UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
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FORM 10-QSB
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________________ to ____________________
Commission File Number 0-20620
MIDWEST BANCSHARES, INC.
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(Exact name of small business issuer as specified in its charter)
Delaware 42-1390587
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
3225 Division Street, Burlington, Iowa 52601
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (319) 754-6526
-----------------------------
Indicate by check mark whether the issuer (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
issuer was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Transitional Small Business Format: Yes / / No /X/
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Common Stock 1,077,738
------------------------ ---------------------------
Class Shares Outstanding
as of October 29, 1998
MIDWEST BANCSHARES, INC. and SUBSIDIARIES
INDEX
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Page
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Part I. Financial Information
Item 1. Financial Statements
Consolidated balance sheets September 30, 1998 and December 31, 1997 1
Consolidated statements of operations, for the three and nine
months ended September 30, 1998 and 1997 2
Consolidated statements of comprehensive income, for the three and nine
months ended September 30, 1998 and 1997 3
Consolidated statements of cash flows, for the nine
months ended September 30, 1998 and 1997 4
Notes to consolidated financial statements 5
Item 2. Management's discussion and analysis of financial condition
and results of operations 6 through 10
Part II. Other Information 11
Signatures 12
Exhibit 27 Financial Data Schedule
MIDWEST BANCSHARES, INC. and SUBSIDIARIES
Consolidated Balance Sheets
(Unaudited)
(Dollars in thousands, except per share data)
September 30, 1998 December 31, 1997
------------------ -----------------
Assets
Cash and cash equivalents $ 1,762 $ 2,524
Securities available for sale 35,399 27,935
Securities held to maturity (estimated
fair value of $21,820 and $20,055) 21,451 19,840
Loans receivable, net 94,931 91,276
Real estate acquired through foreclosure 661 314
Federal Home Loan Bank stock, at cost 2,200 1,960
Office property and equipment, net 2,490 2,561
Accrued interest receivable 1,481 1,203
Other assets 208 111
--------- -------
Total assets $ 160,583 $ 147,724
========= =========
Liabilities
Deposits $ 104,712 $ 105,278
Advances from Federal Home Loan Bank 43,000 30,500
Advances from borrowers for taxes and insurance 220 388
Accrued interest payable 101 80
Accrued expenses and other liabilities 730 803
--------- ---------
Total liabilities 148,763 137,049
--------- ---------
Stockholders' equity
Serial preferred stock, $.01 par value;
authorized 500,000 shares; none issued -- --
Common stock, $.01 par value; 2,000,000 shares authorized;
1,071,453 shares issued and outstanding in 1998 and
1,020,762 shares issued and outstanding in 1997 11 10
Additional paid-in capital 1,751 1,530
Retained earnings, substantially restricted 9,618 8,822
Employee stock ownership plan -- (60)
Accumulated other comprehensive income -
unrealized appreciation on securities available for sale 440 373
--------- ---------
Total stockholders' equity 11,820 10,675
--------- ---------
Total liabilities and stockholders' equity $ 160,583 $ 147,724
========= =========
See accompanying notes to consolidated financial statements.
Page 1
MIDWEST BANCSHARES, INC. and SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)
(In thousands, except per share data)
Three Months Nine Months
Ended September 30, Ended September 30,
1998 1997 1998 1997
------------ ----------- ----------- ------------
Interest income:
Loans receivable $ 1,910 $ 1,817 $ 5,650 $ 5,218
Securities available for sale 592 461 1,836 1,522
Securities held to maturity 280 412 859 1,058
Deposits in other financial institutions 30 15 71 59
Other interest-earning assets 37 35 105 103
------- ------- ------- -------
Total interest income 2,849 2,740 8,521 7,960
------- ------- ------- -------
Interest expense:
Deposits 1,238 1,287 3,701 3,767
Advances from FHLB and other borrowings 581 437 1,698 1,188
------- ------- ------- -------
Total interest expense 1,819 1,724 5,399 4,955
------- ------- ------- -------
Net interest income 1,030 1,016 3,122 3,005
Provision for losses on loans 12 12 36 36
------- ------- ------- -------
Net interest income after provision for losses on loans 1,018 1,004 3,086 2,969
------- ------- ------- -------
Non-interest income:
Fees and service charges 98 71 269 205
Gain on sale of securities available for sale 17 181 114 181
Other 20 11 160 42
------- ------- ------- -------
Total non-interest income 135 263 543 428
------- ------- ------- -------
Non-interest expense:
Compensation and benefits 340 313 1,044 940
Office property and equipment 110 95 317 284
Deposit insurance premiums 17 17 50 37
Data processing 44 43 128 122
Other 189 147 584 512
------- ------- ------- -------
Total non-interest expense 700 615 2,123 1,895
------- ------- ------- -------
Earnings before taxes on income 453 652 1,506 1,502
Taxes on income 123 235 456 548
------- ------- ------- -------
Net earnings $ 330 $ 417 $ 1,050 $ 954
======= ======= ======= =======
Earnings per share - basic $ 0.31 $ 0.41 $ 1.01 $ 0.92
======= ======= ======= =======
Earnings per share - diluted $ 0.30 $ 0.38 $ 0.95 $ 0.86
======= ======= ======= =======
See accompanying notes to consolidated financial statements.
Page 2
MIDWEST BANCSHARES, INC. and SUBSIDIARIES
Consolidated Statements of Comprehensive Income
(Unaudited)
(In thousands)
Three Months Nine Months
Ended September 30, Ended September 30,
1998 1997 1998 1997
--------------- -------------- ------------- -------------
Net earnings $ 330 $ 417 $ 1,050 $ 954
Other comprehensive income:
Unrealized gains on securities available for sale:
Unrealized holding gains arising during the
period, net of taxes on income of $37 and
$80 in 1998 and $188 and $258 in 1997 67 314 139 435
Less: reclassification adjustment for gains
included in net earnings, net of taxes on
income of $6 and $42 in 1998 and $68 for
both periods in 1997 11 113 72 113
----- ------ ------- ------
Other comprehensive income, net of tax $ 56 $ 201 $ 67 $ 322
----- ------ ------- ------
Comprehensive income $ 386 $ 618 $ 1,117 $1,276
===== ====== ======= ======
See accompanying notes to consolidated financial satements.
Page 3
MIDWEST BANCSHARES, INC. and SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
Nine months ended
September 30,
1998 1997
------------------ -------------------
Cash flows from operating activities:
Net earnings $ 1,050 $ 954
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Provision for losses on loans 36 36
Gain on sale of securities available for sale (114) (181)
Depreciation 138 120
ESOP expense 45 41
Amortization of loan fees, premiums and discounts (25) (3)
Increase in accrued interest receivable (278) (256)
Increase in other assets (82) (36)
Increase in accrued interest payable 21 50
(Decrease) increase in accrued expenses and other liabilities (146) 198
------- -------
Net cash provided by operating activities 645 923
------- -------
Cash flows from investing activities:
Purchase of securities available for sale (28,368) (6,281)
Purchase of FHLB stock (240) --
Proceeds from maturities of securities 14,000 --
Proceeds from sales of securities available for sale 7,469 502
Loans purchased (426) (6,955)
Purchase of mortgage-backed securities held to maturity (10,018) (3,484)
Repayment of principal on mortgage-backed securities 8,089 4,599
Increase in loans receivable (3,735) (3,253)
Proceeds from sale of real estate owned, net 121 37
Purchase of office property and equipment (67) (71)
------- -------
Net cash used in investing activities (13,175) (14,906)
------- -------
Cash flows from financing activities:
(Decrease) increase in deposits (567) 3,908
Proceeds from advances from FHLB 14,000 8,500
Repayment of advances from FHLB (1,500) --
Treasury stock acquired -- (393)
Exercise of stock options 221 23
Payment of cash dividends (218) (156)
Net decrease in advances from borrowers for taxes and insurance (168) (164)
------- -------
Net cash provided by financing activities 11,768 11,718
------- -------
Net increase (decrease) in cash and cash equivalents (762) (2,265)
Cash and cash equivalents at beginning of year 2,524 3,998
------- -------
Cash and cash equivalents at end of period $ 1,762 $ 1,733
======= =======
Supplemental disclosures:
Cash paid during the nine months for:
Interest $ 5,378 $ 4,905
Taxes on income 303 340
Transfers from loans to real estate owned 468 497
======= =======
See accompanying notes to consolidated financial statements.
Page 4
MIDWEST BANCSHARES, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 1. Significant Accounting Policies
The consolidated financial statements for the three months and nine
months ended September 30, 1998, and 1997 have not been audited and do
not include information or footnotes necessary for a complete
presentation of financial condition, results of operations and cash
flows in conformity with generally accepted accounting principles.
However, in the opinion of management, the accompanying consolidated
financial statements contain all adjustments, which are of a normal
recurring nature, necessary for a fair presentation. The results of
operations for the interim periods are not necessarily indicative of
the results which may be expected for an entire year. The accounting
policies followed by the Company are set forth in Note 1 to the
Company's consolidated financial statements contained in the 1997
Annual Report to Stockholders and are incorporated herein by reference.
Note 2. Stock Split Effected in the Form of a 200% Stock Dividend
On October 20, 1997, the Company declared a 3-for-1 stock split in the
form of a 200% dividend paid on November 18, 1997, to shareholders of
record on November 4, 1997. Under the terms of this dividend,
shareholders received two shares for every one share held on the record
date. The dividend was paid out of treasury shares and authorized but
unissued shares of common stock of the Company. The par value of the
Company's stock was not affected and remains at $0.01 per share. All
per share amounts previously reported have been restated to reflect the
stock split.
Note 3. Computation of Per Share Earnings
Basic earnings per share amounts are computed by dividing net earnings
by the weighted average number of common shares outstanding during the
period. Diluted earnings per share amounts are computed by dividing net
earnings by the weighted average number of shares and all dilutive
potential shares outstanding during the period. As discussed in note 2
above, 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 three months and nine months ended
September 30, 1998 and 1997.
Three Months Nine Months
------------- -----------------
1998 1997 1998 1997
----- ---- ---- ----
Basic EPS Computation:
Numerator - Net earnings $ 330,350 $ 417,722 $1,049,921 $ 954,488
Denominator - Weighted
average shares outstanding 1,053,249 1,018,014 1,038,935 1,036,935
--------- --------- ---------- ---------
Basic EPS $ 0.31 $ 0.41 $ 1.01 $ 0.92
========= ========= ========== =========
Diluted EPS Computation:
Numerator - Net earnings $ 330,350 $ 417,722 $1,049,921 $ 954,488
--------- --------- ---------- ---------
Denominator - Weighted
average shares outstanding 1,053,249 1,018,014 1,038,935 1,036,935
Stock options 47,707 72,258 62,750 66,522
--------- --------- ---------- ---------
1,100,956 1,090,272 1,101,685 1,103,457
--------- --------- ---------- ---------
Diluted EPS $ 0.30 $ 0.38 $ 0.95 $ 0.86
========= ========= ========== =========
Page 5
MIDWEST BANCSHARES, INC. and SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-looking Statements
When used in this Form 10-QSB, the words or phrases "will likely
result", "are expected to", "will continue", "is anticipated", "estimate",
"project", or similar expressions are intended to identify "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Such statements are subject to certain risks and uncertainties
including changes in economic conditions in the Company's market area, changes
in policies by regulatory agencies, fluctuations in interest rates, demand for
loans in the Company's market area and competition, that could cause actual
results to differ materially from historical earnings and those presently
anticipated or projected. The Company wishes to caution readers not to place
undue reliance on any such forward-looking statements, which speak only as to
the date made. The Company wishes to advise readers that the factors listed
above could affect the Company's financial performance and could cause the
Company's actual results for future periods to differ materially from any
opinions or statements expressed with respect to future periods in any current
statements. The Company does not undertake, and specifically disclaims any
obligation, to publicly release the result of any revisions which may be made to
any forward-looking statements to reflect events or circumstances after the date
of such statements or to reflect the occurrence of anticipated or unanticipated
events.
Year 2000 Compliance
The Company has conducted a comprehensive review of its computer
systems to identify the systems that could be affected by the "Year 2000"
problem. The Year 2000 problem is the result of computer programs using two
digits rather than four to define the year. Any of the Company's programs that
are time sensitive may recognize a date using "00" as the year 1900 rather than
the year 2000. This could result in a major system failure or miscalculations.
Management anticipates that the enhancements necessary to prepare its mission
critical systems for the year 2000 will be completed in early 1999.
The Company is also aware of the risks to third parties, including
vendors (and to the extent appropriate, depositors and borrowers) and the
potential adverse impact on the Company resulting from failures by these parties
to adequately address the Year 2000 problem. The Company has been communicating
with its outside data processing service bureau, as well as other third party
service providers, to assess their progress in evaluating and implementing any
corrective measures required by them to be prepared for the year 2000. To date,
the Company has not been advised by any of its primary vendors that they do not
have plans in place to address and correct the Year 2000 problem; however, no
assurance can be given as to the adequacy of such plans or to the timeliness of
their implementation.
The Company anticipates that it will incur internal staff costs as well
as consulting and other expenses related to the enhancements necessary to
prepare its systems for the year 2000. Based on the Company's current knowledge,
the expense of the year 2000 project as well as the related potential effect on
the Company's earnings is not expected to have a material effect on the
Company's financial position or results of operations. The Company estimates
that it has spent approximately $15,000 through September 30, 1998 on the
awareness, assessment, renovation, and validation phases of its year 2000
effort. The Company anticipates that it will be well into the validation
(testing) phase with its outside data processing service bureau in the fourth
quarter of 1998 and will complete testing by the second quarter of 1999.
The worst-case year 2000 scenario for the Company is that major
suppliers of electricity, communication links, and data processing services may
fail in spite of their best efforts to remediate their systems and in spite of
our best effort to test their systems. The major risk as a result of these
possibilities would be the loss of customer confidence. The Company has
developed a business resumption contingency plan to address these possibilities
and minimize the loss of confidence.
Page 6
MIDWEST BANCSHARES, INC. and SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Midwest Bancshares, Inc. (the "Company") had net earnings of
$330,000, or $0.30 per share, diluted, and $1,050,000, or $0.95 per share,
respectively, for the three months and nine months ended September 30, 1998,
compared to net earnings of $417,000, or $0.38 per share, and $954,000, or $0.86
per share, for the same periods in 1997. The increase in net earnings for the
nine month period was primarily a result of an increase in net interest income,
an increase in fees and service charges, and an increase in other non-interest
income as a result of recognizing a previously-deferred gain of $135,000
(pre-tax) on the sale of the Association's mortgage-banking subsidiary,
partially offset by an increase in non-interest expense. The decrease in net
earnings for the three month period was primarily due to a decrease in gains on
sales of securities. More detailed comparisons are discussed below.
Net Interest Income
Net interest income increased $14,000 and $117,000, for the three months
and nine months ended September 30, l998, respectively, over the comparable
periods in 1997. The increases in net interest income on a tax-equivalent basis
were approximately $84,000 and $255,000 due to the fact that the 1998 periods
included interest income on tax-exempt municipal bonds, whereas the 1997 periods
had a very minimal amount. (See also the discussion of "Taxes on Income" on page
8). The Company's net interest rate spread was 2.61% for both the three months
and nine months ended September 30, 1998, compared to 2.59% and 2.62% for the
comparable periods in 1997. The Company's net interest margin on
interest-earning assets was 2.87% and 2.86%, respectively, for the three months
and nine months ended September 30, 1998, compared to 2.85% and 2.89% for the
comparable periods in 1997. The net interest rate spread and net interest margin
ratios have been calculated on a tax-equivalent basis.
Interest income increased by $109,000 and $561,000 for the three months
and nine months ended September 30, 1998, respectively, over the comparable
periods in 1997, or $179,000 and $699,000 on a tax-equivalent basis. Average
interest-earning assets increased by approximately $10.9 million and $13.2
million for the three months and nine months ended September 30, 1998,
respectively, compared to the same periods in 1997. The increases in average
interest-earning assets primarily consisted of increases in loans and securities
and were the result of a planned growth strategy in an effort to increase net
interest income. The average yield on interest-earning assets, on a
tax-equivalent basis, was 7.61% and 7.62% for the three months and nine months
ended September 30, 1998, respectively, compared to 7.69% and 7.68% for the same
periods in 1997. The Company recorded $221,000 and $453,000, on a tax-equivalent
basis, of interest income on tax-exempt municipal bonds for the three months and
nine months ended September 30, 1998, respectively, with average balances of
$11.9 million and $8.5 million, respectively, in 1998 compared to $18,000 of
interest income and an average balance of $0.4 million for each of the three and
nine months ended September 30, 1997.
Interest expense increased by $95,000 and $444,000 for the three months
and nine months ended September 30, 1998, respectively, over the comparable
periods in 1997. Average interest-bearing liabilities increased by approximately
$10.4 million and $13.2 million for the three months and nine months,
respectively, over the comparable periods in 1997, primarily due to increases of
$11.7 million and $13.1 million, respectively, in average borrowings from the
FHLB. The Company determined to utilize FHLB advances to fund its new asset
growth because the interest cost of new FHLB advances was substantially less
than the incremental cost of adding new certificate of deposit accounts. The
average rates paid on interest-bearing liabilities decreased ten basis points
and six basis points, respectively, to 5.00% for both the three months and nine
months ended September 30, 1998, from 5.10% and 5.06% for the three months and
nine months ended September 30, 1997, respectively.
Page 7
MIDWEST BANCSHARES, INC. and SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations (continued)
Provision for Losses on Loans
The provision for losses on loans was $12,000 and $36,000 for the three
months and nine months ended September 30, 1998 and 1997. The amount of the
provision was a result of the determination to maintain the allowance for losses
on loans at an adequate level to absorb potential loan losses. At September 30,
1998 and 1997, the Company's allowance for losses on loans totaled $470,000 and
$722,000, respectively, or 0.50% and 0.79% of total loans, and 236.18% and
96.78% of total non-performing loans. Net charge-offs amounted to none and
$134,000 for the three months and nine months ended September 30, 1998,
respectively, compared to no net charge-offs during both the three months and
nine months ended September 30, 1997. The $134,000 of charge-offs in the nine
months ended September 30, 1998 was primarily due to loans on two multi-family
properties which were transferred to real estate acquired through foreclosure
resulting in a charge-off of $120,000.
Non-interest income
Total non-interest income decreased by $128,000 and increased by
$115,000 for the three months and nine months ended September 30, 1998,
respectively, compared to the same periods in 1997. The changes were partially
due to increases of $27,000 and $64,000 for the three months and nine months
ended September 30, 1998, respectively, (a 31% increase year-to-date) in fees
and service charges as a result of increased transaction account activity and
increased ATM transaction volumes, in part as a result of the new in-store
branch, located in the Wal-Mart Supercenter in West Burlington, Iowa, which
opened for business on December 8, 1997.
Also contributing to the changes in non-interest income were gains of
$17,000 and $114,000 on the sales of securities for the three months and nine
months ended June 30, 1998, respectively, compared to gains of $181,000 for both
the three and nine months ended September 30, 1997. The gains consist of gains
on the sale of common stock of non-related, publicly-traded companies of none
and $65,000 for the three months and nine months ended September 30, 1998,
respectively, compared to $181,000 for both the three and nine months ended
September 30, 1997, and of gains on the sales of U.S. Agency bonds and municipal
bonds totaling $17,000 and $49,000 in the three months and nine months ended
September 30, 1998. In 1997, the Company began investing a portion of its
investment portfolio using a total-return approach (which considers the return
on investment to be a combination of interest earned and market value
appreciation). The sales of U.S. Agency bonds and municipal bonds during the
nine months ended September 30, 1998 which were purchased under the total-return
approach totaled $6.0 million and resulted in recognizing gains of $49,000. In
addition to these gains, the Company recognized the remaining
previously-deferred gain of $135,000 (pre-tax) on the sale of the Association's
mortgage banking subsidiary, during the nine month period ended September 30,
1998.
Non-interest expense
Total non-interest expense increased by $85,000 and $228,000 for the
three months and nine months ended September 30, 1998 compared to the same
periods in 1997. The increases were primarily a result of the Company's new
in-store branch (in the Wal-Mart store in West Burlington, Iowa) and its
expanded ATM network. The increase in deposit insurance premiums was due to a
$13,000 credit due to an overpayment of FDIC deposit insurance premiums, as a
result of the Deposit Insurance Funds Act of 1996, recorded in the three months
ended March 31, 1997 with no such credit in 1998.
Page 8
MIDWEST BANCSHARES, INC. and SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations (continued)
Taxes on Income
Taxes on income were $112,000 and $92,000 less for the three and nine
months ended September 30, 1998, respectively, than the comparable periods in
1997. The decreases were primarily due to the effect of the tax-exempt interest
income on municipal bonds. Taxes would have increased if not for the $221,000
and $453,000 of tax-exempt interest income on municipal bonds discussed above
under "Net Interest Income".
Financial Condition
The Company's total assets at September 30, 1998 were $160.6 million,
increasing from $147.7 million at December 31, 1997. The increase of
approximately $12.9 million was due to an intentional increase in
interest-earning assets in an effort to increase net interest income and was
primarily due to the purchase of $28.4 million of securities available for sale,
the purchase of $10.0 million of mortgage-backed securities to be held to
maturity, and a net increase in loans receivable of $3.7 million, partially
offset by principal repayments of $8.1 million from mortgage-backed securities,
$14.0 million from matured securities, and $7.5 million proceeds from the sale
of securities available for sale. The net increase in total assets was primarily
funded by an increase of $12.5 million of advances from the FHLB. The Company
does not currently anticipate significant additional growth for the remainder of
1998.
Total stockholders' equity increased $1,145,000 due to the $1,050,000
net earnings for the nine months, $221,000 received from the exercise of stock
options, $60,000 payoff of the loan for the employee stock ownership plan, and a
$67,000 increase in net unrealized gains on investments available for sale, less
$253,000 in dividends declared.
Liquidity and Capital Resources
The Company's principal sources of funds are deposits and advances from
the FHLB, amortization and prepayment of loan principal (including
mortgage-backed securities), sales or maturities of investment securities,
mortgage-backed securities and short-term investments and operations. While
scheduled loan repayments and maturing investments are relatively predictable,
deposit flows and early loan repayments are more influenced by interest rates,
general economic conditions and competition. The Company generally manages the
pricing of its deposits to maintain a steady deposit balance, but has from time
to time decided not to pay deposit rates that are as high as those of its
competitors, and, when necessary, to supplement deposits with longer term and/or
less expensive alternative sources of funds.
Federal regulations require the Association to maintain minimum levels
of liquid assets consisting of cash and other eligible investments. The required
percentage is currently 4% of net withdrawable savings deposits and borrowings
payable on demand or in one year or less during the preceding calendar quarter.
For September 1998, the Association's liquidity ratio was 7.0% compared to 8.1%
for December 1997. The decrease was primarily due to the purchase of investment
securities which, because of their maturity term, did not qualify as liquid
investments. Assuming market interest rates are stable or decrease, a high level
of liquidity may have a negative effect on the Association's interest rate
spread due to a larger amount of the Association's assets earning the
then-current lower rates of interest. However, a high level of liquidity
positions the Association to respond to possible higher interest rates by
providing the Association with the ability to deploy liquid assets into higher
yielding assets as rates increase. The Association has, and intends to continue
to deploy liquid assets by increasing its loan portfolio; however, its ability
to do so depends on the loan demand in its market areas, competition for such
loans, to the extent
Page 9
MIDWEST BANCSHARES, INC. and SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources (continued)
they meet the Association's underwriting guidelines, and opportunities for
participating in and purchasing loans in nearby markets.
Liquidity management is both a daily and long-term responsibility of
management. The Association adjusts its investments in liquid assets based upon
management's assessment of (i) expected loan demand, (ii) expected deposit
flows, (iii) yields available on interest-bearing deposits, and (iv) the
objectives of its asset/liability management strategy. Excess liquidity is
invested generally in interest-bearing overnight deposits and other short-term
government and agency obligations. If the Association requires funds beyond its
ability to generate them internally, it has additional borrowing capacity with
the Federal Home Loan Bank.
The Association anticipates that it will have sufficient funds available
to meet current loan and purchase commitments. At September 30, 1998, the
Association had outstanding commitments to extend credit totaling $3.7 million.
At September 30, 1998, the Association had tangible and core capital of
$10.5 million, or 6.58% of total adjusted assets which exceeded the regulatory
requirements of 1.5% and 3.0%, by $8.1 million and $5.7 million, respectively.
The risk-based capital requirement is currently 8% of risk-weighted assets. As
of September 30, 1998, the Association had risk-weighted assets of $71.1
million, a risk-based requirement of $5.7 million and risk-based capital of
$11.0 million, or 15.45%, which exceeds the requirement by $5.3 million. The
Association's regulatory capital information is shown in the table below.
Regulatory Capital Table (In thousands)
Tangible Core Risk-based
Capital Capital Capital
---------------------------------------------
Association's capital $10,516 $10,516 $10,516
Additional capital -
general allowances -- -- 470
------- ------- -------
Regulatory capital 10,516 10,516 10,986
Minimum capital requirement 2,397 4,793 5,687
------ ------ ------
Excess regulatory capital $ 8,119 $ 5,723 $ 5,299
======= ======= =======
The unrealized appreciation on securities available for sale, which is a
component of stockholders' equity, is a result of the application of Statement
No. 115 of the Financial Accounting Standards Board. At September 30, 1998, the
net unrealized gain of $440,000, up from $373,000 at December 31, 1997,
consisted primarily of the net unrealized market gain, net of tax, on certain
mortgage-backed securities and investment securities, which have been identified
as available for sale by management.
Pending Accounting Pronouncements
The Financial Accounting Standards Board has issued, effective for
fiscal years beginning after June 15, 1999, Statement of Financial Accounting
Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging
Activities". SFAS 133 establishes accounting and reporting standards for
derivative instruments and for hedging activities. The Company expects to adopt
SFAS 133 when required and management believes the adoption will not have a
material effect on the Company's financial statements when adopted.
Page 10
MIDWEST BANCSHARES, INC.
PART II. Other Information
Item 1. Legal Proceedings
-----------------
None.
Item 2. Changes in Securities
---------------------
None.
Item 3. Defaults Upon Senior Securities
-------------------------------
None.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
None.
Item 5. Other Information
-----------------
None.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibit:
Exhibit 27 Financial Data Schedule
(b) There were no reports on Form 8-K filed during the quarter for
which this report is filed.
Page 11
Signatures
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MIDWEST BANCSHARES, INC.
Registrant
Date: October 29, 1998 /s/ William D. Hassel
-------------------- ------------------------------
William D. Hassel
President and Chief Executive Officer
(Principal Executive Officer)
Date: October 29, 1998 /s/ Robert D. Maschmann
-------------------- ------------------------------
Robert D. Maschmann
Executive Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
Page 12
Index to Exhibits
Sequentially
Numbered Page
Exhibit Where Attached
Number Exhibits are Located
- -------------- ------------------------
27 Financial Data Schedule