Exhibit 13
Annual Report
1997 ANNUAL REPORT
MIDWEST BANCSHARES, INC.
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TABLE OF CONTENTS
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Message to Stockholders.............................................1
Selected Consolidated Financial and Other Data......................2
Management's Discussion and Analysis of Financial
Condition and Results of Operations...............................4
Independent Auditors' Report.......................................17
Consolidated Financial Statements..................................18
Stockholder Information............................................43
Corporate Information..............................................44
March 20, 1998
Dear Fellow Stockholder:
We are pleased to present the Annual Report of Midwest Bancshares,
Inc. for the 1997 fiscal year. For the fiscal year ended December 31, 1997,
our Company recorded net earnings of $1.26 million, or $1.14 per share on a
diluted basis. This represents a return on assets of 0.87% and a return on
equity of 12.56%. Stockholders' equity grew to $10.7 million, or 7.23% of
total assets as of December 31, 1997.
Two events stand out as highlights of 1997. On November 18, 1997, we
completed a 3-for-1 stock split effected in the form of a dividend. The stock
split had a significant effect on the market price of our stock, reflected by
the increase in price from a low bid in the first quarter of 1997 of $8.75
(adjusted for the split) to a high bid of $18.37 at the end of 1997. The
second major event was the opening of our in-store branch in the Wal-Mart
Supercenter in West Burlington, Iowa. We view the Wal-Mart branch as a
supplement to our marketing focus by bringing our banking products to where
our customers shop for groceries and other goods.
We want to thank you, our stockholders, for your support. We also
want to thank our employees and our customers for their support and loyalty to
the Company without whom we could not have achieved the excellent results of
1997. We are looking forward to a profitable 1998, and we remind you to visit
our Web Site address (shown on page 44) and drop us an E-mail if you have a
question or need some information. Technology is changing the way we do
banking, but there will always be a need for innovative, efficient and
courteous customer service.
We are ready for the challenge.
Sincerely yours,
William D. Hassel
President and Chief Executive Officer
Robert D. Maschmann
Executive Vice President and
Chief Financial Officer
1
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
December 31,
-------------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
(In Thousands)
Selected Financial Condition Data:
Total assets........................................ $147,724 $136,425 $132,964 $131,260 $130,815
Cash and cash equivalents........................... 2,524 3,998 2,305 3,473 2,486
Securities available for sale....................... 27,935 23,784 19,711 6,139 7,467
Securities held to maturity......................... 19,840 21,811 31,509 45,892 50,434
Loans receivable, net............................... 91,276 81,225 74,035 70,344 65,214
Deposits............................................ 105,278 101,918 101,334 106,894 106,723
Total borrowings.................................... 30,500 24,000 20,500 14,000 14,279
Stockholders' equity................................ 10,675 9,600 9,896 9,283 8,663
December 31,
-------------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
(In Thousands)
Selected Operations Data:
Total interest income............................... $10,750 $10,163 $9,573 $8,840 $8,874
Total interest expense.............................. 6,720 6,243 5,713 4,864 5,196
------- ------- ------ ------ ------
Net interest income.............................. 4,030 3,920 3,860 3,976 3,678
Provision for loan losses........................... 48 48 48 42 59
------- ------- ------ ------ ------
Net interest income after 3,982 3,872 3,812 3,934 3,619
provision for loan losses.......................
Fees and service charges............................ 282 179 171 162 133
Gain on sale of deposits............................ --- --- 493 --- ---
Gain on sales of securities and office property and 220 45 76 --- 14
equipment..........................................
Other non-interest income........................... 51 125 107 73 191
Non-interest expense................................ 2,581 3,217 2,629 2,554 2,506
------- ------- ------ ------ ------
Income before taxes on income..................... 1,954 1,004 2,030 1,615 1,451
Taxes on income..................................... 689 374 680 545 509
Cumulative effect of accounting change.............. --- --- --- --- 170
------- ------- ------ ------ ------
Net earnings........................................ $ 1,265 $ 630 $1,350 $1,070 $1,112
======= ======= ====== ====== ======
Earnings per share(1):
Basic............................................. $1.225 $0.593 $1.196 $0.864 $0.833
======= ======= ====== ====== ======
Diluted........................................... 1.142 0.560 1.136 0.829 0.803
======= ======= ====== ====== ======
Cash dividends per common share(1).................. $0.220 $0.187 $0.167 $0.160 $0.133
======= ======= ====== ====== ======
(1) Reflects the 3-for-1 stock split effected in the form of a 200% stock
dividend in November 1997.
2
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA (cont'd)
December 31,
----------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
Selected Financial Ratios and Other Data:
Performance Ratios:
Return on assets (ratio of net earnings to
average total assets)............................ 0.87% 0.46%(1) 1.02% 0.81% 0.86%
Interest rate spread information:
Average during period........................... 2.63 2.68 2.74 2.89 2.69
End of period................................... 2.62 2.63 2.70 2.96 2.75
Net interest margin(2)............................ 2.89 2.94 2.99 3.11 2.92
Return on stockholders' equity (ratio of net
income to average equity)........................ 12.56 6.59(1) 14.73 11.96 13.15
Average interest-earning assets to average
interest-bearing liabilities..................... 105.43 105.68 105.83 105.89 105.50
Ratio of operating expense to average
total assets..................................... 1.78 2.34(1) 1.98 1.94 1.99
Efficiency ratio(3)............................... 56.92 76.23(1) 63.11 61.26 63.56
Asset Quality Ratios:
Non-performing assets(4) to total assets at
end of year...................................... 0.73 0.83 0.06 0.35 0.43
Allowance for loan losses to non-performing
loans(5) at end of year.......................... 73.86 61.25 1,325.49 396.34 118.98
Allowance for loan losses to total loans, excl.
mortgage-backed securities at end of year......... 0.61 0.82 0.87 0.90 0.97
Capital Ratios:
Stockholders' equity to total assets
(end of year).................................... 7.23 7.04 7.44 7.07 6.62
Average stockholders' equity to average
total assets..................................... 6.95 6.93 6.89 6.79 6.53
Dividend payout ratio (dividends per share
divided by net earnings per share)............... 17.89 33.33(1) 14.75 19.35 16.60
Number of full-service offices.................... 5 4 4 5 5
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(1) Excluding the SAIF assessment, the Company's return on assets, return on
stockholders' equity, ratio of operating expenses to average total
assets, efficiency ratio and dividend payment ratio for the year ended
December 31, 1996 would have been 0.76%, 11.02%, 1.85%, 60.34% and
20.07%, respectively.
(2) Net interest income divided by average interest-earning assets.
(3) Operating expense divided by total operating income; excluding gain on
the sale of deposits for 1995.
(4) Includes loans that are 90 days or more delinquent, as well as real
estate owned.
(5) Includes loans that are 90 days or more delinquent.
3
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
General
Midwest Bancshares, Inc. ("Midwest" or the "Company") was formed in
July of 1992 by Midwest Federal Savings and Loan Association of Eastern Iowa
(the "Association") to become the thrift institution holding company of the
Association. The acquisition of the Association by the Company was consummated
on November 10, 1992 in connection with the Association's conversion from the
mutual to the stock form of ownership (the "Conversion").
Historically, the primary business of the Company has consisted of
attracting deposits from the general public and using such funds, along with
other borrowed funds, as necessary, to provide financing for the purchase of
residential properties. The operations of the Company are significantly
affected by prevailing economic conditions, as well as by government policies
and regulations relating to monetary and fiscal affairs, housing and financial
institutions.
Forward-Looking Statements
When used in this Annual Report or in filings by the Company with the
Securities and Exchange Commission, in the Company's press releases or other
public or shareholder communications, or in oral statements made with the
approval of an authorized executive officer, the words or phrases "will likely
result," "are expected to," "will continue," "is anticipated," "estimate,"
"project," "believe" or similar expressions are intended to identify
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. 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 to advise readers that various factors, including
regional and national economic conditions, changes in levels of market
interest rates, credit risks of lending activities, and competitive and
regulatory factors, could affect the Company's financial performance and could
cause the Company's actual results for future periods to differ materially
from those anticipated or projected.
The Company does not undertake, and specifically disclaims any
obligations, to revise any forward-looking statements to reflect the
occurrence of anticipated or unanticipated events or circumstances after the
date of such statements.
Year 2000 Compliance
As the year 2000 approaches, a critical business issue has emerged
regarding how existing application software programs and operating systems can
accommodate the date value "2000." Many existing application software products
were designed to only accommodate a two digit date position which represents
the year (e.g., the number "95" is stored on the system and represents the
year 1995). As a result, the year 1999 (i.e., "99") is the maximum date value
many systems will be able to accurately process. Management has formed a year
2000 working group to address potential problems posed by this development to
assure that the Company is prepared for the year 2000. Management does not
anticipate that the Company will incur significant operating expenses or be
required to invest heavily in computer system improvements to address the year
2000 issues. However, if modifications and conversions to deal with year 2000
issues are not completed on a timely basis or are not fully effective, the
year 2000 problem may have a significant effect on the operations of the
Company. All costs associated with year 2000 modifications and conversions
will be expensed as incurred.
Financial Condition
Total assets increased by $11.3 million to $147.7 million at December
31, 1997 compared to $136.4 million at December 31, 1996. Total loans
receivable increased $10.1 million to $91.3 million at December 31, 1997 from
$81.2 million at December 31, 1996. During 1997, the Association originated
$21.9 million in loans while loan repayments totaled $15.8 million. This
compares with $19.5 million in originations and $15.5 in repayments in fiscal
1996. Of the loans originated in 1997 and 1996, $3.1 million and $4.1 million,
respectively, represented refinancings of existing loans. Loan originations
were up due to favorable lending rates and generally good economic conditions
for borrowers during 1997. The Company also purchased $7.0 million in loans in
1997 compared with $6.3 million in 1996.
4
Investment securities held to maturity decreased to $19.8 million at
December 31, 1997 from $21.8 million at December 31, 1996, due to the
investment of a portion of the repayments on such securities in securities
available for sale, mortgage loans and loan purchases during the year.
Securities available for sale increased to $27.9 million at December 31, 1997
from $23.8 million at December 31, 1996, due to purchases of securities
available for sale.
Total deposits increased from $101.9 million at December 31, 1996 to
$105.3 million at December 31, 1997. Advances from the FHLB increased from
$24.0 million at December 31, 1996 to $30.5 million at December 31, 1997, due
to new advances of $8.5 million (net of $2.0 million of repayments). The
Company used $394,000 of liquid assets to repurchase 3.5% of the Company's
common stock in 1997.
The Company's ratio of non-performing assets to total assets
decreased to 0.73% at December 31, 1997 from 0.83% at December 31, 1996. Total
non-performing assets decreased $48,000. The majority of non-performing assets
consist of one multi-family property with three related participation loans.
One of the loans is now real estate owned with a carrying value of $315,000.
The other two loans totaling $399,000 are currently in foreclosure.
Results of Operations
The Company's net income is primarily dependent upon the difference
(or "spread") between the average yield earned on loans, mortgage-backed
securities and investments and the average 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
Association, like other thrift institutions, 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.
The Company's interest expense has been a product of the interest
paid on deposits and borrowed funds. The Association emphasizes and promotes
its consumer and passbook, money market and NOW accounts, principally from its
market area. The NOW accounts tend to be less susceptible to rapid changes in
volume and interest rate.
The Company's net income has also been affected by, among other
things, gains and losses on sales of loans, mortgage-backed securities and
investments, provisions for possible loan losses, service charge fees,
subsidiary activities, operating expenses and income taxes. Midwest Financial
Products, Inc., a wholly owned subsidiary of the Association, generates
revenues through the sale of tax-deferred annuities and other financial
products to its customers.
Comparison of Years Ended December 31, 1997 and 1996
General. The Company had net earnings of $1,265,000 in 1997 compared
to $630,000 in 1996, an increase of approximately $635,000. The increase in
net earnings was primarily due to: (i) reduced operating expenses as a result
of the $671,000 FDIC special assessment in the quarter ended September 30,
1996, and subsequent reduction in FDIC insurance premiums; (ii) increased net
interest income, due to earning asset growth; and (iii) increased non-interest
income, primarily due to pre-tax gain of $220,000 on the sale of securities
for 1997 compared to $45,000 for 1996, and increased fee income due to a
revised fee structure, partially offset by a $50,000 reduction in the $59,000
pre-tax gain distribution from the Company's data processor reported in 1996,
which totaled $9,000 in 1997.
Excluding the unusual or non-recurring items from net earnings, such
as the $671,000 FDIC special assessment, the gains on sales of securities, and
the distributions from the Company's data processor, "core" net earnings would
have been approximately $1,112,000 in 1997, compared to $986,000 in 1996.
Net Interest Income. Net interest income increase by $110,000 to
$4,030,000 in 1997 from $3,920,000 in 1996. The increase in net interest
income was primarily the result of the Association's growth in earning assets
as the net interest margin actually decreased from 2.94% in 1996 to 2.89% in
1997. For the year ended December 31, 1997, the Company's average interest
rate spread decreased five basis points from 2.68% in 1996 to 2.63% in 1997.
5
During fiscal 1997, average interest-earning assets increased by
approximately $6.8 million over the 1996 average balances. The increase in
average interest-assets was primarily due to an increase in loans receivable
as the Association successfully deployed cash flow into lending. The average
yield on interest-earning assets increased by six basis points during 1997
compared to 1996. The increase in average yield was primarily due to loan
originations and purchases at rates which are generally higher than investment
securities.
During fiscal 1997, average interest-bearing liabilities increased by
approximately $6.7 million, primarily due to an increase of $3.5 million in
average deposits and an increase of $3.2 million in average borrowings from
the FHLB. The average rate paid on interest-bearing liabilities increased
eleven basis points compared to 1996. The increase in average rate paid was
primarily due to time deposits repricing to higher rates offered in response
to marketplace competition and due to increased FHLB advances. The Company
increased its borrowing from the FHLB 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
remained constant at $48,000 for both 1997 and 1996. 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
December 31, 1997 and 1996, the Company's allowance for losses on loans
totaled $568,000 and $686,000, respectively, or 0.61% and 0.82% of total
loans, excluding mortgage-backed securities, and 73.86% and 61.25% of total
non-performing loans, respectively. The decline in the former ratio was
impacted by charge-offs in 1997, primarily a result of foreclosure of one
multi-family property, resulting in a charge-off of $158,000. This property,
now in real estate owned, with a carrying value of $315,000 combined with two
related multi-family participation loans totaling $399,000, also in
foreclosure, makes up the majority of the nonperforming assets. The Company
had net charge-offs of $166,000 and $38,000 for the years ended December 31,
1997 and 1996, respectively.
Non-interest Income. Total non-interest income increased by $205,000
for 1997 compared to 1996. The increase was primarily due to an increase of
$175,000 in gains on the sales of securities and due to an increase of
$103,000 in fees and service charges, primarily as a result of a new fee
schedule implemented in September 1996. These increases were partially offset
by a $50,000 decrease in the amount recognized as gain from the sale of the
Association's share of their data processing cooperative.
Non-interest Expenses. Total non-interest expenses decreased by
$636,000 for 1997 compared to 1996. The decrease was primarily due to the
Deposit Insurance Funds Act of 1996 passed on September 30, 1996. The
legislation resulted in a one-time pre-tax charge of approximately $671,000 in
1996, representing a special assessment of 65.7 basis points on the
Association's deposits held as of March 31, 1995 to recapitalize the SAIF
insurance fund. As a result of the special assessment, the SAIF is fully
funded. Therefore, the Company's ongoing FDIC premiums were reduced, resulting
in a $183,000 decrease in premiums in 1997 as compared to 1996. Partially
offsetting these decreases were increases of $104,000 in compensation and
benefits expense, $16,000 in office property and equipment, and $99,000 in
other non-interest expenses. These increases in expenses are, in part, due to
start-up costs of the Company's new branch office in the Wal-Mart Supercenter
located in West Burlington, Iowa, which opened for business in December of
1997.
Taxes on Income. Taxes on income increased $315,000 for 1997 compared
to 1996, primarily due to increased taxable income, partially offset by the
effect of investing in tax-exempt municipal bonds for the first time in 1997,
resulting in approximately $16,000 of tax benefit for 1997.
Comparison of Years Ended December 31, 1996 and 1995
General. The Company had net earnings of $630,000 in 1996 compared to
$1,350,000 in 1995, a decrease of approximately $720,000. The decrease in net
earnings was primarily due to two non-recurring events. In 1995, the Company
recognized a pre-tax gain of $493,000 included in non-interest income
resulting from the sale of $7.7 million of deposits of the Association's
Keokuk, Iowa branch, with no comparable gain in 1996, resulting in decreased
6
reported net earnings in 1996 of approximately $310,000. The second event
occurred on September 30, 1996, when the Deposit Insurance Funds Act of 1996
was passed. The legislation resulted in a one-time pre-tax charge of
approximately $671,000, representing a special assessment of 65.7 basis points
on the Association's deposits held as of March 31, 1995, to recapitalize the
SAIF insurance fund. This one-time expense, net of tax, resulted in decreased
reported net earnings of approximately $420,000 in 1996. Excluding these
one-time items, net earnings would have been consistent between 1995 and 1996.
Net Interest Income. Net interest income increased by $60,000 to
$3,920,000 in 1996 from $3,860,000 in 1995. The increase in net interest
income was primarily the result of the Association's growth in earning assets
as the net interest margin actually decreased from 2.99% in 1995 to 2.94% in
1996. For the year ended December 31, 1996, the Company's interest rate spread
decreased six basis points from 2.74% in 1995 to 2.68% in 1996.
During fiscal 1996, average interest-earning assets increased by
approximately $4.2 million over the 1995 average balances. The increase in
average interest-earning assets was primarily due to an increase in loans
receivable, as the Association successfully deployed cash flow into lending.
The average yield on interest-earning assets increased by 21 basis points
during 1996 compared to 1995. The increase in average yield was primarily due
to loan originations and purchases at higher rates and adjustable-rate loans
and mortgage-backed securities in portfolio, some of which having below-market
initial teaser rates, adjusting to higher rates in response to higher market
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.
During fiscal 1996 average interest-bearing liabilities also increased
by approximately $4.1 million, primarily due to an increase of $8.7 million in
average borrowings from the FHLB. This increase was partially offset by a
decrease of $4.6 million in average deposits (primarily resulting from the
sale of $7.7 million of deposits in December, 1995). The average rate paid on
interest-bearing liabilities increased 27 basis points compared to 1995. The
increase in average rate paid was 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 borrowing from the FHLB 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
remained constant at $48,000 for both 1996 and 1995. The amount of the
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 December 31, 1996 and 1995, the Company's allowance for losses on
loans totaled $686,000 and $676,000, respectively, or 0.82% and 0.87% of total
loans, excluding mortgage-backed securities, and 61.25% and 1,325.49% of total
nonperforming loans, respectively. The decline in the latter ratio was
impacted by a $1.1 million increase in non-performing loans, primarily due to
three multi-family participation loans totaling $874,000 which were more than
90 days past due as of December 31, 1996. All three loans are in foreclosure,
however the foreclosure has been delayed as one of the borrowers has filed
bankruptcy. It is unknown how long the foreclosure process will be delayed,
however the Association believes there is adequate collateral in the
properties to minimize the losses on disposition. The Association had net
charge-offs of $38,000 and $22,000 for the years ended December 31, 1996 and
1995, respectively.
Non-interest Income. Total non-interest income decreased by $499,000
for 1996 compared to 1995. The decrease was primarily due to a non -recurring
gain of $493,000 in 1995, resulting from the sale of $7.7 million of deposits
from the Association's Keokuk, Iowa branch in December 1995, with no
comparable gain in 1996. Also contributing to the decrease was a $31,000
decrease in the amount of gains recognized on the sale of securities and a
$14,000 decrease in the amount recognized as gain from the sale of the
Association's share of their data processing cooperative, partially offset by
an increase of $22,000 in commissions on the sale of alternative financial
products (a result of increased sales of annuities and credit life and
disability insurance), and an increase of $11,000 in fee income (as a result
of a new fee schedule implemented in September 1996).
Non-interest Expenses. Total non-interest expenses increased by
$589,000 for 1996 compared to 1995. The increase was primarily due to the
Deposit Insurance Funds Act of 1996 passed on September 30, 1996. The
7
legislation resulted in a one-time pre-tax charge of approximately $671,000
representing a special assessment of 65.7 basis points on the Association's
deposits held as of March 31, 1995 to recapitalize the SAIF insurance fund.
Partially offsetting this increase were decreases of $43,000 in net REO
operations expense (resulting from net gains of the sale of REO properties),
and $39,000 in net reductions in other non-interest expenses. As a result of
the special assessment, the SAIF is fully-funded and, therefore, the
Association expects a reduction in FDIC premiums which will provide annual
savings of approximately $170,000 before income taxes, based on current
deposit levels, beginning in January 1997.
Taxes on Income. Taxes on income decreased $307,000 for 1996 compared
to 1995, primarily due to decreased taxable income.
8
The following table presents for the periods indicated the total
dollar amount of interest income from average interest-earning assets and the
resultant yields, as well as the interest expense on average interest-bearing
liabilities, expressed both in dollars and rates, and the net interest margin.
All average balances are daily average balances and include the balances of
non-accruing loans. The yields and costs for the periods indicated include
fees which are considered adjustments to yields.
Year Ended December 31,
----------------------------------------------------------------------------------------
1997 1996
--------------------------------- -------------------------------------
Yield/Rate at Average Interest Average Interest
December 31, Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
1997 Balance Paid Rate Balance Paid Rate
------------- ----------- -------- ------ ----------- -------- ------
(Dollars in Thousands)
Interest-Earning Assets:
Loans receivable................... 8.13% $ 87,358 $ 7,075 8.10% $ 79,219 $ 6,444 8.13%
Mortgage-backed securities......... 7.18 27,612 1,951 7.07 30,841 2,162 7.01
Investment securities(1)........... 6.88 21,372 1,528 7.15 19,654 1,351 6.87
Deposits in other banks............ 4.59 1,562 75 4.82 1,401 69 4.90
Other interest-earning assets..... 7.00 1,960 137 7.00 1,960 137 7.00
---- -------- --------- ---- -------- ------- ----
Total interest-earning assets.... 7.70 139,864 10,766 7.70 133,075 10,163 7.64
---- -------- --------- ---- -------- ------- ----
Interest-Bearing Liabilities:
Savings deposits, money market
deposit and NOW accounts........ 2.80 30,162 870 2.88 $ 29,562 $ 864 2.92
Time deposits..................... 5.65 74,042 4,169 5.63 71,104 3,863 5.43
---- -------- --------- ---- -------- ------- ----
Total deposits.................. 4.83 104,204 5,039 4.84 100,666 4,727 4.70
----
FHLB advances and other borrowings 5.86 28,451 1,681 5.91 25,256 1,516 6.00
---- -------- --------- ---- -------- ------- ----
Total interest-bearing
liabilities.................... 5.08 $132,655 $ 6,720 5.07 $125,922 6,243 4.96
---- -------- --------- ---- -------- ------- ----
Net interest income; interest rate
spread............................ 2.62% $ 4,046 2.63% $3,920 2.68%
==== ======== ==== ====== ====
Net earning assets/net interest
margin(2)......................... $ 7,209 2.89% $7,153 2.94%
======= ==== ====== ====
Average interest-earning assets to
average interest-bearing
liabilities....................... 105.4% 105.7%
===== =====
[RESTUBBED FROM TABLE ABOVE]
Year Ended December 31,
---------------------------------------
1995
---------------------------------------
Average Interest
Outstanding Earned/ Yield/
Balance Paid Rate
----------- --------- ------
(Dollars in Thousands)
Interest-Earning Assets:
Loans receivable................... $ 71,784 $5,799 8.08%
Mortgage-backed securities......... 33,981 2,366 6.96
Investment securities(1)........... 18,307 1,107 6.05
Deposits in other banks............ 2,923 162 5.57
Other interest-earning assets..... 1,921 139 7.25
--------- ------ ----
Total interest-earning assets.... 128,916 9,573 7.43
--------- ------ ----
Interest-Bearing Liabilities:
Savings deposits, money market
deposit and NOW accounts........ $ 31,597 $ 910 2.88
Time deposits..................... 73,621 3,826 5.20
--------- ------ ----
Total deposits.................. 105,218 4,736 4.50
FHLB advances and other borrowings 16,596 977 5.89
--------- ------ ----
Total interest-bearing
liabilities.................... $121,814 5,713 4.69
--------- ------ ----
Net interest income; interest rate
spread............................ $3,860 2.74%
====== ====
Net earning assets/net interest
margin(2)......................... $ 7,102 2.99%
========= ====
Average interest-earning assets to
average interest-bearing
liabilities....................... 105.8%
=====
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(1) Interest income and yield/rate on tax-exempt securities are presented on
a tax-equivalent basis utilizing a federal tax rate of 34%, resulting in
additional earnings of $16,000 for 1997 and none for 1996 or 1995.
(2) Net interest margin is net interest income divided by average
interest-earning assets.
9
Rate/Volume Analysis of Net Interest Income
The following table presents the extent to which changes in volume
and changes in interest rates of interest-earning assets and interest-bearing
liabilities have affected the Association's interest income and interest
expense during the periods indicated. The table distinguishes between the
changes related to higher outstanding balances and that due to changes in
interest rates. For each category of interest-earning assets and
interest-bearing liabilities, information is provided on changes attributable
to (i) changes in volume (i.e., changes in volume multiplied by old rate) and
(ii) changes in rate (i.e., changes in rate multiplied by old volume). Changes
attributable to both rate and volume which cannot be segregated have been
allocated proportionately to the change due to volume and the change due to
rate.
Year Ended December 31,
--------------------------------------------------------------------
1997 vs. 1996 1996 vs. 1995
--------------------------------- --------------------------------
Increase Increase
(Decrease) (Decrease)
Due to Total Due to Total
--------------------- Increase ------------------- Increase
Volume Rate (Decrease) Volume Rate (Decrease)
-------- -------- ---------- -------- -------- ----------
Interest-Earning Assets:
Loans receivable ................................... $ 659 $ (28) $ 631 $ 604 $ 41 $ 645
Mortgage-backed securities ......................... (228) 17 (211) (220) 16 (204)
Investment securities .............................. 121 56 177 85 159 244
Deposits in other banks ............................ 8 (2) 6 (76) (17) (93)
Other interest-earning assets ...................... -- -- -- 3 (5) (2)
----- ----- ----- ----- ----- -----
Total interest-earning assets .................... 560 43 603 396 194 590
----- ----- ----- ----- ----- -----
Interest-Bearing Liabilities:
Savings deposits, money market deposit ............. 17 (11) 6 (59) 13 (46)
and NOW accounts
Time deposits ...................................... 163 143 306 (113) 150 37
----- ----- ----- ----- ----- -----
Total deposits ................................... 180 132 312 (172) 163 (9)
FHLB advances and other borrowings ................. 188 (23) 165 520 19 539
----- ----- ----- ----- ----- -----
Total interest-bearing liabilities ............... 368 109 477 348 182 530
----- ----- ----- ----- ----- -----
Net change in net interest income ................... $ 192 $ (66) $ 126 $ 48 $ 12 $ 60
===== ===== ===== ===== ===== =====
10
Asset/Liability Management
The Association, like other thrift institutions, is subject to
interest rate risk to the extent that its interest-bearing liabilities mature
or reprice at different times, or on a different basis, than its
interest-earning assets, a portion of which consists of long-term, fixed-rate
loans and securities. As a continuing part of its strategy, the Association
considers methods of managing this asset/liability mismatch, consistent with
maintaining acceptable levels of net interest income.
The Association has an Asset/Liability Committee composed principally
of its President and the lending and finance department heads. The
responsibilities of this Committee are to assess the Association's
asset/liability mix and to recommend strategies to the Board of Directors that
will enhance income while managing the Association's vulnerability to changes
in interest rates.
In managing its asset/liability mix, the Association, at times,
depending on the relationship between long- and short-term interest rates,
market conditions and consumer preference, may place greater emphasis on
maximizing its net interest margin than on matching the interest rate
sensitivity of its assets and liabilities, in an effort to improve its spread.
Management believes that the increased net income resulting from a mismatch in
the maturity of its asset and liability portfolios can, during periods of
declining or stable interest rates, provide high enough returns to justify the
increased vulnerability to sudden and unexpected increases in interest rates
which can result from such a mismatch.
A negative gap for a given period means that the amount of
interest-earning assets maturing or otherwise repricing within such period is
less than the amount of interest-bearing liabilities maturing or otherwise
repricing within the same period. Accordingly, in a declining interest rate
environment, an institution with a negative gap generally experiences a
greater decrease in the cost of its liabilities than in the yield on its
assets. Conversely, a rising interest rate environment will generally have an
unfavorable impact on an institution with a negative gap because its cost of
funds will generally increase more than the yield on its assets. Changes in
interest rates generally have the opposite effect on an institution with a
positive gap. A declining interest rate environment imposes risks on an
institution with a positive gap, because the increased yield on its assets
generally will exceed the decreased cost of its liabilities.
The following table sets forth the repricing periods of the
Association's interest-earning assets and interest-bearing liabilities at
December 31, 1997 and the Association's interest rate sensitivity "gap"
percentages at the dates indicated. The interest rate sensitivity gap is
defined as the amount by which assets repricing within the respective periods
exceed liabilities repricing within such periods. One- to four-family
fixed-rate mortgage loans and mortgage-backed securities are assumed to prepay
at annual rates ranging from 7% to 24% per year, depending on the stated
interest rate. Adjustable-rate mortgage loans are assumed to prepay at a rate
of 8% to 9% per year, depending on the property type and index rate the loan
is priced on. All other loans are assumed to prepay at a rate of 8.0%.
Securities with call features are assumed to be extended to maturity and not
called, which is unlikely over the life of the security. However, it presents
a worst case scenario for gap analysis. Passbook accounts are assumed to be
withdrawn at annual rates of 17.0%, 17.0%, 17.0%, 16.0% and 14.0%,
respectively, during the periods shown. Money market deposit accounts are
assumed to reprice immediately in the first period. Finally, transaction
accounts are assumed to decay at annual rates of 37.0%, 37.0%, 32.0%, 17.0%
and 17.0%, respectively, in each of the periods shown. All prepayment and
liability repricing assumptions are the most recent supplied by the FHLB of
Des Moines, Iowa, based on a model for the quarter ended December 31, 1997.
The effect of these assumptions is to quantify the dollar amount of
items that are interest-sensitive and can be repriced within each of the
periods specified. Such repricing can occur in one of three ways: (1) the rate
of interest to be paid on an asset or liability may adjust periodically on the
basis of an index, (2) an asset or liability such as a mortgage loan may
amortize, permitting reinvestment of cash flows at the then-prevailing
interest rates, or (3) an asset or liability may mature, at which time the
proceeds can be reinvested at current market rates.
11
The following table sets forth the interest rate sensitivity of the
Association's assets and liabilities (excluding non-performing assets) and
certain associated weighted average yields and costs at December 31, 1997 on
the basis of the factors and assumptions set forth above.
Maturing or Repricing
-------------------------------------------------
0-3 Months 4-12 Months
----------------------- ----------------------
Amount Rate Amount Rate
------------ -------- ----------- --------
(Dollars in Thousands)
Fixed-rate one- to four-family (including
mortgage-backed securities), commercial/multi-
family real estate and construction loans...... $ 3,594 7.01% $ 9,898 7.26%
Adjustable-rate one- to four-family (including
mortgage-backed securities), commercial/multi-
family real estate and construction loans....... 8,623 7.79 18,124 7.97
Consumer and other loans.......................... 965 8.35 2,793 8.35
Investment securities and other................... 3,048 6.29 2,456 5.44
------- ----- --------- -----
Total interest-earning assets................ 16,230 7.37 33,271 7.60
------- ----- --------- -----
Savings deposits, money market deposit and NOW
accounts, excluding non-interest bearing
checking accounts............................... 15,310 3.61 2,852 1.70
Time deposits..................................... 16,991 5.47 29,381 5.44
------- ----- --------- -----
Total interest-bearing deposits................. 32,301 4.59 32,233 5.11
FHLB advances..................................... 3,500 5.79 11,000 5.45
------- ----- --------- -----
Total interest-bearing liabilities........... 35,801 4.71 43,233 5.20
------- ----- --------- -----
Interest-earning assets less interest-bearing
liabilities..................................... $(19,571) $ (9,962)
========= ========
Cumulative interest rate sensitivity gap.......... $(19,571) $(29,533)
========= ========
Cumulative interest rate sensitivity gap as a
percentage of totalassets at December 31, 1997.. (13.2)% (20.0)%
===== =====
Cumulative interest rate sensitivity gap as a
percentage of total assets at December 31, 1996.. (9.2)% (10.9)%
==== =====
Cumulative interest rate sensitivity gap as a
percentage of total assets at December 31, 1995.. 7.1% 1.9%
=== ===
Cumulative interest rate sensitivity gap as a
percentage of total assets at December 31, 1994.. (.5)% 9.1%
=== ===
Cumulative interest rate sensitivity gap as a
percentage of total assets at December 31, 1993.. 4.0% 1.8%
=== ===
[RESTUBBED FROM TABLE ABOVE]
Maturing or Repricing
-----------------------------------------------------
Over 1-3 Over 3-5 Over
Years Years 5 Years Total
-------- ------- ------- --------
Amount Amount Amount Amount
-------- ------- ------- --------
(Dollars in Thousands)
Fixed-rate one- to four-family (including
mortgage-backed securities), commercial/multi-
family real estate and construction loans...... $ 16,080 $ 7,510 $12,544 $ 49,626
Adjustable-rate one- to four-family (including
mortgage-backed securities), commercial/multi-
family real estate and construction loans....... 13,545 4,776 7,569 52,637
Consumer and other loans.......................... 5,267 2,963 2,292 14,280
Investment securities and other................... 1,222 2,233 15,572 24,531
-------- ------- ------- --------
Total interest-earning assets................ 36,114 17,482 37,977 141,074
-------- ------- ------- --------
Savings deposits, money market deposit and NOW
accounts, excluding non-interest bearing
checking accounts............................... 5,903 2,487 3,369 29,921
Time deposits..................................... 27,046 772 518 74,708
-------- ------- ------- --------
Total interest-bearing deposits................. 32,949 3,259 3,887 104,629
FHLB advances..................................... 10,000 4,000 2,000 30,500
-------- ------- ------- --------
Total interest-bearing liabilities........... 42,949 7,259 5,887 135,129
-------- ------- ------- --------
Interest-earning assets less interest-bearing
liabilities..................................... $ (6,835) $ 10,223 $32,090 $5,945
========= ======== ======= ======
Cumulative interest rate sensitivity gap.......... $ (36,368) $(26,145) $ 5,945
========= ======== =======
Cumulative interest rate sensitivity gap as a
percentage of totalassets at December 31, 1997.. (24.6)% (17.7)% 4.0%
===== ===== ===
Cumulative interest rate sensitivity gap as a
percentage of total assets at December 31, 1996..
Cumulative interest rate sensitivity gap as a
percentage of total assets at December 31, 1995..
Cumulative interest rate sensitivity gap as a
percentage of total assets at December 31, 1994..
Cumulative interest rate sensitivity gap as a
percentage of total assets at December 31, 1993..
12
The shift in the Association's one-year gap from a negative 10.9% at
December 31, 1996 to a negative 20.0% at December 31, 1997 was primarily due
to the increase in the amount of FHLB advances maturing or repricing in one
year or less to $14.5 million in 1997 from $1.0 million in 1996.
Office of Thrift Supervision ("OTS") regulations currently provide a
Net Portfolio Value ("NPV") approach to the quantification of interest rate
risk. In essence, this approach calculates the difference between the present
value of expected cash flows from assets and the present value of expected
cash flows from liabilities, as well as cash flows from off balance sheet
contracts. Under OTS regulations, an institution's "normal" level of interest
rate risk in the event of this assumed change in interest rates is a decrease
in the institution's NPV in an amount not exceeding 2% of the present value of
its assets. Beginning July 1, 1994, thrift institutions with greater than
"normal" interest rate exposure must take a deduction from their total capital
available to meet their risk-based capital requirement. The amount of that
deduction is one-half of the difference between (a) the institution's actual
calculated exposure to the 200 basis point interest rate increase or decrease
(whichever results in the greater pro forma decrease in NPV) and (b) its
"normal" level of exposure which is 2% of the present value of its assets. Any
savings association with less than $300 million in assets and a total capital
ratio in excess of 12%, such as Midwest Federal, is exempt from this
requirement unless the OTS determines otherwise. At December 31, 1997, 2.0% of
the present value of the Association's assets was approximately $3.0 million,
which was less than $3.4 million, the amount of the greatest decrease in NPV
resulting from a 200 basis point change in interest rates. As a result, the
Association would have been required to make a $0.2 million deduction from
total capital in calculating its risk-based capital requirement, had the
requirement been applicable to the Association.
The Board of Directors dictates acceptable limits on the amount of
change in NPV given certain changes in interest rates. Presented below, as of
December 31, 1997, is an analysis of the Association's interest rate risk as
measured by changes in NPV for instantaneous and sustained parallel shifts in
the yield curve, in 100 basis point increments, up and down 400 basis points.
Assumptions used in calculating the amounts in this table are OTS assumptions.
Change In Net Portfolio Value
Interest Rate ---------------------------------------------------
(Basis Points) $ Amount $ Change % Change
-------------- ------------ ------------ ------------
(Dollars in Thousands)
+400 $5,994 $(7,791) (57)%
+300 8,226 (5,559) (40)
+200 10,354 (3,431) (25)
+100 12,249 (1,536) (11)
0 13,785 --- ---
-100 14,799 1,013 7
-200 15,458 1,673 12
-300 16,227 2,442 18
-400 17,512 3,727 27
Management's policy involves structuring the Company's assets and
liabilities to accept modest exposure to interest rate risk. In the event of a
400 basis point change in interest rates, the Association would experience a
27% increase in NPV in a declining rate environment and a 57% decrease in a
rising rate environment. During periods of rising rates, the value of monetary
assets and monetary liabilities decline. Conversely, during periods of falling
rates, the value of monetary assets and liabilities increase. However, the
amount of change in value of specific assets and liabilities due to changes in
rates is not the same in a rising rate environment as in a falling rate
environment (i.e., the amount of value increase under a specific rate decline
may not equal the amount of value decrease under an identical upward rate
movement due to embedded options in loan contracts and callable securities).
13
Certain shortcomings are inherent in the methods of analysis
presented in the "gap" and NPV tables presented above. For example, although
certain assets and liabilities may have similar maturities or periods to
repricing, they may react in different degrees to changes in market interest
rates. Also, the interest rates on certain types of assets and liabilities may
fluctuate in advance of changes in market interest rates, while interest rates
on other types may lag behind changes in market rates. Certain investment
securities with call option features are not adequately modeled by the gap
table or the OTS model. Further, in the event of a change in interest rates,
prepayments and early withdrawal levels would likely deviate significantly
from those assumed in calculating the tables. Finally, the ability of many
borrowers to service their debt may decrease in the event of an interest rate
increase. As a result, the actual effect of changing interest rates may differ
from that presented in the foregoing tables.
Liquidity and Capital Resources
The Company's principal sources of funds are deposits, borrowings
(including FHLB advances), 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, competition, and,
most recently, the restructuring of the thrift industry. 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 a minimum
level of liquid assets. The required percentage has varied from time to time
based upon economic conditions and savings flows and is currently 4% of net
withdrawable savings deposits and borrowings payable on demand or in one year
or less during the preceding calendar quarter. Liquid assets for purposes of
this ratio include cash, certain time deposits, U.S. Government, government
agency and corporate securities and other obligations generally having
remaining maturities of less than five years. The Association has historically
maintained its liquidity ratio at levels in excess of those required. For
December 1997, the Association's liquidity ratio was 8.1%, compared to 9.8%
for December 1996. The decrease in the Association's liquidity ratio was the
result, in part, of the investment of cash flow into assets which have terms
to maturity or balloon payments longer than five years, in accordance with the
Association's asset/liability management policy based on the current interest
rate environment. It is management's intent to continue its efforts to deploy
excess liquidity into mortgage and other loans and participations; however,
the success of such efforts is dependent upon the availability of favorable
lending opportunities.
During fiscal 1997, the primary source of cash from operating
activities was net income, and the net cash provided by operating activities
was $1.3 million.
The primary investing activities of the Company are lending and
purchasing loans, mortgage-backed securities and investment securities. Loan
originations, net of principal repayments, used $3.5 million during the year
ended December 31, 1997. Loan purchases used $7.0 million during the year
ended December 31, 1997. There were $3.5 million mortgage-backed securities
purchased, while mortgage-backed securities principal repayments totaled $6.5
million. Purchases of investment securities of $14.7 million were partially
offset by maturities of $9.5 million during the year ended December 31, 1997.
If general interest rates decline, the Company would expect to experience an
increase in prepayments, particularly in its investment securities with call
option features, adjustable-rate mortgage loans and adjustable-rate
mortgage-backed securities. The increased funds from this source could not
necessarily be re-invested at yields and on terms which would allow the
Company to maintain the net interest margins the Company has experienced
during recent periods.
The primary financing activity of the Company is deposits. For the
year ended December 31, 1997 deposits grew by $3.4 million. The Company also
utilizes advances from the FHLB, and increased such advances by $6.5 million
in 1997.
14
Liquidity management is both a daily and long-term responsibility of
management. The Company adjusts its investments in liquid assets based upon
management's assessment of (i) expected loan demand, (ii) the projected amount
of loans and mortgage-backed securities held for sale by the Company, (iii)
expected deposit flows, (iv) yields available on interest-bearing deposits,
and (v) the objective of its asset/liability management program. Excess
liquidity is invested generally in interest-bearing overnight deposits and
other short-term government and agency obligations. If the Company requires
funds beyond its ability to generate them internally, it has additional
borrowing capacity with the FHLB.
The Company anticipates that it will have sufficient funds available
to meet current loan commitments. At December 31, 1997 the Company had
outstanding commitments to extend credit and purchase loans which amounted to
$2.6 million and no commitments to sell loans or participations in loans. See
Note 3 of the Notes to Consolidated Financial Statements.
Certificates of deposit scheduled to mature in one year or less at
December 31, 1997 totaled approximately $46.4 million. Based on the level of
retention of such deposits in the recent past, management believes that a
significant portion of such deposits will remain with the Company. At December
31, 1997, the Company had $30.5 million advances outstanding from the FHLB of
Des Moines.
At December 31, 1997, the Company's stockholders' equity totaled
$10.7 million, or 7.23% of assets. During the past several years, the capital
requirements applicable to all savings institutions, including the
Association, have been substantially increased. At December 31, 1997, the
Association was in compliance with all three of its regulatory capital
requirements.
At December 31, 1997, the Association had tangible and core capital
of $9,414,000, or 6.42% of total adjusted assets which exceeded the regulatory
requirements of 1.5% and 3.0%, respectively, by $7,215,000 and $5,015,000,
respectively. The risk-based capital requirement is currently 8% of
risk-weighted assets. As of December 31, 1997, the Association had
risk-weighted assets of $67,364,000, a risk-based requirement of $5,389,000
and risk-based capital of $9,982,000, or $14.82%, which exceeds the
requirement by $4,593,000.
Tangible Core Risk-based
Capital Capital Capital
------- ------- -------
(Dollars In Thousands)
Association's capital ................. $9,414 $9,414 $9,414
Additional capital - general allowances -- -- 568
------ ------ ------
Regulatory capital .................... 9,414 9,414 9,982
Minimum capital requirement ........... 2,199 4,399 5,389
------ ------ ------
Excess regulatory capital ............. $7,215 $5,015 $4,593
====== ====== ======
The unrealized gain on investments 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 December 31,
1997, the unrealized gain of $373,000, up from $52,000 at December 31, 1996,
consisted primarily of the net unrealized market gain, net of tax, on certain
GNMA mortgage-backed securities, U.S. Agency securities, municipal bond
securities and marketable equity securities which have been identified as
available for sale by management.
Impact of Inflation and Changing Prices
The Consolidated Financial Statements and Notes thereto presented
herein have been prepared in accordance with generally accepted accounting
principles, which require the measurement of financial position and operating
results in terms of historical dollars without considering the change in the
relative purchasing power of money over time due to inflation. The impact of
inflation is reflected in the increased cost of the Company's operations.
Unlike most industrial companies, nearly all the assets and liabilities of the
Company are monetary. As a result, interest rates have a greater impact on the
Company's performance than do the effects of general levels of inflation.
Interest rates do not necessarily move in the same direction or to the same
extent as the price of goods and services.
15
Effect of New Accounting Standards
SFAS 125, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities," was effective for the Company for the
year beginning January 1, 1997, and did not have a material effect on the
financial position and results of operations, nor did the adoption require
additional capital resources.
SFAS 128, "Earnings Per Share," was adopted by the Company effective
December 31, 1997. This statement replaces the primary earnings per share
(EPS) disclosure with basic and diluted EPS disclosures to simplify the
calculation and improve international comparability. The adoption of SFAS 128
did not have a material effect on the financial position and results of
operations, nor did the adoption require additional capital resources.
SFAS 130, "Reporting Comprehensive Income," will be effective for the
Company for the year beginning January 1, 1998, and establishes the standards
for the reporting and display of comprehensive income in the financial
statements. Comprehensive income represents net earnings and certain amounts
reported directly in stockholders' equity, such as the net unrealized gain or
loss on available-for-sale securities.
16
MIDWEST BANCSHARES, INC.
AND SUBSIDIARIES
Consolidated Financial Statements
December 31, 1997 and 1996
(With Independent Auditors' Report Thereon)
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Midwest Bancshares, Inc.
Burlington, Iowa:
We have audited the accompanying consolidated balance sheets of Midwest
Bancshares, Inc. and subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the years in the three-year period ended December 31, 1997.
These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Midwest
Bancshares, Inc. and subsidiaries as of December 31, 1997 and 1996, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1997, in conformity with generally
accepted accounting principles.
KPMG Peat Marwick LLP
Des Moines, Iowa
January 9, 1998
17
MIDWEST BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1997 and 1996
1997 1996
---- ----
Assets
Cash and cash equivalents $ 2,523,983 3,998,163
Securities available for sale (note 2) 27,934,974 23,783,968
Securities held to maturity (estimated fair
value of $20,055,364 and $21,763,670) (notes 2 and 7) 19,839,678 21,810,592
Loans receivable, net (notes 3, 4, and 9) 91,276,434 81,225,412
Real estate acquired through foreclosure 314,583 12,000
Federal Home Loan Bank (FHLB) stock, at cost 1,959,700 1,959,700
Office property and equipment, net (note 5) 2,560,749 2,446,983
Accrued interest receivable (note 6) 1,203,471 1,007,547
Other assets 110,869 180,908
------------- -------------
Total assets $ 147,724,441 136,425,273
============= =============
Liabilities and Stockholders' Equity
Liabilities:
Deposits (note 7) $ 105,278,292 101,917,765
Advances from FHLB (note 8) 30,500,000 24,000,000
Advances from borrowers for taxes and insurance 387,881 378,435
Accrued interest payable 80,175 73,743
Accrued expenses and other liabilities 802,632 455,082
------------- -------------
Total liabilities 137,048,980 126,825,025
------------- -------------
Stockholders' equity:
Serial preferred stock, $.01 par value;
authorized 500,000 shares; none issued -- --
Common stock, $.01 par value; 2,000,000 shares authorized;
1,020,762 shares issued and outstanding in 1997 and
455,000 shares issued and outstanding in 1996 10,208 4,550
Additional paid-in capital 1,530,430 4,037,058
Retained earnings, substantially restricted (notes 11 and 15) 8,821,782 7,836,808
Treasury stock, at cost; none in 1997 and 105,621 shares in 1996 -- (2,210,642)
Employee Stock Ownership Plan (ESOP) (note 10) (60,000) (120,000)
Unrealized appreciation on securities available for sale, net of
taxes on income of $222,000 in 1997 and $31,000 in 1996 373,041 52,474
------------- -------------
Total stockholders' equity 10,675,461 9,600,248
Contingencies (note 15)
------------- -------------
Total liabilities and stockholders' equity $ 147,724,441 136,425,273
============= =============
See accompanying notes to consolidated financial statements.
18
MIDWEST BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended December 31, 1997, 1996, and 1995
1997 1996 1995
---- ---- ----
Interest income:
Loans receivable $ 7,074,649 6,444,056 5,798,577
Securities available for sale 2,073,271 1,902,576 655,606
Securities held to maturity 1,388,444 1,609,591 2,816,738
Deposits in other financial institutions 75,365 68,717 162,756
Other interest-earning assets 138,271 137,496 139,452
----------- ----------- -----------
10,750,000 10,162,436 9,573,129
----------- ----------- -----------
Interest expense:
Deposits (note 7) 5,039,036 4,726,637 4,736,154
Advances from FHLB and other borrowings 1,681,261 1,516,060 977,375
----------- ----------- -----------
6,720,297 6,242,697 5,713,529
----------- ----------- -----------
Net interest income 4,029,703 3,919,739 3,859,600
Provision for losses on loans (note 4) 48,000 47,972 48,000
----------- ----------- -----------
Net interest income after provision for losses on loans 3,981,703 3,871,767 3,811,600
----------- ----------- -----------
Noninterest income:
Fees and service charges 282,249 179,326 171,378
Gain on sale of deposits (note 16) -- -- 493,345
Gain on sale of securities available for sale (note 2) 220,223 29,213 75,816
Gain on sale of mortgage-backed securities -- 15,950 --
held to maturity (note 2)
Other 51,214 124,531 107,091
----------- ----------- -----------
553,686 349,020 847,630
----------- ----------- -----------
Noninterest expenses:
Compensation and benefits (note 10) 1,285,960 1,181,748 1,170,425
Office property and equipment 364,804 349,156 337,615
Deposit insurance premiums 53,687 236,989 238,777
Deposit insurance special assessment (note 12) -- 670,861 --
Data processing 164,087 164,939 169,201
Other 712,937 613,782 712,917
----------- ----------- -----------
2,581,475 3,217,475 2,628,935
----------- ----------- -----------
Earnings before taxes on income 1,953,914 1,003,312 2,030,295
Taxes on income (note 9) 689,000 373,654 680,452
----------- ----------- -----------
Net earnings $ 1,264,914 629,658 1,349,843
=========== =========== ===========
Earnings per share - basic $ 1.23 0.59 1.20
=========== =========== ===========
Earnings per share - diluted $ 1.14 0.56 1.14
=========== =========== ===========
See accompanying notes to consolidated financial statements.
19
MIDWEST BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years ended December 31, 1997, 1996, and 1995
Additional
Common paid-in Retained Treasury
stock capital earnings stock
----- ------- -------- -----
Balance at December 31, 1994 $ 4,550 4,037,058 6,237,510 (806,488)
Net earnings -- -- 1,349,843 --
Dividends declared ($.167 per share*) -- -- (184,291) --
Treasury stock acquired -- -- -- (893,045)
ESOP loan payment -- -- -- --
Amortization of recognition
and retention plan -- -- -- --
Net change in unrealized appreciation
on securities available for sale -- -- -- --
----------- ----------- ----------- -----------
Balance at December 31, 1995 4,550 4,037,058 7,403,062 (1,699,533)
Net earnings -- -- 629,658 --
Dividends declared ($.187 per share*) -- -- (195,912) --
Treasury stock acquired -- -- -- (511,109)
ESOP loan payment -- -- -- --
Amortization of recognition
and retention plan -- -- -- --
Net change in unrealized appreciation
on securities available for sale -- -- -- --
----------- ----------- ----------- -----------
Balance at December 31, 1996 4,550 4,037,058 7,836,808 (2,210,642)
Net earnings -- -- 1,264,914 --
Dividends declared ($.22 per share*) -- -- (225,624) --
Treasury stock acquired -- -- -- (393,659)
ESOP loan payment -- -- -- --
Issuance of shares of common stock
under the stock option plan (note 10) 28 26,237 (54,316) 77,066
3-for-1 stock split effected in the
form of a 200% stock dividend (note 11 ) 5,630 (2,532,865) -- 2,527,235
Net change in unrealized appreciation
on securities available for sale -- -- -- --
----------- ----------- ----------- -----------
Balance at December 31, 1997 $ 10,208 1,530,430 8,821,782 --
=========== =========== =========== ===========
[RESTUBBED FROM TABLE ABOVE]
Employee
Stock
Ownership Recognition Net unrealized
Plan and appreciation on
borrowing retention securities available
guarantee plan for sale Total
--------- ---- -------- -----
Balance at December 31, 1994 (230,000) (26,720) 66,955 9,282,865
Net earnings -- -- -- 1,349,843
Dividends declared ($.167 per share*) -- -- -- (184,291)
Treasury stock acquired -- -- -- (893,045)
ESOP loan payment 50,000 -- -- 50,000
Amortization of recognition
and retention plan -- 16,995 -- 16,995
Net change in unrealized appreciation
on securities available for sale -- -- 273,571 273,571
----------- ----------- ----------- -----------
Balance at December 31, 1995 (180,000) (9,725) 340,526 9,895,938
Net earnings -- -- -- 629,658
Dividends declared ($.187 per share*) -- -- -- (195,912)
Treasury stock acquired -- -- -- (511,109)
ESOP loan payment 60,000 -- -- 60,000
Amortization of recognition
and retention plan -- 9,725 -- 9,725
Net change in unrealized appreciation
on securities available for sale -- -- (288,052) (288,052)
----------- ----------- ----------- -----------
Balance at December 31, 1996 (120,000) -- 52,474 9,600,248
Net earnings -- -- -- 1,264,914
Dividends declared ($.22 per share*) -- -- -- (225,624)
Treasury stock acquired -- -- -- (393,659)
ESOP loan payment 60,000 -- -- 60,000
Issuance of shares of common stock
under the stock option plan (note 10) -- -- -- 49,015
3-for-1 stock split effected in the
form of a 200% stock dividend (note 11 ) -- -- -- --
Net change in unrealized appreciation
on securities available for sale -- -- 320,567 320,567
----------- ----------- ----------- -----------
Balance at December 31, 1997 (60,000) -- 373,041 10,675,461
=========== =========== =========== ===========
* Reflects the 3-for-1 stock split effected in the form of a 200 percent
dividend in November 1997.
See accompanying notes to consolidated financial statements.
20
MIDWEST BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 1997, 1996, and 1995
1997 1996 1995
---- ---- ----
Cash flows from operating activities:
Net earnings $ 1,264,914 629,658 1,349,843
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Provision for losses on loans 48,000 47,972 48,000
Proceeds from sale of loans originated for resale -- -- 128,243
Disbursements on loans originated for resale -- -- (95,143)
Depreciation 161,250 144,301 127,451
Provision for deferred taxes 96,000 24,000 7,000
Gain on sale of deposits -- -- (493,345)
Gain on sale of securities available for sale (220,223) (29,213) (75,816)
Gain on sale of securities held to maturity -- (15,950) --
Amortization of recognition and retention plan benefits -- 9,725 16,995
ESOP expense 56,482 53,938 39,058
Amortization of premiums and discounts (25,496) 76,778 146,825
FHLB stock dividend -- -- (38,700)
Increase in accrued interest receivable (195,924) (133,035) (71,523)
(Increase) decrease in other assets (9,961) 90,050 (91,214)
Increase in accrued interest payable 6,432 2,236 42,027
Increase (decrease) in accrued expenses and other liabilities 160,229 (194,335) 169,567
------------ ------------ ------------
Net cash provided by operating activities 1,341,703 706,125 1,209,268
------------ ------------ ------------
Cash flows from investing activities:
Purchase of securities (14,680,737) (5,568,000) (15,488,160)
Proceeds from maturities of securities 9,490,000 7,543,478 11,000,000
Proceeds from sale of securities available for sale 798,473 550,239 285,433
Proceeds from sale of securities held to maturity -- 780,407 --
Loans purchased (6,955,215) (5,555,413) (4,002,260)
Purchase of mortgage-backed securities (3,484,096) (4,051,131) --
Repayments of principal on mortgage-backed securities 6,464,986 5,862,203 5,344,786
(Increase) decrease in loans receivable (3,505,057) (1,800,202) 132,800
Proceeds from sale of real estate owned, net 47,235 155,042 398,621
Purchase of office property and equipment (275,016) (276,470) (265,261)
------------ ------------ ------------
Net cash used in investing activities (12,099,427) (2,359,847) (2,594,041)
------------ ------------ ------------
Cash flows from financing activities:
Payment on sale of deposits, net -- -- (7,279,871)
Increase in deposits 3,360,527 583,328 2,148,772
Proceeds from advances from FHLB 8,500,000 8,000,000 6,500,000
Repayment of advances from FHLB (2,000,000) (4,500,000) --
Net increase (decrease) in advances from
borrowers for taxes and insurance 9,446 (33,992) (73,585)
Treasury stock acquired (393,659) (511,109) (893,045)
Stock options exercised 24,015 -- --
Payment of cash dividends (216,785) (191,453) (185,520)
------------ ------------ ------------
Net cash provided by financing activities 9,283,544 3,346,774 216,751
------------ ------------ ------------
Net (decrease) increase in cash and cash equivalents (1,474,180) 1,693,052 (1,168,022)
Cash and cash equivalents at beginning of year 3,998,163 2,305,111 3,473,133
------------ ------------ ------------
Cash and cash equivalents at end of year $ 2,523,983 3,998,163 2,305,111
============ ============ ============
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 6,713,865 6,240,461 5,671,502
Taxes on income 485,140 531,654 558,866
Transfers from loans to real estate acquired through foreclosure 349,818 134,098 154,608
Transfers of mortgage-backed securities to available for sale -- -- 3,864,506
============ ============ ============
See accompanying notes to consolidated financial statements.
21
MIDWEST BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1997 and 1996
(1) Summary of Significant Accounting Policies
Description of Business
Midwest Bancshares, Inc. (the Company or Parent Company) is a Delaware
corporation operating as a savings and loan holding company. The
Company owns all of the outstanding stock of Midwest Federal
Savings and Loan Association of Eastern Iowa (the Association).
The Association serves Des Moines, Lee, and Louisa Counties in
southeastern Iowa through its five retail banking offices located
in Burlington, Wapello, and Ft. Madison, Iowa. The Association is
primarily engaged in attracting retail deposits from the general
public and investing those funds in first mortgages on
owner-occupied, single-family residential loans and mortgage-backed
securities. Midwest Financial Products, Inc., a wholly owned
subsidiary of the Association, is engaged in the marketing of
financial products.
Principles of Consolidation
The consolidated financial statements include the accounts of Midwest
Bancshares, Inc. and its wholly owned subsidiary; Midwest Federal
Savings and Loan Association of Eastern Iowa and its subsidiary;
Midwest Financial Products, Inc. All material intercompany accounts
and transactions have been eliminated.
The consolidated financial statements have been prepared in accordance
with generally accepted accounting principles. In preparing such
financial statements, management is required to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities as
of the date of the balance sheet and revenues and expenses for the
period. Actual results could differ significantly from those
estimates. Material estimates that are particularly susceptible to
significant change relate to the determination of the allowance for
loan losses.
Regulatory Capital
The Association is required by the Office of Thrift Supervision (OTS)
to maintain prescribed levels of regulatory capital. At December
31, 1997, the Association met the requirements, and management
anticipates meeting the requirements at December 31, 1998 (see note
11).
Cash and Cash Equivalents
For purposes of reporting cash flows, the Company includes cash and due
from other financial institutions and interest-bearing deposits
with original maturities of three months or less in cash and cash
equivalents. Amounts of interest-bearing deposits included as cash
equivalents at December 31, 1997 and 1996, were $1,088,237 and
$3,126,659, respectively.
22
MIDWEST BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(1) Summary of Significant Accounting Policies, Continued
Earnings Per Share
Basic earnings per share amounts are computed by dividing net income by
the weighted average number of common shares outstanding during the
year. Diluted earnings per share amounts are computed by dividing
net income by the weighted average number of shares and all
dilutive potential shares outstanding during the year. As further
discussed in note 11, the Company declared a 3-for-1 stock split
effected in the form of a stock dividend. The average number of
shares and dilutive potential shares have been restated for the
stock split. The following information was used in the computation
of earnings per share on both a basic and diluted basis for the
years ended December 31, 1997, 1996, and 1995.
1997 1996 1995
---- ---- ----
Basic EPS Computation:
Numerator -
Net income $1,264,914 629,658 1,349,843
Denominator -
Weighted average
shares outstanding 1,032,310 1,061,442 1,128,891
---------- ---------- ----------
Basic EPS $ 1.23 0.59 1.20
========== ========== ==========
Diluted EPS Calculation:
Numerator -
Net income $1,264,914 629,658 1,349,843
---------- ---------- ----------
Denominator:
Weighted average
shares outstanding 1,032,310 1,061,442 1,128,891
Stock options 75,631 62,941 59,127
---------- ---------- ----------
1,107,941 1,124,383 1,188,018
---------- ---------- ----------
Diluted EPS $ 1.14 0.56 1.14
========== ========== ==========
Securities
The Company's method of classifying debt securities is based on the
intended holding period. Securities which may be sold prior to
maturity to meet liquidity needs, to respond to market changes, or
to adjust the asset-liability position are classified as available
for sale. Securities which the Company intends to hold to maturity
are classified as held to maturity.
23
MIDWEST BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(1) Summary of Significant Accounting Policies, Continued
Securities, Continued
Securities available for sale are recorded at fair value. The aggregate
unrealized gains or losses, net of the effect of taxes on income
are recorded as a component of stockholders' equity. Securities for
which the Company has the positive intent and ability to hold to
maturity are reported at cost, adjusted for amortization of premium
or accretion of discount, over the term of the security using the
interest method. Original issue discounts on short-term securities
are accreted as accrued interest receivable over the lives of such
securities.
Mortgage-backed securities for which the Company has the positive
intent and ability to hold to maturity are reported at amortized
cost. Premiums and discounts are amortized and accreted using the
interest method over the remaining period to contractual maturity,
adjusted for prepayments. Actual prepayment experience is
periodically reviewed, and the amortization and accretion is
adjusted accordingly. In 1996, certain mortgage-backed securities
with remaining principal balances of less than 15 percent of
original purchase amounts were sold (see note 2).
Gain or loss on sale is recognized in the statement of operations using
the specific identification method.
Allowances for Losses on Loans and Real Estate
The allowance for losses on loans is increased by charges to operations
and decreased by net charge-off and is maintained at an amount
considered adequate to provide for such losses. The allowance for
losses on loans is based on management's periodic evaluation of the
loan portfolio and reflects an amount that, in management's
opinion, is adequate to absorb losses in the existing portfolio. In
evaluating the portfolio, management takes into consideration
numerous factors, including current economic conditions, prior loan
loss experience, the composition of the loan portfolio, and
management's estimate of anticipated credit losses.
Realestate acquired is carried at the lower of cost or fair value less
estimated costs of disposition. When a property is acquired through
foreclosure or a loan is considered impaired, any excess of the
loan balance over fair value of the property plus disposition costs
is charged to the allowance for losses on loans. When circumstances
indicate additional loss on the property, a direct charge to the
provision for losses on real estate is made, and the real estate is
recorded net of such provision.
Accrued interest receivable in arrears which management believes is
doubtful of collection (generally when a loan becomes 90 days
delinquent) is charged to income. Subsequent interest income is not
recognized on such loans until collected or until determined by
management to be collectible.
Under the Company's credit policies, all nonaccrual and restructured
loans are considered to meet the definition of impaired loans. Loan
impairment is measured based on the present value of expected
future cash flows, discounted at the loan's effective interest rate
except, where more practical, at the observable market price of the
loan or the fair value of the collateral if the loan is collateral
dependent.
24
MIDWEST BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(1) Summary of Significant Accounting Policies, Continued
Unearned Loan Fees and Discounts
Loan origination and commitment fees charged to borrowers and certain
direct costs related to originations are deferred and amortized
into interest income using the interest method. Direct loan
origination costs for other loans are expensed, as such costs are
not material in amount.
Premiums and discounts on loans are amortized primarily over the
expected remaining life of the related loans using the interest
method.
Concentrations of Credit Risk
The Association grants residential and commercial real estate loans and
other consumer and commercial loans, primarily in its central Iowa
market area. Although the Company has a diversified loan portfolio,
a substantial portion of its borrowers' ability to repay their
loans is dependent upon economic conditions in the Company's market
area.
Financial Instruments with Off Balance Sheet Risk
In the normal course of business to meet the financing needs of its
customers, the Company is a party to financial instruments with off
balance sheet risk, which include commitments to extend credit. The
Company's exposure to credit loss in the event of nonperformance by
the other party to the commitments to extend credit is represented
by the contractual amount of those instruments. The Company uses
the same credit policies in making commitments as it does for on
balance sheet instruments.
Commitments to extend credit are agreements to lend to a customer as
long as there are no violations of any conditions established in
the contract. Commitments generally have fixed expiration dates or
other termination clauses and may require payment of a fee. Since
some of the commitments are expected to expire without being drawn
upon, the total commitment amounts do not necessarily represent
future cash requirements (see note 3). The Company evaluates each
customer's creditworthiness on a case-by-case basis. The amount of
collateral obtained if deemed necessary by the Company upon
extension of credit is based on management's credit evaluation of
the counterparty.
Office Property and Equipment
Office property and equipment are recorded at cost, and depreciation is
provided primarily using the straight-line basis over the estimated
useful lives of the related assets, which range from 25 to 50 years
for office buildings and from 5 to 15 years for furniture,
fixtures, and equipment.
Maintenance and repairs are charged against income. Betterments are
capitalized and subsequently depreciated. The cost and accumulated
depreciation of properties retired or otherwise disposed of are
eliminated from the asset and accumulated depreciation accounts.
Related profit or loss from such transactions is credited or
charged to income.
25
MIDWEST BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(1) Summary of Significant Accounting Policies, Continued
Taxes on Income
The Company files a consolidated federal income tax return. Federal
income taxes are allocated based on taxable income or loss included
in the consolidated return. For state tax purposes, the Association
files a franchise tax return. The Parent Company and the
Association's subsidiary file corporate income tax returns.
Under the asset and liability method, deferred tax assets and
liabilities are recognized for the future tax consequences
attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are
expected to be recovered or settled. The effect of a change in tax
rates on deferred tax assets and liabilities is recognized in
income in the period that includes the enactment date.
Stock Option Plan
Prior to December 31, 1995, the Company accounted for its stock option
plan (the Plan) in accordance with the provisions of Accounting
Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued
to Employees," and related interpretations. As such, compensation
expense would be recorded on the date of grant only if the current
market price of the underlying stock exceeded the exercise price.
On December 31, 1995, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based
Compensation," which permits entities to recognize as expense over
the vesting period the fair value of all stock-based compensation
awards on the date of grant. Alternatively, SFAS 123 also allows
entities to continue to apply the provisions of APB Opinion 25 and
provide pro forma net earnings and pro forma net earnings per share
disclosures for employee stock option grants made in the years
ended December 31, 1996, and future years as if the
fair-value-based method defined in SFAS 123 had been applied. The
Company has elected to continue to apply the provisions of APB
Opinion 25 and provide the pro forma disclosure provisions of SFAS
123.
Fair Value of Financial Instruments
The Company discloses the estimated fair values for its financial
instruments. Fair value estimates, methods, and assumptions are set forth
below.
Cash and Cash Equivalents
The carrying amount is a reasonable estimate of fair value.
Securities Available for Sale and Held to Maturity
The fair value of securities is estimated based on bid prices
published in financial newspapers, bid quotations received from
securities dealers, or quoted market prices of similar instruments,
adjusted for differences between the quoted instruments and the
instruments being valued.
26
MIDWEST BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(1) Summary of Significant Accounting Policies, Continued
Fair Value of Financial Instruments, Continued
Loans
Fair values are estimated for portfolios of loans with similar
financial characteristics. Loans are segregated by type, such as
real estate, consumer, and commercial.
The fair value of single family residential loans is calculated by
obtaining quoted market prices of similar loans that are sold in
conjunction with securitization transactions.
The fair value of all other loans is calculated by discounting
scheduled cash flows through the estimated maturity using estimated
market discount rates that reflect the credit and interest rate
risk inherent in the loan. The estimate of maturity is based on the
Company's historical experience, with repayments for each loan
classification, modified, as required, by an estimate of the effect
of current economic and lending conditions. The effect of
nonperforming loans is considered in assessing the credit risk
inherent in the fair value estimate.
FHLB Stock
The fair value of FHLB stock is equivalent to its carrying value,
because it is redeemable at par value.
Deposits
The fair value of deposits with no stated maturity, such as
passbook; money market; noninterest-bearing checking; and checking
accounts, is estimated to be the amount payable on demand. The fair
value of certificates of deposit is based on the discounted value
of contractual cash flows. The discount rate is estimated using the
rates currently offered for deposits of similar remaining
maturities. The fair value estimates do not include the benefit
that results from the low-cost funding provided by the deposit
liabilities compared to the cost of borrowing funds in the market.
Advances from FHLB
The fair value of advances from the FHLB is calculated by
discounting the scheduled payments through maturity. The discount
rate is estimated using the rates currently offered for similar
instruments.
Limitations
Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial
instrument. Because no market exists for a significant portion of
the Company's financial instruments, fair value estimates are based
on judgments regarding future expected loss experience, current
economic conditions, risk characteristics of various financial
instruments, and other factors. These estimates are subjective in
nature and involve uncertainties and matters of significant
judgment and, therefore, cannot be determined with precision.
Changes in assumptions could significantly affect the estimates.
27
MIDWEST BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(1) Summary of Significant Accounting Policies, Continued
Effect of New Financial Accounting Standards
SFAS 125, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities," was effective for the Company
for the year beginning January 1, 1997, and did not have a
material effect on the financial position and results of
operations, nor did the adoption require additional capital
resources.
SFAS 128, "Earnings Per Share," was adopted by the Company effective
December 31, 1997. This statement replaces the primary earnings
per share (EPS) disclosure with basic and diluted EPS disclosures
to simplify the calculation and improve international
comparability. The adoption of SFAS 128 did not have a material
effect on the financial position and results of operations, nor
did the adoption require additional capital resources.
SFAS 130, "Reporting Comprehensive Income," will be effective for the
Company for the year beginning January 1, 1998, and establishes
the standards for the reporting and display of comprehensive
income in the financial statements. Comprehensive income
represents net earnings and certain amounts reported directly in
stockholders' equity, such as the net unrealized gain or loss on
available-for-sale securities.
Reclassifications
Certain amounts previously reported have been reclassified to conform
with the presentation in these financial statements. These
reclassifications did not affect previously reported net income or
retained earnings.
28
MIDWEST BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(2) Debt and Equity Securities
Debtand equity securities have been classified in the consolidated
balance sheets according to management's intent. The carrying
amount of securities and their approximate fair values at December
31, 1997 and 1996, follow.
Securities available for sale:
Gross Gross Estimated
Amortized unrealized unrealized fair
Description cost gains losses values
----------- ---- ----- ------ ------
1997:
Government National Mortgage Association
(GNMA) mortgage-backed securities $ 7,641,683 442,566 - 8,084,249
Marketable equity securities 654,030 253,750 84,030 823,750
Municipal bonds:
Due from one to five years 440,000 3,850 - 443,850
Due from five to ten years 1,605,000 18,638 - 1,623,638
Due after ten years 1,021,115 19,622 - 1,040,737
U.S. agency obligations:
Due from one to five years 2,990,163 24,865 3,778 3,011,250
Due from five to ten years 2,000,000 - 10,000 1,990,000
Due after ten years 10,987,943 1,202 71,645 10,917,500
------------ ---------- --------- -----------
$ 27,339,934 764,493 169,453 27,934,974
============ ========= ========= ===========
1996:
GNMA mortgage-backed securities $ 8,644,039 351,477 - 8,995,516
Marketable equity securities 570,750 138,750 - 709,500
U.S. agency obligations:
Due from five to ten years 2,000,000 - 23,474 1,976,526
Due after ten years 12,485,705 - 383,279 12,102,426
------------ --------- --------- -----------
$ 23,700,494 490,227 406,753 23,783,968
============ ========= ========= ===========
29
MIDWEST BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(2) Debt and Equity Securities, Continued
Proceeds from the sale of mortgage-backed securities amounted to
$550,239, resulting in gains of $29,213 during the year ended
December 31, 1996. There were no sales of mortgage-backed
securities, which were held available for sale, in 1997 or 1995.
Proceeds from the sale of marketable equity securities amounted to
$798,473, $-0-, and $285,433, resulting in gains of $220,223, $-0-,
and $75,816 during the three years ended December 31, 1997,
respectively.
Securities held to maturity:
Gross Gross Estimated
Amortized unrealized unrealized fair
Description cost gains losses value
----------- --------- ---------- ---------- ---------
1997:
Mortgage-backed securities:
Federal Home Loan Mortgage
Corporation (FHLMC) $ 8,829,148 75,772 25,190 8,879,730
Federal National Mortgage
Association (FNMA) 8,115,716 175,497 - 8,291,213
Resolution Trust Corporation (RTC) 438,579 461 - 439,040
U.S. agency obligations -
Due in one year or less 2,456,235 - 10,854 2,445,381
------------ --------- -------- -----------
$19,839,678 251,730 36,044 20,055,364
=========== ========= ======== ===========
1996:
Mortgage-backed securities:
FHLMC $10,291,636 22,634 147,131 10,167,139
FNMA 8,502,102 103,710 2,910 8,602,902
RTC 561,121 1,018 - 562,139
U.S. agency obligations -
Due from one to five years 2,455,733 - 24,243 2,431,490
----------- --------- -------- -----------
$21,810,592 127,362 174,284 21,763,670
=========== ========= ======== ===========
Proceeds from the sale of residual amounts of mortgage-backed
securities with remaining principal balances of less than 15
percent of original purchase amounts totaled $780,407, resulting in
gains of $15,950 during the year ended December 31, 1996. There
were no sales of securities held to maturity during the years ended
December 31, 1997 and 1995.
At December 31, 1997 and 1996, mortgage-backed securities were
comprised of fixed rate securities of $6,673,987 and $3,959,416,
respectively; adjustable rate securities of $4,631,763 and
$5,950,700, respectively; fixed rate seven-year balloon securities
of $2,273,558 and $2,689,272, respectively; and fixed rate
five-year balloon securities of $3,804,135 and $6,755,471,
respectively.
30
MIDWEST BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(3) Loans Receivable
Loans receivable at December 31, 1997 and 1996, are summarized as
follows:
1997 1996
---- ----
Real estate loans:
One- to four-family $66,549,359 63,208,484
Commercial/multi-family 11,209,675 10,363,426
Construction 817,905 827,676
----------- -----------
Total real estate loans 78,576,939 74,399,586
Consumer and other loans 14,167,194 8,932,386
----------- -----------
92,744,133 83,331,972
----------- -----------
Less:
Loans in process 835,737 1,273,281
Unearned discounts and deferred loan fees 63,962 147,279
Allowance for losses on loans 568,000 686,000
----------- -----------
1,467,699 2,106,560
----------- -----------
$91,276,434 81,225,412
=========== ===========
The Company originates residential and commercial real estate loans and
other consumer and commercial loans, primarily in its Iowa market
area and adjacent counties in Illinois. In addition, the Company
purchases residential loans located in other states. At December
31, 1997, the geographic location of the Company's loan portfolio
was as follows: local market area, 85.9 percent; Wisconsin, 8.5
percent; California, 4.5 percent; and other states, 1.1 percent.
Although the Company has a diversified loan portfolio, a
substantial portion of its borrowers' ability to repay their loans
is dependent upon economic conditions in the Company's market area.
At December 31, 1997, the Association had outstanding commitments to
originate loans totaling $502,000, which included fixed rate
commitments of $274,250 at 7.80 percent weighted-average interest
rate and commitments to purchase loans totaling $410,000. The
Association also had unused lines of credit totaling $1,709,000 at
a variable rate indexed to the Bank Prime rate.
Loans on nonaccrual status and considered impaired amounted to $769,000
and $1,120,000 at December 31, 1997 and 1996, respectively. The
allowance for loan losses related to these nonaccrual loans were
$157,000 and $156,000, respectively. There were no nonaccrual loans
that were not subject to related allowances for loan losses at
December 31, 1997 and 1996. The average balances of nonaccrual
loans for the years ended December 31, 1997, 1996, and 1995, were
$885,000; $429,000; and $113,000, respectively. For the years ended
December 31, 1997, 1996, and 1995, interest income which would have
been recorded under the original terms of the loans was
approximately $79,000; $103,000; and $5,000, respectively, and
interest income actually recorded amounted to approximately
$25,000; $56,000; and $2,000, respectively.
31
MIDWEST BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(3) Loans Receivable, Continued
Loancustomers of the Association include certain executive officers and
directors and their related interests and associates. All loans to
this group were made in the ordinary course of business at
prevailing terms and conditions. Such loans at December 31, 1997
and 1996, amounted to $852,861 and $692,411, respectively. During
the year ended December 31, 1997, new loans totaled $235,000 and
repayments totaled $74,550.
(4) Allowance for Losses on Loans
A summary of the allowance for losses on loans for the three years
ended December 31, 1997, follows:
1997 1996 1995
---- ---- ----
Balance at beginning of year $686,000 676,000 650,000
Provision for losses on loans 48,000 47,972 48,000
Charge-offs (166,000) (37,972) (22,000)
-------- ---------- ----------
Balance at end of year $568,000 686,000 676,000
======== ========== ==========
(5) Office Property and Equipment
The cost and accumulated depreciation of office property and equipment
at December 31, 1997 and 1996, were as follows:
1997 1996
---- ----
Land $ 312,320 312,320
Office buildings 2,403,081 2,403,081
Furniture, fixtures, and equipment 1,316,437 1,041,421
Vehicles 41,905 41,905
---------- ----------
4,073,743 3,798,727
Less accumulated depreciation 1,512,994 1,351,744
---------- ----------
$2,560,749 2,446,983
========== ==========
(6) Accrued Interest Receivable
Accrued interest receivable at December 31, 1997 and 1996, is
summarized as follows:
1997 1996
---- ----
Loans receivable $ 768,460 622,247
Securities available for sale 305,645 243,601
Securities held to maturity 129,366 141,699
---------- ----------
$1,203,471 1,007,547
========== ==========
32
MIDWEST BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(7) Deposits
Deposits at December 31, 1997 and 1996, are summarized as follows:
1997 1996
---- ----
Passbook $ 8,372,800 8,608,433
Noninterest checking 649,162 398,933
Money market investments 14,281,692 13,590,014
Regular checking 7,266,643 6,738,035
Certificates of deposit 74,707,995 72,582,350
------------ ------------
$105,278,292 101,917,765
============ ============
At December 31, 1997, the scheduled maturities of certificates of
deposit were as follows:
1998 $46,371,385
1999 19,668,053
2000 7,378,013
2001 486,816
2002 and thereafter 803,728
-----------
$74,707,995
===========
Interest expense on deposits for the three years ended December 31,
1997, is summarized as follows:
1997 1996 1995
---- ---- ----
Passbook $ 234,586 244,988 272,603
Money market and checking 635,551 618,377 637,198
Certificates of deposit 4,168,899 3,863,272 3,826,353
---------- ---------- ----------
$5,039,036 4,726,637 4,736,154
========== ========== ==========
The aggregate amount certificates of deposit with a minimum denomination
of $100,000 was approximately $4,844,000 and $3,202,000 at December
31, 1997 and 1996, respectively.
At December 31, 1997, mortgage-backed securities with carrying amounts
of $2,020,144 were pledged as collateral for deposits of
approximately $1,534,000.
33
MIDWEST BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(8) Advances from FHLB
A summary at December 31, 1997 and 1996, follows:
1997 1996
---------------------------------- ---------------------------------
Weighted- Weighted-
average average
Amount rate Amount rate
------ ---- ------ ----
Advance maturity (A):
Within 1 year $ 13,000,000 5.45% $ 1,000,000 5.49%
Beyond 1 year but within 5 years 14,000,000 6.09 21,000,000 5.91
Beyond 5 years 2,000,000 5.62 2,000,000 5.62
------------- -------------
29,000,000 5.77 24,000,000 5.87
Line of credit with FHLB (B) 1,500,000 Variable - Variable
-------------- ======== -------------- ========
$ 30,500,000 $ 24,000,000
============= =============
(A) Advances from the FHLB are secured by stock in the FHLB. In
addition, the Bank has agreed to maintain unencumbered
additional security in the form of certain residential
mortgage loans aggregating no less than 150 percent of
outstanding advances.
(B) Line of credit with the FHLB with a limit of $3,000,000
maturing in March of 1998. The Bank intends to renew the
agreement at that time. The line has an interest rate which
fluctuates daily. During 1997, the interest rate ranged from
5.07 percent to 6.90 percent and at December 31, 1997, was
6.25 percent. The line is collateralized as described in (A)
above.
(9) Taxes on Income
Effective in 1996, the Association is no longer allowed the special bad
debt deduction based on 8 percent of taxable income. The
Association may, alternatively, utilize an experience method which
is based on actual net charge-offs, similar to the method allowed
for small commercial banking entities.
Taxes on income for the three years ended December 31, 1997, were
comprised as follows:
1997 1996
----------------------------------------------- --------------------------------------------
Federal State Total Federal State Total
Current $ 524,000 69,000 593,000 306,347 43,307 349,654
Deferred 83,000 13,000 96,000 22,000 2,000 24,000
---------- -------- --------- ---------- -------- ---------
$ 607,000 82,000 689,000 328,347 45,307 373,654
========== ======== ========= ========== ======== =========
1995
------------------------------------------------
Federal State Total
Current $ 585,018 88,434 673,452
Deferred 6,000 1,000 7,000
---------- --------- ---------
$ 591,018 89,434 680,452
========== ========= =========
34
MIDWEST BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(9) Taxes on Income, Continued
Taxes on income differ from the amounts computed by applying the federal
income tax rate of 34 percent to earnings before taxes on income for
the following reasons:
1997 1996 1995
---- ---- ----
Computed "expected" tax expense $ 664,331 341,126 690,300
State income tax 54,120 29,903 59,026
Bad debt deduction -- -- (55,919)
Tax-exempt investment income (11,418) -- --
Other (18,033) 2,625 (12,955)
--------- --------- ---------
$ 689,000 373,654 680,452
========= ========= =========
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities as
of December 31, 1997 and 1996, are presented below:
1997 1996
---- ----
Deferred tax assets:
Allowance for loan losses for
financial reporting purposes $ 180,000 256,000
Accrued expenses not deducted 72,000 73,000
--------- ---------
Total gross deferred tax assets 252,000 329,000
--------- ---------
Deferred tax liabilities:
Unrealized gains on securities available for sale 222,000 31,000
Office property and equipment 167,000 148,000
FHLB stock 101,000 101,000
--------- ---------
Total gross deferred tax liabilities 490,000 280,000
--------- ---------
Net deferred tax (liability) asset $(238,000) 49,000
========= =========
There was no valuation allowance for deferred tax assets during the
three years ended December 31, 1997.
35
MIDWEST BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(10) Employee Benefit Plans
Pension Plan
The Company is a participant in the Financial Institutions Retirement
Fund (FIRF), and substantially all of its officers and employees
are covered by the plan. FIRF does not segregate the assets,
liabilities, or costs by participating employer. According to
FIRF's administrators, as of June 30, 1997, the date of the latest
actuarial valuation, the book and market values of the fund assets
exceeded the value of vested benefits in the aggregate. In
accordance with FIRF's instructions, there were no pension
contributions in 1997, 1996, and 1995, because the plan was fully
funded.
ESOP
All employees meeting the age and service requirements are eligible to
participate in an ESOP established in September 1992. Contributions
made by the Association to the ESOP are allocated to participants
by a formula based on compensation. Participant benefits become 100
percent vested after five years of service. At December 31, 1997,
1996, and 1995, 18,000; 18,000; and 15,000 shares (all shares
amounts have been restated for the 1997 stock split discussed in
note 11), respectively, were committed to be released and 18,000;
36,000; and 51,000 shares were unallocated. The fair value on
unearned shares at December 31, 1997, 1996, and 1995, was
approximately $324,000; $325,500; and $468,000, respectively. ESOP
expense was $56,482; $53,938; and $39,058 for the years ended
December 31, 1997, 1996, and 1995, respectively.
Stock Options
The Company's stock option plan (the Plan) permits the board of
directors to grant options to purchase up to 136,500 shares of the
Company's $.01 par value common stock. The options may be granted
to directors and officers of the Company. The price at which
options may be exercised cannot be less than the fair market value
of the shares at the date the options are granted. The options are
subject to certain vesting requirements and maximum exercise
periods, as established by the board of directors.
The Company applies APB Opinion 25 in accounting for the Plan, and,
accordingly, no compensation expense has been recognized for its
stock options in the consolidated financial statements. Under SFAS
123, the Company determined compensation cost based on the fair
value of options granted in 1997 using the Black-Scholes method,
using a risk-free interest rate of approximately 6.64 percent, an
expected life of 6 years, and historical dividend rates. The pro
forma effect of the compensation cost on 1997 earnings per share
was approximately one cent.
36
MIDWEST BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(10) Employee Benefit Plans, Continued
Stock Options, Continued
Changes in options outstanding and exercisable during 1997, 1996, and
1995 (as restated for the 1997 stock split discussed in note 11)
were as follows:
Exercisable Outstanding Option price
options options per share
December 31, 1994 61,425 102,375 $ 3.33
Vested 13,650 - 3.33
-------- --------
December 31, 1995 75,075 102,375 3.33
Vested 13,650 - 3.33
-------- --------
December 31, 1996 88,725 102,375 3.33
Granted - 13,650 9.08
Vested 18,204 - 3.33 - 9.08
Exercised (10,205) (10,205) 3.33
-------- --------
December 31, 1997 96,724 105,820 3.33 - 9.08
======== ========
Recognition and Retention Plan
The Association has a recognition and retention plan (RRP) for certain
executive officers. The Association contributed funds to the RRP,
which acquired approximately 3 percent of shares of the common
stock of the Parent Company. The employees became fully vested in
the shares of stock during 1997. RRP expense for the years ended
December 31, 1996 and 1995 was $9,725 and $16,995, respectively;
there was no RRP expense for the year ended December 31, 1997.
37
MIDWEST BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(11) Stockholders' Equity
Stock Conversion
At the time of the conversion from a mutual to a stock savings and
loan association, the Association established a liquidation account
in an amount equal to the regulatory capital as of December 31,
1991, to grant priority to eligible account holders in the event of
future liquidation. In the event of such liquidation, eligible
account holders who continue to maintain their deposit accounts
shall be entitled to receive a distribution from the liquidation
account. The total amount of the liquidation account will be
decreased as the balance of eligible account holders is reduced
subsequent to the conversion, based on an annual determination of
such balances.
Stock Split Effected in the Form of a Dividend
In October 1997, the Company declared a 3-for-1 stock split effected
in the form of a 200 percent stock dividend. The dividend was paid
out of treasury shares and authorized but unissued shares,
resulting in the issuance of 562,933 new shares and reissuance of
115,689 treasury shares on November 18, 1997 to stockholders of
record on November 4, 1997. As of December 31, 1997, there were
1,020,762 shares issued and outstanding.
Regulatory Capital Requirements
The Financial Institution Reform, Recovery, and Enforcement Act of 1989
(FIRREA), and the capital regulations of the OTS promulgated
thereunder, require institutions to have a minimum regulatory
tangible capital equal to 1.5 percent of total assets; a minimum 3
percent core capital ratio; and, after December 31, 1992, a minimum
8 percent risk-based capital ratio. These capital standards set
forth in the capital regulations must generally be no less
stringent than the capital standards applicable to national banks.
FIRREA also specifies the required ratio of housing-related assets
in order to qualify as a savings institution. The Association met
the regulatory capital requirements at December 31, 1997 and 1996.
The Federal Deposit Insurance Corporation Improvement Act of 1991
(FIDICIA) established additional capital requirements which require
regulatory action against depository institutions in one of the
undercapitalized categories defined in implementing regulations.
Institutions, such as the Association, which are defined as well
capitalized, must generally have a leverage capital (core) ratio of
at least 5 percent, a tier 1 risk-based capital ratio of at least 6
percent, and a total risk-based capital ratio of at least 10
percent. FIDICIA also provides for increased supervision by federal
regulatory agencies, increased reporting requirements for insured
depository institutions, and other changes in the legal and
regulatory environment for such institutions. The Association met
the regulatory capital requirements at December
31, 1997 and 1996.
38
MIDWEST BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(11) Stockholders' Equity, Continued
Regulatory Capital Requirements, Continued
The Association's actual and required capital amounts and ratios as of
December 31, 1997, were as follows:
For capital To be well capitalized
adequacy under prompt corrective
Actual purposes action provisions
--------------------- --------------------- -----------------------
Amount Percent Amount Percent Amount Percent
Tangible capital $9,414,000 6.42% $2,199,000 1.50% n/a n/a
Tier I leverage (core) capital 9,414,000 6.42 4,399,000 3.00 $7,332,000 5.00%
Risk-based capital 9,982,000 14.82 5,389,000 8.00 6,736,000 10.00
Tier I risk-based capital 9,414,000 13.97 n/a n/a 4,042,000 6.00
========== ===== ========== ==== ========== =====
At December 31, 1997 and 1996, the Association had federal income tax
bad debt reserves of approximately $2,819,000 and $2,781,000,
respectively, which constitute allocations to bad debt reserves for
federal income tax purposes for which no provision for taxes on
income had been made. If such allocations are charged for other
than bad debt losses, taxable income is created to the extent of
the charges. The Association's retained earnings at December 31,
1997 and 1996, were substantially restricted because of the effect
of these tax bad debt reserves.
Dividend Restrictions
Federal regulations impose certain limitations on the payment of
dividends and other capital distributions by the Association. Under
the regulations, a savings institution, such as the Association,
that will meet the fully phased-in capital requirements (as defined
by the OTS regulations) subsequent to a capital distribution is
generally permitted to make such capital distribution without OTS
approval, subject to certain limitations and restrictions as
described in the regulations. A savings institution with total
capital in excess of current minimum capital requirements but not
in excess of the fully phased-in requirements is permitted by the
regulations to make, without OTS approval, capital distributions of
between 25 and 75 percent of its net earnings for the previous four
quarters less dividends already paid for such period. A savings
institution that fails to meet current minimum capital requirements
is prohibited from making any capital distributions without prior
approval from the OTS.
(12) Federal Deposit Insurance Corporation (FDIC) Special Assessment
On September 30, 1996, the United States Congress passed, and the
President signed, legislation that imposed a one-time assessment of
65.7 basis points on deposits insured by the Savings Association
Insurance Fund (SAIF). Substantially all of the deposits of the
Association are SAIF-insured. The Association incurred a one-time
pre-tax expense of $670,861 that is recorded in the Association's
statement of operations for the year ended December 31, 1996.
39
MIDWEST BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(13) Fair Value of Financial Instruments
The estimated fair values of the Company's financial instruments at
December 31, 1997 and 1996, were as follows:
1997 1996
------------------------------ -----------------------------
Carrying Fair Carrying Fair
amount value amount value
-------- ------ -------- -------
Financial assets:
Cash and cash equivalents $ 2,523,983 2,523,983 3,998,163 3,998,163
Securities available for sale 27,934,974 27,934,974 23,783,968 23,783,968
Securities held to maturity 19,839,678 20,055,364 21,810,592 21,763,670
Loans receivable 91,276,434 92,552,734 81,225,412 81,869,104
FHLB stock 1,959,700 1,959,700 1,959,700 1,959,700
Accrued interest receivable 1,203,471 1,203,471 1,007,547 1,007,547
Financial liabilities:
Deposits 105,278,292 105,472,882 101,917,765 101,825,024
Advances from FHLB 30,500,000 30,376,708 24,000,000 23,716,947
Accrued interest payable 80,175 80,175 73,743 73,743
============ ============ ============ ============
Notional Unrealized Notional Unrealized
amount gain (loss) amount gain (loss)
-------- ---------- -------- ----------
Off balance sheet liabilities:
Commitments to extend credit $ 2,211,000 -- 543,050 --
Commitments to purchase loans 410,000 -- 767,000 --
Commitments to
purchase investments 1,110,000 -- -- --
============ ============ ============ ============
40
MIDWEST BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(14) Midwest Bancshares, Inc. (Parent Company Only) Financial Information
Condensed Balance Sheets
December 31, 1997 and 1996
1997 1996
---- ----
Cash and cash equivalents $ 236,836 204,431
Securities available for sale 823,750 709,500
Loans receivable and related accrued interest 60,965 121,881
Investment in subsidiary 9,680,915 8,667,843
------------ ------------
Total assets $ 10,802,466 9,703,655
============ ============
Dividends payable $ 61,246 52,407
Income taxes payable (deferred and current) 65,759 51,000
Stockholders' equity:
Common stock 10,208 4,550
Additional paid-in capital 1,530,430 4,037,058
Retained earnings 8,821,782 7,836,808
Treasury stock -- (2,210,642)
ESOP (60,000) (120,000)
Unrealized gain on securities available for sale, net 373,041 52,474
------------ ------------
Total stockholders' equity 10,675,461 9,600,248
------------ ------------
Total liabilities and stockholders' equity $ 10,802,466 9,703,655
============ ============
Condensed Statement of Operations
Years ended December 31, 1997, 1996, and 1995
1997 1996 1995
---- ---- ----
Gain on sale of marketable equity securities $ 220,223 -- 75,816
Interest income 11,609 16,366 24,082
Noninterest income 15,950 7,925 550
Income - equity in undistributed earnings of subsidiary 1,151,475 657,200 1,337,988
Noninterest expenses (76,375) (70,469) (84,908)
----------- ----------- -----------
Net earnings before income
tax expense (benefit) 1,322,882 611,022 1,353,528
Income tax expense (benefit) 57,968 (18,636) 3,685
----------- ----------- -----------
Net earnings $ 1,264,914 629,658 1,349,843
=========== =========== ===========
41
MIDWEST BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(14) Midwest Bancshares, Inc. (Parent Company Only) Financial Information,
Continued
Condensed Statements of Cash Flows
Years ended December 31, 1997, 1996, and 1995
1997 1996 1995
---- ---- ----
Operating activities:
Net earnings $ 1,264,914 629,658 1,349,843
Equity in undistributed earnings of subsidiary (1,151,475) (657,200) (1,337,988)
Gain on sale of investments (220,223) -- (75,816)
Other, net 28,675 (1,863) (1,730)
----------- ----------- -----------
Net cash used in operating activities (78,109) (29,405) (65,691)
----------- ----------- -----------
Investing activities:
Proceeds from sale of securities 798,473 -- 285,433
Purchase of securities available for sale (661,530) (570,750) --
Decrease in loans receivable 60,000 60,000 50,000
----------- ----------- -----------
Net cash provided by
(used in) investing activities 196,943 (510,750) 335,433
----------- ----------- -----------
Financing activities:
Dividends from subsidiary 500,000 1,200,000 1,050,000
Treasury stock acquired (393,659) (511,109) (893,045)
Stock options exercised 24,015 -- --
Dividends paid (216,785) (191,453) (185,520)
----------- ----------- -----------
Net cash (used in) provided by
financing activities (86,429) 497,438 (28,565)
----------- ----------- -----------
Net increase (decrease) in cash
and cash equivalents 32,405 (42,717) 241,177
Cash and cash equivalents at beginning of year 204,431 247,148 5,971
----------- ----------- -----------
Cash and cash equivalents at end of year $ 236,836 204,431 247,148
=========== =========== ===========
(15) Contingencies
The Company is involved with various claims and legal actions arising
in the ordinary course of business. In the opinion of management,
the ultimate disposition of these matters will not have a material
adverse effect on the Company's consolidated financial statements.
(16) Sale of Deposits
On December 15, 1995, the Association sold the deposits of its Keokuk
branch to a local bank. The sale resulted in the Association paying
$7,279,871 to the bank and recognizing a gain of $493,345.
42
MIDWEST BANCSHARES, INC.
STOCKHOLDER INFORMATION
ANNUAL MEETING
The Annual Meeting of Stockholders will be held at 1:00 p.m., on April 27,
1998, at the main offices of the Company located at 3225 Division Street,
Burlington, Iowa.
MARKET INFORMATION
The Company's stock is traded on the Nasdaq Small Cap Market tier of
the Nasdaq Stock Market under the symbol "MWBI." As of December 31, 1997, the
Company had approximately 310 stockholders of record and 1,020,762 outstanding
shares of common stock.
The table below shows the range of high and low bid prices for the
common stock as well as information regarding the Company's payment of
dividends with all such prices and dividends adjusted to reflect the
three-for-one stock split effective November 18, 1997. The bid prices do not
necessarily represent actual transactions and do not include retail markups,
markdowns or commissions. Beginning with the first quarter of 1993, the
Company has paid quarterly cash dividends to stockholders and intends to
continue paying quarterly dividends, dependent on the future earnings and
financial condition of the Company as well as other relevant factors. The
Company's ability to pay dividends is dependent on the dividend payments it
receives from its subsidiary, Midwest Federal Savings and Loan Association of
Eastern Iowa, which are subject to regulation and the Association's continued
compliance with all regulatory capital requirements. The Company is also
subject to the requirements of Delaware law, which generally limits dividends
to an amount in excess of a corporation's net assets over paid-in capital, or,
if there is no such excess, to its net profits for the current and immediately
preceding fiscal year.
Bid
------------------------- Dividends Per
Quarter Ended High Low Share Declared
------------- -------- ------- --------------
3/31/96 $8.66 $8.58 $ 0.043
6/30/96 8.66 8.58 0.043
9/30/96 8.33 8.25 0.050
12/31/96 8.83 8.50 0.050
3/31/97 10.00 8.75 0.050
6/30/97 10.67 9.33 0.050
9/30/97 13.58 10.42 0.060
12/31/97 18.37 13.50 0.060
TRANSFER AGENT STOCKHOLDER AND GENERAL INQUIRIES
First Bankers Trust Company William D. Hassel Robert D. Maschmann
1201 Broadway Midwest Bancshares, Inc. Midwest Bancshares, Inc.
Quincy, Illinois 62301 3225 Division Street 3225 Division Street
(217) 228-8000 Burlington, Iowa 52601 Burlington, Iowa 52601
(319) 754-6526 (319) 754-6526
ANNUAL AND OTHER REPORTS
The Company is required to file an annual report on Form 10-KSB for its fiscal
year ended December 31, 1997, with the Securities and Exchange Commission.
Copies of the Form 10-KSB annual report and the Company's quarterly reports
may be obtained without charge by contacting:
Thomas A. Jacobs
Midwest Bancshares, Inc.
3225 Division Street
Burlington, Iowa 52601
(319) 754-6526
43
MIDWEST BANCSHARES, INC.
CORPORATE INFORMATION
CORPORATE OFFICE
3225 Division Street WEB SITE ADDRESS
Burlington, Iowa 52601 http:\\www.mwbi.com
(319) 754-6526 E-MAIL ADDRESS
midwest1@interl.net
BOARD OF DIRECTORS
Midwest Bancshares, Inc. and
Midwest Federal Savings and Loan Association of Eastern Iowa
Henry L. Hirsch Edward C. Whitham, Jr.
Chairman of the Board, Midwest Federal Owner, Financial Management Accounting
Savings and Loan Association of Eastern
Iowa and of counsel to Hirsch, Adams, James E. Witte
Krekel, Putnam, Cahill & Miller Supervisor, Komick Construction
William D. Hassel Robert D. Maschmann
President and Chief Executive Officer, Executive Vice President, Treasurer and
Midwest Federal Savings and Loan Chief Financial Officer, Midwest Federal
Association of Eastern Iowa Savings and Loan Association of Eastern
Iowa
James R. Walker
Shareholder, Walker & Egerton, P.C., Yuh-Fen (Boni) Lin
Accountants Clinical Dietician, Burlington
Medical Center
MIDWEST BANCSHARES, INC. OFFICERS
Henry L. Hirsch Robert D. Maschmann
Chairman of the Board Executive Vice President, Treasurer
and Chief Financial Officer
William D. Hassel
President and Chief Executive Officer Thomas A. Jacobs
Vice President and Corporate
Secretary
INDEPENDENT AUDITORS CORPORATE COUNSEL SPECIAL COUNSEL
KPMG Peat Marwick LLP Hirsch, Adams, Krekel, Silver, Freedman & Taff, L.L.P.
2500 Ruan Center Putnam, Cahill & Miller 1100 New York Avenue, N.W.
Des Moines, Iowa 50309 101 Jefferson Street Washington, D.C. 20005
2nd Floor
Burlington, Iowa 52601
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-21
<SEQUENCE>3
<DESCRIPTION>EXHIBIT 21
<TEXT>
Exhibit 21
Subsidiaries of Registrant
SUBSIDIARIES OF THE REGISTRANT
State of
Percentage Incorporation
of or
Parent Subsidiary Ownership Organization
- ------------------- ----------------- ---------- -------------
Midwest Bancshares, Midwest Federal 100% Federal
Inc. Savings and Loan
Association of
Eastern Iowa
Midwest Federal Midwest Financial 100% Iowa
Savings and Loan Products, Inc.
Association of
Eastern Iowa
The financial statements of Midwest Bancshares, Inc. are consolidated
with those of its subsidiaries.
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-23
<SEQUENCE>4
<DESCRIPTION>EXHIBIT 23
<TEXT>
Exhibit 23
Consent of KPMG Peat Marwick LLP
The Board of Directors
Mudwest Bancshares, Inc.:
We consented to incorporation by reference in the Registration Statement on
Form S-8 of Midwest Bancshares, Inc, of our report dated January 9, 1998,
relating to the consolidated balance sheets of Midwest Bancshares, Inc. and
subsidiaries as of December 31, 1997 and 1996, and the related consolidated
statements of income. changes in shareholders' equity, and cash flows for each
of the years in the three-year period ended December 31, 1997, which report
appears in the December 31, 1997, annual report on Form 10-K of Midwest
Bancshare, Inc.
KPMG Peat Marwick LLP
Des Moines, Iowa
March 11, 1998