September 30, June 30,
1995 1996
(Unaudited)
--------------------------
(Dollars in Thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits $195,716 $215,213
Advance payments by borrowers for taxes and insurance 2,029 1,140
Income taxes payable, net of deposits 607 314
Deferred income taxes 168 168
Accrued and other liabilities 2,668 3,720
Advances from Federal Home Loan Bank 33,000 56,500
--------------------------
Total liabilities 234,188 277,055
--------------------------
COMMITMENTS AND CONTINGENT LIABILITIES
STOCKHOLDERS' EQUITY
Preferred Stock, no par, 10,000,000 shares authorized, no
shares issued or outstanding
Common Stock, $0.10 par value, 20,000,000 shares
authorized, 2,248,250 shares issued 225 225
Additional paid-in capital 21,553 21,634
Less unearned compensation - Employee Stock Ownership Plan (1,190) (1,083)
Less unearned compensation - Management Stock Bonus Plan (746) (597)
Retained earnings, substantially restricted 18,067 20,149
--------------------------
Total 37,909 40,328
Less Treasury Stock, 80,000 and 216,500 shares,
respectively, at cost (1,174) (3,624)
--------------------------
Total stockholders' equity 36,735 36,704
--------------------------
Total liabilities and stockholders' equity $270,923 $313,759
==========================
See notes to consolidated financial statements (concluded)
5
MID CONTINENT BANCSHARES, INC.
CONSOLIDATED STATEMENT OF INCOME
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
1995 1996 1995 1996
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
-----------------------------------------------------
(Dollars in Thousands)
INTEREST INCOME:
Loans receivable $2,794 $2,899 $7,552 $8,399
Mortgage-related securities 733 738 2,219 2,220
Investment securities 809 1,379 1,710 3,631
Other interest-cash and cash
equivalents 34 73 247 272
--------------------------------------------------
Total interest income 4,370 5,089 11,728 14,522
--------------------------------------------------
INTEREST EXPENSE:
Deposits 2,019 2,429 5,237 7,013
Advances from Federal Home Loan Bank 446 622 1,097 1,757
--------------------------------------------------
Total interest expense 2,465 3,051 6,334 8,770
--------------------------------------------------
NET INTEREST INCOME 1,905 2,038 5,394 5,752
PROVISION FOR LOAN LOSSES 17 30 121 23
--------------------------------------------------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 1,888 2,008 5,273 5,729
OTHER INCOME:
Loan servicing fees 1,062 1,190 3,299 3,596
Amortization of mortgage servicing
rights (237) (413) (1,026) (1,273)
Gain on sale of servicing rights 162 - 1,961 -
Service fees and other charges to
customers 503 618 1,283 1,868
Gain on sale of loans, net 195 277 439 1,020
Insurance commissions 33 3 95 50
Other 12 80 33 83
--------------------------------------------------
Total other income 1,730 1,755 6,084 5,344
--------------------------------------------------
OTHER EXPENSE:
Salaries and employee benefits 1,004 1,201 3,186 3,483
Occupancy of premises 219 250 634 711
Office supplies and related expenses 135 156 385 483
Data processing 114 147 328 439
Advertising and promotions 123 126 285 336
Federal insurance premiums 89 111 259 332
Professional services 64 70 210 205
Provision for losses on real estate
owned 31 - 63 18
Amortization of excess cost over
fair value of asset acquired 19 14 60 47
Deposit account expense 74 73 185 210
Loan servicing expense 52 101 116 257
Other 91 50 327 295
--------------------------------------------------
Total other expenses 2,015 2,299 6,038 6,816
--------------------------------------------------
INCOME BEFORE INCOME TAX EXPENSE 1,603 1,464 5,319 4,257
INCOME TAX EXPENSE 520 569 2,039 1,591
--------------------------------------------------
NET INCOME $1,083 $895 $3,280 $2,666
==================================================
Earnings per share $0.54 $0.46 $1.57 $1.35
==================================================
Weighted average shares outstanding 2,065,086 1,951,916 2,101,523 1,972,049
==================================================
See notes to consolidated financial statements.
6
==========================================
MID CONTINENT BANCSHARES, INC.
==========================================
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
NINE MONTHS ENDED JUNE 30, 1996
(Dollars in Thousands)
Unearned
Compensation- Unearned
Employee Compensation Retained
Common Stock Additional Stock Management Earnings, Treasury Stock Total
------------------ Paid-In Ownership Stock Bonus Substantially ------------------- Stockholders'
Shares Amount Capital Plan Plan Restricted Shares Amount Equity
BALANCE,
October 1, 1995 2,248,250 $225 $21,553 $(1,190) $(746) $18,067 80,000 $(1,174) $36,735
Acquisition of
Treasury Stock 136,500 (2,450) (2,450)
Common stock
committed to be
released for
allocation -
Employee Stock
Ownership Plan 107 107
Amortization of
unearned
compensation -
Management
Stock Bonus Plan 149 149
Dividends on
common stock to
stockholders (584) (584)
Increase in fair
market value
of Employee Stock
Ownership Plan
shares committed
to be released
for allocation 81 81
Net income 2,666 2,666
-----------------------------------------------------------------------------------------------------------
BALANCE,
June 30, 1996 2,248,250 $225 $21,634 $(1,083) $(597) $20,149 216,500 $(3,624) $36,704
===========================================================================================================
6
MID CONTINENT BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED
JUNE 30,
1995 1996
(Unaudited) (Unaudited)
-------------------------
(Dollars in Thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,280 $ 2,666
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Common stock committed to be released for allocation -
Employee Stock Ownership Plan 88 107
Increase in fair market value of Employee Stock Ownership
Plan shares committed to be realized for allocation 5 81
Amortization of unearned compensation - Management Stock
Bonus Plan 249 149
Stock dividend on capital stock in Federal Home Loan bank (110)
Amortization of premiums and discounts on mortgage-related
securities and investment securities, net (102) (113)
Provision for loan losses 121 23
Provision for losses on real estate owned 63 18
Net loan origination fees capitalized 183 1,481
Amortization of net deferred loan origination fees (314) (116)
Amortization of mortgage servicing rights 1,026 1,273
Amortization of excess of costs over fair value of asset
acquired 60 47
Gain on sale of premises and equipment (12) --
Depreciation on premises and equipment 287 350
Gain on sale of loans, net (439) (1,020)
Origination of loans held for sale (62,717) (148,675)
Proceeds from sale of loans held for sale 50,322 157,934
Gain on sale of loan servicing rights (1,961)
Changes in:
Accrued interest receivable (1,012) (683)
Other assets 244 (200)
Income taxes payable 826 (293)
Accrued and other liabilities 1,731 1,067
---------------------
Net cash provided by (used in) operating activities (8,072) 13,986
---------------------
See notes to consolidated financial statements. (continued)
7
MID CONTINENT BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED
JUNE 30,
1995 1996
(Unaudited) (Unaudited)
-------------------------
(Dollars in Thousands)
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturity or call of investment securities -- 29,000
Purchases of investment securities (22,000) (61,313)
Principal collected on mortgage-related securities 3,409 5,145
Purchase of mortgage-related securities - (1,158)
Origination of loans receivable, net of principal
collection (23,809) (21,731)
Proceeds from sale of mortgage servicing rights 3,766 --
Acquisitions of mortgage servicing rights (5,008) (1,878)
Proceeds from sale of premises and equipment 117 --
Purchases of premises and equipment (1,223) (1,388)
Proceeds from sales of real estate owned 121 327
--------------------
Net cash used in investing activities (44,627) (52,996)
--------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Receipts for deposits, net 34,836 19,498
Net decrease in advance payments by borrowers for taxes
and insurance (302) (890)
Proceeds from advances from Federal Home Loan Bank 55,200 88,800
Repayments on advances from Federal Home Loan Bank (40,200) (65,300)
Purchase of common stock for Management Stock Bonus Plan (995) --
Cash dividends on common stock to stockholders (423) (597)
Acquisition of Treasury Stock (1,174) (2,450)
--------------------
Net cash provided by financing activities 46,942 39,061
--------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (5,757) 51
CASH AND CASH EQUIVALENTS:
Beginning of period 10,823 5,677
--------------------
End of period $ 5,066 $ 5,728
====================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Income tax payments $ 1,212 $ 1,884
====================
Interest payments $ 5,934 $ 8,781
====================
Loans held for sale securitized into mortgage-related
securities $ 22,110 $ 66,577
====================
Loans transferred to real estate owned $ 404 $ 178
====================
Accrued dividends on common stock $ 204 $ 192
====================
See notes to consolidated financial statements (concluded)
8
MID CONTINENT BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Mid Continent
Bancshares, Inc., (the Company), and its wholly-owned subsidiary, Mid-Continent
Federal Savings Bank (the Bank) and its subsidiary, Laredo Investment, Inc. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
2. BASIS OF PRESENTATION
The consolidated balance sheet as of June 30, 1996, the consolidated statements
of income for the three and nine months ended June 30, 1995 and 1996,
stockholders' equity for the nine months ended June 30, 1996 and cash flows for
the nine months ended June 30, 1995 and 1996, have been prepared by the Company,
without audit, and therefore do not include information or footnotes necessary
for a complete presentation of consolidated financial condition, results of
operations, and cash flows in conformity with generally accepted accounting
principles. It is suggested that these consolidated financial statements be read
in conjunction with the September 30, 1995 financial statements and notes
thereto included in the Annual Report of the Company. In the opinion of
management, all adjustments (consisting on only normal recurring adjustments)
necessary for the fair presentation of the consolidated financial statements
have been included. The results of operations for the three and nine months
ended June 30, 1996 are not necessarily indicative of the results which may be
expected for the entire year.
3. DIVIDENDS ON COMMON STOCK
On June 27, 1996 the Company declared a $0.10 per share cash dividend to
shareholders of record on July 11, 1996. The dividend was paid on July 25, 1996.
4. NEW STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS
In May 1993, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 114, "Accounting by Creditors for
Impairment of a Loan" and in October 1994, SFAS No. 118, "Accounting by
Creditors for Impairment of a Loan Income Recognition and Disclosures" which
became effective for the Company beginning October 1, 1995. These statements
require a lender to consider a loan to be impaired if the lender believes it is
probable that it will be unable to collect all principal and interest due
according to the contractual terms of the loan. If a loan is impaired, the
lender is required to record a loss valuation allowance equal to the present
value of the estimated future cash flows discounted at the loan's effective rate
or based on the loan's observable market price or the fair value of the
9
collateral if the loan is collateral dependent. The implementation of this
statement did not have a material effect on the Company.
In March 1995, FASB issued SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of", which will
become effective for the Company beginning October 1, 1996. This Statement
established accounting standards for the impairment of long-lived assets,
certain identifiable intangibles and goodwill related to those assets to be held
and used and for long-lived assets and certain identifiable intangibles to be
disposed of. The Statement requires that long-lived assets and certain
identifiable intangibles to be held and used by an entity be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. In performing the review for
recoverability, the entity should estimate the future cash flows expected to
result from the use of the asset and its eventual disposition. If the sum of the
undiscounted cash flows is less than the carrying amount of the asset, an
impairment loss is recognized to reduce the carrying amount to the fair value of
the asset. Generally, long-lived assets and certain identifiable intangibles
that are to be disposed of should be reported at the lower of the carrying
amount or fair value less costs to sell. The Company does not anticipate that
the implementation of this statement will have a material impact on the
consolidated financial statements.
In October 1995, the FASB issued SFAS No. 123, Accounting for Stock-Based
Compensation, which will become effective for the Company beginning October 1,
1996. SFAS No. 123 will require increased disclosure of compensation expense
arising from both fixed and performance stock compensation plans. Such expense
will be measured as the fair value of the award at the date it is granted using
an option-pricing model that takes into account the exercise price and expected
volatility, expected dividends on the stock and the expected risk-free rate of
return during the term of the option. The compensation cost would be recognized
over the service period, usually the period from the grant date to the vesting
date. SFAS No. 123 encourages, rather than requires, companies to adopt a new
method that accounts for stock compensation awards based on their estimated fair
value at the date they are granted. Companies would be permitted, however, to
continue accounting under Accounting Principles Board ("APB") Opinion No. 25.
The Company will continue to apply APB Opinion No. 25 in their financial
statements and will be required to disclose pro forma net income and earnings
per share in a footnote in the Company's 1996 annual report, determined as if
the Company had applied the new method.
In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and
servicing of Financial Assets and Extinquishments of Liabilities", which will
become effective for the Company for tranfers and servicing of financial assets
and extinguishments of liabilities occurring after December 31, 1996. This
Statement supersedes SFAS No. 122, "Accounting for Mortgage Servicing Rights".
For each servicing contract in existence before January 1, 1997, previously
recognized servicing rights and "excess servicing" receivables that do not
exceed contractually specified servicing fees shall be combined, net of any
previously recognized servicing obligations under that contract, as a servicing
asset or liability. Previously recognized servicing receivables that exceed
contractually specified servicing fees shall be reclassified as interest-only
strips. The Statement provides that servicing assets and other retained
interests in transferred assets be measured by allocating the previous carrying
amount between the assets sold, if any, and retained interests, if any, based on
their relative fair values at the date of the transfer, and servicing assets and
liabilities be subsequently measured by (1) amortization in proportion to and
over the period of estimated net servicing income or loss, and (2) assessment
for asset impairment or increased obligation based on their fair values. The
Company does not anticipate that the implementation of this statement will have
a material impact on the consolidated financial statements.
10
5. LOANS RECEIVABLE
September 30, June 30,
1995 1996
(Unaudited)
------------------ -----------------
(Dollars in Thousands)
Residential-one-to-four units $115,803 $133,573
Secured by other properties 1,280 1,121
Construction loans 10,351 15,100
------------------ -----------------
127,434 149,794
------------------ -----------------
Other installment loans:
Property improvement, auto and other 3,915 4,687
Mobile home 499 369
Deposits 688 595
------------------ -----------------
5,102 5,651
------------------ -----------------
Less:
Unearned discounts and loan fees 693 513
Undisbursed loan funds 6,624 9,590
Allowance for loan losses 423 381
================== =================
$124,796 $144,961
================== =================
The Bank services loans for others which are not included in the accompanying
consolidated balance sheets. The approximate unpaid principal balances of these
loans are summarized as follows:
September 30, June 30,
1995 1996
(Unaudited)
----------------- ----------------
(Dollars in Thousands)
Government National Mortgage Association $902,977 $881,995
Federal National Mortgage Association 132,209 118,519
Federal Home Loan Mortgage Corporation 146,624 211,791
Other Investors 8,082 7,081
================= ================
$1,189,892 $1,219,386
================= ================
12
6. MORTGAGE SERVICING RIGHTS (MSR)
Following is an analysis of the changes in mortgage servicing rights:
Nine Months Ended
June 30,
(Unaudited)
---------------------------------------------
1995 1996
(Dollars in Thousands)
Balance, Beginning of period $6,312 $11,625
Additions 5,009 1,878
Sales (1,806) --
Amortization (1,026) (1,273)
---------------------- -------------------
Total 8,489 12,230
Allowance for loss -- --
====================== ===================
Balance, End of period $8,489 $12,230
====================== ===================
7. CONTINGENCIES
Supreme Court Ruling on Breach of Contract Regarding Supervisory Goodwill:
Mid-Continent Federal Savings Bank, the wholly-owned subsidiary of Mid Continent
Bancshares, Inc., is pursuing its claim against the federal government to
recover funds lost as a result of the enactment of the Financial Institutions
Reform, Recovery, and Enforcement Act of 1989 ("FIRREA"). In 1986, the Bank was
encouraged by the federal government to acquire an insolvent thrift institution
("Reserve Savings and Loan Association"). The federal government allowed the
Bank to count the insolvent thrift's losses as "goodwill" assets and to
double-count as "capital credit" federal government funds provided to help the
Bank take over the failing thrift. The Bank contends (among other things) in its
law suit that the federal government breached its contract with the Bank when
FIRREA was enacted because FIRREA prevented the Bank from counting such assets
toward minimum capital requirements. As a result of FIRREA, the Bank was forced
to write off approximately $7,500,000 in supervisory goodwill. This write off
reduced the Bank's regulatory capital.
On July 1, 1996, the United States Supreme Court Affirmed decisions by a federal
appellate court that the government had breached express contracts with three
thrifts (U.S. v. Winstar Corp, et al.) and therefore was liable for damages.
Those lawsuits stemmed from circumstances that are similar to those of the Bank;
in order to persuade those thrifts to acquire certain insolvent thrift
institutions, the federal government promised accounting treatment similar to
that promised to the Bank.
While the Supreme Court's ruling in U.S. v. Winstar Corp, et al., serves to
support the Bank's legal claims in its pending law suit against the federal
government, it is not possible at this time to predict what effect the Supreme
Court's ruling, and subsequent rulings of a lower court concerning damages, will
have on the outcome of the Bank's lawsuit. Notwithstanding the
13
Supreme Court's ruling, there can be no assurance that the Bank will be able to
recover any funds arising out of its claim and, if any recovery is made, the
amount of such recovery.
Insurance of Deposits Accounts:
Due to a disparity in the capitalization of federal deposit insurance funds,
effective January 1, 1996 the FDIC lowered the annual insurance premium for most
members of the Bank Insurance Fund ("BIF") to $2,000 while maintaining the
current range of between 0.23% and 0.31% of deposits for members of Savings
Association Insurance Fund ("SAIF"). These insurance premiums for BIF members
could place SAIF members, such as the Bank, at a material competitive
disadvantage to BIF members. Proposals under consideration for addressing this
disparity include a possible one-time assessment on deposits of 0.80% to 0.85%
on SAIF members, sufficient to recapitalize SAIF to a level that would approach
that of BIF. While there can be no assurance that this or any other proposal
will be effected, a one-time assessment could have an adverse impact on the
Bank's results of operations. Based on outstanding deposits as of March 31, 1995
(the proposed assessment date), the assessment could result in expense to the
Bank of approximately $1,000,000 to $1,300,000 on a pre-tax basis.
In connection with the consideration of the BIF/SAIF disparity, various bills
have been introduced in congress which would call for eventual combination of
the insurance funds and would address the tax deductibility of a proposed
one-time assessment. Certain bills introduced call for conversion of the thrift
charter into a bank charter. The tax impact of elimination of the thrift charter
could be significant if it resulted in recapture of existing tax bad debt
reserves. Under current proposals, the recapture of bad debt reserves will not
have a significant impact on the financial statements since it only applies to
tax reserves established after 1987, for which deferred tax liabilities have
been established.
14
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
Mid Continent Bancshares, Inc. is a Kansas corporation organized in January,
1994. The Holding Company is engaged in the business of directing and planning
the activities of Mid-Continent Federal Savings Bank, the holding company's
primary asset.
Mid-Continent Federal Savings Bank is engaged principally in the business of
attracting deposits from the general public and using such deposits, together
with other borrowed funds, to originate permanent and construction loans secured
by one-to-four family residential real estate, to make permitted investments,
including mortgage-backed and mortgage-related securities, and to acquire the
rights to perform loan servicing functions for others.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity Resources:
The Bank's primary sources of funds are deposits, advances from the Federal Home
Loan Bank and proceeds from principal and interest payments on loans,
mortgage-related securities and investment securities. While maturities and
scheduled amortization of loans and mortgage-related securities are a
predictable source of funds, deposit flows and mortgage prepayments are greatly
influenced by general interest rates, economic conditions and competition.
Dependent on the current economic conditions, the Bank receives additional funds
through unscheduled prepayments of mortgage loans and mortgage-related
securities.
The Office of Thrift Supervision (OTS) requires a savings institution to
maintain an average daily balance of liquid assets (cash and eligible
investments) equal to at least 5% of the average daily balance of its net
withdrawable deposits and short-term borrowings. In addition, short-term liquid
assets currently must constitute 1% of the sum of net withdrawable deposit
accounts plus short-term borrowings. The Bank's actual liquidity ratios were
14.7% and 11.6% as of September 30, 1995 and June 30, 1996, respectively. The
Bank's short-term liquidity ratio was 4.5% and 4.0%, respectively.
Managing the Bank's liquidity levels is a daily and a long-term function of the
Bank and its Asset Liability Committee. Cash flows are monitored by the Bank on
a regular basis. Cash flow planning is utilized to enhance the Bank's earnings
where possible. Management believes that the Bank has access to ample funds to
meet any unforeseen liquidity needs of the near future.
The Bank has acquired real estate for a future branch office in Wichita and
Derby, Kansas. The future branch office facility in Wichita, Kansas is currently
under construction with completion anticipated in September 1996. Expenditures
for future offices will not have an adverse impact on liquidity.
15
Capital Resources:
As required under the Financial Institution Reform, Recovery and Enforcement Act
(FIRREA) the Bank is required to maintain specific amounts of capital. As of
June 30, 1996, the Bank was in compliance with all regulatory capital
requirements. Capital includes tangible, core and risk-based capital ratios of
10.0%, 10.0% and 27.3%, respectively.
The Bank's capital requirements and actual capital under OTS regulations are as
follows as of June 30, 1996:
AMOUNT RATIO
(in thousands)
GAAP CAPITAL $31,360
TANGIBLE CAPITAL:
ACTUAL $31,360 10.0%
REQUIRED 4,724 1.5
------- -----
EXCESS $26,636 8.5%
======= =====
CORE CAPITAL:
ACTUAL $31,360 10.0%
REQUIRED 9,448 3.0
-------- -----
EXCESS $21,912 7.0%
======= ======
RISK-BASED CAPITAL:
ACTUAL $31,775 27.3%
REQUIRED 9,318 8.0
------- ----
EXCESS $22,457 19.3%
======= =====
16
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1996 AND 1995
(Dollars in Thousands)
GENERAL - The Company's net income for the three months ended June 30, 1996 was
$895 compared with $1,083 the three months ended June 30, 1995.
NET INTEREST INCOME - The Company's net interest income is primarily dependent
upon the difference of "spread" between the yield earned on loans and
investments and the rate paid on deposits and borrowings, as well as the
relative amounts of such assets and liabilities. The interest rate spread is
affected by regulatory, economic and competitive factors that influence interest
rates, loan demand and deposit flows. The Company, like other savings
institution holding companies, is subject to interest rate risk to the degree
that its interest-bearing liabilities mature or reprice at difference times, or
on a different basis, than its interest-earning assets.
Net interest income for the three month period ended June 30, 1996 was $2,038,
representing a 7.0% increase from the three month period ended June 30, 1995.
Interest-bearing assets and liabilities increased from June 30, 1995 to June 30,
1996. (Interest-bearing assets increased by $52,500, or 22.2%, while
interest-bearing liabilities increased by $58,113, or 27.2%.) Total interest
income increased by 16.4% to $5,089 while interest expense increased 23.8% to
$3,051.
INTEREST INCOME - Interest income for the three months ended June 30, 1996 was
$5,089 compared with $4,370 for the three months ended June 30, 1995,
representing an increase of $719 or 16.5%.
The Bank's interest on loans receivable increased $105 during the three months
ended June 30, 1996 over the same period in 1995. This increase reflects an
increase in loans receivable, comprised primarily of adjustable rate loans.
Loans held for investment purposes at June 30, 1996 was approximately $19,301
greater than such loans at June 30, 1995.
Interest on mortgage-related securities increased $5. The Bank's investment in
mortgage-related securities declined in the quarter ended June 30, 1996.
Adjustable rate securities enabled the Bank to maintain a modest income increase
from a portfolio of securities declining in size.
Income from the investment portfolio and cash and cash equivalents increased
$609. The improvement is due to a higher interest-rate environment and an
increase in investment securities of $41,887, from $44,300 at June 30, 1995 to
$86,187 at June 30, 1996.
INTEREST EXPENSE - Interest expense for the three months ended June 30, 1996 was
$3,051 compared with $2,465 for the three months ended June 30, 1995,
representing an increase of $586 or 23.8%. The increased interest expense for
the period was the result of growth in the deposits of $25,613, from $189,600 at
June 30, 1995 to $215,213 at June 30, 1996, as well as an increased amount of
borrowings of $32,500, from $24,000 at June 30, 1995 to $56,500 at June 30,
1996.
17
PROVISION FOR LOAN LOSSES - The Bank currently maintains an allowance for loan
losses based upon management's periodic evaluation of known and inherent risks
in the loan portfolio, the Bank's past loss experience, adverse situations that
may affect the borrowers' ability to repay loans, estimated value of the
underlying collateral and current and expected market conditions. During the
three months ended June 30, 1996 and 1995, respectively, the Bank recorded a
provision for loan losses of $30 and $17.
OTHER INCOME - Other income for the three month period ended June 30, 1996 was
$1,755 compared with $1,730 for the three months ended June 30, 1995,
representing an increase of $25. During the three months ended June 30, 1995 the
Bank realized a gain on the sale of servicing rights of $162. There were no
sales of servicing rights in the current quarter. Most other sources of
significant other income increased in 1996 compared to 1995.
At June 30, 1996, the Bank was servicing approximately $1,219,386 of mortgage
loans for others. At June 30, 1995, the Bank was servicing approximately
$963,686 of mortgage loans for others. The Bank's total servicing portfolio for
others increased $255,700, or 26.5%. Net loan servicing fees decreased $48 from
$825 for the quarter ended June 30, 1995 to $777 for the quarter ended June 30,
1996. Gross loan servicing fees increased $128, but amortization of loan
servicing rights increased $176.
Increases in revenue from non-interest sources came from service fees and other
charges to customers which increased $115, from $503 for the quarter ended June
30, 1995 to $618 for the quarter ended June 30, 1996 and gains on sale of loans
which increased $82, from $195 for the quarter ended June 30, 1995 to $277 for
the quarter ended June 30, 1996.
A primary source of the increase in service fees from customers is the Bank's
checking account programs. The number of checking accounts increased from
approximately 12,800 at June 30, 1995 to approximately 15,500 at June 30, 1996.
In addition to enhancing service fee income, the checking account programs
provide a source of low-cost deposits for the Bank.
Loans held for sale decreased $4,493, or 24.5%, to $13,869 at June 30, 1996,
compared to $18,362 at June 30, 1995. Sales of loans held for sale increased
$41,463, or 235.1%, from $17,640 for the quarter ended June 30, 1995 to $59,103
for the quarter ended June 30, 1996. Gain on the sale of loans increased from
$195 for the quarter ended June 30, 1995 to $277 for the quarter ended June 30,
1996. Although the Company reduces the level of market risk by obtaining
commitments to sell loans at fixed prices, it cannot eliminate all such risks.
OTHER EXPENSE - Other expenses for the three months ended June 30, 1996 totaled
$2,299 compared to $2,015 for the three months ended June 30, 1995. Other
expenses consisted of compensation related expenses, building and maintenance
expenses, federal insurance premiums, audit and OTS examination fees, and other
general and administrative expenses.
Salaries and employee benefits increased from $1,004 in the June 30, 1995
quarter to $1,201 in the June 30, 1996 quarter.
18
Office occupancy, supplies and data processing expenses collectively increased
$85 in the June 30, 1996 quarter compared to the June 30, 1995 quarter. The Bank
opened an additional full service branch in May of 1995. In addition to general
increases in costs of services, the June 30, 1996 quarter includes the costs of
seven full service branches in 1996, compared to six for a portion of the
comparable period in 1995.
Loan servicing expenses increased from $52 for the quarter ended June 30, 1995
to $101 for the quarter ended June 30, 1996. Increase in expense has been
incurred in custodial fees for loan documents, additional loan payoff interest
associated with GNMA pooled mortgages and improvements in the Bank's mortgage
payment and processing systems.
INCOME TAXES - Income tax expense for the three months ended June 30, 1996 was
$569 which represents an effective tax rate of 38.9%. Income tax expense for the
three months ended June 30, 1995 was $520 which represents an effective tax rate
of 32.4%. The Company has adjusted its effective income tax rates in interim
periods of the fiscal 1996 year to more closely approximate the effective tax
rate for fiscal 1995, which was 37.3%.
19
RESULTS OF OPERATIONS
NINE MONTHS ENDED JUNE 30, 1996 AND 1995
(Dollars in Thousands)
GENERAL - The Company's net income for the nine months ended June 30, 1996 was
$2,666 compared with $3,280 for the nine months ended June 30, 1995.
NET INTEREST INCOME - The Company's net interest income is primarily dependent
upon the difference or "spread" between the yield earned on loans and
investments and the rate paid on deposits and borrowings, as well as the
relative amounts of such assets and liabilities. The interest rate spread is
affected by regulatory, economic and competitive factors that influence interest
rates, loan demand and deposit flows. The Company, like other savings
institution holding companies, is subject to interest rate risk to the degree
that its interest-bearing liabilities mature or reprice at different times, or
on a different basis, than its interest-earning assets.
Net interest income for the nine month period ended June 30, 1996 was $5,752,
representing a 6.6% increase from the nine month period ended June 30, 1995.
Interest-bearing assets and liabilities increased from June 30, 1995 to June 30,
1996. (Interest-bearing assets increased by $52,500, or 22.2%, while
interest-bearing liabilities increased by $58,113, or 27.2%.) Total interest
income increased by 23.8% to $14,522 while interest expense increased 38.5% to
$8,770.
INTEREST INCOME - Interest income for the nine months ended June 30, 1996 was
$14,522 compared with $11,728 for the nine months ended June 30, 1995,
representing an increase of $2,794 or 23.8%.
The Bank's interest on loans receivable increased $847 during the nine months
ended June 30, 1996 over the same period in 1995. This increase reflects an
increase in loans receivable, comprised primarily of adjustable rate loans.
Loans held for investment purposes at June 30, 1996 was approximately $19,301
greater than such loans at June 30, 1995.
Interest on mortgage-related securities increased $1. The Bank's investment in
mortgage-related securities declined in the nine months ended June 30, 1996.
Adjustable rate securities enabled the Bank to maintain its income despite the
decline in size of the securities portfolio.
Income from the investment portfolio and cash and cash equivalents increased
$1,946. The improvement is due to a higher interest-rate environment and an
increase in investment securities of $41,887, from $44,300 at June 30, 1995 to
$86,187 at June 30, 1996.
INTEREST EXPENSE - Interest expense for the nine months ended June 30, 1996 was
$8,770 compared with $6,334 for the nine months ended June 30, 1995,
representing an increase of $2,436 or 38.5%. The increased interest expense for
the period was the result of growth in the deposits of $25,613, from $189,600 at
June 30, 1995 to $215,213 at June 30, 1996, as well as an increased amount of
borrowings of $32,500, from $24,000 at June 30, 1995 to $56,500 at June 30,
1996.
20
PROVISION FOR LOAN LOSSES - The Bank currently maintains an allowance for loan
losses based upon management's periodic evaluation of known and inherent risks
in the loan portfolio, the Bank's past loss experience, adverse situations that
may affect the borrowers' ability to repay loans, estimated value of the
underlying collateral and current and expected market conditions. During the
nine months ended June 30, 1996 and 1995, respectively, the Bank recorded a
provision for loan losses of $23 and $121.
OTHER INCOME - Other income for the nine month period ended June 30, 1996 was
$5,344 compared with $6,084 for the nine months ended June 30, 1995,
representing a decrease of $740. During the nine months ended June 30, 1995 the
Bank realized a gain on the sale of servicing rights of $1,961. There were no
sales of servicing rights in the current nine months. All other sources of
significant other income increased in 1996 compared to 1995.
At June 30, 1996, the Bank was servicing approximately $1,219,386 of mortgage
loans for others. At June 30, 1995, the Bank was servicing approximately
$963,686 of mortgage loans for others. The Bank's total servicing portfolio for
others increased $255,700, or 26.5%. However, during the nine months ended June
30, 1995 the Bank sold the servicing of approximately $304 million of loans
serviced for others, which provided loan servicing fees during much of the nine
months ended June 30, 1995.
Increases in revenue from non-interest sources came from loan servicing fees
(net of mortgage servicing rights amortization), which increased $50, from
$2,273 for the nine months ended June 30, 1995 to $2,323 for the nine months
ended June 30, 1996, and service fees and other charges to customers which
increased $585 from $1,283 for the nine months ended June 30, 1995 to $1,868 for
the nine months ended June 30, 1996.
Loans held for sale decreased $4,493, or 24.5%, to $13,869 at June 30, 1996,
compared to $18,362 at June 30, 1995. Sales of loans held for sale increased
$107,612, or 213.8%, from $50,322 for the nine months ended June 30, 1995 to
$157,934 for the nine months ended June 30, 1996. Gain on the sale of loans
increased from $439 for the nine months ended June 30, 1995 to $1,020 for the
nine months ended June 30, 1996. Although the Company reduces the level of
market risk by obtaining commitments to sell loans at fixed prices, it cannot
eliminate all such risks.
OTHER EXPENSE - Other expenses for the nine months ended June 30, 1996 totaled
$6,816 compared to $6,038 for the nine months ended June 30, 1995. Other
expenses consisted of compensation related expenses, building and maintenance
expenses, federal insurance premiums, audit and OTS examination fees, and other
general and administrative expenses.
Salaries and employee benefits increased from $3,186 for the nine months ended
June 30, 1995 to $3,483 for the nine months ended June 30, 1996.
Office occupancy, supplies and data processing expenses collectively increased
$286 in the nine months ended June 30, 1996 compared to the nine months ended
June 30, 1995. The Bank opened an additional full service branch in May of 1995.
In addition to general increases in costs
21
of services the nine months ended June 30, 1996 includes the costs of seven full
service branches in 1996, compared to six during most of the comparable period
in 1995.
Loan servicing expenses increased from $116 in the nine months ended June 30,
1995 to $257 for the nine months ended June 30, 1996. Increase in expense has
been incurred in custodial fees for loan documents, additional loan payoff
interest associated with GNMA pooled mortgages and improvements in the Bank's
mortgage payment and processing systems.
INCOME TAXES - Income tax expense for the nine months ended June 30, 1996 was
$1,591 which represents an effective tax rate of 37.4%. Income tax expense for
the nine months ended June 30, 1995 was $2,039 which represents an effective tax
rate of 38.3%. The Company has adjusted its effective income tax rates in
interim periods of the fiscal 1996 year to more closely approximate the
effective tax rate for fiscal 1995, which was 37.3%.
22
MID CONTINENT BANCSHARES, INC.
PART II
Item 1. Legal Proceedings
The Company has no material proceedings pending against it.
Item 2. Changes in Securities
None.
Item 3. Defaults upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other information
None.
Item 6. Exhibits and Reports on Form 8-K
None.
23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Mid Continent Bancshares, Inc.
August 2, 1996 /s/Richard T. Pottorff
- - -------------- -----------------------
Date Richard T. Pottorff
President
Chief Executive Officer
August 2, 1996 /s/Larry R. Goddard
- - -------------- ------------------------
Date Larry R. Goddard
Executive Vice President
Chief Financial Officer
24