UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
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FORM 10-QSB
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 0-20620
MIDWEST BANCSHARES, INC.
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(Exact name of small business issuer as specified in its charter)
Delaware 42-1390587
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
3225 Division Street, Burlington, Iowa 52601
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (319) 754-6526
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Indicate by check mark whether the issuer (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 such shorter period that the issuer
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 Format: Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Common Stock 349,379
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Class Shares Outstanding
as of November 5, 1996
MIDWEST BANCSHARES, INC. and SUBSIDIARIES
INDEX
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Page
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Part I. Financial Information
Item 1 Financial Statements
Consolidated balance sheets September 30, 1996 and December 31, 1995 1
Consolidated statements of operations, for the three
months and nine months ended September 30, 1996 and 1995 2
Consolidated statements of cash flows, for the nine
months ended September 30, 1996 and 1995 3
Notes to consolidated financial statements 4
Item 2 Management's discussion and analysis of financial condition
and results of operations 5 through 9
Part II. Other Information 10
Signatures 11
Exhibit 11 Computation of per share earnings
Exhibit 27 Financial Data Schedule
MIDWEST BANCSHARES, INC. and SUBSIDIARIES
Consolidated Balance Sheets
(Dollars in thousands)
September 30, 1996 December 31, 1995
------------------ -----------------
Assets
Cash and cash equivalents $1,727 $2,305
Securities available for sale 25,329 19,711
Investment securities held to maturity
(estimated market value of $2,415 and $9,032) 2,455 9,058
Mortgage-backed securities held to maturity
(estimated market value of $20,800 and $22,393) 20,980 22,450
Loans receivable, net 81,076 74,035
Real estate owned and in judgment, net 40 33
Federal Home Loan Bank stock, at cost 1,960 1,960
Office property and equipment, net 2,475 2,315
Accrued interest receivable 1,132 875
Other assets 533 222
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Total assets $137,707 $132,964
============== =============
Liabilities
Deposits $101,297 $101,334
Advances from Federal Home Loan Bank 25,900 20,500
Advances from borrowers for taxes and insurance 215 412
Accrued interest payable 122 72
Accrued expenses and other liabilities 1,105 750
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Total liabilities $128,639 $123,068
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Stockholders' equity
Serial preferred stock, $.01 par value,
500,000 shares authorized, none issued $ --- $ ---
Common stock, $.01 par value, 2,000,000 shares
authorized, 455,000 issued and outstanding 5 5
Additional paid-in capital 4,037 4,037
Retained earnings, substantially restricted 7,608 7,403
Treasury stock, at cost, 105,621 shares
for 1996 and 86,170 shares for 1995 (2,211) (1,700)
Employee benefit plans (180) (190)
Unrealized (loss) appreciation on securities
available for sale, net of taxes on income (191) 341
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Total stockholders' equity $9,068 $9,896
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Total liabilities and stockholders' equity $137,707 $132,964
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Page 1
MIDWEST BANCSHARES, INC. and SUBSIDIARIES
Consolidated Statements of Operations
(Dollars in thousands, except per share data)
Three Months Nine Months
Ended September 30, Ended September 30,
1996 1995 1996 1995
------------ ----------- ------------ ------------
Interest income:
Loans receivable $1,627 $1,467 $4,776 $4,274
Mortgage-backed securities 552 581 1,652 1,806
Investment securities 329 321 1,036 811
Deposits in other banks 13 27 41 79
Other interest-earning assets 36 34 103 101
---------- ----------- ------------ ------------
Total interest income 2,557 2,430 7,608 7,071
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Interest expense:
Deposits 1,189 1,211 3,523 3,495
Advances from FHLB and other borrowings 402 266 1,136 672
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Total interest expense 1,591 1,477 4,659 4,167
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Net interest income 966 953 2,949 2,904
Provision for losses on loans 12 12 36 36
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Net interest income after provision for losses on loans 954 941 2,913 2,868
---------- ----------- ------------ ------------
Non-interest income:
Fees and service charges 45 46 126 129
Gain on sale of securities available for sale 0 26 0 76
Other 9 79 97 95
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Total non-interest income 54 151 223 300
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Non-interest expense:
Compensation and benefits 284 283 860 878
Office property and equipment 89 88 259 254
Deposit insurance premiums 734 61 854 183
Data processing 43 42 125 126
Other 151 181 487 535
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Total non-interest expense 1,301 655 2,585 1,976
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Earnings (loss) before taxes on income (293) 437 551 1,192
Taxes on income (tax benefit from loss) (106) 146 202 395
---------- ----------- ------------ ------------
Net earnings (loss) ($187) $291 $349 $797
========== =========== ============ ============
Earnings (loss) per share -
- primary and fully-diluted ($0.51) $0.75 $0.93 $1.99
========== =========== ============ ============
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Page 2
MIDWEST BANCSHARES, INC. and SUBSIDIARIES
Consolidated Statements of Cash Flows
(Dollars in thousands)
Nine months ended
September 30,
1996 1995
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Cash flows from operating activities:
Net earnings $349 $797
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Provision for losses on loans 36 36
Proceeds from sale of loans originated for resale --- 128
Disbursements on loans originated for resale --- (95)
Depreciation 102 96
Gain on sale of investment securities --- (76)
Amortization of recognition and retention plan benefits 10 14
ESOP expense 32 26
Amortization of loan fees, premiums and discounts 72 111
Decrease (increase) in accrued interest receivable (257) (267)
Decrease (increase) in other assets (90) (143)
Increase (decrease) in accrued interest payable 51 56
Increase (decrease) in accrued expenses and other liabilities 417 (15)
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Net cash provided by operating activities 722 668
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Cash flows from investing activities:
Purchase of investment securities held to maturity --- (4,000)
Proceeds from maturities of investment securities 6,543 2,000
Proceeds from sale of available for sale securities --- 285
Purchase of investments available for sale (7,605) (3,000)
Purchase of loans (5,046) (1,982)
Purchase of mortgage-backed securities held to maturity (2,014) ---
Principal repayments on mortgage-backed securities 4,593 4,048
Decrease (increase) in loans receivable (2,126) (89)
Proceeds from sale of real estate owned, net 102 368
Purchase of office property and equipment (262) (139)
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Net cash provided by (used in) investing activities (5,815) (2,509)
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Cash flows from financing activities:
Increase (decrease) in deposits (38) (218)
Proceeds from advances from FHLB 7,500 6,000
Repayment of advances from FHLB (2,100) ---
Treasury stock acquired (511) (893)
Payment of cash dividends (139) (138)
Net increase (decrease) in advances from borrowers
for taxes and insurance (197) (192)
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Net cash provided by (used in) financing activities 4,515 4,559
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Net increase (decrease) in cash and cash equivalents (578) 2,718
Cash and cash equivalents at beginning of year 2,305 3,473
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Cash and cash equivalents at end of period $1,727 $6,191
============ =============
Supplemental disclosures:
Cash paid during the nine months for:
Interest $4,609 $4,111
Taxes on income 532 421
Transfers from loans to real estate owned 109 125
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SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Page 3
MIDWEST BANCSHARES, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Significant Accounting Policies
The consolidated financial statements for the three months and nine
months ended September 30, 1996 and 1995 are unaudited and do not
include information or footnotes necessary for a complete presentation
of financial condition, results of operations and cash flows in
conformity with generally accepted accounting principles. However, in
the opinion of management, the accompanying consolidated financial
statements contain all adjustments, which are of a normal recurring
nature, necessary for a fair presentation. The results of operations
for the interim periods are not necessarily indicative of the results
which may be expected for an entire year.
The accounting policies followed by the Company are set forth in Note 1
to the Company's consolidated financial statements contained in the
1995 Annual Report to stockholders and are incorporated herein by
reference.
Page 4
MIDWEST BANCSHARES, INC. and SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-looking Statements
When used in this Form 10-QSB, 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 certain risks and uncertainties
including 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, that 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 to
the date made. 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.
The Company does not undertake, and specifically disclaims any
obligation, to publicly release the result of any revisions which may be made to
any forward-looking statements to reflect events or circumstances after the date
of such statements or to reflect the occurrence of anticipated or unanticipated
events.
Results of Operations
Midwest Bancshares, Inc. (the "Company") had a net loss of $187,000, or
$0.51 per share, and net earnings of $349,000, or $0.93 per share, respectively,
for the three months and nine months ended September 30, 1996, compared to net
earnings of $291,000 and $797,000, or $0.75 and $1.99 per share, for the same
periods in 1995. The net loss for the quarter and the decrease in net earnings
for the nine month period were primarily due to a one-time pre-tax charge of
approximately $675,000 representing a special assessment of 65.7 basis points on
the Association's deposits held as of March 31, 1995, as a result of the Deposit
Insurance Funds Act of 1996 which was passed on September 30, 1996 to
recapitalize the SAIF insurance fund. Excluding this unusual expense, net
earnings for the three and nine months ended September 30, 1996 would have been
$241,000, or $0.65 per share, and $777,000, or $2.06 per share, respectively.
Other comparisons are discussed in more detail below.
Net Interest Income
Net interest income increased $13,000 and $45,000, respectively, for
the three months and nine months ended September 30, 1996 over the comparable
periods in 1995. The Company's net interest rate spread was 2.60% and 2.68%,
respectively, for the three months and nine months ended September 30, 1996
compared to 2.66% and 2.77% for the comparable periods in 1995. The Company's
net interest margin on interest-earning assets was 2.87% and 2.95%,
respectively, for the three months and nine months ended September 30, 1996
compared to 2.93% and 3.02% for the comparable periods in 1995.
Interest income increased by $127,000 and $537,000 for the three months
and nine months ended September 30, 1996, respectively, over the comparable
periods in 1995. Average interest-earning assets increased by approximately $4.4
million and $5.4 million for the three months and nine months ended September
30, 1996, respectively, compared to the same periods in 1995. The increases in
average interest-earning assets were primarily due to increases in loans
outstanding and increases in investments, primarily U.S. Agency bonds, funded by
increases in FHLB advances. The average yield on interest-earning assets
increased by 13 basis points and 24 basis points, respectively, for the three
months and nine months ended September 30, 1996, over the comparable periods in
1995. The increases in average
Page 5
MIDWEST BANCSHARES, INC. and SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations (continued)
Net Interest Income (continued)
yield were primarily due to the purchase of investments and loans yielding
higher market interest rates and due to adjustable-rate loans, some of which
have below-market initial teaser rates, and mortgage-backed securities in the
portfolio adjusting to higher rates in response to higher market interest rates.
Yield adjustments on the Company's adjustable-rate portfolio occur periodically
over time and may tend to lag behind the changes experienced in the market.
These adjustments may also be limited by periodic and lifetime caps on such
adjustments.
Interest expense increased by $114,000 and $492,000, respectively, for
the three months and nine months ended September 30, 1996, over the comparable
periods in 1995. Average interest-bearing liabilities increased by approximately
$4.3 million and $5.1 million for the three months and nine months,
respectively, primarily due to increases of $8.7 million and $9.7 million in
borrowings from the FHLB, partially offset by decreases of $4.4 million and $4.6
million of deposits, respectively. The decrease in average deposits was
primarily the result of the sale of $7.7 million of deposits in December, 1995.
The average rates paid on interest-bearing liabilities increased 19 basis points
and 33 basis points for the three months and nine months ended September 30,
1996, respectively, over the comparable periods in 1995. The increases in
average rates paid were primarily due to deposits and FHLB advances repricing to
higher rates as a result of higher market interest rates. The changing mix of
funding sources also contributed to the increase in the cost of funds as the
Company increased its borrowings from the FHLB, in order to fund asset growth,
at rates which were generally higher than the overall cost of deposits.
Provision for Losses on Loans
The provision for losses on loans was $12,000 and $36,000 for the three
months and nine months ended September 30, 1996 and 1995. The amount of
provision was a result of the determination by management to maintain the
allowance for losses on loans at an adequate level to absorb potential loan
losses. At September 30, 1996 and 1995, the Company's allowance for losses on
loans totaled $674,000 and $664,000, respectively, or 0.82% and 0.91% of total
loans, excluding mortgage-backed securities, and 110.67% and 337.06% of total
non-performing loans. The latter ratio was impacted by a $412,000 increase in
non-performing loans from $197,000 at September 30, 1995 to $609,000 at
September 30, 1996, primarily due to one multi-family loan for $476,000 which
was placed on non-accrual status due to the bankruptcy filing of the borrower.
Management does not anticipate a material loss on the resolution of this loan
delinquency. The Company had net charge-offs of $1,000 and $38,000,
respectively, during the three months and nine months ended September 30, 1996
compared to none and $22,000 for the three months and nine months ended
September 30, 1995.
Non-interest income
Total non-interest income decreased by $97,000 and $77,000 for the
three months and nine months ended September 30, 1996 compared to the same
periods in 1995. The decreases were primarily due to gains of $26,000 and
$76,000 on the sale of marketable equity securities for the three months and
nine months ended September 30, 1995 with no comparable gains in 1996. Also
contributing to the decrease in non-interest income for the three months ended
September 30, 1996 was a $75,000 special dividend received from the
Association's data processor in September 1995, with no comparable dividend in
1996. The Company did, however, receive a $59,000 distribution from the sale of
the Company's data processor in June, 1996.
Page 6
MIDWEST BANCSHARES, INC. and SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations (continued)
Non-interest expense
Total non-interest expense increased by $646,000 and $609,000 for the
three months and nine months ended September 30, 1996 compared to the same
periods in 1995. The increases were primarily due to a one-time pre-tax charge
of approximately $675,000 representing a special assessment of 65.7 basis points
on the Association's deposits held as of March 31, 1995, as a result of the
Deposit Insurance Funds Act of 1996 which was passed on September 30, 1996 to
recapitalize the SAIF insurance fund. This assessment is payable on November 27,
1996 and will be deductible for tax purposes on the Company's 1996 income tax
returns. As a result of the special assessment, the SAIF fund will be
fully-funded and therefore, the Association expects a reduction of FDIC
assessments which will provide annual savings of approximately $170,000 before
tax, based on current deposit levels, beginning in January 1997.
The one-time charge discussed above was partially offset by a decrease
in compensation and benefits of $18,000 for the nine months ended September 30,
1996 primarily due to increased loan production due to more favorable borrowing
rates, primarily in the first quarter, which resulted in increased loan fees of
$28,000 for the nine months ended September 30, 1996, which offset the cost of
originating loans, primarily compensation and benefits.
Taxes on Income
Taxes on income were $252,000 and $193,000 less for the three months
and nine months ended September 30, 1996, than the comparable periods in 1995.
The decreases were primarily due to decreased taxable income due to the
tax-deductibility of the deposit insurance assessment discussed above.
Financial Condition
The Company's total assets at September 30, 1996 were $137.7 million,
increasing from $133.0 million at December 31, 1995. The increase was due to an
intentional increase in interest-earning assets in an effort to increase net
interest income. The increase of approximately $4.7 million was primarily due to
the purchase of $7.6 million of securities available for sale, the purchase of
$2.0 million of mortgage-backed securities to be held to maturity, the purchase
of $5.0 million in loans receivable, and the net origination of loans receivable
of $2.1 million, partially offset by maturities of $6.5 million of investment
securities held to maturity, and principal repayments of $4.6 million from
mortgage-backed securities. The increase in total assets was funded by borrowing
$5.4 million, net in advances from the FHLB. Cash of $511,000 was used to
acquire 5% of the Company's common stock during the nine months ended September
30, 1996 pursuant to the Company's stock repurchase program. Loan originations
during the nine months ended September 30, 1996 totaled $5.5 million more than
in the same period in 1995. The increase was primarily due to a more favorable
lending market due to lower loan rates in the first quarter of 1996 compared to
the first quarter of 1995.
Total stockholders' equity decreased $828,000 due to the $511,000
purchase of treasury stock and the $532,000 change in net unrealized losses on
investments available for sale (due to increased market rates of interest),
offset by the $349,000 net earnings for the period less $144,000 in dividends
declared during the period.
Page 7
MIDWEST BANCSHARES, INC. and SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
The Company's principal sources of funds are deposits and advances from
FHLB, amortization and prepayment of loan principal (including mortgage-backed
securities), sales or maturities of investment securities, mortgage-backed
securities and short-term investments and operations. While scheduled loan
repayments and maturing investments are relatively predictable, deposit flows
and early loan repayments are more influenced by interest rates, general
economic conditions and competition. The Company generally manages the pricing
of its deposits to maintain a steady deposit balance, but has from time to time
decided not to pay deposit rates that are as high as those of its competitors,
and, when necessary, to supplement deposits with longer term and/or less
expensive alternative sources of funds.
Federal regulations require the Association to maintain minimum levels
of liquid assets consisting of cash and other eligible investments. The required
percentage is currently 5% of net withdrawable savings deposits and borrowings
payable on demand or in one year or less during the preceding calendar quarter.
For September 1996, the Association's liquidity ratio was 9.6% compared to 23.4%
for December 1995. The decrease was primarily due to the purchase of investment
securities available for sale, which, because of their maturity term, did not
qualify as liquid investments and due to the use of liquid assets to fund an
increase in the loan portfolio. Assuming market interest rates are stable or
decrease, a high level of liquidity may have a negative effect on the
Association's interest rate spread due to a larger amount of the Association's
assets earning the then-current lower rates of interest. However, a high level
of liquidity positions the Association to respond to possible higher interest
rates by providing the Association with the ability to deploy liquid assets into
higher yielding assets as rates increase. The Association intends to deploy
liquid assets by increasing its loan portfolio; however, its ability to do so
depends on the loan demand in its market areas, competition for such loans, to
the extent they meet the Association's underwriting guidelines, and
opportunities for participating in loans in nearby markets.
Liquidity management is both a daily and long-term responsibility of
management. The Association adjusts its investments in liquid assets based upon
management's assessment of (i) expected loan demand, (ii) expected deposit
flows, (iii) yields available on interest-bearing deposits, and (iv) the
objectives of its asset/liability management strategy. Excess liquidity is
invested generally in interest-bearing overnight deposits and other short-term
government and agency obligations. If the Association requires funds beyond its
ability to generate them internally, it has additional borrowing capacity with
the Federal Home Loan Bank.
The Association anticipates that it will have sufficient funds
available to meet current loan and purchase commitments. At September 30, 1996,
the Association had outstanding commitments to extend credit totaling $0.6
million and no commitments to purchase loans or investments.
At September 30, 1996, the Association had tangible and core capital of
$8.4 million, or 6.09% of total adjusted assets which exceeded the regulatory
requirements of 1.5% and 3.0%, respectively, by $6.3 million and $4.2 million,
respectively. The risk-based capital requirement is currently 8% of
risk-weighted assets. As of September 30, 1996, the Association had
risk-weighted assets of $59.2 million, a risk-based requirement of $4.7 million
and risk-based capital of $9.0 million, or 15.27%, which exceeds the requirement
by $4.3 million. The Association's regulatory capital information is shown in a
table on the following page.
Page 8
MIDWEST BANCSHARES, INC. and SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources (continued)
Regulatory Capital Table
(Dollars in thousands)
Tangible Core Risk-based
Capital Capital Capital
-------------------------------------------
Association's capital $8,359 $8,359 $8,359
Additional capital - general allowances -- -- 674
------ ------ ------
Regulatory capital $8,359 $8,359 $9,033
Minimum capital requirement 2,058 4,117 4,732
------ ------ ------
Excess regulatory capital $6,301 $4,242 $4,301
====== ====== ======
The unrealized (loss) appreciation on securities available for sale,
which is a component of stockholders' equity, is a result of the implementation
of Statement No. 115 of the Financial Accounting Standards Board. At September
30, 1996, the net unrealized loss of $191,000, down from a net gain of $341,000
at December 31, 1995, consisted primarily of the net unrealized market loss, net
of tax, due to increased market interest rates, on certain GNMA mortgage-backed
securities, U.S. Agency securities, and marketable equity securities which have
been identified as available for sale by management.
Page 9
MIDWEST BANCSHARES, INC.
PART II. Other Information
Item 1. Legal Proceedings
None.
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
(a) Exhibits:
Exhibit 11 Computation of Per Share Earnings
Exhibit 27 Financial Data Schedule
(b) There were no reports on Form 8-K filed during the quarter for
which this report is filed.
Page 10
Signatures
Pursuant to the requirement 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.
MIDWEST BANCSHARES, INC.
Registrant
Date: November 5, 1996 /s/ William D. Hassel
-------------------- ------------------------------
William D. Hassel
President and Chief Executive Officer
(Principal Executive Officer)
Date: November 5, 1996 /s/ Robert D. Maschmann
-------------------- ------------------------------
Robert D. Maschmann
Executive Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
Page 11
Index to Exhibits
Sequentially
Numbered Page
Exhibit Where Attached
Number Exhibits are Located
- ------------- ------------------------
11 Computation of Per Share Earnings
27 Financial Data Schedule