Form 10-QSB
[X] QUARTERLY REPORT PURSUANT SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 333-53797
MOUND CITY FINANCIAL SERVICES, INC.
(Exact name of small business issuer as specified in its charter)
WISCONSIN 39-1867686
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
25 East Pine Street, Platteville, Wisconsin 53818
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (608) 348-2685
N/A
(Former name, former address and former
fiscal year, if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes ___ No X
APPLICABLE ONLY TO CORPORATE ISSUERS:
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date.
29,336 shares of Issuer's Common Stock, no par value,
issued and outstanding as of September 30, 1998
<PAGE>
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements............................................1
Consolidated Balance Sheets (Unaudited) September 30,
1998 and December 31, 1997..........................................2
Consolidated Statements of Income (Unaudited)
Three months and Nine months ended September 30, 1998 and 1997......3
Consolidated Statements of Comprehensive Income (Unaudited)
Three months and Nine months ended September 30, 1998 and 1997......4
Consolidated Statements of Changes in
Stockholders' Equity (Unaudited)
Nine months ended September 30, 1998 and 1997.......................5
Consolidated Statements of Cash Flows (Unaudited)
Nine months ended September 30, 1998 and 1997.......................6
Notes to Financial Statements.......................................7
Item 2 - Management's Discussion and Analysis or Plan of Operation.......8
PART II -- OTHER INFORMATION
Item 2 - Changes in Securities and Use of Proceeds......................19
Item 6 - Exhibits and Reports on Form 8-K...............................19
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
The following unaudited consolidated financial statements include all
adjustments, which in the opinion of management, are necessary in order to make
such financial statements not misleading.
1
<PAGE>
MOUND CITY FINANCIAL SERVICES, INC.
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
September 30, 1998 and December 31, 1997
- --------------------------------------------------------------------------------
(Unaudited)
September December
ASSETS 30, 1998 31, 1997
- --------------------------------------------------------------------------------
Cash and due from banks $ 2,862,853 $ 3,495,103
Federal funds sold 1,669,000 4,562,000
Interest-bearing deposits in banks 7,320 ---
-------------------------------
Cash and cash equivalents 4,539,173 8,057,103
Available for sale securities
stated at fair value 19,190,258 19,956,739
Loans receivable 95,099,978 88,427,414
Less allowance for estimated loan losses (1,179,877) (1,159,300)
Office buildings and equipment, net 4,297,040 4,343,474
Accrued interest receivable and other assets 2,921,347 2,489,203
-------------------------------
Total assets $ 124,867,919 $ 122,114,633
===============================
LIABILITIES AND STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
Liabilities:
Deposits:
Demand $ 9,129,171 $ 10,029,112
Savings and NOW 39,566,103 34,400,049
Other Time 59,260,793 64,721,866
-------------------------------
Total deposits 107,956,067 109,151,027
Short-term borrowings 3,530,834 4,376,625
Long-term borrowings 4,000,000 ---
Accrued interest payable & other liabilities 1,968,540 1,771,702
-------------------------------
Total liabilities 117,455,441 115,299,354
-------------------------------
Commitments and contingencies
Stockholders' equity:
Common stock 26,940 26,940
Surplus 6,270,446 6,270,446
Retained earnings 943,143 362,546
-------------------------------
7,240,529 6,659,932
Less treasury stock (8,066) (5,056)
Accumulated other comprehensive income 180,015 160,403
-------------------------------
Total stockholders' equity 7,412,478 6,815,279
-------------------------------
Total liabilities and stock-
holders' equity $ 124,867,919 $ 122,114,633
===============================
2
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MOUND CITY FINANCIAL SERVICES, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
Three months ended Nine months ended
--------------------------------------------------------------
September September September September
30, 1998 30, 1997 30, 1998 30, 1997
--------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $ 2,034,378 $ 1,900,713 $ 6,040,208 $ 5,537,215
Interest on investment securities 270,761 290,723 837,958 901,660
Interest on federal funds sold 48,269 52,089 99,809 76,867
Interest on deposits in banks 604 198 6,224 674
--------------------------------------------------------------
Total interest income 2,354,012 2,243,723 6,984,199 6,516,416
--------------------------------------------------------------
Interest expense:
Interest on deposits 1,254,835 1,285,555 3,789,140 3,540,187
Interest on short-term borrowings 67,048 69,243 206,833 115,405
Interest on long-term borrowings 55,789 --- 108,348 ---
--------------------------------------------------------------
Total interest expense 1,377,672 1,354,798 4,104,321 3,655,592
--------------------------------------------------------------
Net interest income before
provision for loan losses 976,340 888,925 2,879,878 2,860,824
Provision for loan losses 45,000 30,000 120,000 90,000
--------------------------------------------------------------
Net interest income after
provision for loan losses 931,340 858,925 2,759,878 2,770,824
--------------------------------------------------------------
Other operating income:
Service fees 80,474 78,588 226,779 216,359
Other income 113,863 94,429 331,483 266,136
Securities gain (losses) --- (1,314) 21,666 5,241
--------------------------------------------------------------
Total other operating income 194,337 171,703 579,928 487,736
--------------------------------------------------------------
Other operating expenses:
Salaries 491,754 443,460 1,508,460 1,322,747
Occupancy expense 124,845 123,208 367,416 368,235
Other expenses 237,036 253,121 745,877 709,220
--------------------------------------------------------------
Total other operating
expenses 853,635 819,789 2,621,753 2,400,202
--------------------------------------------------------------
Income before income taxes 272,042 210,839 718,053 858,358
Less applicable income taxes 62,799 31,500 137,456 159,351
--------------------------------------------------------------
Net income $ 209,243 $ 179,339 $ 580,597 $ 699,007
==============================================================
Earnings per share:
Basic $ 7.77 $ 6.66 $ 21.55 $ 21.19
==============================================================
Diluted $ 7.77 $ 6.66 $ 21.55 $ 21.19
==============================================================
Weighted average shares 26,930 26,940 26,936 32,980
outstanding ==============================================================
</TABLE>
3
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MOUND CITY FINANCIAL SERVICES, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Three Months and Nine Months Ended September 30, 1998 and 1997
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
Three months ended Nine months ended
--------------------------------------------------------------
September September September September
30, 1998 30, 1997 30, 1998 30, 1997
--------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income $ 209,243 $ 179,339 $ 580,597 $ 699,007
--------------------------------------------------------------
Other comprehensive income, net of taxes
Unrealized gains (losses)
arising during period 60,909 13,819 32,612 (30,409)
Less reclassified adjustment for (gains)
losses included in net income --- 788 (13,000) (3,145)
--------------------------------------------------------------
Total other comprehensive
income 60,909 14,607 19,612 (33,554)
--------------------------------------------------------------
Comprehensive income $ 270,152 $ 193,946 $ 600,209 $ 665,453
==============================================================
</TABLE>
4
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MOUND CITY FINANCIAL SERVICES, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Nine Months Ended September 30, 1998 and 1997
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
Accumulated
other
Common Retained Treasury comprehensive
stock Surplus earnings stock income (loss)
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balances, December 31, 1996 $ 36,000 $ 7,464,000 $ 2,289,873 $ -- $ 151,236
Net income - 1997 -- -- 699,007 -- --
Purchase 20 shares of Treasury stock -- -- -- (5,056) --
Purchase of 906 dissenter
shares of bank stock (9,060) (1,193,554) (2,637,386) -- --
Other comprehensive income (loss) -- -- -- -- (33,554)
------------------------------------------------------------------------
Balances, September 30, 1997 26,940 6,270,446 351,494 (5,056) 117,682
========================================================================
Balances, December 31, 1997 26,940 6,270,446 362,546 (5,056) 160,403
Net income - 1998 -- -- 580,597 -- --
Purchase 10 shares of Treasury stock -- -- -- (3,010) --
Other comprehensive income -- -- -- -- 19,612
------------------------------------------------------------------------
Balances, September 30, 1998 $ 26,940 $ 6,270,446 $ 943,143 $ (8,066) $ 180,015
========================================================================
</TABLE>
5
<PAGE>
MOUND CITY FINANCIAL SERVICES, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, 1998 and 1997
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
September September
30, 1998 30, 1997
<S> <C> <C>
------------------------------------
Cash flows from operating activities:
Net income $ 580,597 $ 699,007
------------------------------------
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 194,428 195,300
Provision for loan losses 120,000 90,000
Securities gains (21,666) (5,241)
Change in assets and liabilities:
Increase in accrued interest receivable and other assets (432,144) (477,770)
Increase in accrued interest payable and other liabilities 186,688 331,191
------------------------------------
Total adjustments 47,306 133,480
------------------------------------
Net cash provided by operating activities 627,903 832,487
------------------------------------
Cash flows from investing activities:
Purchase of securities (10,119,678) (6,877,352)
Proceeds from sale/maturities of securities 10,937,587 7,756,139
Net increase in loans (6,771,987) (6,513,658)
Purchase of office buildings and equipment (147,994) (195,391)
------------------------------------
Net cash used in investing activities (6,102,072) (5,830,262)
------------------------------------
Cash flows from financing activities:
Net increase (decrease) in deposits (1,194,960) 2,789,183
Net increase (decrease) in demand
notes issued to U.S. Treasury (645,791) 293,440
Payment of dissenter shares -- (3,840,000)
Proceeds on long-term borrowing 4,000,000 --
Proceeds (payment) on short-term borrowing (200,000) 3,840,000
Purchase of treasury shares (3,010) (5,056)
------------------------------------
Net cash provided by financing activities 1,956,239 3,077,567
------------------------------------
Decrease in cash and cash equivalents (3,517,930) (1,920,208)
Cash and cash equivalents:
Beginning of year 8,057,103 7,721,805
------------------------------------
End of period $ 4,539,173 $ 5,801,597
====================================
</TABLE>
6
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MOUND CITY FINANCIAL SERVICES, INC.
AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note A. Principles of Consolidation
- ------------------------------------
The consolidated financial statements of Mound City Financial Services, Inc.
(the "Company) include the accounts of its wholly-owned subsidiary, Mound City
Bank (the "Bank"). Mound City Bank includes the accounts of its wholly-owned
subsidiary, Mound City Investments, Inc. All significant intercompany accounts
and transactions have been eliminated in the consolidated financial statements.
Note B. Basis of Presentation
- ------------------------------
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial reporting and with instructions to Form 10-QSB. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for the fair presentation have been included. Operating results for
the nine months ended September 30, 1998 are not necessarily indicative of the
results that may be expected to the year ended December 31, 1998.
Note C. Stock Offering
- -----------------------
The Company filed a registration statement with the U.S. Securities and Exchange
Commission, effective August 11, 1998 to issue 12,000 shares of common stock at
$310 per share. The offering period expires on December 4, 1998.
7
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ITEM 2
MOUND CITY BANK
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF COMPANY'S FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General
- -------
The following discussion and analysis provides information regarding the
financial condition and historical results of operations of Mound City Financial
Services, Inc. and Subsidiary (the "Company"), Platteville, Wisconsin for the
nine months ended September 30, 1998 and 1997. This discussion and analysis
should be read in conjunction with the related financial statements and notes
thereto and the other financial information included herein.
Cautionary Statement for Purposes of the
"Safe Harbor" Provisions of the Private Securities
Litigation Reform Act of 1995
When used in this 10-QSB and in future filings by the Company with the
Securities and Exchange Commission, in the Company's press releases or
other public or shareholder communications, and in oral statements
made with the approval of an authorized executive officer, the words
or phrases "are expected to," "estimate," "is anticipated," "project,"
"will continue," "will likely result," 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, fluctuation 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 of the date made. The
Company wishes to advise readers that factors addressed within the
discussion below 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.
Where any such forward-looking statement includes a statement of the
assumptions or bases underlying such forward-looking statement, the
Company cautions that, while it believes such assumptions or bases to
be reasonable and makes them in good faith, assumed facts or bases
almost always vary from actual results, and the differences between
assumed facts or bases and actual results can be material, depending
on the circumstances. Where, in any forward-looking statement, the
Company, or its Management, expresses an expectation or belief as to
the future results, such expectation or belief is expressed in good
faith and believed to have a reasonable basis, but there can be no
8
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assurance that the statement of expectation or belief will result, or
be achieved or accomplished.
The Company does not undertake -- and specifically declines 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.
Financial Condition
-------------------
Total assets of $124,867,919 at September 30, 1998 increased
$2,753,286, or 2.3% from $122,114,633 at December 31, 1997.
Total deposits of $107,956,067 at September 30, 1998 reflects a
decrease of 1,194,960 or 1.1%, from December 31, 1997.
Noninterest-bearing deposits decreased $899,941 or 9.0% to $9,129,171
at September 30, 1998 while interest-bearing deposits decreased
$295,020 to $98,826,896, or 0.3% from December 31, 1997.
Loans
-----
As of September 30, 1998, gross loans outstanding were $95,099,978, an
increase of $6,672,564, or 7.5% from December 31, 1997. The largest
increases were in commercial and residential real estate loans.
Commercial real estate increased $3,661,382, or 17.2% to 24,931,000 at
September 30, 1998 and residential real estate increased to
$32,290,000, or 6.3% for same period.
Asset Quality
-------------
The Company continued its commitment to credit quality in 1998. Net
charge-offs of $99,000 were recorded in 1998. Accrual of interest is
discontinued on a loan when management believes, after considering
economic and business conditions and collection efforts, that the
borrower's financial condition is such that collection of interest is
doubtful. As of September 30, 1998, non-accrual loans totaled
$729,000, or 0.77% of gross loans.
As of September 30, 1998, 34.0% of total gross loans or $32,290,000
were secured by residential real estate.
Total gross loans increased to $95,099,978 at September 30, 1998, or
7.5% from $88,427,414 at December 31, 1997.
At September 30, 1998, the allowance for possible loan losses was
$1,179,877, or 1.24% of gross loans. At December 31, 1997, the
allowance for possible loan losses was $1,159,300, or 1.31% of gross
loans compared with $1,104,338, or 1.35% of gross loans at December
31, 1996. Management considers the allowance more than adequate to
9
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cover possible loan losses in the loan portfolio. Management performs
a quarterly analysis to reassess the adequacy of the reserve in order
to maintain the allowance at an adequate level to absorb possible
future charge-offs of existing loans.
Capital
-------
Total stockholders' equity increased by $597,199 to $7,412,478 at
September 30, 1998 due to year to date income of $580,597, an increase
in accumulated comprehensive income of $19,612, and additional
treasury stock purchased of $3,010.
Capital requirements set by federal regulatory agencies establish
minimum capital levels for the Bank. These guidelines require minimum
Tier 1 capital of 4%, a Tier 1 leverage ratio of 4% and total
risk-based capital of 8% of risk-weighted assets. The Bank was in
compliance with all such minimum capital guidelines at September 30,
1998.
Set forth below is a comparison of the Bank's September 30, 1998
actual capital levels with the minimum requirements for
well-capitalized and adequately capitalized banks, as defined by the
federal regulatory agencies' Prompt Corrective Action Rules:
<TABLE>
<CAPTION>
To be well
For capital capitalized under
adequacy prompt corrective
Actual purposes action provisions
----------------------- ---------------------- ---------------------
Amount Ratio Amount Ratio Amount Ratio
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
As of September 30, 1998:
Total capital (to risk
weighted assets) $ 8,372,434 9.2% $ 7,292,605 8.0% $ 9,115,756 10.0%
Tier I capital (to risk
weighted assets) $ 7,232,466 7.9% $ 3,646,303 4.0% $ 5,469,454 6.0%
Tier I capital (to
average assets) $ 7,232,466 5.6% $ 5,120,347 4.0% $ 6,400,433 5.0%
</TABLE>
The Company filed a registration statement with the U.S. Securities
and Exchange Commission, Registration No. 333-53797, effective August
11, 1998, to issue 12,000 shares of common stock at $310 per share.
The offering period expires on December 4, 1998.
The Company and its Board of Directors believe that the best avenue
for the continued success of the Bank is through the controlled and
stable growth of the Bank. This offering is intended to further the
Bank's growth strategy by raising capital to repay $3,400,000 in
borrowings made by the Bank for the purpose of purchasing shares owned
by a Bank shareholder who dissented from the shareholder vote
ratifying formation of the Company. This offering is also viewed by
10
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the Board as an important step in the Bank's growth strategy because
of the Bank's long-term interest in expansion, its need to increase
its capacity for acquiring and holding fixed assets, and its plan to
provide additional products to Bank customers.
Liquidity
---------
The liquidity position of the Company is managed to ensure that
sufficient funds are available to meet customers' needs for loans and
deposit withdrawals. Liquidity to meet demand is provided by
maintaining marketable investment securities, federal funds sold, as
well as, maintaining a full line of competitively priced deposit and
short-term borrowing products. The ratio of loans to deposits is a key
indicator of a bank's liquidity position. The Company's loan to
deposit ratio was 87% on September 30, 1998. The Company's loan to
deposit ratio was 80% and 78% at December 31, 1997 and 1996
respectively.
Asset/Liability Management
--------------------------
Closely related to liquidity management is the management of
interest-earning assets and interest-bearing liabilities. The Company
manages its rate sensitivity position to avoid wide swings in net
interest margins and to minimize risk due to changes in interest
rates.
Changes in net interest income, other than volume related changes,
arise when interest rates on assets reprice in a time frame or
interest rate environment that is different from the repricing period
for liabilities. Changes in net interest income also arise from
changes in the mix of interest earning assets and interest-bearing
liabilities.
The Company does not expect to experience any significant fluctuations
in its net interest income as a consequence of changes in interest
rates.
Year 2000 Update
----------------
New Federal Minimum Safety and Soundness Standards
--------------------------------------------------
The federal banking regulators recently issued guidelines
establishing minimum safety and soundness standards for achieving
Year 2000 compliance. The guidelines, which took effect October
15, 1998 and apply to all FCIC-insured depository institutions,
establish standards for developing and managing Year 2000 project
plans, testing remediation efforts and planning for
contingencies. The guidelines are based upon guidance previously
issued by the agencies under the auspices of the Federal
Financial Institutions Examination Council (the "FFIEC"), but are
not intended to replace or supplant the FFIEC guidance which will
continue to apply to all federally insured depository
institutions.
11
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The guidelines were issued under Section 39 of the Federal
Deposit Insurance Act, as amended (the "FDIA"), which requires
the federal banking regulators to establish standards for the
safe and sound operation of federally insured depository
institutions. Under Section 39 of the FDIA, if an institution
fails to meet any of the standards established in the guidelines,
the institution's primary federal regulatory may require the
institution to submit a plan for achieving compliance. If an
institution fails to submit an acceptable compliance plan, or
fails in any material respect to implement a compliance plan that
has been accepted by its primary federal regulatory, the
regulator is required to issue an order directing the institution
to cure the deficiency. Such order is enforceable in court in the
same manner as a cease and desist order. Until the deficiency
cited in the regulator's order is cured, the regulator may
restrict the institution's rate of growth, require the
institution to increase its capital, restrict the rates the
institution pays on deposits or require the institution to take
any action the regulator deems appropriate under the
circumstances. In addition to the enforcement procedures
established in Section 39 of the FDIA, noncompliance with the
standards established by the guidelines may also be grounds for
other enforcement action by the federal banking regulators,
including cease and desist orders and civil money penalty
assessments.
Year 2000 Plan
--------------
The Company utilizes and is dependent upon data processing
systems, software, and certain non-information technology to
conduct its business. The data processing systems and software
include those developed and maintained by the Company's data
processor and purchased software which is run on in-house
computer networks. In response to the issue of computer programs
and embedded computer chips being unable to distinguish between
the year 1900 and the year 2000, the Company has a written plan
for the correction of, or contingency plan for, the Year 2000
problem ("Plan"). This Plan is generally proceeding on schedule.
Pursuant to the Plan, senior management of the Bank has been
reporting to the Board at least monthly on the Bank's year 2000
progress.
Pursuant to the Plan, the Company has divided its efforts into
eight different phases:
1. Awareness of the Problem: Includes informing the Board of
Directors, senior management, officers and staff, and customers
about the problem; attending seminars; and hiring a full-time
computer network administrator.
The Company believes that, as of September 30, 1998, this phase
is 100% complete.
12
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2. Assessment: Includes assessing the need for renovation or
replacement of information and non-information technology
systems; rating date sensitive items by risk and criticality, and
contacting Company vendors to obtain completed compliance dates.
The Company believes that, as of September 30, 1998, this phase
is 100% complete.
3. Credit Policy and Underwriting: Includes contacting affected
customers; gathering information from those customers about the
consequences of Year 2000 on their ability to repay; and
developing a risk rating system for these customers in order to
determine whether the Company's loan loss reserves are adequate
and to adjust the Company's reserves accordingly. The Company
completed its customer review and risk rating assessment as of
September 30, 1998. It was determined from this assessment that
an additional $24,748.79 be added to the current reserve for loss
on loans. The Company anticipates that this review will be
approved by the Board of Directors and the reserve addition will
be made in October 1998.
The Company has added to its new loan documents entered into
after April 22, 1998 new covenants that the borrower be Year 2000
compliant.
The Company believes that, as of September 30, 1998, this phase
is 100% complete, but in continual review.
4. Renovation: Involves renovating or replacing the Company's
in-house software and hardware and embedded technology as well as
working with its outside data processor and vendors to ensure
that all of its mission critical operating systems are year 2000
compliant by December 31, 1998. In 1997, the Company initiated a
review and assessment of all hardware and software to confirm
that it will function properly in the year 2000. The Company's
data processing provider and those vendors who have been
contacted indicate that their hardware and/or software will be
Year 2000 compliant by the end of 1998. Additionally, alarms,
heating and cooling systems and other computer-controlled
mechanical devices on which the Company relies have been
evaluated. We have received certifications on all equipment that
will not need to be tested. The Company has replaced and modified
equipment found not to be in compliance. The Company has replaced
six computers and upgraded the operating system to become Year
2000 compliant. The costs associated with these upgrades were
approximately $10,000.
The Company believes that, as of September 30, 1998, this phase
is 50% complete.
5. Contingency Plan: Involves prioritizing all core business
processes and developing a contingency plan in the event that
13
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certain mission critical systems are not Year 2000 compliant on
or before certain targeted date. The plan has not needed to be
revised to date as system vendors certified year 2000 compliance,
but the Company anticipates that it may need to be revised as
additional system vendors certify year 2000 compliance.
The Company believes that, as of September 30, 1998, this phase
is 100% complete, but in continual review.
6. Strategies to Discuss Customer Awareness: Includes informing
all Company officers and employees of the year 2000 problem;
mailing brochures to all Company customers and making them
available to customers at the Company lobby, and conducting a
seminar on the year 2000 problem for Company customers. The
Company conducted the seminar for customers on September 15,
1998.
The Company believes that, as of September 30, 1998, this phase
is 100% complete. However, the Company anticipates making
additional customer notifications in November 1998 and
thereafter.
7. Validation: Involves testing the Company's outside data
processor and other systems critical to the Company. The Company
anticipates that all hardware and software testing will be
substantially completed by December 31, 1998. The Company's
outside data processor concluded 19xx testing in August 1998, and
will conclude 20xx testing in March 1999. The Company anticipates
testing the data processing renovation on October 4, 1998. To
date, some internal software and hardware, as well as some
non-information technology has been tested. Some test plans for
certain services, such as credit cards, are dependent upon notice
from the outside vendor that its systems are ready for testing.
The Company intends to test such services when the vendors notify
the Company of the proper test script. To date, the Company has
tested some of these services. Some of the providers have begun
their own testing this fall.
The Company has rated its computer systems based on the degree of
risk of noncompliance, and has 39 systems that are high and
medium risk. Of the 39 systems, 65% are currently Year 2000
compliant. The Company continues to anticipate that 75% will be
year 2000 compliant by December 31, 1998, and that all will be
compliant by June 30, 1999.
The Company believes that, as of September 30, 1998, this phase
is 50% complete.
8. Implementation: Involves the implementation of the Company's
mission critical systems. The Company's outside data processor is
scheduled to implement the Company's mission critical system on
14
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October 3, 1998. The Company anticipates that December 31, 1998
will be the implementation date for all of its mission critical
systems.
The Company believes that, as of September 30, 1998, this phase
is 75% complete.
Updated Year 2000 Budget
------------------------
The Company has updated its budget established for year 2000
compliance. The total amount of the budget as of September 30,
1998, is $89,251.74, and is comprised of the following:
To Date Projected Total
---------- ---------- ----------
Hardware Replacement $47,517.08 $17,659.87 $65,176.95
Hardware Upgrade -0- 5,486.06 5,486.06
Software Replacement 7,053.73 -0- 7,053.73
Software Upgrade -0- 2,500.00 2,500.00
Education of Problem 3,000.00 925.00 3,925.00
ATM Upgrades -0- 5,110.00 5,110.00
---------- ---------- ----------
TOTALS $57,570.81 $31,680.93 $89,251.74
All hardware costs to date will be capitalized on a five year
depreciated schedule. Software costs to date will be capitalized
on a three year depreciated schedule. The remaining balance of
$3,925 constitutes operational expenses for 1998.
The total cost associated with required modifications to become
Year 2000 compliant is not expected to be material to the
Company's financial position.
Risks
-----
The failure to correct a material Year 2000 problem could result
in an interruption in, or a failure of, certain normal business
activities or operations. Such failures could materially and
adversely affect the Company's results of operations, liquidity
or financial condition. Due to the general uncertainty inherent
in the Year 2000 problem, resulting in part from the uncertainty
of the Year 2000 readiness of third-party vendors and customers,
the Company is unable to determine at this time whether the
consequences of Year 2000 failures will have a material impact on
the Company's results of operations, liquidity or financial
condition. The Year 2000 Plan is expected to significantly reduce
15
<PAGE>
the Company's level of uncertainty about the Year 2000 problem
and about the Year 2000 compliance and readiness of its material
outside vendors. The Company believes that, with the completion
of the Plan as scheduled, the possibility of significant
interruptions of normal operations should be reduced.
Readers are cautioned that forward-looking statements contained
in the Year 2000 Update should be read in conjunction with the
Company's disclosures under the heading "Cautionary Statement for
Purposes of the 'Safe Harbor' Provisions of the Private
Securities Litigation Reform Act of 1995" beginning on page 8.
16
<PAGE>
Results of operations for nine months ended
September 30, 1998 compared with the
nine months ended September 30, 1997
- --------------------------------------------
Results of Operations Overview
- ------------------------------
For the nine months ended September 30, 1998, the Bank's net income decreased
from the same period in 1997 by $118,410, or 16.9%.
Interest Revenue
- ----------------
Net interest income increased by $19,054, or 0.7% to $2,879,878 for the first
nine months of 1998 compared to the same period in 1997. Interest income
increased $467,783, or 7.2% while interest expense increased by $448,729, or
12.3%. The increase in interest expense was caused by an increase in interest on
short-term and long-term borrowings of $199,776, or 173.1%.
Allowance for Loan Losses
- -------------------------
The allowance for loan losses is adequate to cover probable credit losses
relating to specifically identified loans, as well as probable credit losses
inherent in the balance of the loan portfolio. In accordance with FASB
Statements 5 and 114, the allowance is provided for losses that have incurred as
of the balance sheet date. The allowance is based on past events and current
economic conditions, and does not included the effect of expected losses on
specific loans or groups of loans that are related to future events or expected
changes in economic conditions.
During the first nine months of 1998, provisions of $120,000 were made to the
allowance for loan losses compared to $90,000 for the same period in 1997. Total
non-performing loans increased $600,000 at September 30, 1998, from a year
earlier. Non-performing loans totaled $729,000 at September 30, 1998 and
$129,000 at September 30, 1997. There were net charge-offs of $99,000 in the
first nine months of 1998 and net recoveries of $57,000 in the same period in
1997.
Other Operating Revenue and Expenses
- ------------------------------------
Other operating income increased $92,192, or 18.9% between periods. Service fees
increased by $10,420 while other income increased by $65,347. Realized gains on
securities increased to $21,666 for the nine month period ended September 30,
1998 compared to gains of $5,241 for the same period in 1997. Other operating
expenses increased $221,551 or 9.2% to $2,621,753 for the nine months ended
September 30, 1998, compared to the same period in 1997. Salaries and benefits
increased $185,713, or 14.0% between periods. All other operating expenses had
modest increases or decreases.
17
<PAGE>
Income Taxes
- ------------
Income tax expense decreased $21,895 in the first nine months of 1998 compared
to the same period in 1997 resulting from an decrease in pretax income of
$140,305.
18
<PAGE>
PART II - OTHER INFORMATION
---------------------------
ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS
- --------------------------------------------------
(d) On August 11, 1998, the Securities and Exchange Commission declared
effective the Mound City Financial Services, Inc. Form SB-2/A Registration
Statement, Registration No. 333-53797, pertaining to Mound City's initial public
offering of 12,000 shares of its common stock (the "Offering"). The Offering was
commenced on August 14, 1998. The Offering has not terminated. With respect to
the Offering:
i. There are no managing underwriters;
ii. The securities registered pursuant to Form SB-2/A are 12,000 shares of
Mound City Financial Services, Inc. common stock, no par value, at a
proposed maximum aggregate Offering price of $3,720,000;
iii. As of September 30, 1998, 2,426 shares had been sold pursuant to the
Offering at an aggregate price of $752,060.00;
iv. Expenses incurred for Mound City Financial Services, Inc.'s account
prior to August 11, 1998 (the effective date of the Registration
Statement) in connection with the issuance and distribution of the
securities registered totaled $58,075.77. From August 11, 1998 until
September 30, 1998, the amount of expenses incurred for Mound City
Financial Services, Inc.'s account in connection with the issuance and
distribution of the securities registered totaled $2,783.41. These
totals represent reasonable estimates of the amount of expenses
incurred. All of the expenses incurred were direct or indirect
payments to others.
v. From August 11, 1998 until September 30, 1998, the amount of net
offering proceeds to Mound City Financial Services, Inc. used for:
temporary investments - $752,060.00
(100% invested in Mound City Bank
Money Market Investment Account)
This amount represents the actual amount of net offering proceeds used
for the above purpose.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------
(a) Exhibits.
19
<PAGE>
The following Exhibits are filed as part of this report. (Exhibit numbers
correspond to the exhibits required by item 601 of Regulation S-B for an annual
report on Form 10-KSB).
Exhibit No.
3(i) Articles of Incorporation of Mound City Financial Services, Inc.*
3(ii) Bylaws of Mound City Financial Services, Inc.*
4(i) Articles of Incorporation of Mound City Financial Services, Inc.*
Bylaws of Mound City Financial Services, Inc.* Stock Certificate.*
27 Financial Data Schedule.
*Incorporated by reference from the Registration Statement on Form S-4/A of
Mound City Financial Services, Inc., as amended, Registration No. 333-14825,
filed December 4, 1996.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by Mound City Financial Services, Inc.
during three months ending September 30, 1998.
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MOUND CITY FINANCIAL SERVICES, INC.
Dated: November 13, 1998 /s/ Robert J. Just, Jr.
-----------------------------------
Robert J. Just, Jr., President, Principal
Financial and Accounting Officer
20
<PAGE>
<TABLE>
<CAPTION>
Mound City Financial Services
Financial Data Schedule
3rd Qtr 1998
<S> <C>
Period Type 9 mos
Fiscal Year end 12/31/98
Period End 09/30/98
Cash 2,863,000
Interest Bearing Deposits 7,000
Fed Funds Sold 1,669,000
Trading Assets 0
Investments Held for Sale 19,190,000
Investments Carrying 0
Investments Market 0
Loans 95,100,000
Allowance 1,180,000
Total Assets 124,868,000
Deposits 107,956,000
Short term 3,531,000
Liabilities Other 1,969,000
Long term 4,000,000
Preferred Mandatory 0
Preferred 0
Common 27,000
Other SE 7,385,000
Total Liabilities and Equity 124,868,000
Interest Loan 6,040,000
Interest Invest 838,000
Interest Other 106,000
Interest Total 6,984,000
Interest Deposit 3,789,000
Interest Expense 4,104,000
Total Interest income net 2,880,000
Loan Losses 120,000
Securities Gains 22,000
Expense Other 2,622,000
Income Pre-tax 718,000
Income Pre-Extraordinary 718,000
Extraordinary 0
Changes 0
Net income 581,000
EPS Primary 22
EPS Diluted 22
Yield Actual 8.72
Loans Non 729,000
Loans Past 389,000
Loans Troubled 729,000
Loans Problem 729,000
Allowance Open 1,159,000
Charge Offs 119,000
Recoveries 20,000
Allowance Close 1,180,000
Allowance Domestic 1,180,000
Allowance Foreign 0
Allowance unallocated 0
21
</TABLE>
