<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
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Commission file number 0-20620
MIDWEST BANCSHARES, INC.
- -------------------------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
Delaware 42-1390587
- ------------------------------- -----------------------------------
(State or other jurisdiction of I.R.S. Employer Identification No.)
incorporation or organization)
3225 Division Street, Burlington, Iowa 52601
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (319) 754-6526
------------------------------
Securities Registered Pursuant to Section 12(b) of the Act:
None
----
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
--------------------------------------
(Title of class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 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 requirements for the past 90 days.
YES X NO
--- ---
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained herein, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [X]
State issuer's revenues for its most recent fiscal year: $10.5 million.
The aggregate market value of the voting stock held by non-affiliates of
the registrant, computed by reference to the average of the bid and asked prices
of such stock on the Nasdaq Stock Market as of February 28, 1997, was $7.1
million. (The exclusion from such amount of the market value of the shares owned
by any person shall not be deemed an admission by the registrant that such
person is an affiliate of the registrant.)
As of March 21, 1997, there were issued and outstanding 349,379 shares of
the Issuer's Common Stock.
Transitional Small Business Disclosure Format (check one): Yes No X
DOCUMENTS INCORPORATED BY REFERENCE
Parts II and IV of Form 10-KSB - Annual Report to Stockholders
for the fiscal year ended December 31, 1996. Part III of
Form 10-KSB - Proxy Statement for 1997 Annual Meeting of Stockholders.
<PAGE>
PART I
Item 1. Business
General
Midwest Bancshares, Inc. (the "Company" or "Midwest") is a Delaware
corporation which was organized in 1992 by Midwest Federal Savings and Loan
Association of Eastern Iowa (the "Association" or "Midwest Federal") for the
purpose of becoming a savings and loan holding company. The Company owns all of
the outstanding stock of the Association issued on November 10, 1992 in
connection with the completion of the conversion of the Association from the
mutual to the stock form of organization (the "Conversion"). The Company issued
455,000 shares of common stock at a price of $10.00 per share in the Conversion.
All references to the Company at or before November 10, 1992 refer to the
Association. The Association, the Company's only operating subsidiary, was
initially chartered in 1919 and became a federal savings and loan association in
1934.
The Company serves Des Moines, Lee and Louisa Counties in southeastern
Iowa through the Association's four retail banking offices located in
Burlington, Wapello and Ft. Madison, Iowa. At December 31, 1996, the Company had
total assets of $136.4 million, deposits of $101.9 million, and stockholders'
equity of $9.6 million.
As a community-oriented financial institution, the Association offers a
variety of financial services to meet the needs of the communities it serves.
The Association is principally engaged in attracting retail deposits from the
general public and investing those funds primarily in first mortgages on
owner-occupied, single-family residential loans and mortgage-backed securities.
To a much lesser extent, the Association also originates residential
construction, small business commercial loans, land development, agricultural
land and consumer loans in the Association's market area and a limited amount of
loans secured by multi-family and non-residential real estate. Through a wholly
owned subsidiary, the Association also offers for sale tax-deferred annuities
and other financial products.
Like all federally chartered savings associations, Midwest Federal's
operations are regulated by the Office of Thrift Supervision (the "OTS"). The
Association is a member of the Federal Home Loan Bank System ("FHLBank System")
and a stockholder in the Federal Home Loan Bank ("FHLBank") of Des Moines. The
Association is also a member of the Savings Association Insurance Fund ("SAIF")
and its deposit accounts are insured up to applicable limits by the Federal
Deposit Insurance Corporation ("FDIC").
The principal sources of funds for the Association's lending activities
include deposits, advances from the FHLBank of Des Moines, amortization and
prepayment of loan principal (including mortgage-backed securities), sales or
maturities of investment securities, mortgage-backed securities and short-term
investments, borrowings and funds provided from operations.
The Association's revenues are derived principally from interest on
mortgage loans and mortgage-backed securities, interest and dividends on
investment securities, loan origination income and income from deposit account
service charges and from subsidiary activities.
The executive offices of the Association are located at 3225 Division
Street, Burlington, Iowa 52601 and its telephone number is (319) 754-6526.
Unless the context otherwise requires, all references herein to the Association
or the Company include the Company and the Association on a consolidated basis.
2
<PAGE>
Lending Activities
General. Historically, the Association originated fixed-rate mortgage
loans. Since 1989, however, the Association has emphasized the origination and
holding of adjustable-rate mortgage ("ARM") loans and loans with shorter terms
to maturity than traditional 30 year, fixed-rate loans. Management's strategy
has been to increase the percentage of assets in its portfolio with more
frequent repricing or shorter maturities. In response to customer demand,
however, the Association continues to originate fixed-rate mortgages with terms
generally not greater than 15 years.
The Association's primary focus in lending activities is on the
origination of loans secured by first mortgages on owner-occupied, one- to
four-family residences. To a much lesser extent, the Association also originates
residential construction, small business commercial loans, land development,
agricultural land and consumer loans in the Association's market area. See "-
Originations, Purchases and Sales of Loans and Mortgage-Backed Securities." At
December 31, 1996, the Association's net loan and mortgage-backed securities
portfolio totalled $109.6 million.
Generally, all loans must be approved by a committee comprised of the
three top officers in the Association's lending department, with the
Association's President acting as an alternate member. A majority vote is
required for the approval of any loan. All loan approvals are ratified by the
Board of Directors.
Under the Financial Institutions Reform, Recovery, and Enforcement Act
of 1989 ("FIRREA"), the Association's loans-to-one-borrower limit was reduced,
generally to the greater of $500,000 or 15% of unimpaired capital and surplus.
See "Regulation - Federal Regulation of Savings Associations." At December 31,
1996, the maximum amount which the Association could have lent to any one
borrower and the borrower's related entities was approximately $1.3 million. At
December 31, 1996, the Association had no loans which exceeded this amount.
At December 31, 1996, the principal balance of the largest lending
relationship with any one borrower or group of related borrowers, was $1,289,000
and consists of two participation loans secured by a 192-unit apartment building
located in Bettendorf, Iowa. The principal balance of the second largest lending
relationship with one borrower was $975,000 at December 31, 1996, and is a
participation loan secured by a 92-bed nursing home located in Oskaloosa, Iowa.
This loan was paid off on March 14, 1997. The third largest lending relationship
with one borrower had a principal balance of $971,000 at December 31, 1996, and
consists of two participation loans, secured by two assisted, congregate-care
facilities. One is a 68-unit facility located in Cedar Rapids, Iowa, and the
other is a 46-unit facility located in Dubuque, Iowa. The fourth largest lending
relationship with one borrower had a principal balance of $812,000 at December
31, 1996, and consists of two participation loans, secured by two apartment
complexes located in Madison, Wisconsin, one 20-unit and one 23-unit. See "-
Commercial/Multi-Family Real Estate Lending" for details regarding these loan
participations. Each of the loans discussed above was current as of December 31,
1996. At December 31, 1996, the Association had no other loans to one borrower
or group of related borrowers which had an existing balance at December 31,
1996, in excess of $500,000.
3
<PAGE>
Loan Portfolio Composition. The following information concerning the
composition of the Association's loan portfolio in dollar amounts and in
percentages (before deductions (or additions) for loans in process, deferred
fees (premiums) and discounts and allowances for losses) as of the dates
indicated.
<TABLE>
<CAPTION>
December 31,
1996 1995 1994
---------------------------------------------------------------------------
Amount Percent Amount Percent Amount Percent
<S> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Real Estate Loans:
One- to
four-family.............................. $63,209 75.85% $61,839 80.03% $61,849 85.54%
Commercial/multi-family................... 10,363 12.44 7,820 10.12 3,992 5.52
Construction or 1,151 2,342
development(1)........................... 828 .99 1.49 3.24
-------- ------ ------ -----
Total real estate loans............... 74,400 89.28 70,810 91.64 68,183 94.30
-------- ------ ------- ------ ------- ------
Consumer and Other Loans:
Deposit account........................... 354 .43 383 .50 344 .47
Automobile................................ 1,001 1.20 1,033 1.34 810 1.12
Home equity/home
improvement.............................. 4,093 4.91 3,886 5.03 2,745 3.80
Other..................................... 3,484 4.18 1,155 1.49 224 .31
-------- ------ ------- ------ ------ ------
Total consumer and
other loans.......................... 8,932 10.72 6,457 8.36 4,123 5.70
-------- ------- ------- ------ ------ ------
Total loans........................... 83,332 100.00% 77,267 100.00% 72,306 100.00%
====== ====== ======
Less:
Loans in process.......................... 1,274 2,347 1,096
Deferred fees and discounts............... 147 209 216
Allowance for losses...................... 686 676 650
-------- ------- -------
Total loans receivable, net............... $81,225 $74,035 $70,344
======= ======= =======
December 31,
-----------------------------------------------
1993 1992
-----------------------------------------------
Amount Percent Amount Percent
<S> <C> <C> <C> <C>
(Dollars in Thousands)
Real Estate Loans:
One- to
four-family.............................. $58,405 86.64% $51,808 84.86%
Commercial/multi-family................... 4,535 6.73 6,017 9.86
Construction or 1,677 1,469
development(1)........................... 2.49 2.40
------ ------
Total real estate loans............... 64,617 95.86 59,294 97.12
------- ------ ------- ------
Consumer and Other Loans:
Deposit account........................... 257 .38 287 .47
Automobile................................ 568 .84 198 .32
Home equity/home
improvement.............................. 1,798 2.67 1,267 2.08
Other..................................... 168 .25 4 .01
------ ------ ------ ------
Total consumer and
other loans.......................... 2,791 4.14 1,756 2.88
------ ------ ------ ------
Total loans........................... 67,408 100.00% 61,050 100.00%
====== ======
Less:
Loans in process.......................... 1,417 946
Deferred fees and discounts............... 125 78
Allowance for losses...................... 652 587
------- -------
Total loans receivable, net............... $65,214 $59,439
======= =======
</TABLE>
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(1) Consists primarily of residential construction loans.
4
<PAGE>
The following table shows the composition of the Association's loan
portfolio by fixed- and adjustable-rate categories at the dates indicated.
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------------------------
1996 1995 1994
---------------------------------------------------------------------------
Amount Percent Amount Percent Amount Percent
<S> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Fixed-Rate Loans:
Real estate:
One- to four-family........................... $26,595 31.91% $24,218 31.34% $25,319 35.01%
Commercial/multi-family......................... 1,230 1.48 1,522 1.97 1,603 2.22
Construction or development................... 65 .08 274 .36 504 .70
--------- ------- ------- ------- --------- -------
Total real estate loans.................... 27,890 33.47 26,014 33.67 27,426 37.93
-------- ------ ------- ------ -------- ------
Consumer and other loans...................... 6,104 7.32 5,332 6.90 4,123 5.70
--------- ------ ------- ------ -------- -------
Total fixed-rate loans..................... 33,994 40.79 31,346 40.57 31,549 43.63
-------- ------ ------- ------ -------- -------
Adjustable-Rate Loans:
Real estate:
One- to four-family........................... 36,614 43.94 37,621 48.69 36,530 50.52
Commercial/multi-family....................... 9,133 10.96 6,298 8.15 2,389 3.31
Construction or development 763 .92 877 1.13 1,838 2.54
Total adjustable-rate -------- ------- -------- ------ --------- ------
real estate loans......................... 46,510 55.82 44,796 57.97 40,757 56.37
Consumer and other loans................... 2,828 3.39 1,125 1.46 --- ---
-------- ------- -------- ------ --------- ------
Total adjustable-rate
loans..................................... 49,338 59.21 45,921 59.43 40,757 56.37
------ ------- -------- ------ ------- ------
Total loans................................ 83,332 100.00% 77,267 100.00% 72,306 100.00%
====== ====== ======
Less:
Loans in process............................... 1,274 2,347 1,096
Deferred fees and discounts.................... 147 209 216
Allowance for loan losses...................... 686 676 650
-------- -------- ---------
Total loans receivable, net................. $81,225 $74,035 $70,344
======= ======= =======
December 31,
------------------------------------------------
1993 1992
------------------------ ----------------------
Amount Percent Amount Percent
<S> <C> <C> <C> <C>
(Dollars in Thousands)
Fixed-Rate Loans:
Real estate:
One- to four-family........................... $25,279 37.50% $28,252 46.28%
Commercial/multi-family......................... 4,294 6.37 5,916 9.69
Construction or development................... 458 .68 --- ---
-------- ------ ------- ------
Total real estate loans.................... 30,031 44.55 34,168 55.97
-------- ------ -------- ------
Consumer and other loans...................... 2,791 4.14 1,756 2.88
-------- ------- --------- ------
Total fixed-rate loans..................... 32,822 48.69 35,924 58.85
-------- ------- -------- ------
Adjustable-Rate Loans:
Real estate:
One- to four-family........................... 33,126 49.14 23,556 38.58
Commercial/multi-family....................... 241 .36 101 .16
Construction or development 1,219 1.81 1,469 2.41
------- ------ ------- ------
Total adjustable-rate 34,586 51.31 25,126 41.15
real estate loans......................... --- --- --- ---
Consumer and other loans................... ------- ------ ------- ------
Total adjustable-rate
loans..................................... 34,586 51.31 25,126 41.15
------- ------ ------- ------
Total loans................................ 67,408 100.00% 61,050 100.00%
====== ======
Less:
Loans in process............................... 1,417 946
Deferred fees and discounts.................... 125 78
Allowance for loan losses...................... 652 587
------- -------
Total loans receivable, net................. $65,214 $59,439
======= =======
</TABLE>
5
<PAGE>
The following table illustrates the contractual maturity of the
Association's loan portfolio at December 31, 1996. Mortgages which have
adjustable or renegotiable interest rates are shown as repricing in the period
during which the contract is due. The schedule does not reflect the effects of
possible prepayments or enforcement of due-on-sale clauses.
<TABLE>
<CAPTION>
Real Estate
--------------------------------------------------------------------------
One- to four- Commercial/ Construction
Family Multi-family or Development
-------------------- -------------------- ----------------------
Weighted Weighted Weighted
Average Average Average
Amount Rate Amount Rate Amount Rate
------ ---- ------ ---- ------ ----
<S> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Due During Year(s) Ended
December 31,
1997(1)................................ $ 2,465 8.18% $ 303 8.72% $ 13 8.09%
1998................................... 2,676 8.19 329 8.72 14 8.08
1999................................... 2,905 8.19 359 8.72 16 8.10
2000 and 2001.......................... 6,569 8.21 821 8.72 36 8.09
2002 to 2006........................... 21,643 8.19 1,731 8.45 119 8.09
2007 to 2016........................... 25,264 7.78 5,284 8.25 401 8.05
2017 and following..................... 1,687 7.55 1,536 8.25 229 8.01
-------- -------- -----
Total.............................. $63,209 $10,363 $828
======= ======= ====
Consumer
and Other Total
---------------------- ------------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
------ ---- ------ ----
<S> <C> <C> <C> <C>
(Dollars in Thousands)
Due During Year(s) Ended
December 31,
1997(1)................................ $1,975 8.37% $ 4,756 8.29%
1998................................... 2,148 8.37 5,167 8.30
1999................................... 1,053 8.30 4,333 8.26
2000 and 2001.......................... 1,831 8.27 9,257 8.27
2002 to 2006........................... 1,616 8.00 25,109 8.20
2007 to 2016........................... 309 8.00 31,258 7.86
2017 and following..................... --- --- 3,452 7.89
--------- --------
Total.............................. $8,932 $83,332
====== =======
</TABLE>
- ---------------
(1) Includes demand loans, loans having no stated maturity and overdraft loans.
As of December 31, 1996, the total amount of loans due or repricing
after December 31, 1997 which had predetermined interest rates was $30.4
million, while the total amount of loans due or repricing after such date which
had floating, adjustable or renegotiable interest rates was $48.2 million.
6
<PAGE>
One-to Four-Family Residential Mortgage Lending. Residential loan
originations are generated by the Association's marketing efforts, its present
customers, walk-in customers and referrals from real estate brokers and
builders. The Association has focused its lending efforts primarily on the
origination of loans secured by first mortgages on owner-occupied, single-family
residences in its market area. At December 31, 1996, the Association's one- to
four-family residential mortgage loans, excluding mortgage-backed securities,
totalled $63.2 million, or 75.85% of the Association's loan portfolio,
substantially all of which are conventional loans.
The Association currently makes adjustable-rate one- to four-family
residential mortgage loans in amounts up to 95% of the appraised value, or
selling price, of the secured property, whichever is less. Generally, for loans
with a loan-to-value ratio in excess of 80%, the Association requires private
mortgage insurance to reduce exposure levels below the 80% level. The
Association currently offers one-year ARM loans at rates determined in
accordance with market and competitive factors for a term of up to 30 years. The
loans provide for a 2% annual cap and floor, and a 6% lifetime cap and floor on
the interest rate over the rate in effect at the date of origination. The
Association also offers loans with a fixed rate for three, five or seven years
which automatically convert to the one-year ARM terms discussed above at the end
of the fixed-rate term. These loans' annual and lifetime caps on interest rate
increases reduce the extent to which they can help protect the Association
against interest rate risk. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Asset/Liability Management" in
the Company's Annual Report to Stockholders filed as Exhibit 13 hereto (the
"Annual Report"). Approximately 37% of the loans originated in 1996 by the
Association were originated with adjustable rates of interest. See "-
Originations, Purchases and Sales of Loans and Mortgage-Backed Securities."
Adjustable-rate loans decrease the risks associated with changes in
interest rates, as indicated above. They do, however, involve other risks,
primarily because as interest rates rise, the payment by the borrower rises to
the extent permitted by the terms of the loan, thereby increasing the potential
for default. At the same time, the marketability of the underlying property may
be adversely affected by higher interest rates. The Association believes that
these risks, which have not had a material adverse effect on the Association to
date, generally are less than the risks associated with holding fixed-rate loans
in an increasing interest rate environment.
The Association also originates fixed-rate mortgage loans for its
portfolio. These loans are predominantly for terms of 15 years. Interest rates
charged on these fixed-rate loans are competitively priced according to market
conditions.
In underwriting residential real estate loans, the Association
evaluates both the borrower's ability to make monthly payments and the value of
the property securing the loan. Potential borrowers are qualified for fixed-rate
loans based upon the initial or stated rate of the loan. On ARM loans, the
borrower is generally qualified on at least the maximum second year rate.
An appraisal of the security property is obtained on all loan
applications from Board-approved independent fee appraisers. The Association
requires, in connection with the origination of residential real estate loans,
an opinion of counsel regarding title, and fire and casualty insurance coverage,
as well as flood insurance where appropriate, to protect the Association's
interest. The cost of this insurance coverage is paid by the borrower.
At December 31, 1996, approximately $5.5 million, or 8.7% of the
Association's one- to four-family residential mortgage loan portfolio had been
purchased by the Association. These loans are secured by property located
primarily in California, Colorado, Arizona, Virginia and Texas, and have been in
the Association's portfolio for several years. The majority of the loans secured
by property located in California were purchased from the Association's former
mortgage banking subsidiary. The Association has purchased only a limited amount
of one- to four-family residential mortgage loans over the last five years.
Despite a decrease in the Association's portfolio of purchased one- to
four-family loans from $5.9 million in 1995, $6.9 million in 1994 and $10.1 in
1993, the level of delinquencies in this portion of the Association's portfolio
was higher than that of the loans originated and retained by the Association at
December 31, 1996 and accounted for 31% of the total dollar amount of delinquent
one- to four-family loans at that date compared to 45% at December 31, 1995. The
Association believes that the higher level of delinquencies, when compared to
the rest of the loan portfolio, was due to general economic conditions in
California during the recent past, where most of the properties securing
delinquent purchased loans are located. See also "- Asset Quality -
Non-Performing Assets."
7
<PAGE>
The Association's residential mortgage loans customarily include
due-on-sale clauses giving the Association the right to declare the loan
immediately due and payable in the event, among other things, the borrower sells
or otherwise disposes of the property subject to the mortgage and the loan is
not repaid. The Association has enforced due-on-sale clauses in its mortgage
contracts for the purpose of increasing its loan portfolio yield. The yield
increase is obtained through the authorization of assumptions of existing loans
at higher rates of interest and the imposition of assumption fees. ARM loans may
be assumed provided home buyers meet the Association's underwriting standards
and the loan terms are modified, to the extent necessary, to conform with
present yield and maturity requirements.
The Association also maintains an escrow account for most of its loans
secured by real estate, in order to ensure that the borrower provides funds to
cover property taxes in advance of the required payment. These accounts are
analyzed annually to confirm that adequate funds are available. For loans which
do not include an escrow requirement, an annual review of tax payments is
performed by the Association in order to confirm payment. In order to monitor
the adequacy of cash flows on income-producing properties, the borrower or lead
lender is notified annually, requesting financial information including rental
rates and income, maintenance costs and an update of real estate property tax
payments.
Commercial/Multi-Family Real Estate Lending. At December 31, 1996, the
Association had $10.4 million in commercial/multi-family real estate loans,
representing 12.44% of the Association's loan portfolio. Most of these loans
have been purchased or are participations with other lenders. Substantially all
of the Association's commercial/multi-family real estate loan portfolio is
secured by multi-family residential property, primarily apartment buildings.
Many of these properties are located outside the Association's market area,
primarily Des Moines and Cedar Rapids, Iowa, and the States of Wisconsin and
Washington.
At December 31, 1996, the principal balance of the largest lending
relationship with any one borrower or group of related borrowers, was $1,289,000
and consists of two participation loans originated in 1995 and 1996, secured by
a 192-unit apartment building located in Bettendorf, Iowa. The Association's
participation represents approximately 50.0% of the first loan of approximately
$1.8 million and approximately 7.0% of the second loan amount of approximately
$5.7 million. The first loan is amortized over 26 years, at a rate of 9.25% for
the first three years and thereafter at a rate equal to the Federal Cost of
Funds index plus 3.75%, adjusted annually. The second loan is a 10-year balloon
loan, at a rate of 9.0% for the first three years and thereafter at a rate equal
to the National Monthly Median Cost of Funds of SAIF Institutions plus 3.75%.
The principal balance of the second largest lending relationship was
$975,000 and is a participation loan originated in 1994, secured by a 92-bed
nursing home located in Oskaloosa, Iowa. The Association's participation
represents approximately 55.5% of the total outstanding loan amount of $1.8
million. The loan is amortized over 20 years, at a rate of 7.75% (representing
the New York prime rate plus, 1.75%) for the first three years and thereafter at
a rate equal to the New York prime rate plus 1.25%, adjusted annually. This loan
was paid in full on March 14, 1997.
The third largest lending relationship had a principal balance of
$971,000 and consists of two participation loans originated in 1995, secured by
two assisted, congregate-care facilities. One is a 68-unit facility located in
Cedar Rapids, Iowa, and the other is a 46-unit facility located in Dubuque,
Iowa. The Association's participation represents approximately 14% of the first
loan amount of approximately $3.5 million and approximately 16% of the second
loan amount of approximately $3.0 million. The first loan is amortized over 25
years, at a rate of 9.00% for the first three years and thereafter at a rate
equal to the Federal Cost of Funds index plus 3.50%. The second loan is
amortized over 25 years, at a rate of 9.50% for the first three years and
thereafter at a rate equal to the Federal Cost of Funds plus 3.25%.
The fourth largest lending relationship had a principal balance of
$812,000 and consists of two participation loans originated in 1996, secured by
two apartment complexes located in Madison, Wisconsin, one 20-unit and one
23-unit. The Association's participation represents approximately 40% of the
first loan amount of approximately $1.1 million and approximately 40% of the
second loan amount of approximately $1.0 million. The first loan is amortized
over 25 years, at a rate of 8.875% for the first three years and thereafter at a
rate equal to the Federal Cost of Funds index plus 3.50%. The second loan is
amortized over 15 years, at a rate of 8.75% for the first three
8
<PAGE>
years and thereafter at a rate equal to the Federal cost of Funds index plus
3.50%. Each of these loans was current as of December 31, 1996.
The Association has no other commercial/multi-family real estate loans
to one borrower, or group of borrowers, which have an existing net balance in
excess of $500,000.
Commercial/multi-family real estate lending affords the Association an
opportunity to receive interest at rates higher than those generally available
from one- to four-family residential lending. Nevertheless, loans secured by
such properties are generally larger and involve a greater degree of risk than
one- to four-family residential mortgage loans. Because payments on loans
secured by commercial/multi-family real estate properties are often dependent on
the successful operation or management of the properties, repayment of such
loans may be subject to adverse conditions in the real estate market or the
economy. If the cash flow from the project is reduced (for example, if leases
are not obtained or renewed), the borrower's ability to repay the loan may be
impaired. The Association has attempted to minimize these risks through its
underwriting standards. For the years 1996, 1995 and 1994, the Association
purchased participations in commercial/multi-family real estate loans totaling
$3.4 million, $4.3 million and $2.5 million, respectively. See also "-
Originations Purchases and Sales of Loans and Mortgage- Backed Securities."
Residential Construction Lending. The Association originates a limited
number of loans to finance the construction of single-family residences. These
loans are primarily made to individuals who will ultimately be the
owner-occupier of the house. Such loans are generally made as a permanent
financing on the constructed property with the initial six month term on an
interest-only basis. At December 31, 1996, the Association had loans to finance
the construction of single-family residences totaling $828,000, or 0.99% of the
Association's loan portfolio.
Residential construction loans are generally underwritten using the
same criteria as for one- to four-family residential loans. Payouts during the
construction phase are only made after inspection by the Association's
personnel. Authority for payouts is also required from the borrower and the
general contractor.
The Association has also originated a limited amount of land
development loans in its local market area. As of December 31, 1996, the
Association had only one such loan outstanding, totalling $19,000, which was
current at such date.
Consumer and Other Lending. Management considers consumer lending to be
an important component of its strategic plan. Specifically, consumer loans
generally have shorter terms to maturity (thus reducing Midwest Federal's
exposure to changes in interest rates) and carry higher rates of interest than
do one- to four-family residential mortgage loans. In addition, management
believes that the offering of consumer loan products helps to expand and create
stronger ties to its existing customer base, by increasing the number of
customer relationships and providing cross-marketing opportunities. At December
31, 1996, the Association's consumer loan portfolio totalled $8.9 million, or
10.72 of its loan portfolio. Under applicable federal law, the Association is
authorized to invest up to 35% of its assets in consumer loans.
Midwest Federal offers a variety of secured consumer loans, including
home equity, home improvement, auto, boat and recreational vehicle loans and
loans secured by savings deposits. The Association has also originated one loan
secured by inventory of a mobile home dealer with a balance of $22,000 as of
December 31, 1996. The Association also offers a limited amount of unsecured
loans. The Association currently originates all of its consumer loans in its
market area. The Association's home equity and home improvement loans comprised
approximately 46% of the Association's total consumer loan portfolio at December
31, 1996. These loans are generally originated in amounts, together with the
amount of the existing first mortgage, of up to 80% of the appraised value of
the property securing the loan. The term to maturity on such loans may be up to
ten years. Other consumer loan terms vary according to the type of collateral,
length of contract and creditworthiness of the borrower. The Association's
consumer loans generally have a fixed-rate of interest.
The Association does not originate any consumer loans on an indirect
basis (i.e., where loan contracts are purchased from retailers of goods or
services which have extended credit to their customers).
9
<PAGE>
The underwriting standards employed by the Association for consumer
loans include a determination of the applicant's payment history on other debts
and an assessment of the ability to meet existing obligations and payments on
the proposed loan. Although creditworthiness of the applicant is a primary
consideration, the underwriting process also includes a comparison of the value
of the security, if any, in relation to the proposed loan amount.
In 1995, the Association began purchasing participations in FmHA loans.
Generally, the Association only purchases the 90% guaranteed portion of the
loan. For the years 1996 and 1995, the Association purchased FmHA participations
totaling $2.8 million and $1.1 million, respectively. See also "- Originations,
Purchases and Sales of Loans and Mortgage-Backed Securities."
Consumer loans may entail greater risk than do residential mortgage
loans, particularly in the case of consumer loans which are unsecured, such as
checking account overdraft privilege loans, or are secured by rapidly
depreciable assets, such as automobiles. In such cases, any repossessed
collateral for a defaulted consumer loan may not provide an adequate source of
repayment of the outstanding loan balance as a result of the greater likelihood
of damage, loss or depreciation. In addition, consumer loan collections are
dependent on the borrower's continuing financial stability, and thus are more
likely to be affected by adverse personal circumstances. Furthermore, the
application of various federal and state laws, including bankruptcy and
insolvency laws, may limit the amount which can be recovered on such loans.
Although the level of delinquencies in the Association's consumer loan portfolio
has generally been low (at December 31, 1996, $50,000, or approximately .56% of
the consumer loan portfolio, was 30 days or more delinquent), there can be no
assurance that delinquencies will not increase in the future.
Mortgage-Backed Securities. The Association has a substantial portfolio
of mortgage-backed securities and has utilized such investments to complement
its mortgage lending activities. At December 31, 1996, mortgage-backed
securities totalled $28.4 million. At such date, $9.0 million of these
mortgage-backed securities (all of which were issued by the Government National
Mortgage Association ("GNMA")) were available for sale. For information
regarding the carrying and market values of Midwest Federal's mortgage-backed
securities portfolio, see Note 2 of the Notes to Consolidated Financial
Statements in the Annual Report.
The Association purchases mortgage-backed securities in order to
supplement the Association's loan originations. At December 31, 1996, $6.0
million, or 21.0%, and $9.4 million, or 33.3%, of the Association's
mortgage-backed securities carried adjustable rates of interest and balloon
maturities, respectively. Under the OTS' risk-based capital requirements, GNMA
mortgage-backed securities have a zero percent risk weighting for the risk-
based capital requirement of the OTS and Federal National Mortgage Association
("FNMA"), Federal Home Loan Mortgage Corporation ("FHLMC") and AA-rated
mortgage-backed securities have a 20% risk weighting, in contrast to the 50%
risk weighting carried by one- to four-family performing residential mortgage
loans.
10
<PAGE>
The following table sets forth the contractual maturities of the
Association's mortgage-backed securities at December 31, 1996. The table does
not reflect normal monthly amortization payments or anticipated prepayments.
<TABLE>
<CAPTION>
Due in December 31,
----------------------------------------------------------------- 1996
6 Months 6 Months 1 to 3 to 5 5 to 10 10 to 20 Over 20 Balance
or Less to 1 Year 3 Years Years Years Years Years Outstanding
-------- --------- -------- --------------- -------- ------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(In Thousands)
Adjustable-rate mortgage-backed securities:
Federal Home Loan
Mortgage Corporation.................. $--- $ --- $ --- $ --- $ --- --- $ 847 $ 847
Federal National
Mortgage Association.................. --- --- --- --- --- --- 4,542 4,542
Resolution Trust Corporation........... --- --- --- --- --- --- 561 561
----- ------- ----- ----- ------- ----- ------ ---------
Total adjustable-rate............... --- --- --- --- --- --- 5,950 5,950
----- ------- ------ ----- ------- ----- ------ --------
Fixed-rate mortgage-backed securities:
Federal Home Loan
Mortgage Corporation.................. 432 1,404 4,920 2,689 --- --- --- 9,445
Federal National
Mortgage Association.................. --- --- --- --- 1,982 1,977 --- 3,959
Government National
Mortgage Corporation.................. --- --- --- --- --- 6,983 2,013 8,996
------ ---------------- ---------------- ------ ------- ---------
Total fixed-rate.................... 432 1,404 4,920 2,689 1,982 8,960 2,013 22,400
----- ------ ------- ------ ------ ------ ------- --------
Total mortgage-backed
securities.............................. $432 $1,404 $4,920 $2,689 $1,982 $8,960 $7,963 $28,350
==== ====== ====== ====== ====== ====== ====== =======
</TABLE>
11
<PAGE>
Originations, Purchases and Sales of Loans and Mortgage-Backed Securities
As described above, the Association originates real estate loans
through marketing efforts, the Association's customer base, walk-in customers,
and referrals from real estate brokers and builders. The Association originates
both adjustable-rate and fixed-rate loans. Its ability to originate loans is
dependent upon the relative customer demand for fixed-rate or ARM loans in the
origination market, which is affected by the term structure (short-term compared
to long-term) of interest rates as well as the current and expected future level
of interest rates.
The Association purchases loans, to the extent favorable opportunities
arise, on a selected basis, predominantly in multi-family real estate loans and,
to a more limited extent, in small commercial real estate loans and FmHA
guaranteed loan participations. Generally, the Association's purchased loans
meet the criteria established by the Association for the loans it originates.
During fiscal 1996, the Association recorded gains of $45,000 from the
sale of mortgage-backed securities. During fiscal 1995, the Association recorded
no gains or losses from the sale of loans and mortgage-backed securities. At
December 31, 1996, the Association had no commitments to sell loans.
The Association had no loans serviced for others as of December 31,
1996, and $18.4 million in loans serviced by others at that date.
12
<PAGE>
The following table sets forth the loan origination, purchase, sale and
repayment activities of the Association for the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------
1996 1995 1994
--------- --------- --------
<S> <C> <C> <C>
(In Thousands)
Originations by Type:
Adjustable-rate:
Real estate - one- to four-family........................... $ 6,469 $ 4,462 $ 6,905
- construction................................ 841 1,450 3,191
------- ------- -------
Total adjustable-rate................................ 7,310 5,912 10,096
------- ------- -------
Fixed-rate:
Real estate - one- to four-family........................... 7,445 4,333 5,112
- construction................................ 883 134 1,580
Consumer and other loans.................................... 3,901 4,112 3,811
-------- ------- -------
Total fixed-rate..................................... 12,229 8,579 10,503
-------- ------- -------
Total loans originated(1)............................ 19,539 14,491 20,599
------- ------- -------
Purchases:
Real estate - commercial/multi-family....................... 3,434 4,261 2,495
Consumer and other loans.................................... 2,846 1,052 ---
Mortgage-backed securities.................................. 4,051 --- 6,241
-------- --------- -------
Total purchased...................................... 10,331 5,313 8,736
-------- ------- -------
Sales:
Real estate - one- to four-family........................... --- 95 520
Mortgage-backed securities.................................. 1,285 --- ---
-------- --------- --------
Total sales ................................................ 1,285 95 520
-------- -------- -------
Principal repayments.......................................... 21,375 18,198 23,378
-------- ------- -------
(Decrease) in other items, net................................ (4,463) (1,462) (1,532)
-------- ------- -------
Net increase......................................... $ 2,747 $ 49 $ 3,905
======= ======= =======
</TABLE>
- -----------
(1) $ 4,104,000, $1,285,000 and $1,177,000 of these originations for the years
ended December 31, 1996, 1995 and 1994, respectively, were to refinance
existing loans held by the Association.
13
<PAGE>
Asset Quality
When a borrower fails to make a required payment on a loan, the
Association attempts to cause the delinquency to be cured by contacting the
borrower. In the case of residential loans, a late notice is sent 15 days after
the due date. If the delinquency is not cured by the 30th day, contact with the
borrower is made by phone. Additional written and verbal contacts are made with
the borrower to the extent the borrower appears to be cooperative. If not, the
Association will send a 30-day default letter and, once that period elapses,
usually institutes appropriate action to foreclose on the property. Interest
income on loans at this point is reduced by the full amount of accrued and
uncollected interest. If foreclosed, the property is sold at public auction and
may be purchased by the Association. Delinquent consumer loans are handled in a
generally similar manner, except that initial contacts are made when the payment
is 10 days past due and telephone contact begins when a loan is 25 days past
due. If these efforts fail to bring the loan current, appropriate action may be
taken to collect any loan payment that remains delinquent. The Association's
procedures for repossession and sale of consumer collateral are subject to
various requirements under Iowa consumer protection laws.
14
<PAGE>
Delinquent Loans. The following table sets forth information concerning
delinquent mortgage and other loans at December 31, 1996 and 1995. The amounts
presented represent the total remaining principal balances of the related loans,
rather than the actual payment amounts which are overdue. Percentages are
exclusive of mortgage-backed securities.
<TABLE>
<CAPTION>
Real Estate
----------------------------------------------------------
One- to four-family Commercial/Multi-Family
------------------------ -----------------------------
Number Amount Percent Number Amount Percent
------ ------ ------- ------ ------ -------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Loans delinquent for:
December 31, 1996:
30-59 days.......................... 23 $263 .42% --- $ --- ---%
60-89 days.......................... 11 399 .63 --- --- ---
90 days and over.................... 7 245 .38 3 874 8.43
-- ---- ----- --- ---- ----
Total........................... 41 $907 1.43% 3 $874 8.43%
== ==== ==== === ==== ====
December 31, 1995:
30-59 days.......................... 30 $380 .61% --- $ --- ---%
60-89 days.......................... 21 568 .92 --- --- ---
90 days and over.................... 3 51 .09 --- --- ---
-- ----- ---- --- ---- ---
Total........................... 54 $999 1.62% --- $--- ---%
== ==== ==== === ==== ===
Consumer and Other Total
----------------------------- --------------------------
Number Amount Percent Number Amount Percent
------ ------ ------- ------ ------ -------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Loans delinquent for:
December 31, 1996:
30-59 days.......................... 8 $49 .55% 31 $ 312 .37%
60-89 days.......................... --- --- --- 11 399 .48
90 days and over.................... 1 1 .01 11 1,120 1.35
-- ---- --- --- ------ ----
Total........................... 9 $50 .56% 53 $1,831 2.20%
=== === === === ====== ====
December 31, 1995:
30-59 days.......................... 5 $ 20 .31% 35 $ 400 .52%
60-89 days.......................... 1 1 .02 22 569 .74
90 days and over.................... --- --- --- 3 51 .06
--- ---- --- --- ------- ----
Total........................... 6 $ 21 .33% 60 $1,020 1.32%
=== ==== === === ====== ====
</TABLE>
15
<PAGE>
Non-Performing Assets. The table below sets forth the amounts and
categories of non-performing assets in the Association's loan portfolio at the
dates indicated. Loans are placed on non-accrual status when the collection of
principal and/or interest become doubtful. As a matter of policy, the
Association does not accrue interest on loans past due 90 days or more. For all
periods presented, the Association has had no troubled debt restructurings
(which involve forgiving a portion of interest or principal on any loans or
making loans at a rate materially less than that of market rates). Real estate
owned includes assets acquired in settlement of loans, and reflect the lower of
cost or fair value.
<TABLE>
<CAPTION>
December 31,
----------------------------------
1996 1995 1994
------- ------ ------
<S> <C> <C> <C>
(Dollars in Thousands)
Non-accruing loans:
One- to four-family............................ $ 245 $ 51 $ 164
Commercial/multi-family real estate............ 874 --- ---
Consumer and other............................. 1 --- ---
------- ----- -----
Total....................................... 1,120 51 164
------- ----- -----
Real estate owned:
One- to four-family............................ 12 28 20
Commercial/multi-family real estate............ --- --- 274
Residential land............................... --- 5 5
------- ----- -----
Total....................................... 12 33 299
------- ----- -----
Total non-performing assets...................... $1,132 $ 84 $ 463
======= ===== =====
Total as a percentage of total assets............ .83% .06% .35%
=== === ===
</TABLE>
For the year ended December 31, 1996, gross interest income which would
have been recorded had the non-accruing loans been current in accordance with
their original terms totalled $103,000. The amount that was included in interest
income on such loans was $56,000 for the year ended December 31, 1996.
The Company's ratio of non-performing assets to total assets increased
to .83% at December 31, 1996 from .06% at December 31, 1995. Total
non-performing assets increased $1,048,000 resulting primarily from an $874,000
increase in non-accruing commercial/multi-family real estate loans as a result
of three loans becoming more than 90 days delinquent. The largest of the three
loans is a participation loan, which totaled $476,000 at December 31, 1996 and
is secured by a 104 unit apartment complex in Madison, Wisconsin. The
Association owns approximately 17% of a $2.8 million loan. The other two loans
are participation loans to one borrower, which totaled approximately $398,000 at
December 31, 1996 and are secured by a 96-unit apartment complex in Madison,
Wisconsin. The Association owns approximately 8% of a $5.1 million loan. All
three loans are in the foreclosure process, however the foreclosure has been
halted on the first loan as the borrower has filed bankruptcy. It is unknown how
long the foreclosure process will be postponed; however, the Association
believes there is adequate collateral in the properties to minimize the losses
on disposition.
Other Loans of Concern. In addition to the non-performing assets set
forth in the table above, as of December 31, 1996 there was also an aggregate of
$1,287,000 in net book value of loans with respect to which known information
about the possible credit problems of the borrowers or the cash flows of the
security properties have caused management to have doubts as to the ability of
the borrowers to comply with present loan repayment terms and which may result
in the future inclusion of such items in the non-performing asset categories.
See "Classified Assets" for a discussion of the loans in this category.
Classified Assets. Federal regulations provide for the classification
of loans and other assets, such as debt and equity securities considered by the
OTS to be of lesser quality, as "substandard," "doubtful" or "loss." An asset is
considered "substandard" if it is inadequately protected by the current net
worth and paying capacity of the obligor or of the collateral pledged, if any.
"Substandard" assets include those characterized by the "distinct possibility"
that the insured institution will sustain "some loss" if the deficiencies are
not corrected. Assets classified as
16
<PAGE>
"doubtful" have all of the weaknesses inherent in those classified
"substandard," with the added characteristic that the weaknesses present make
"collection or liquidation in full," on the basis of currently existing facts,
conditions, and values, "highly questionable and improbable." Assets classified
as "loss" are those considered "uncollectible" and of such little value that
their continuance as assets without the establishment of a specific loss reserve
is not warranted. Assets which do not currently expose the insured institution
to sufficient risk to warrant classification in one of the aforementioned
categories but possess weaknesses are designated "special mention" by
management.
When an insured institution classifies problem assets as either
substandard or doubtful, it may establish general allowances for loan losses in
an amount deemed prudent by management. General allowances represent loss
allowances which have been established to recognize the inherent risk associated
with lending activities, but which, unlike specific allowances, have not been
allocated to particular problem assets. When an insured institution classifies
problem assets as "loss," it is required either to establish a specific
allowance for losses equal to 100% of that portion of the asset so classified or
to charge-off such amount. An institution's determination as to the
classification of its assets and the amount of its valuation allowances is
subject to review by the regulatory authorities, who may order the establishment
of additional general or specific loss allowances.
In connection with the filing of its periodic reports with the OTS and
in accordance with its classification of assets policy, the Association
regularly reviews the problem loans in its portfolio to determine whether any
loans require classification in accordance with applicable regulations.
Classified assets (including those considered to be "special mention") of the
Association at December 31, 1996, 1995 and 1994 were as follows:
December 31,
--------------------------------------------------
1996 1995 1994
--------------------------------------------------
Special Mention............... $ 876,000 $302,000 $ 357,000
Substandard................... 1,543,000 455,000 749,000
Doubtful...................... --- --- ---
Loss.......................... --- --- 22,000
---------- --------- ----------
Total classified assets..... $2,419,000 $757,000 $1,128,000
========== ======== ==========
The increase in loans designated "special mention" from 1995 to 1996
was primarily the result of including one commercial/multi-family loan
participation amounting to $492,000 which is secured by a 68-unit congregate
care facility in Cedar Rapids, Iowa. The loan has been designated "special
mention" since several mechanics liens have been filed on the property. Despite
the filing of such liens, the loan payments were current as of December 31,
1996.
The increase in loans designated "substandard" from 1995 to 1996 was
primarily the result of the three commercial/multi-family loans discussed under
"- Asset Quality - Non-Performing Assets."
Allowance for Loan Losses. The allowance for loan losses is established
through a provision for loan losses based on management's evaluation of the risk
inherent in its loan portfolio and changes in the nature and volume of its loan
activity. Such evaluation, which includes a review of all loans of which full
collectibility may not be reasonably assured, considers among other matters, the
estimated fair value of the underlying collateral, economic conditions,
historical loan loss experience and other factors that warrant recognition in
providing for an adequate loan loss allowance. Although management believes it
uses the best information available to make such determinations, future
adjustments to reserves may be necessary, and net income could be significantly
affected, if circumstances differ substantially from the assumptions used in
making the initial determinations. At December 31, 1996, the Association had an
allowance for loan losses of $686,000. See also Notes 1 and 4 of the Notes to
Consolidated Financial Statements and "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Comparison of Years Ended
December 31, 1996 and 1995 - Provision for Losses on Loans" in the Annual
Report.
17
<PAGE>
The following table sets forth an analysis of the Association's
allowance for loan losses at the dates indicated.
Year Ended December 31,
------------------------
1996 1995 1994
----- ------ ------
(Dollars in Thousands)
Balance at beginning of period................... $ 676 $ 650 $ 652
----- ------ ------
Charge-offs:
One- to four-family............................. (37) (22) (10)
Commercial/Multi-family......................... --- --- (35)
Consumer and other.............................. (1) --- ---
----- ------ ------
(38) (22) (45)
----- ------ ------
Recoveries:
One- to four-family............................ --- --- 1
----- ------ ------
--- --- 1
----- ------ ------
Net (charge-offs) recoveries..................... (38) (22) (44)
----- ------ ------
Additions charged to operations.................. 48 48 42
----- ------ ------
Balance at end of period......................... $ 686 $ 676 $ 650
===== ====== ======
Ratio of net charge-offs (recoveries) during the
period to average loans, excluding mortgage-
backed securities outstanding during the period. .05% .03% .06%
==== ==== ====
Allowance for loan losses to non-performing
loans at end of period.......................... 61.25% 1,325.49% 396.34%
Allowance for loan losses to total loans,
excluding mortgage-backed securities
at end of period................................ .82% .87% .90%
18
<PAGE>
The distribution of the Association's allowance for losses on loans at
the dates indicated is summarized as follows:
December 31,
--------------------------------------------------
1996 1995 1994
---------------- ----------------- ---------------
Percent Percent Percent
of Loans of Loans of Loans
in Each in Each in Each
Category Category Category
to Total to Total to Total
Amount Loans Amount Loans Amount Loans
------ -------- ------ -------- ------ --------
(Dollars in Thousands)
One- to four-family.......... $225 75.9% $ 199 80.0% $ 221 85.5%
Commercial/multi-family
real estate................. 246 12.4 47 10.1 55 5.5
Construction or development.. 2 1.0 3 1.5 6 3.3
Consumer and other........... 60 10.7 66 8.4 42 5.7
Unallocated.................. 153 N/A(1) 361 N/A(1) 326 N/A(1)
----- ------ ----- ----- ----- -----
Total................... $686 100.00% $ 676 100.0% $ 650 100.0%
==== ====== ===== ===== ===== =====
(1) Not applicable.
Investment Activities
Midwest Federal must maintain minimum levels of investments that
qualify as liquid assets under OTS regulations. Liquidity may increase or
decrease depending upon the availability of funds and comparative yields on
investments in relation to the return on loans. Historically, the Association
has maintained liquid assets at levels above the minimum requirements imposed by
the OTS regulations and at levels believed adequate to meet the requirements of
normal operations, including repayments of maturing debt and potential deposit
outflows. Cash flow projections are regularly reviewed and updated to assure
that adequate liquidity is maintained. For December 1996, the Association's
liquidity ratio (liquid assets as a percentage of net withdrawable savings
deposits and current borrowings) was 9.78%. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources" in the Annual Report and "Regulation - Liquidity."
Federally chartered savings institutions have the authority to invest
in various types of liquid assets, including United States Treasury obligations,
securities of various federal agencies, certain certificates of deposit of
insured banks and savings institutions, certain bankers' acceptances, repurchase
agreements and federal funds. Subject to various restrictions, federally
chartered savings institutions may also invest their assets in commercial paper,
investment grade corporate debt securities and mutual funds whose assets conform
to the investments that a federally chartered savings institution is otherwise
authorized to make directly.
Generally, the investment policy of the Association is to invest funds
among various categories of investments and maturities based upon the
Association's asset/liability management policies, investment quality and
marketability, liquidity needs and performance objectives.
At December 31, 1996, Midwest Federal's interest-bearing deposits with
banks totalled $3.1 million, or 2.3% of total assets, and its investment
securities totalled $16.5 million, or 12.1% of total assets. As of such date,
the Association also had a $2.0 million investment in FHLBank stock, satisfying
its requirement for membership in the FHLBank of Des Moines. It is the
Association's general policy to purchase investment securities which are U.S.
Government securities and federal agency obligations and other issues that are
rated investment grade or have credit enhancements. At December 31, 1996, the
average term to maturity or repricing of the investment securities
19
<PAGE>
portfolio was 11.6 years. However, most of the securities have call features,
and if called, the remaining term would be 4 months. See also "- Mortgage-Backed
Securities" and Note 2 of the Notes to Consolidated Financial Statements in the
Annual Report.
The following table sets forth the composition of the Association's
investment portfolio at the dates indicated.
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------
1996 1995 1994
------------------------------------------------------
Book % of Book % of Book % of
Value Total Value Total Value Total
------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Interest-bearing deposits with banks.............. $ 3,127 100.0% $ 1,861 100.0% $ 2,813 100.0%
======= ===== ======= ===== ======= =====
Investment securities:
U.S. Government securities....................... $ --- ---% $ 1,007 4.7 $ 4,061 23.4%
Federal agency obligations....................... 16,535 86.1 18,545 86.2 11,153 64.2
Other marketable equity securities(1)............ 710 3.7 --- --- 237 1.3
-------- ------- ------ ----- ------- -----
Subtotal..................................... 17,245 89.8 19,552 90.9 15,451 88.9
FHLBank stock..................................... 1,960 10.2 1,960 9.1 1,921 11.1
-------- ------ ------- ----- ------- -----
Total investment securities and FHLBank
stock....................................... $19,205 100.0% $21,512 100.0% $17,372 100.0%
======= ===== ======= ===== ======= =====
Average remaining life or term to repricing,
excluding FHLBank stock and other
marketable equity securities (assuming call
feature are exercised)........................... 0.3 years 0.8 years 2.3 years
</TABLE>
(1) Represents primarily investments in common stock of non-related thrift
institutions.
The composition and maturities, assuming the call features are not
exercised, of the investment securities portfolio, excluding FHLBank of Des
Moines stock and other marketable equity securities, are indicated in the
following table.
<TABLE>
<CAPTION>
December 31, 1996
---------------------------------------------------------------
1 to 5 5 to 10 After 10 Total Investment
Years Years Years Securities
------- ------ ------- --------------------
Book Book Book Book Market
Value Value Value Value Value
------- ------ ------- ------- -------
<S> <C> <C> <C> <C> <C>
(Dollars in Thousands)
U.S. Government securities.................. $ --- $ --- $ --- $ --- $ ---
Federal agency obligations.................. 2,456 1,977 12,102 16,535 16,510
------- ------ ------- ------- -------
Total investment securities................. $2,456 $1,977 $12,102 $16,535 $16,510
====== ====== ======= ======= =======
Weighted average yield...................... 5.44% 7.30% 7.34% 7.06%
</TABLE>
20
<PAGE>
The Association's investment securities portfolio at December 31, 1996
contained neither tax-exempt securities nor securities of any issuer with an
aggregate book value in excess of 10% of the Association's retained earnings,
excluding securities issued by the United States Government, or its agencies.
The Association's investment securities portfolio is managed in
accordance with a written investment policy adopted by the Board of Directors.
Investments may be made by the Association's officers within specified limits
and must be approved in advance by the Board of Directors for transactions over
certain limits. For information regarding the carrying and market values of
Midwest Federal's investment securities portfolio, see Note 2 of the Notes to
Consolidated Financial Statements in the Annual Report.
Sources of Funds
General. The Association's primary sources of funds are deposits,
amortization and prepayment of loan principal (including mortgage-backed
securities), sales or maturities of investment securities, mortgage-backed
securities and short-term investments, borrowings, and funds provided from
operations.
Borrowings, predominantly from the FHLBank of Des Moines, may be used
to compensate for seasonal reductions in deposits or deposit inflows at less
than projected levels, and have been used on a longer-term basis to support
lending activities. See "--Borrowings."
Deposits. Midwest Federal offers a variety of deposit accounts having a
wide range of interest rates and terms. The Association's deposits consist of
passbook accounts, NOW accounts, and money market and certificate accounts. The
Association relies primarily on advertising, competitive pricing policies and
customer service to attract and retain these deposits. Midwest Federal solicits
deposits from its market area only, and does not use brokers to obtain deposits.
The flow of deposits is influenced significantly by general economic
conditions, changes in money market and prevailing interest rates and
competition. The variety of deposit accounts offered by the Association has
allowed it to be competitive in obtaining funds and to respond with flexibility
to changes in consumer demand. The Association has become more susceptible to
short-term fluctuations in deposit flows, as customers have become more interest
rate conscious. The Association manages the pricing of its deposits in keeping
with its asset/liability management and profitability objectives. Based on its
experience, the Association believes that its passbook, NOW and
non-interest-bearing checking accounts are relatively stable sources of
deposits. However, the ability of the Association to attract and maintain
certificate deposits, and the rates paid on these deposits, has been and will
continue to be significantly affected by market conditions.
On December 15, 1995, the Association sold all of the deposits of its
Keokuk branch, totalling $7.7 million, terminated the office rental agreement,
and closed the branch office.
21
<PAGE>
The following table sets forth the dollar amount of savings deposits in
the various types of deposit programs offered by the Association for the periods
indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------------------------------
1996 1995 1994
---------------------------------------------------------------------------------
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Interest Rate Range:
Money Market Deposit
Accounts 2.75-4.00%................ $ 13,590 13.3% $ 13,282 13.1% $ 16,736 15.7%
Passbook Accounts 2.75-3.00%. 8,609 8.5 8,887 8.8 9,812 9.2
NOW Accounts 1.50-2.00%............. 6,738 6.6 7,841 7.8 7,185 6.7
Non-interest checking accounts...... 399 .4 351 .3 304 .3
---------- ------ --------- ------ ---------- -----
Total Non-Certificates.............. 29,336 28.8 30,361 30.0 34,037 31.9
--------- ----- -------- ----- -------- -----
Certificates:
3.00 - 3.99%....................... --- --- --- --- 8,152 7.6
4.00 - 4.99%....................... 9,133 9.0 20,609 20.3 46,735 43.7
5.00 - 5.99%....................... 49,464 48.5 40,357 39.8 10,860 10.2
6.00 - 6.99%....................... 10,466 10.2 6,564 6.5 2,328 2.2
7.00 - 7.99%....................... 3,235 3.2 3,161 3.1 4,233 3.9
8.00 - 8.99%....................... 284 .3 282 .3 549 .5
---------- ------ ---------- ----- ---------- ------
Total Certificates.................. 72,582 71.2 70,973 70.0 72,857 68.1
--------- ----- --------- ----- --------- -----
Total Deposits...................... $101,918 100.0% $101,334 100.0% $106,894 100.0%
======== ===== ======== ===== ======== =====
</TABLE>
The following table sets forth the savings flows at the Association
during the periods indicated. Net deposits (withdrawals) refers to the amount of
deposits during a period less the amount of withdrawals during the period.
Deposit flows at savings institutions may also be influenced by external factors
such as governmental credit policies and, particularly in recent periods,
depositors' perceptions of the adequacy of federal insurance of accounts.
Year Ended December 31,
-----------------------------------------
1996 1995 1994
--------- --------- --------
(Dollars in Thousands)
Opening balance................ $101,334 $106,894 $106,723
Deposits sold.................. --- (7,709) ---
Net deposits (withdrawals)..... (3,260) (1,558) (3,083)
Interest credited.............. 3,844 3,707 3,254
--------- --------- --------
Ending balance................. $101,918 $101,334 $106,894
======== ======== ========
Net increase (decrease)........ $ 584 $ (5,560) $ 171
========= ======== ========
Percent increase (decrease).... .58 % (5.20)% .16%
=== ===== ===
22
<PAGE>
The following table shows rate and maturity information for the
Association's certificates of deposit as of December 31, 1996.
<TABLE>
<CAPTION>
4.00- 5.00- 6.00- 7.00- 8.00- Percent
4.99% 5.99% 6.99% 7.99% 8.99% Total of Total
------ ------ ----- ----- ----- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Certificate accounts maturing
in quarter ending :
March 31, 1997..................... $3,727 $12,693 $ 600 $ 16 $ 134 $17,170 23.7%
June 30, 1997...................... 1,735 9,548 740 --- --- 12,023 16.6
September 30, 1997................. 739 6,156 374 77 --- 7,346 10.1
December 31, 1997.................. 1,089 6,262 1,394 475 --- 9,220 12.7
March 31, 1998..................... 1,090 2,987 602 153 --- 4,832 6.7
June 30, 1998...................... 619 3,414 46 9 --- 4,088 5.6
September 30, 1998................. 13 2,742 389 --- 49 3,193 4.4
December 31, 1998.................. 67 2,093 395 9 9 2,573 3.5
March 31, 1999..................... 54 1,639 162 --- 4 1,859 2.6
June 30, 1999...................... --- 892 3,366 --- --- 4,258 5.9
September 30, 1999................. --- 212 1,849 --- 65 2,126 2.9
December 31, 1999.................. --- 249 222 2,415 23 2,909 4.0
Thereafter......................... --- 577 327 81 --- 985 1.3
-------- -------- -------- ------- ------ -------- -----
Total......................... $9,133 $49,464 $10,466 $3,235 $284 $72,582 100.0%
====== ======= ======= ====== ==== ======= =====
Percent of total.............. 12.6% 68.1% 14.4% 4.5% 0.4% 100.0%
==== ==== ==== === === =====
</TABLE>
The following table indicates the amount of the Association's
certificates of deposit and other deposits by time remaining until maturity as
of December 31, 1996.
<TABLE>
<CAPTION>
Maturity
-------------------------------------------------
Over Over
3 Months 3 to 6 6 to 12 Over
or Less Months Months 12 months Total
-------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
(In Thousands)
Certificates of deposit less
than $100,000.............................. $16,106 $11,493 $16,466 $25,315 $69,380
Certificates of deposit of
$100,000 or more........................... 1,064 530 100 1,508 3,202
-------- --------- -------- -------- --------
Total certificates of deposit............... $17,170 $12,023 $16,566 $26,823 $72,582
======= ======= ======= ======= =======
</TABLE>
From time to time the Association has had public funds. The Association
is required to pledge collateral against such funds equal to 110% of such funds.
The Association had $357,000, $211,000, and no such funds on deposit at December
31, 1996, 1995 and 1994, respectively.
Borrowings. Although deposits are the Association's primary source of
funds, the Association's policy has been to utilize borrowings when they are a
less costly source of funds or can be invested at a positive rate of return. In
addition, the Association has relied upon selected borrowings for short-term
liquidity needs.
23
<PAGE>
Midwest Federal may obtain advances from the FHLBank of Des Moines upon
the security of its capital stock of the FHLBank of Des Moines and certain of
its mortgage loans and investments. Such advances may be made pursuant to
several different credit programs, each of which has its own interest rate and
range of maturities. At December 31, 1996, the Association had $24.0 million of
fixed-rate advances from the FHLBank of Des Moines. The Association also had a
$3.0 million open line of credit with the FHLBank, which expired in December
1996. The Association may renew the line of credit at any time. Although the
Association has also used securities sold under agreements to repurchase in the
past, no such borrowings have been made during the last three years.
The following table sets forth the maximum month-end balance and
average balance of FHLBank advances at and for the dates indicated.
At and For the Year Ended December 31,
--------------------------------------------
1996 1995 1994
------- -------- -------
(In Thousands)
Maximum Balance:
FHLBank advances......... $28,000 $20,500 $16,000
Average Balance:
FHLBank advances......... $25,256 $16,596 $13,725
The following table sets forth certain information as to the
Association's FHLBank advances at the dates indicated.
December 31,
---------------------------------
1996 1995 1994
----------------------------------
(Dollars in Thousands)
FHLBank advances........................... $24,000 $20,500 $14,000
------- ------- -------
Total borrowings...................... $24,000 $20,500 $14,000
======= ======= =======
Weighted average interest rate during the
period of FHLBank advances................ 6.00% 5.89% 5.15%
Weighted average interest rate at end of
period of FHLBank advances................ 5.87% 6.03% 5.44%
Subsidiary and Other Activities
As a federally chartered savings and loan association, Midwest Federal
is permitted by OTS regulations to invest up to 2% of its assets, or $2.7
million at December 31, 1996, in the stock of, or unsecured loans to, service
corporation subsidiaries. As of such date, the net book value of Midwest
Federal's investment in and unsecured loans to its service corporation was
$26,557. Midwest Federal may invest an additional 1% of its assets in service
corporations where such additional funds are used for inner-city or community
development purposes.
Midwest Federal has one active wholly owned subsidiary, Midwest
Financial Products, Inc. ("MFP"), engaged in the sale of tax-deferred annuities
and other financial products. For the year ended December 31, 1996, MFP had net
earnings of $14,284. MFP has an expense-sharing agreement with Midwest Federal
whereby MFP reimburses Midwest Federal for its share of common expenses such as
personnel and occupancy expenses. This expense reimbursement is paid quarterly.
24
<PAGE>
At December 31, 1996, the Association had an equity investment in MFP
of $26,557 (equal to its $100 capital plus $26,457 retained earnings), with no
loans outstanding.
Regulation
General. Midwest Federal is a federally chartered stock savings and
loan association, the deposits of which are insured by the FDIC up to applicable
limits. Such insurance is backed by the full faith and credit of the United
States Government. Accordingly, Midwest Federal is subject to broad federal
regulation and oversight extending to all its operations. The Association is a
member of the FHLBank of Des Moines and is subject to certain limited regulation
by the Board of Governors of the Federal Reserve System (the "Federal Reserve
Board"). As the savings and loan holding company of Midwest Federal, the Company
also is subject to federal regulation and oversight. The purpose of the
regulation of the Company and other holding companies is to protect subsidiary
savings associations. The Association is a member of the Savings Association
Insurance Fund ("SAIF") of the FDIC. As a result, the FDIC has certain
regulatory and examination authority over Midwest Federal.
Certain of these regulatory requirements and restrictions are discussed
below or elsewhere in this document.
Federal Regulation of Savings Associations. The OTS has extensive
authority over the operations of savings associations. As part of this
authority, Midwest Federal is required to file periodic reports with the OTS and
is subject to periodic examinations by the OTS and the FDIC. Under agency
scheduling guidelines, it is likely that another examination will be initiated
in the near future. When these examinations are conducted by the OTS and the
FDIC, the examiners may require Midwest Federal to provide for higher general or
specific loan loss reserves. All savings associations are subject to a
semi-annual assessment, based upon the savings association's total assets, to
fund the operations of the OTS. Midwest Federal's OTS assessment for the fiscal
year ended December 31, 1996, was $41,962. The last regular examinations of the
Association by the OTS and the FDIC were as of March 11, 1996 and November 30,
1991, respectively.
The OTS also has extensive enforcement authority over all savings
institutions and their holding companies, including Midwest Federal and the
Company, and their institution affiliated parties such as directors, officers,
agents and other persons providing services to the Association or the Company.
This enforcement authority includes, among other things, the ability to assess
civil money penalties, to issue cease-and-desist or removal orders and to
initiate injunctive actions. In general, these enforcement actions may be
initiated for violations of laws and regulations and unsafe or unsound
practices. Other actions or inactions may provide the basis for enforcement
action, including misleading or untimely reports filed with the OTS. Except
under certain circumstances, public disclosure of final enforcement actions by
the OTS is required.
In addition, the investment, lending and branching authority of the
Association is prescribed by federal laws and it is prohibited from engaging in
any activities not permitted by such laws. For instance, no savings institution
may invest in non-investment grade corporate debt securities. In addition, the
permissible level of investment by federal associations in loans secured by
non-residential real property may not exceed 400% of total capital, except with
approval of the OTS. Federal savings associations are also generally authorized
to branch nationwide. As of December 31, 1996, Midwest Federal is in compliance
with the noted restrictions.
The Association's general permissible lending limit for
loans-to-one-borrower is equal to the greater of $500,000 or 15% of unimpaired
capital and surplus (except for loans fully secured by certain readily
marketable collateral, in which case this limit is increased to 25% of
unimpaired capital and surplus). At December 31, 1996, the Association's lending
limit under this restriction was approximately $1.3 million. As of December 31,
1996, Midwest Federal is in compliance with the loans-to-one-borrower
limitation.
The OTS, as well as the other federal banking agencies, has adopted
guidelines establishing safety and soundness standards on matters such as loan
underwriting and documentation, asset quality, earnings standards, internal
controls and audit systems, interest rate risk exposure and compensation and
other employee benefits. Any institution which fails to comply with these
standards must submit a compliance plan. A failure to submit a plan or to comply
with an approved plan will subject the institution to further enforcement
action.
25
<PAGE>
Insurance of Accounts and Regulation by the FDIC. Midwest Federal is a
member of the SAIF, which is administered by the FDIC. Deposits are insured to
applicable limits by the FDIC and such insurance is backed by the full faith and
credit of the United States Government. As insurer, the FDIC imposes deposit
insurance premiums and is authorized to conduct examinations of and to require
reporting by FDIC-insured institutions. It also may prohibit any FDIC-insured
institution from engaging in any activity the FDIC determines by regulation or
order to pose a serious risk to the SAIF or the Bank Insurance Fund (the "BIF").
The FDIC also has the authority to initiate enforcement actions against savings
associations, after giving the OTS an opportunity to take such action, and may
terminate the deposit insurance if it determines that the institution has
engaged or is engaging in unsafe or unsound practices, or is in an unsafe or
unsound condition.
The FDIC's deposit insurance premiums are assessed through a risk-based
system under which all insured depository institutions are placed into one of
nine categories and assessed insurance premiums based upon their level of
capital and supervisory evaluation. Under the system, institutions classified as
well capitalized (i.e., a core capital ratio of at least 5%, a ratio of Tier 1
or core capital to risk-weighted assets ("Tier 1 risk-based capital") of at
least 6% and a risk-based capital ratio of at least 10%) and considered healthy
pay the lowest premium while institutions that are less than adequately
capitalized (i.e., core or Tier 1 risk-based capital ratios of less than 4% or a
risk-based capital ratio of less than 8%) and considered of substantial
supervisory concern pay the highest premium. Risk classification of all insured
institutions will be made by the FDIC for each semi-annual assessment period.
For the first six months of 1995, the assessment schedule for Bank Insurance
Fund ("BIF") members and SAIF members ranged from .23% to .31% of deposits.
The FDIC is authorized to increase assessment rates, on a semiannual
basis, if it determines that the reserve ratio of the SAIF will be less than the
designated reserve ratio of 1.25% of SAIF insured deposits. In setting these
increased assessments, the FDIC must seek to restore the reserve ratio to that
designated reserve level, or such higher reserve ratio as established by the
FDIC. The FDIC may also impose special assessments on SAIF members to repay
amounts borrowed from the United States Treasury or for any other reason deemed
necessary by the FDIC.
As is the case with the SAIF, the FDIC is authorized to adjust the
insurance premium rates for banks that are insured by the BIF of the FDIC in
order to maintain the reserve ratio of the BIF at 1.25% of BIF insured deposits.
As a result of the BIF reaching its statutory reserve ratio the FDIC revised the
premium schedule for BIF insured institutions to provide a range of .04% to .31%
of deposits. The revisions became effective in the third quarter of 1995. In
addition, the BIF rates were further revised, effective January 1996, to provide
a range of 0% to .27%. The SAIF rates, however, were not adjusted. At the time
the FDIC revised the BIF premium schedule, it noted that, absent legislative
action (as discussed below), the SAIF would not attain its designated reserve
ratio until the year 2002. As a result, SAIF insured members would continue to
be generally subject to higher deposit insurance premiums than BIF insured
institutions until, all things being equal, the SAIF attained its required
reserve ratio.
In order to eliminate this disparity and any competitive disadvantage
between BIF and SAIF member institutions with respect to deposit insurance
premiums, legislation to recapitalize the SAIF was enacted in September 1996.
The legislation provides for a one-time assessment to be imposed on all deposits
assessed at the SAIF rates, as of March 31, 1995, in order to recapitalize the
SAIF. It also provides for the merger of the BIF and the SAIF on January 1, 1999
if no savings associations then exist. The special assessment rate has been
established at .657% of deposits by the FDIC and the resulting assessment of
$670,861 was paid in November 1996. This special assessment significantly
increased noninterest expense and adversely affected Midwest Federal's results
of operations for the year ended December 31, 1996. As a result of the special
assessment, Midwest Federal's deposit insurance premiums was reduced to $16,439
for the first quarter of 1997, based upon its current risk classification and
the new assessment schedule for SAIF insured institutions. These premiums are
subject to change in future periods.
Prior to the enactment of the legislation, a portion of the SAIF
assessment imposed on savings associations was used to repay obligations issued
by a federally chartered corporation to provide financing ("FICO") for resolving
the thrift crisis in the 1980's. Although the FDIC has proposed that the SAIF
assessment be equalized with the BIF assessment schedule, effective October 1,
1996, SAIF-insured institutions will continue to be subject to a FICO assessment
as a result of this continuing obligation. Although the legislation also now
requires
26
<PAGE>
assessments to be made on BIF-assessable deposits for this purpose, effective
January 1, 1997, that assessment will be limited to 20% of the rate imposed on
SAIF assessable deposits until the earlier of December 31, 1999 or when no
savings association continues to exist, thereby imposing a greater burden on
SAIF member institutions such as Midwest Federal. Thereafter, however,
assessments on BIF-member institutions will be made on the same basis as
SAIF-member institutions. The rates to be established by the FDIC to implement
this requirement for all FDIC- insured institutions is uncertain at this time,
but are anticipated to be about a 6.5 basis points assessment on SAIF deposits
and 1.5 basis points on BIF deposits until BIF insured institutions participate
fully in the assessment.
Regulatory Capital Requirements. Federally insured savings
associations, such as the Association, are required to maintain a minimum level
of regulatory capital. The OTS has established capital standards, including a
tangible capital requirement, a leverage ratio (or core capital) requirement and
a risk-based capital requirement applicable to such savings associations. These
capital requirements must be generally as stringent as the comparable capital
requirements for national banks. The OTS is also authorized to impose capital
requirements in excess of these standards on individual associations on a
case-by-case basis.
The capital regulations require tangible capital of at least 1.5% of
adjusted total assets (as defined by regulation). Tangible capital generally
includes common stockholders' equity and retained income and certain
noncumulative perpetual preferred stock and related income. In addition, all
intangible assets, other than a limited amount of purchased mortgage servicing
rights, must be deducted from tangible capital for this purpose. At December 31,
1996, Midwest Federal had no unamortized purchased mortgage servicing rights
which were required to be deducted from tangible capital. At December 31, 1996,
Midwest Federal had no intangible assets which were subject to these tests.
The OTS regulations establish special capitalization requirements for
savings associations that own subsidiaries. Under these regulations certain
subsidiaries are consolidated for capital purposes and others are excluded from
assets and capital. In determining compliance with the capital requirements, all
subsidiaries engaged solely in activities permissible for national banks,
engaged solely in mortgage-banking activities, or engaged in certain other
activities solely as agent for its customers are "includable" subsidiaries that
are consolidated for capital purposes in proportion to the association's level
of ownership, including the assets of includable subsidiaries in which the
association has a minority interest that is not consolidated for purposes of
generally accepted accounting principles ("GAAP"). The Association's subsidiary
is an includable subsidiary.
At December 31, 1996, the Association had tangible capital of $8.7
million, or 6.4% of adjusted total assets, which is approximately $6.7 million
above the minimum requirement of 1.5% of adjusted total assets in effect on that
date.
The capital standards also require core capital equal to at least 3% of
adjusted total assets (as defined by regulation). Core capital generally
consists of tangible capital plus certain intangible assets, including a limited
amount of credit card relationships. As a result of the prompt corrective action
provisions discussed below, however, a savings association must maintain a core
capital ratio of at least 4% to be considered adequately capitalized unless its
supervisory condition is such to allow it to maintain a 3% ratio. At December
31, 1996, the Association had no intangibles which were subject to these tests.
At December 31, 1996, the Association had core capital equal to $8.7
million, or 6.4% of adjusted total assets, which is $4.6 million above the
minimum leverage ratio requirement of 3% as in effect on that date.
The OTS risk-based requirement requires savings associations to have
total capital of at least 8.0% of risk-weighted assets. Total capital consists
of core capital, as defined above, and supplementary capital. Supplementary
capital consists of certain permanent and maturing capital instruments that do
not qualify as core capital and general valuation loan and lease loss allowances
up to a maximum of 1.25% of risk-weighted assets. Supplementary capital may be
used to satisfy the risk-based requirement only to the extent of core capital.
The OTS is also authorized to require a savings association to maintain an
additional amount of total capital to account for concentration of credit risk
and the risk of non-traditional activities. At December 31, 1996, Midwest
Federal had $686,000 of general loss reserves, which was equal to 1.16% of
risk-weighted assets. As a result, all of such reserves may be used to satisfy
the capital requirement.
27
<PAGE>
Certain exclusions from capital and assets are required to be made for
the purpose of calculating total capital. Such exclusions consist of equity
investments (as defined by regulation) and that portion of land loans and
nonresidential construction loans in excess of an 80% loan-to-value ratio and
reciprocal holdings of qualifying capital instruments. Midwest Federal had no
such exclusions from capital and assets at December 31, 1996.
In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet items, will be multiplied by a risk weight,
ranging from 0% to 100%, based on the risk inherent in the type of asset. For
example, the OTS has assigned a risk weight of 50% for prudently underwritten
permanent one- to four-family first lien mortgage loans not more than 90 days
delinquent and having a loan to value ratio of not more than 80% at origination
unless insured to such ratio by an insurer approved by FNMA or FHLMC.
The OTS has adopted a final rule that requires every savings
association with more than normal interest rate risk to deduct from its total
capital, for purposes of determining compliance with such requirement, an amount
equal to 50% of its interest-rate risk exposure multiplied by the present value
of its assets. This exposure is a measure of the potential decline in the net
portfolio value of a savings association, greater than 2% of the present value
of its assets, based upon a hypothetical 200 basis point increase or decrease in
interest rates (whichever results in a greater decline). Net portfolio value is
the present value of expected cash flows from assets, liabilities and off-
balance sheet contracts. The rule provides for a two quarter lag between
calculating interest rate risk and recognizing any deduction from capital. The
rule provides for a two quarter lag between calculating interest rate risk and
recognizing any deduction from capital. The rule will not become effective until
the OTS evaluates the process by which savings associations may appeal an
interest rate risk deduction determination. It is uncertain as to when this
evaluation may be completed. 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.
On December 31, 1996, the Association had total capital of $9.4 million
(including $8.7 million in core capital and $686,000 in qualifying supplementary
capital) and risk-weighted assets of $59.1 million (and no converted off-balance
sheet assets); or total capital of 15.9% of risk-weighted assets. This amount
was $4.7 million above the 8.0% requirement in effect on that date.
The OTS and the FDIC are authorized and, under certain circumstances
required, to take certain actions against associations that fail to meet capital
requirements. The OTS is generally required to take action to restrict the
activities of an "undercapitalized association" (generally defined to be one
with less than either a 4% core ratio, a 4% Tier 1 risked-based capital ratio or
an 8% risk-based capital ratio). Any such association must submit a capital
restoration plan and until such plan is approved by the OTS may not increase its
assets, acquire another institution, establish a branch or engage in any new
activities, and generally may not make capital distributions. The OTS is
authorized to impose the additional restrictions, that are applicable to
significantly undercapitalized associations.
As a condition to the approval of the capital restoration plan, any
company controlling an undercapitalized association must agree that it will
enter into a limited capital maintenance guarantee with respect to the
institution's achievement of its capital requirements.
Any savings association that fails to comply with its capital plan or
is "significantly undercapitalized" (i.e., Tier 1 risk-based or core capital
ratios of less than 3% or a risk-based capital ratio of less than 6%) must be
made subject to one or more of additional specified actions and operating
restrictions which may cover all aspects of its operations and include a forced
merger or acquisition of the association. An association that becomes
"critically undercapitalized" (i.e., a tangible capital ratio of 2% or less) is
subject to further mandatory restrictions on its activities in addition to those
applicable to significantly undercapitalized associations. In addition, the OTS
must appoint a receiver (or conservator with the concurrence of the FDIC) for a
savings association, with certain limited exceptions, within 90 days after it
becomes critically undercapitalized. Any undercapitalized association is also
subject to the general enforcement authority of the OTS and the FDIC, including
the appointment of a receiver or conservator.
28
<PAGE>
The OTS is also generally authorized to reclassify an association into
a lower capital category and impose the restrictions applicable to such category
if the institution is engaged in unsafe or unsound practices or is in an unsafe
or unsound condition.
The imposition by the OTS or the FDIC of any of these measures on
Midwest Federal may have a substantial adverse effect on its operations and
profitability. Stockholders of the Company do not have preemptive rights, and
therefore, if the Company is directed by the OTS or the FDIC to issue additional
shares of Common Stock, such issuance may result in the dilution in the
percentage of ownership of the Company.
Limitations on Dividends and Other Capital Distributions. OTS
regulations impose various restrictions on savings associations with respect to
their ability to make distributions of capital which include dividends, stock
redemptions or repurchases, cash-out mergers and other transactions charged to
the capital account. OTS regulations also prohibit a savings association from
declaring or paying any dividends or from repurchasing any of its stock if, as a
result, the regulatory (or total) capital of the association would be reduced
below the amount required to be maintained for the liquidation account
established in connection with its mutual to stock conversion.
The OTS utilizes a three-tiered approach to permit associations, based
on their capital level and supervisory condition, to make capital distributions
which include dividends, stock redemptions or repurchases, cash-out mergers and
other transactions charged to the capital account (see "--Regulatory Capital
Requirements").
Generally, Tier 1 associations, which are associations that before and
after the proposed distribution meet their fully phased-in capital requirements,
may make capital distributions during any calendar year equal to the greater of
100% of net income for the year-to-date plus 50% of the amount by which the
lesser of the association's tangible, core or risk-based capital exceeds its
fully phased-in capital requirement for such capital component, as measured at
the beginning of the calendar year, or the amount authorized for a Tier 2
association. However, a Tier 1 association deemed to be in need of more than
normal supervision by the OTS may be downgraded to a Tier 2 or Tier 3
association as a result of such a determination. Midwest Federal meets the
requirements for a Tier 1 association and has not been notified of a need for
more than normal supervision. Tier 2 associations, which are associations that
before and after the proposed distribution meet their current minimum capital
requirements, may make capital distributions of up to 75% of net income over the
most recent four quarter period.
Tier 3 associations (which are associations that do not meet current
minimum capital requirements) that propose to make any capital distribution and
Tier 2 associations that propose to make a capital distribution in excess of the
noted safe harbor level must obtain OTS approval prior to making such
distribution. Tier 2 associations proposing to make a capital distribution
within the safe harbor provisions and Tier 1 associations proposing to make any
capital distribution need only submit written notice to the OTS 30 days prior to
such distribution. As a subsidiary of the Holding Company, Midwest Federal will
also be required to give the OTS 30 days' notice prior to declaring any dividend
on its stock. The OTS may object to the distribution during that 30-day period
based on safety and soundness concerns. See "- Regulatory Capital Requirements."
The OTS has proposed regulations that would revise the current capital
distribution restrictions. Under the proposal, a savings association may make a
capital distribution without notice to the OTS (unless it is a subsidiary of a
holding company) provided that it has a CAMEL rating of 1 or 2, is not of
supervisory concern; and would remain adequately capitalized (as defined in the
OTS prompt corrective action regulations) following the proposed distribution.
Savings associations that would remain adequately capitalized following the
proposed distribution but do not meet the other noted requirements must notify
the OTS 30 days prior to declaring a capital distribution. The OTS stated it
will generally regard as permissible that amount of capital distributions that
do not exceed 50% of the institution's excess regulatory capital plus net income
to date during the calendar year. A savings association may not make a capital
distribution without prior approval of the OTS and the FDIC if it is
undercapitalized before, or as a result of, such a distribution. As under the
current rule, the OTS may object to a capital distribution if it would
constitute an unsafe or unsound practice. No assurance may be given as to
whether or in what form the regulations may be adopted.
29
<PAGE>
Liquidity. All savings associations, including Midwest Federal, are
required to maintain an average daily balance of liquid assets equal to a
certain percentage of the sum of its average daily balance of net withdrawable
deposit accounts and borrowings payable in one year or less. For a discussion of
what the Association includes in liquid assets, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations-Liquidity and Capital
Resources." This liquid asset ratio requirement may vary from time to time
(between 4% and 10%) depending upon economic conditions and savings flows of all
savings associations. At the present time, the minimum liquid asset ratio is 5%.
In addition, short-term liquid assets (e.g., cash, certain time
deposits, certain bankers acceptances and short-term United States Treasury
obligations) currently must constitute at least 1% of the association's average
daily balance of net withdrawable deposit accounts and current borrowings.
Penalties may be imposed upon associations for violations of either liquid asset
ratio requirement. At December 31, 1996, the Association was in compliance with
both requirements, with an overall liquid asset ratio of 9.8% and a short-term
liquid assets ratio of 2.8%.
Accounting. An OTS policy statement applicable to all savings
associations clarifies and re-emphasizes that the investment activities of a
savings association must be in compliance with approved and documented
investment policies and strategies, and must be accounted for in accordance with
GAAP. Under the policy statement, management must support its classification of
and accounting for loans and securities (i.e., whether held for investment,
available for sale or trading) with appropriate documentation. The Association
is in compliance with these rules.
OTS accounting regulations, which may be made more stringent than GAAP
by the OTS, require that transactions be reported in a manner that best reflects
their underlying economic substance and inherent risk and that financial reports
must incorporate any other accounting regulations or orders prescribed by the
OTS.
Qualified Thrift Lender Test. All savings associations, including the
Association, are required to meet a qualified thrift lender ("QTL") test to
avoid certain restrictions on their operations. This test requires a savings
association to have at least 65% of its portfolio assets (which consists of
total assets less intangibles, properties used to conduct the savings
association's business and liquid assets not exceeding 20% of total assets) in
qualified thrift investments on a monthly average for nine out of every 12
months on a rolling basis. As an alternative, the savings association may
maintain 60% of its assets in those assets specified in Section 770(a)(19) of
the Internal Revenue Code. Under either test such assets primarily consist of
residential housing related loans and investments. At December 31, 1996, the
Association met the test and has always met the test since its effectiveness.
Any savings association that fails to meet the QTL test must convert to
a national bank charter, unless it requalifies as a QTL and thereafter remains a
QTL. If the association does not requalify and converts to a national bank
charter, it must remain SAIF-insured until the FDIC permits it to transfer to
the Bank Insurance Fund. If an association that fails the test has not yet
requalified and has not converted to a national bank, its new investments and
activities are limited to those permissible for both a savings association and a
national bank, and it is limited to national bank branching rights in its home
state. In addition, the association is immediately ineligible to receive any new
FHLBank borrowings and is subject to national bank limits for payment of
dividends. If such association has not requalified or converted to a national
bank within three years after the failure, it must divest of all investments and
cease all activities not permissible for a national bank. In addition, it must
repay promptly any outstanding FHLBank borrowings, which may result in
prepayment penalties. If any association that fails the QTL test is controlled
by a holding company, then within one year after the failure, the holding
company must register as a bank holding company and become subject to all
restrictions on bank holding companies. See "- Holding Company Regulation."
Community Reinvestment Act
Under the Community Reinvestment Act ("CRA"), every FDIC insured
institution has a continuing and affirmative obligation consistent with safe and
sound banking practices to help meet the credit needs of its entire community,
including low and moderate income neighborhoods. The CRA does not establish
specific lending requirements or programs for financial institutions nor does it
limit an institution's discretion to develop the types
30
<PAGE>
of products and services that it believes are best suited to its particular
community, consistent with the CRA. The CRA requires the OTS, in connection with
the examination of Midwest Federal, to assess the institution's record of
meeting the credit needs of its community and to take such record into account
in its evaluation of certain applications, such as a merger or the establishment
of a branch, by Midwest Federal. An unsatisfactory rating may be used as the
basis for the denial of an application by the OTS.
The federal banking agencies, including the OTS, have recently revised
the CRA regulations and the methodology for determining an institution's
compliance with the CRA. Due to the heightened attention being given to the CRA
in the past few years, the Association may be required to devote additional
funds for investment and lending in its local community. The Association was
last examined for CRA compliance in 1995 and received a rating of satisfactory.
Transactions with Affiliates. Generally, transactions between a savings
association or its subsidiaries and its affiliates are required to be on terms
as favorable to the association as transactions with non-affiliates. In
addition, certain of these transactions are restricted to a percentage of the
association's capital. Affiliates of Midwest Federal include the Company and any
company which is under common control with the Association. In addition, a
savings association may not lend to any affiliate engaged in activities not
permissible for a bank holding company or acquire the securities of most
affiliates. The Association's subsidiaries are not deemed affiliates, however;
the OTS has the discretion to treat subsidiaries of savings associations as
affiliates on a case-by-case basis.
Certain transactions with directors, officers or controlling persons
are also subject to conflict of interest regulations enforced by the OTS. These
conflict of interest regulations and other statutes also impose restrictions on
loans to such persons and their related interests. Among other things, such
loans must be made on terms substantially the same as for loans to unaffiliated
individuals.
Holding Company Regulation. The Company is a unitary savings and loan
holding company subject to regulatory oversight by the OTS. As such, the Company
is required to register and file reports with the OTS and is subject to
regulation and examination by the OTS. In addition, the OTS has enforcement
authority over the Company and its non-savings association subsidiaries which
also permits the OTS to restrict or prohibit activities that are determined to
be a serious risk to the subsidiary savings association.
As a unitary savings and loan holding company, the Company generally is
not subject to activity restrictions. If the Company acquires control of another
savings association as a separate subsidiary, it would become a multiple savings
and loan holding company, and the activities of the Company and any of its
subsidiaries (other than the Association or any other SAIF-insured savings
association) would become subject to such restrictions unless such other
associations each qualify as a QTL and were acquired in a supervisory
acquisition.
If the Association fails the QTL test, the Company must obtain the
approval of the OTS prior to continuing after such failure, directly or through
its other subsidiaries, any business activity other than those approved for
multiple savings and loan holding companies or their subsidiaries. In addition,
within one year of such failure the Company must register as, and will become
subject to, the restrictions applicable to bank holding companies. The
activities authorized for a bank holding company are more limited than are the
activities authorized for a unitary or multiple savings and loan holding
company. See "- Qualified Thrift Lender Test."
The Company must obtain approval from the OTS before acquiring control
of any other SAIF-insured association. Such acquisitions are generally
prohibited if they result in a multiple savings and loan holding company
controlling savings associations in more than one state. However, such
interstate acquisitions are permitted based on specific state authorization or
in a supervisory acquisition of a failing savings association.
Federal Securities Law. The stock of the Company is registered with the
SEC under the Securities Exchange Act of 1934, as amended (the "Exchange Act").
The Company is subject to the information, proxy solicitation, insider trading
restrictions and other requirements of the SEC under the Exchange Act.
Company stock held by persons who are affiliates (generally officers,
directors and principal stockholders) of the Company may not be resold without
registration or unless sold in accordance with certain resale restrictions.
31
<PAGE>
If the Company meets specified current public information requirements, each
affiliate of the Company is able to sell in the public market, without
registration, a limited number of shares in any three-month period.
Federal Reserve System. The Federal Reserve Board requires all
depository institutions to maintain non-interest bearing reserves at specified
levels against their transaction accounts (primarily checking, NOW and Super NOW
checking accounts) and non-personal time deposits. At December 31, 1996, the
Association was in compliance with these reserve requirements. The balances
maintained to meet the reserve requirements imposed by the Federal Reserve Board
may be used to satisfy liquidity requirements that may be imposed by the OTS.
See "- Liquidity."
Savings associations are authorized to borrow from the Federal Reserve
Bank "discount window," but Federal Reserve Board regulations require
associations to exhaust other reasonable alternative sources of funds, including
FHLBank borrowings, before borrowing from the Federal Reserve Bank.
Federal Home Loan Bank System. The Association is a member of the
FHLBank of Des Moines, which is one of 12 regional FHLBanks, that administers
the home financing credit function of savings associations. Each FHLBank serves
as a reserve or central bank for its members within its assigned region. It is
funded primarily from proceeds derived from the sale of consolidated obligations
of the FHLBank System. It makes loans to members (i.e., advances) in accordance
with policies and procedures established by the board of directors of the
FHLBank. These policies and procedures are subject to the regulation and
oversight of the Federal Housing Finance Board. All advances from the FHLBank
are required to be fully secured by sufficient collateral as determined by the
FHLBank. In addition, all long-term advances are required to provide funds for
residential home financing.
As a member, Midwest Federal is required to purchase and maintain stock
in the FHLBank of Des Moines. At December 31, 1996, Midwest Federal had $2.0
million in FHLBank stock, which was in compliance with this requirement. In the
past years, the Association has received substantial dividends on its FHLBank
stock. Over the past five calendar years such dividends have averaged 7.93% and
were 7.00% for calendar year 1996.
Under federal law, the FHLBanks are required to provide funds for the
resolution of troubled savings associations and to contribute to low- and
moderately priced housing programs through direct loans or interest subsidies on
advances targeted for community investment and low- and moderate-income housing
projects. These contributions have affected adversely the level of FHLBank
dividends paid and could continue to do so in the future. These contributions
could also have an adverse effect on the value of FHLBank stock in the future. A
reduction in value of the Association's FHLBank stock may result in a
corresponding reduction in Midwest Federal's capital.
For the year ended December 31, 1996, dividends paid by the FHLBank of
Des Moines to Midwest Federal totalled $137,192, which constituted a $2,120
decrease from the amount of dividends received in 1995. The $34,482 dividend
received for the quarter ended December 31, 1996 reflects an annualized rate of
7.00%, compared to a rate of 7.25% for calendar 1995.
Federal and State Taxation.
Federal Taxation. Savings associations such as the Association that
meet certain definitional tests relating to the composition of assets and other
conditions prescribed by the Internal Revenue Code of 1986, as amended (the
"Code"), are permitted to establish reserves for bad debts and to make annual
additions thereto which may, within specified formula limits, be taken as a
deduction in computing taxable income for federal income tax purposes. The
amount of the bad debt reserve deduction for "non-qualifying loans" is computed
under the experience method. The amount of the bad debt reserve deduction for
"qualifying real property loans" (generally loans secured by improved real
estate) may be computed under either the experience method or the percentage of
taxable income method (based on an annual election).
Under the experience method, the bad debt reserve deduction is an
amount determined under a formula based generally upon the bad debts actually
sustained by the savings association over a period of years.
32
<PAGE>
The percentage of specially computed taxable income that is used to
compute a savings association's bad debt reserve deduction under the percentage
of taxable income method (the "percentage bad debt deduction") is 8%. The
percentage bad debt deduction thus computed is reduced by the amount permitted
as a deduction for non-qualifying loans under the experience method. The
availability of the percentage of taxable income method permits qualifying
savings associations to be taxed at a lower effective federal income tax rate
than that applicable to corporations generally (approximately 31.3% assuming the
maximum percentage bad debt deduction and exclusive of any environmental tax or
minimum tax).
If an association's specified assets (generally, loans secured by
residential real estate or deposits, educational loans, cash and certain
government obligations) constitute less than 60% of its total assets, the
association may not deduct any addition to a bad debt reserve and generally must
include existing reserves in income over a four year period. As of December 31,
1996, at least 60% of the Association's assets were qualifying assets as defined
in the Code. No representation can be made as to whether the Association will
meet the 60% test for subsequent taxable years.
Under the percentage of taxable income method, the percentage bad debt
deduction cannot exceed the amount necessary to increase the balance in the
reserve for "qualifying real property loans" to an amount equal to 6% of such
loans outstanding at the end of the taxable year or the greater of (i) the
amount deductible under the experience method or (ii) the amount which when
added to the bad debt deduction for "non-qualifying loans" equals the amount by
which 12% of the amount comprising savings accounts at year-end exceeds the sum
of surplus, undivided profits and reserves at the beginning of the year. At
December 31, 1996, the 6% and 12% limitations did not restrict the percentage
bad debt deduction available to the Association. It is not expected that these
limitations would be a limiting factor in the foreseeable future.
In August 1996, legislation was enacted that repeals the reserve method
of accounting (including the percentage of taxable income method) used by many
thrifts, including the Association, to calculate their bad debt reserve for
federal income tax purposes. As a result, large thrifts such as the Association
must recapture that portion of the reserve that exceeds the amount that could
have been taken under the specific charge-off method for post-1987 tax years.
The legislation also requires thrifts to account for bad debts for federal
income tax purposes on the same basis as commercial banks for tax years
beginning after December 31, 1995. The recapture will occur over a six-year
period, the commencement of which will be delayed until the first taxable year
beginning after December 31, 1997, provided the institution meets certain
residential lending requirements. The management of the Company does not believe
that the legislation will have a material impact on the Company or the Bank,
except to the extent that future tax bad debt deductions will be reduced because
the percentage of income method generally provided a larger deduction than the
experience method.
In addition to the regular income tax, corporations, including savings
associations such as the Association, generally are subject to a minimum tax. An
alternative minimum tax is imposed at a minimum tax rate of 20% on alternative
minimum taxable income, which is the sum of a corporation's regular taxable
income (with certain adjustments) and tax preference items, less any available
exemption. The alternative minimum tax is imposed to the extent it exceeds the
corporation's regular income tax and net operating losses can offset no more
than 90% of alternative minimum taxable income. For taxable years beginning
after 1986 and before 1996, corporations, including savings associations such as
the Association, are also subject to an environmental tax equal to 0.12% of the
excess of alternative minimum taxable income for the taxable year (determined
without regard to net operating losses and the deduction for the environmental
tax) over $2 million.
To the extent earnings appropriated to a savings association's bad debt
reserves for "qualifying real property loans" and deducted for federal income
tax purposes exceed the allowable amount of such reserves computed under the
experience method and to the extent of the association's supplemental reserves
for losses on loans ("Excess"), such Excess may not, without adverse tax
consequences, be utilized for the payment of cash dividends or other
distributions to a shareholder (including distributions on redemption,
dissolution or liquidation) or for any other purpose (except to absorb bad debt
losses). As of December 31, 1996, the Association's Excess for tax purposes
totalled approximately $2.8 million.
33
<PAGE>
The Company, the Association and the Association's subsidiary file
consolidated federal income tax returns on a calendar year basis using the
accrual method of accounting. Savings associations, such as the Association,
that file federal income tax returns as part of a consolidated group are
required by applicable Treasury regulations to reduce their taxable income for
purposes of computing the percentage bad debt deduction for losses attributable
to activities of the non-savings association members of the consolidated group
that are functionally related to the activities of the savings association
member.
The Association and its consolidated subsidiaries have been audited by
the IRS with respect to consolidated federal income tax returns through 1981.
With respect to years examined by the IRS, either all deficiencies have been
satisfied or sufficient reserves have been established to satisfy asserted
deficiencies. In the opinion of management, any examination of still open
returns (including returns of subsidiaries and predecessors of, or entities
merged into, the Association) would not result in a deficiency which could have
a material adverse effect on the financial condition of the Association and its
consolidated subsidiaries.
Iowa Taxation. The Company and the Association's subsidiary file an
Iowa corporation tax return while the Association files the Iowa franchise tax
return, each on a calendar year basis.
Iowa imposes a franchise tax on the taxable income of both mutual and
stock savings and loan associations. The tax rate is 5%, which may effectively
be increased, in individual cases, by application of a minimum tax provision.
Taxable income under the franchise tax is generally similar to taxable income
under the federal corporate income tax, except that, under the Iowa franchise
tax, no deduction is allowed for Iowa franchise tax payments and taxable income
includes interest on state and municipal obligations. Interest on U.S.
obligations is taxable under the Iowa franchise tax and under the federal
corporate income tax.
Taxable income under the Iowa corporate income tax is generally similar
to taxable income under the federal corporate income tax, except that, under the
Iowa tax, no deduction is allowed for Iowa income tax payments; interest from
state and municipal obligations is included in income; interest from U.S.
obligations is excluded from income; and 50% of federal corporate income tax
payments are excluded from income. The Iowa corporate income tax rates range
from 6% to 12% and may be effectively increased, in individual cases, by
application of a minimum tax provision.
Delaware Taxation. As a Delaware holding company, the Company is
exempted from Delaware corporate income tax but is required to file an annual
report with and pay an annual fee to the State of Delaware. The Company is also
subject to an annual franchise tax imposed by the State of Delaware.
Effect of New Accounting Standards. See Note 1 of the Notes to
Consolidated Financial Statements in the Annual Report.
SFAS 125, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities," will be effective for the Association for
transactions occurring after December 31, 1996, and provides standards for
accounting recognition or derecognition of assets and liabilities. The
Association expects to adopt SFAS 125 when required, and management believes
adoption will not have a material effect on the financial position and results
of operations, nor will adoption require additional capital resources. See Note
1 of the Notes to Consolidated Financial Statements in the Annual Report.
Competition
Midwest Federal faces strong competition, both in originating real
estate and other loans and in attracting deposits. Competition in originating
real estate loans comes primarily from other savings institutions, commercial
banks, credit unions and mortgage bankers making loans secured by real estate
located in the Association's market areas. Other savings institutions,
commercial banks and credit unions provide vigorous competition in consumer
lending.
34
<PAGE>
The Association attracts all of its deposits through its branch
offices, primarily from the communities in which those branch offices are
located; therefore, competition for those deposits is principally from other
savings institutions and commercial banks located in the same communities. The
Association competes for these deposits by offering a variety of deposit
accounts at competitive rates, convenient business hours, and convenient branch
locations with interbranch deposit and withdrawal privileges at each. Automated
teller machine ("ATM") facilities are available at the main office in Burlington
and the Ft. Madison and Wapello branches. The Association also has one off-site
drive-up ATM located at a convenience store in West Burlington. The Association
estimates its share of the savings market in its primary market area to be
approximately 10%.
Executive Officers of the Registrant Who Are Not Directors
The following information as to the business experience during the last
five years is supplied with respect to executive officers of the Association who
do not serve on the Company's or Association's Board of Directors.
Thomas A. Jacobs - Mr. Jacobs, age 47, is Senior Vice President in
charge of loan operations for the Association. His primary responsibilities
include overall administration of the Association's lending operations,
including real estate, consumer and commercial lending. Mr. Jacobs joined the
Association in 1984 and served in several capacities in the Association's
lending department prior to being promoted to his present position in 1989.
Dennis L. Dietzman - Mr. Dietzman, age 47, joined the Association in
1988 as Vice President and marketing and business development manager. Mr.
Dietzman is primarily responsible for planning and directing the Association's
marketing function as well as establishing marketing objectives and programs
designed to promote the growth of the Association. In addition, Mr. Dietzman
serves as managing officer of MFP. Prior to joining Midwest Federal, Mr.
Dietzman served as a Vice President, Consumer Loan Manager and Marketing
Director of Hawkeye Bank & Trust for 15 years.
Michele L. Schnicker - Ms. Schnicker, age 36, has been Vice President
in charge of data processing and customer service operations with the
Association since 1989. In this capacity, she is responsible for the overall
administration of operations and data processing of the Association. Ms.
Schnicker has been employed by the Association since 1980.
Employees
At December 31, 1996, the Association and its subsidiaries had a total
of 38 employees, including 2 part-time employees. The Association's employees
are not represented by any collective bargaining group.
Management considers its employee relations to be good.
Item 2. Properties
The following table sets forth information relating to each of the
Association's current offices, all of which are owned by the Association. The
total net book value of the Association's premises and equipment at December 31,
1996 was $2.4 million.
35
<PAGE>
Date Owned or Net Book Value
Location Acquired Leased at December 31, 1996
- -------------------------------------------------------------------------------
(In Thousands)
Main Office:
3225 Division Street 1974 Owned $1,281
Burlington, IA
Branch Offices:
323 Jefferson Street 1974 Owned 184(1)
Burlington, IA
926 Avenue G 1975 Owned 251
Ft. Madison IA
Highway 61 1974 Owned 34
Wapello, IA
- ------------------
(1) Includes 319 Jefferson Street.
The Association maintains depositor and borrower customer files on an
on-line basis with the Financial Information Trust, Des Moines, Iowa. The net
book value of the data processing and computer equipment utilized by the
Association at December 31, 1996 was $244,000.
Item 3. Legal Proceedings
Midwest Federal and its subsidiaries are involved as plaintiff or
defendant in various legal actions arising in the normal course of their
businesses. While the ultimate outcome of these proceedings cannot be predicted
with certainty, it is the opinion of management, after consultation with counsel
representing Midwest Federal in the proceedings, that the resolution of these
proceedings should not have a material effect on Midwest Federal's consolidated
results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the quarter ended December 31,
1996.
36
<PAGE>
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
Page 40 of the Annual Report is herein incorporated by reference.
Item 6. Management's Discussion and Analysis or Plan of Operation
Pages 4 through 15 of the Annual Report is herein incorporated by
reference.
Item 7. Financial Statements
(a) Financial Statements
The following information appearing in the Company's Annual Report to
Stockholders for the year ended December 31, 1996, is incorporated by reference
in this Annual Report on Form 10-KSB as Exhibit 13.
Annual Report Section Pages in Annual Report
Common Stock and Related Information 40
Selected Financial and Other Data 2
Management's Discussion and Analysis 4
of Financial Condition and Results
of Operations
Independent Auditors' Report 17
Consolidated Balance Sheets as of 18
December 31, 1996 and 1995
Consolidated Statements of Operations 19
for Years Ended December 31, 1996,
1995 and 1994
Consolidated Statements of Stockholders' 20
Equity for Years Ended December 31,
1996, 1995 and 1994
Consolidated Statements of Cash Flows 21
for Years Ended December 31, 1996,
1995 and 1994
Notes to Consolidated Financial 22
Statements
With the exception of the aforementioned information, the Corporation's
Annual Report to Stockholders for the year ended December 31, 1996 is not deemed
filed as part of this Annual Report on Form 10-KSB.
37
<PAGE>
Item 8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
There has been no Current Report on Form 8-K filed within 24 months
prior to the date of the most recent financial statements reporting a change of
accountants and/or reporting disagreements on any matter of accounting principle
or financial statement disclosure.
PART III
Item 9. Directors, Executive Officers Promoters and Control
Persons; Compliance with Section 16(a) of the Exchange Act
Information concerning Directors of the Registrant is incorporated
herein by reference from the Company's definitive Proxy Statement for the Annual
Meeting of Stockholders to be held in 1997, a copy of which will be filed not
later than 120 days after the close of the fiscal year.
Item 10. Executive Compensation
Information concerning executive compensation is incorporated herein by
reference from the definitive Proxy Statement for the Annual Meeting of
Stockholders to be held in 1997, a copy of which will be filed not later than
120 days after the close of the fiscal year.
Item 11. Security Ownership of Certain Beneficial Owners and
Management
Information concerning security ownership of certain beneficial owners
and management is incorporated herein by reference from the definitive Proxy
Statement for the Annual Meeting of Stockholders to be held in 1997, a copy of
which will be filed not later than 120 days after the close of the fiscal year.
Item 12. Certain Relationships and Related Transactions
Information concerning certain relationships and related transactions
is incorporated herein by reference from the definitive Proxy Statement for the
Annual Meeting of Stockholders to be held in 1997, a copy of which will be filed
not later than 120 days after the close of the fiscal year.
38
<PAGE>
PART IV
Item 13. Exhibits and Reports on Form 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Reference to Prior
Regulation filing or Exhibit
S-K Exhibit Number Attached
Number Document Hereto
- ----------- --------------------------------------------------------------------------- ------------------
<S> <C> <C>
2 Plan of acquisition, reorganization, arrangement, liquidation or succession None
3(i) Articles of Incorporation *
3(ii) By-Laws *
4 Instruments defining the rights of security holders, including debentures *
9 Voting Trust Agreement None
10 Material contracts:
Employment Agreements **
1992 Stock Option and Incentive Plan 10.1
Recognition and Retention Plan and Trust *
Employee Stock Ownership Plan *
11 Statement re: computation of per share earnings None
13 Annual Report 13
16 Letter re: change in certifying accountants None
21 Subsidiaries of Registrant 21
22 Published report regarding matters submitted to vote of security holders None
23 Consent of Experts and Counsel 23
24 Power of attorney Not required
27 Financial Data Schedule 27
28 Information from reports furnished to state insurance regulatory authorities None
99 Additional Exhibits None
</TABLE>
- ----------------
* Filed as exhibit to the Company's Form S-1 registration statement filed on
August 5, 1992 (File No. 33-50494) pursuant to Section 5 of the Securities
Act of 1933. All of such previously filed documents are hereby incorporated
herein by reference in accordance with Item 601 of Regulation S-B.
** Filed as Exhibit 10 to the Company's Annual Report on Form 10-KSB filed on
March 30, 1994 (File No. 0-20620). All of such previously filed documents
are hereby incorporated by reference in accordance with Item 601 of
Regulation S-B.
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the quarter
ended December 31, 1996.
39
<PAGE>
Exhibit Index
Sequential
Exhibit No. Document Page Number
- ----------- ---------------------------------------- -----------
10.1 1992 Stock Option and Incentive Plan
13 Annual Report
21 Subsidiaries of Registrant
23 Consent of KPMG Peat Marwick LLP
27 Financial Data Schedule
<PAGE>
MIDWEST BANCSHARES, INC.
Holding Company for
Midwest Federal Savings and Loan Association
of Eastern Iowa
1992 Stock Option and Incentive Plan
1. Plan Purpose. The purpose of the Plan is to promote the long-term
interests of the Corporation and its stockholders by providing a means for
attracting and retaining directors, officers and employees of the Corporation
and its Affiliates. It is intended that designated Options granted pursuant to
the provisions of this Plan to persons employed on a full-time basis will
qualify as Incentive Stock Options. Options granted to persons who are not
full-time employees will be Non-Qualified Stock Options.
2. Definitions. The following definitions are applicable to the Plan:
"Affiliate" - means any "parent corporation" or "subsidiary corporation" of
the Corporation, as such terms are defined in Section 424(e) and (f),
respectively, of the Code.
"Award" - means the grant of an Incentive Stock Option, a Non-Qualified
Stock Option, a Stock Appreciation Right, a Limited Stock Appreciation Right, or
of Restricted Stock, or any combination thereof, as provided in the Plan.
"Association" - means Midwest Federal Savings and Loan Association of
Eastern Iowa and its successors.
"Code" - means the Internal Revenue Code of 1986, as amended.
"Committee" - means the Committee referred to in Section 3 hereof.
"Continuous Service" - means the absence of any interruption or termination
of service as a director, officer or employee of the Corporation or an
Affiliate, except that when used with respect to persons granted an Incentive
Stock Option such term means the absence of any interruption or termination of
service as a full-time employee of the Corporation or an Affiliate. Service
shall not be considered interrupted in the case of sick leave, military leave or
any other leave of absence approved by the Corporation or in the case of
transfers between payroll locations of the Corporation or between the
Corporation, its parent, its subsidiaries or its successor.
"Corporation" - means Midwest Bancshares, Inc., a Delaware corporation.
"Employee" - means any person, including an officer or director, who is
employed by the Corporation or any Affiliate.
"ERISA" - means the Employee Retirement Income Security Act of 1974, as
amended.
"Exercise Price" - means (i) in the case of an Option, the price per Share
at which the Shares subject to such Option may be purchased upon exercise of
such Option and (ii) in the case of a Right, the price per Share (other than the
Market Value per Share on the date of exercise and the Offer Price per Share as
defined in Section 10 hereof) which, upon grant, the Committee determines shall
be utilized in calculating the aggregate value which a Participant shall be
entitled to receive pursuant to Sections 9, 10 or 13 hereof upon exercise of
such Right.
"Incentive Stock Option" - means an option to purchase Shares granted by
the Committee pursuant to Section 6 hereof which is subject to the limitations
and restrictions of Section 8 hereof and is intended to qualify under Section
422 of the Code.
<PAGE>
"Limited Stock Appreciation Right" - means a stock appreciation right with
respect to Shares granted by the Committee pursuant to Sections 6 and 10 hereof.
"Market Value" - means the average of the high and low quoted sales price
on the date in question (or, if there is no reported sale on such date, on the
last preceding date on which any reported sale occurred) of a Share on the
Composite Tape for the New York Stock Exchange-Listed Stocks, or, if on such
date the Shares are not quoted on the Composite Tape, on the New York Stock
Exchange, or, if the Shares are not listed or admitted to trading on such
Exchange, on the principal United States securities exchange registered under
the Securities Exchange Act of 1934 on which the Shares are listed or admitted
to trading, or, if the Shares are not listed or admitted to trading on any such
exchange, the mean between the closing high bid and low asked quotations with
respect to a Share on such date on the National Association of Securities
Dealers, Inc., Automated Quotations System, or any similar system then in use,
or, if no such quotations are available, the fair market value on such date of a
Share as the Committee shall determine.
"Non-Employee Director" - means a director who a) is not currently an
officer or employee of the Corporation; b) is not a former employee of the
Corporation who receives compensation for prior services (other than from a
tax-qualified retirement plan); c) has not been an officer of the Corporation;
d) does not receive remuneration from the Corporation in any capacity other than
as a director; and e) does not possess an interest in any other transactions or
is not engaged in a business relationship for which disclosure would be required
under Item 404(a) or (b) of Regulation S-K.
"Non-Qualified Stock Option" - means an option to purchase Shares granted
by the Committee pursuant to Section 6 hereof, which option is not intended to
qualify under Section 422 of the Code.
"Option" - means an Incentive Stock Option or a NonQualified Stock Option.
"Participant" - means any officer or employee of the Corporation or any
Affiliate who is selected by the Committee to receive an Award and any director
of the Corporation who is granted an Award pursuant to Section 21 hereof.
"Plan" - means the 1992 Stock Option and Incentive Plan of the Corporation.
"Related" - means (i) in the case of a Right, a Right which is granted in
connection with, and, to the extent exercisable, in whole or in part, in lieu
of, an Option or another Right and (ii) in the case of an Option, an Option with
respect to which and to the extent a Right is exercisable, in whole or in part,
in lieu thereof has been granted.
"Restricted Period" - means the period of time selected by the Committee
for the purpose of determining when restrictions are in effect under Section 11
hereof with respect to Restricted Stock awarded under the Plan.
"Restricted Stock" - means Shares which have been contingently awarded to a
Participant by the Committee subject to the restrictions referred to in Section
11 hereof, so long as such restrictions are in effect.
"Right" - means a Limited Stock Appreciation Right or a Stock Appreciation
Right.
"Shares" - means the shares of common stock of the Corporation.
"Stock Appreciation Right" - means a stock appreciation right with respect
to Shares granted by the Committee pursuant to Sections 6 and 9 hereof.
<PAGE>
"Ten Percent Beneficial Owner" - means the beneficial owner of more than
ten percent of any class of the Corporation's equity securities registered
pursuant to Section 12 of the Securities Exchange Act of 1934.
3. Administration. The Plan shall be administered by a Committee consisting
of two or more members, each of whom shall be a Non-Employee Director. The
members of the Committee shall be appointed by the Board of Directors of the
Corporation. Except as limited by the express provisions of the Plan, the
Committee shall have sole and complete authority and discretion to (i) select
Participants and grant Awards, (ii) determine the number of Shares to be subject
to types of Awards generally, as well as to individual Awards granted under the
Plan, (iii) determine the terms and conditions upon which Awards shall be
granted under the Plan, (iv) prescribe the form and terms of instruments
evidencing such grants, and (v) establish from time to time regulations for the
administration of the Plan, interpret the Plan, and make all determinations
deemed necessary or advisable for the administration of the Plan. The Committee
may maintain, and update from time to time as appropriate, a list designating
selected directors as Non-Employee Directors. The purpose of such list shall be
to evidence the status of such individuals as Non-Employee Directors, and the
Board of Directors may appoint to the Committee any individual actually
qualifying as a Non-Employee Director, regardless of whether identified as such
on said list.
A majority of the Committee shall constitute a quorum, and the acts of a
majority of the members present at any meeting at which a quorum is present, or
acts approved in writing by a majority of the Committee without a meeting, shall
be acts of the Committee.
4. Participation in Committee Awards. The Committee may select from time to
time Participants in the Plan from those directors, officers and employees of
the Corporation or its Affiliates who, in the opinion of the Committee, have the
capacity for contributing to the successful performance of the Corporation or
its Affiliates.
5. Shares Subject to Plan. Subject to adjustment by the operation of
Section 12 hereof, the maximum number of Shares with respect to which Awards may
be made under the Plan is 10% of the total Shares issued in the Association's
conversion to the capital stock form. The Shares with respect to which Awards
may be made under the Plan may be either authorized and unissued shares or
issued shares heretofore or hereafter reacquired and held as treasury shares.
Shares which are subject to Related Rights and Related Options shall be counted
only once in determining whether the maximum number of Shares with respect to
which Awards may be granted under the Plan has been exceeded. An Award shall not
be considered to have been made under the Plan with respect to any Option or
Right which terminates or with respect to Restricted Stock which is forfeited,
and new Awards may be granted under the Plan with respect to the number of
Shares as to which such termination or forfeiture has occurred.
6. General Terms and Conditions of Options and Rights. The Committee shall
have full and complete authority and discretion, except as expressly limited by
the Plan, to grant Options and/or Rights and to provide the terms and conditions
(which need not be identical among Participants) thereof. In particular, the
Committee shall prescribe the following terms and conditions: (i) the Exercise
Price of any Option or Right, which shall not be less than the Market Value per
Share at the date of grant of such Option or Right, except as set forth in
Section 21 hereof, (ii) the number of Shares subject to, and the expiration date
of, any Option or Right, which expiration date shall not exceed ten years from
the date of grant, (iii) the manner, time and rate (cumulative or otherwise) of
exercise of such Option or Right, and (iv) the restrictions, if any, to be
placed upon such Option or Right or upon Shares which may be issued upon
exercise of such Option or Right. The Committee may, as a condition of granting
any Option or Right, require that a Participant agree not to thereafter exercise
one or more Options or Rights previously granted to such Participant.
7. Exercise of Options or Rights.
(a) An Option or Right granted under the Plan shall be exercisable during
the lifetime of the Participant to whom such Option or Right was granted only by
such Participant and, except as provided in paragraphs (c) and (d) of this
Section 7, no such Option or Right may be exercised unless at the time such
<PAGE>
Participant exercises such Option or Right, such Participant has maintained
Continuous Service since the date of grant of such Option or Right.
(b) To exercise an Option or Right under the Plan, the Participant to whom
such Option or Right was granted shall give written notice to the Corporation in
form satisfactory to the Committee (and, if partial exercises have been
permitted by the Committee, by specifying the number of Shares with respect to
which such Participant elects to exercise such Option or Right) together with
full payment of the Exercise Price, if any and to the extent required. The date
of exercise shall be the date on which such notice is received by the
Corporation. Payment, if any is required, shall be made either (i) in cash
(including check, bank draft or money order) or (ii) by delivering (A) Shares
already owned by the Participant and having a fair market value equal to the
applicable exercise price, such fair market value to be determined in such
appropriate manner as may be provided by the Committee or as may be required in
order to comply with or to conform to requirements of any applicable laws or
regulations, or (B) a combination of cash and such Shares.
(c) If a Participant to whom an Option or Right was granted shall cease to
maintain Continuous Service for any reason (including total or partial
disability and normal or early retirement, but excluding death and termination
of employment by the Corporation or any Affiliate for cause), such Participant
may, but only within the period of three months immediately succeeding such
cessation of Continuous Service and in no event after the expiration date of
such Option or Right, exercise such Option or Right to the extent that such
Participant was entitled to exercise such Option or Right at the date of such
cessation, provided, however, that such right of exercise after cessation of
Continuous Service shall not be available to a Participant if the Committee
otherwise determines and so provides in the applicable instrument or instruments
evidencing the grant of such Option or Right. Notwithstanding the foregoing, if
a Participant to whom an Option or Right was granted shall cease to maintain
Continuous Service due to normal retirement, and such Participant has served the
Corporation or the Association for at least five years, such Option or Right
granted to such Participant shall become immediately exercisable, and the
Participant may, but only during the period of three years immediately
succeeding such cessation of Continuous Service and in no event after the
expiration of such Option or Right, exercise such Option or Right. If the
Continuous Service of a Participant to whom an Option or Right was granted by
the Corporation is terminated for cause, all rights under any Option or Right of
such Participant shall expire immediately upon the giving to the Participant of
notice of such termination.
(d) In the event of the death of a Participant while in the Continuous
Service of the Corporation or an Affiliate or within the three month and three
year periods referred to in paragraph (c) of this Section 7, the person to whom
any Option or Right held by the Participant at the time of his death is
transferred by will or the laws of descent and distribution may, but only to the
extent such Participant was entitled to exercise such Option or Right
immediately prior to his death, exercise such Option or Right at any time within
a period of one year succeeding the date of death of such Participant, but in no
event later than ten years from the date of grant of such Option or Right.
Following the death of any Participant to whom an Option was granted under the
Plan, irrespective of whether any Related Right shall have theretofore been
granted to the Participant or whether the person entitled to exercise such
Related Right desires to do so, the Committee may, as an alternative means of
settlement of such Option, elect to pay to the person to whom such Option is
transferred by will or by the laws of descent and distribution or, with respect
to an Award other than an Incentive Stock Option, pursuant to a qualified
domestic relations order as defined in the Code or Title I of the ERISA or the
rules thereunder, the amount by which the Market Value per Share on the date of
exercise of such Option shall exceed the Exercise Price of such Option,
multiplied by the number of Shares with respect to which such Option is properly
exercised. Any such settlement of an Option shall be considered an exercise of
such Option for all purposes of the Plan.
8. Incentive Stock Options. Incentive Stock Options may be granted only to
Participants who are Employees. Any provision of the Plan to the contrary
notwithstanding, (i) no Incentive Stock Option shall be granted more than ten
years from the date the Plan is adopted by the Board of Directors of the
Corporation and no Incentive Stock Option shall be exercisable more than ten
years from the date such Incentive Stock Option is granted, (ii) the Exercise
Price of any Incentive Stock Option shall not be less than the Market Value per
<PAGE>
Share on the date such Incentive Stock Option is granted, (iii) any Incentive
Stock Option shall not be transferable by the Participant to whom such Incentive
Stock Option is granted other than by will or the laws of descent and
distribution and shall be exercisable during such Participant's lifetime only by
such Participant, (iv) no Incentive Stock Option shall be granted to any
individual who, at the time such Incentive Stock Option is granted, owns stock
possessing more than ten percent of the total combined voting power of all
classes of stock of the Corporation or any Affiliate unless the Exercise Price
of such Incentive Stock Option is at least 110 percent of the Market Value per
Share at the date of grant and such Incentive Stock Option is not exercisable
after the expiration of five years from the date such Incentive Stock Option is
granted, and (v) the aggregate Market Value (determined as of the time any
Incentive Stock Option is granted) of the Shares with respect to which Incentive
Stock Options are exercisable for the first time by a Participant in any
calendar year shall not exceed $100,000.
9. Stock Appreciation Rights. A Stock Appreciation Right shall, upon its
exercise, entitle the Participant to whom such Stock Appreciation Right was
granted to receive a number of Shares or cash or combination thereof, as the
Committee in its discretion shall determine, the aggregate value of which (i.e.,
the sum of the amount of cash and/or Market Value of such Shares on date of
exercise) shall equal (as nearly as possible, it being understood that the
Corporation shall not issue any fractional shares) the amount by which the
Market Value per Share on the date of such exercise shall exceed the Exercise
Price of such Stock Appreciation Right, multiplied by the number of Shares with
respect to which such Stock Appreciation Right shall have been exercised. A
Stock Appreciation Right may be Related to an Option or may be granted
independently of any Option as the Committee shall from time to time in each
case determine. At the time of grant of an Option the Committee shall determine
whether and to what extent a Related Stock Appreciation Right shall be granted
with respect thereto; provided, however, and notwithstanding any other provision
of the Plan, that if the Related Option is an Incentive Stock Option, the
Related Stock Appreciation Right shall satisfy all the restrictions and
limitations of Section 8 hereof as if such Related Stock Appreciation Right were
an Incentive Stock Option and as if other rights which are Related to Incentive
Stock Options were Incentive Stock Options. In the case of a Related Option,
such Related Option shall cease to be exercisable to the extent of the Shares
with respect to which the Related Stock Appreciation Right was exercised. Upon
the exercise or termination of a Related Option, any Related Stock Appreciation
Right shall terminate to the extent of the Shares with respect to which the
Related Option was exercised or terminated.
10. Limited Stock Appreciation Rights. At the time of grant of an Option or
Stock Appreciation Right to any Participant, the Committee shall have full and
complete authority and discretion to also grant to such Participant a Limited
Stock Appreciation Right which is Related to such Option or Stock Appreciation
Right; provided, however, and notwithstanding any other provision of the Plan,
that if the Related Option is an Incentive Stock Option, the Related Limited
Stock Appreciation Right shall satisfy all the restrictions and limitations of
Section 8 hereof as if such Related Limited Stock Appreciation Right were an
Incentive Stock Option and as if all other Rights which are Related to Incentive
Stock Options were Incentive Stock Options. Notwithstanding any other provision
of the Plan, a Limited Stock Appreciation Right shall be exercisable only during
the period beginning on the first day following the date of expiration of any
"offer" (as such term is hereinafter defined) and ending on the forty-fifth day
following such date.
A Limited Stock Appreciation Right shall, upon its exercise, entitle the
Participant to whom such Limited Stock Appreciation Right was granted to receive
an amount of cash equal to the amount by which the "Offer Price per Share" (as
such term is hereinafter defined) or the Market Value on the date of such
exercise, as shall have been provided by the Committee in its discretion at the
time of grant, shall exceed the Exercise Price of such Limited Stock
Appreciation Right, multiplied by the number of Shares with respect to which
such Limited Stock Appreciation Right shall have been exercised. Upon the
exercise of a Limited Stock Appreciation Right, any Related Option and/or
Related Stock Appreciation Right shall cease to be exercisable to the extent of
the Shares with respect to which such Limited Stock Appreciation Right was
exercised. Upon the exercise or termination of a Related Option or Related Stock
Appreciation Right, any Related Limited Stock Appreciation Right shall terminate
to the extent of the Shares with respect to which such Related Option or Related
Stock Appreciation Right was exercised or terminated.
<PAGE>
For the purposes of this Section 10, the term "Offer" shall mean any tender
offer or exchange offer for Shares other than one made by the Corporation,
provided that the corporation, person or other entity making the offer acquires
pursuant to such offer either (i) 25% of the Shares outstanding immediately
prior to the commencement of such offer or (ii) a number of Shares which,
together with all other Shares acquired in any tender offer or exchange offer
(other than one made by the Corporation) which expired within sixty days of the
expiration date of the offer in question, equals 25% of the Shares outstanding
immediately prior to the commencement of the offer in question. The term "Offer
Price per Share" as used in this Section 10 shall mean the highest price per
Share paid in any Offer which Offer is in effect any time during the period
beginning on the sixtieth day prior to the date on which a Limited Stock
Appreciation Right is exercised and ending on the date on which such Limited
Stock Appreciation Right is exercised. Any securities or property which are part
or all of the consideration paid for Shares in the Offer shall be valued in
determining the Offer Price per Share at the higher of (A) the valuation placed
on such securities or property by the corporation, person or other entity making
such Offer or (B) the valuation placed on such securities or property by the
Committee.
11. Terms and Conditions of Restricted Stock. The Committee shall have full
and complete authority, subject to the limitations of the Plan, to grant awards
of Restricted Stock and, in addition to the terms and conditions contained in
paragraphs (a) through (f) of this Section 11, to provide such other terms and
conditions (which need not be identical among Participants) in respect of such
Awards, and the vesting thereof, as the Committee shall determine and provide in
the agreement referred to in paragraph (d) of this Section 11.
(a) At the time of an award of Restricted Stock, the Committee shall
establish for each Participant a Restricted Period during which or at the
expiration of which, as the Committee shall determine and provide in the
agreement referred to in paragraph (d) of this Section 11, the Shares awarded as
Restricted Stock shall vest. Subject to any such other terms and conditions as
the Committee shall provide, shares of Restricted Stock may not be sold,
assigned, transferred, pledged or otherwise encumbered by the Participant,
except as hereinafter provided, during the Restricted Period. Except for such
restrictions, and subject to paragraphs (c), (d) and (e) of this Section 11 and
Section 12 hereof, the Participant as owner of such shares shall have all the
rights of a stockholder, including but not limited to the right to receive all
dividends paid on such shares and the right to vote such shares. The Committee
shall have the authority, in its discretion, to accelerate the time at which any
or all of the restrictions shall lapse with respect to any shares of Restricted
Stock prior to the expiration of the Restricted Period with respect thereto, or
to remove any or all of such restrictions, whenever it may determine that such
action is appropriate by reason of changes in applicable tax or other laws or
other changes in circumstances occurring after the commencement of such
Restricted Period.
(b) Except as provided in Section 14 hereof, if a Participant ceases to
maintain Continuous Service for any reason (other than death, total or partial
disability or normal or early retirement), unless the Committee shall otherwise
determine, all shares of Restricted Stock theretofore awarded to such
Participant and which at the time of such termination of Continuous Service are
subject to the restrictions imposed by paragraph (a) of this Section 11 shall
upon such termination of Continuous Service be forfeited and returned to the
Corporation. Unless the Committee shall have provided in the agreement referred
to in paragraph (d) of this Section 11 for a ratable lapse of restrictions with
respect to an award of shares of Restricted Stock during the Restricted Period,
if a Participant ceases to maintain Continuous Service by reason of death, total
or partial disability or normal or early retirement, such portion of such shares
of Restricted Stock awarded to such Participant which at the time of such
termination of Continuous Service are subject to the restrictions imposed by
paragraph (a) of this Section 11 as shall be equal to the portion of the
Restricted Period with respect to such shares which shall have elapsed at the
time of such termination of Continuous Service shall be free of restrictions and
shall not be forfeited.
(c) Each certificate in respect of shares of Restricted Stock awarded under
the Plan shall be registered in the name of the Participant and deposited by the
Participant, together with a stock power endorsed in blank, with the Corporation
and shall bear the following (or a similar) legend:
<PAGE>
"The transferability of this certificate and the shares of
stock represented hereby are subject to the terms and conditions
(including forfeiture) contained in the 1992 Stock Option and Incentive
Plan of Midwest Bancshares, Inc. and an Agreement entered into between
the registered owner and Midwest Bancshares, Inc. Copies of such Plan
and Agreement are on file in the offices of the Secretary of Midwest
Bancshares, Inc., 3225 Division Street, Burlington, Iowa 52601."
(d) At the time of an award of shares of Restricted Stock, the Participant
may enter into an Agreement with the Corporation in a form specified by the
Committee, agreeing to the terms and conditions of the award and such other
matters as the Committee shall in its sole discretion determine.
(e) At the time of an award of shares of Restricted Stock, the Committee
may, in its discretion, determine that the payment to the Participant of
dividends declared or paid on such shares, or specified portion thereof, by the
Corporation shall be deferred until the earlier to occur of (i) the lapsing of
the restrictions imposed under paragraph (a) of this Section 11 or (ii) the
forfeiture of such shares under paragraph (b) of this Section 11, and shall be
held by the Corporation for the account of the Participant until such time. In
the event of such deferral, there shall be credited at the end of each year (or
portion thereof) interest on the amount of the account at the beginning of the
year at a rate per annum as the Committee, in its discretion, may determine.
Payment of deferred dividends, together with interest accrued thereon as
aforesaid, shall be made upon the earlier to occur of the events specified in
(i) and (ii) of the immediately preceding sentence.
(f) At the expiration of the restrictions imposed by paragraph (a) of this
Section 11, the Corporation shall redeliver to the Participant (or where the
relevant provision of paragraph (b) of this Section 11 applies in the case of a
deceased Participant, to his legal representative, beneficiary or heir) the
certificate(s) and stock power deposited with it pursuant to paragraph (c) of
this Section 11 and the Shares represented by such certificate(s) shall be free
of the restrictions referred to in paragraph (a) of this Section 11.
12. Adjustments Upon Changes in Capitalization. In the event of any change
in the outstanding Shares subsequent to the effective date of the Plan by reason
of any reorganization, recapitalization, stock split, stock dividend,
combination or exchange of shares, merger, consolidation or any change in the
corporate structure or Shares of the Corporation, the maximum aggregate number
and class of shares as to which Awards may be granted under the Plan and the
number and class of shares with respect to which Awards theretofore have been
granted under the Plan shall be appropriately adjusted by the Committee, whose
determination shall be conclusive. Any shares of stock or other securities
received, as a result of any of the foregoing, by a Participant with respect to
Restricted Stock shall be subject to the same restrictions and the
certificate(s) or other instruments representing or evidencing such shares or
securities shall be legended and deposited with the Corporation in the manner
provided in Section 11 hereof.
13. Effect of Merger on Options or Rights. In the event of any merger or
consolidation of the Corporation (other than a merger or consolidation in which
the Corporation is the continuing entity and which does not result in the
outstanding Shares being converted into or exchanged for different securities,
cash or other property, or any combination thereof) pursuant to a plan or
agreement the terms of which are binding upon all stockholders of the
Corporation (except to the extent that dissenting stockholders may be entitled,
under statutory provisions or provisions contained in the certificate of
incorporation, to receive the appraised or fair value of their holdings), any
Participant to whom an Option or Right has been granted shall have the right
(subject to the provisions of the Plan and any limitation applicable to such
Option or Right), thereafter and during the term of each such Option or Right,
to receive upon exercise of any such Option or Right an amount equal to the
excess of the fair market value on the date of such exercise of the securities,
cash or other property, or combination thereof, receivable upon such merger,
consolidation or combination in respect of a Share over the Exercise Price of
such Right or Option, multiplied by the number of Shares with respect to which
such Option or Right shall have been exercised. Such amount may be payable fully
in cash, fully in one or more of the kind or kinds of property payable
<PAGE>
in such merger, consolidation or combination, or partly in cash and partly in
one or more of such kind or kinds of property, all in the discretion of the
Committee.
14. Effect of Change in Control. Each of the events specified in the
following clauses (i) through (iii) of this Section 14 shall be deemed a "change
of control": (i) any third person, including a "group" as defined in Section
13(d)(3) of the Securities Exchange Act of 1934, shall become the beneficial
owner of shares of the Corporation with respect to which 25% or more of the
total number of votes for the election of the Board of Directors of the
Corporation may be cast, (ii) as a result of, or in connection with, any cash
tender offer, merger or other business combination, sale of assets or contested
election, or combination of the foregoing, the persons who were directors of the
Corporation shall cease to constitute a majority of the Board of Directors of
the Corporation or (iii) the shareholders of the Corporation shall approve an
agreement providing either for a transaction in which the Corporation will cease
to be an independent publicly owned entity or for a sale or other disposition of
all or substantially all the assets of the Corporation; provided, however, that
the occurrence of any such events shall not be deemed a "change in control" if,
prior to such occurrence, a resolution specifically approving such occurrence
shall have been adopted by at least a majority of the Board of Directors of the
Corporation. If the Continuous Service of any Participant of the Corporation or
any Affiliate is involuntarily terminated for whatever reason, at any time
within eighteen months after a change in control, unless the Committee shall
have otherwise provided in the agreement referred to in paragraph (d) of Section
11 hereof, any Restricted Period with respect to Restricted Stock theretofore
awarded to such Participant shall lapse upon such termination and all Shares
awarded as Restricted Stock shall become fully vested in the Participant to whom
such Shares were awarded. If a tender offer or exchange offer for Shares (other
than such an offer by the Corporation) is commenced, or if the event specified
in clause (iii) above shall occur, unless the Committee shall have otherwise
provided in the instrument evidencing the grant of an Option or Stock
Appreciation Right, all Options and Stock Appreciation Rights theretofore
granted and not fully exercisable shall become exercisable in full upon the
happening of such event and shall remain so exercisable for a period of sixty
days following such date, after which they shall revert to being exercisable in
accordance with their terms; provided, however, that no Option or Stock
Appreciation Right which has previously been exercised or otherwise terminated
shall become exercisable.
15. Assignments and Transfers. No Award nor any right or interest of a
Participant under the Plan in any instrument evidencing any Award under the Plan
may be assigned, encumbered or transferred except, in the event of the death of
a Participant, by will or the laws of descent and distribution or in the case of
an Award other than an Incentive Stock Option, pursuant to a qualified domestic
relations order as defined in the Code or Title I of the ERISA or the rules
thereunder.
16. Employee Rights Under the Plan. No director, officer or employee shall
have a right to be selected as a Participant nor, having been so selected, to be
selected again as a Participant and no director, officer, employee or other
person shall have any claim or right to be granted an Award under the Plan or
under any other incentive or similar plan of the Corporation or any Affiliate.
Neither the Plan nor any action taken thereunder shall be construed as giving
any employee any right to be retained in the employ of the Corporation or any
Affiliate.
17. Delivery and Registration of Stock. The Corporation's obligation to
deliver Shares with respect to an Award shall, if the Committee so requests, be
conditioned upon the receipt of a representation as to the investment intention
of the Participant to whom such Shares are to be delivered, in such form as the
Committee shall determine to be necessary or advisable to comply with the
provisions of the Securities Act of 1933 or any other Federal, state or local
securities legislation or regulation. It may be provided that any representation
requirement shall become inoperative upon a registration of the Shares or other
action eliminating the necessity of such representation under such Securities
Act or other securities legislation. The Corporation shall not be required to
deliver any Shares under the Plan prior to (i) the admission of such shares to
listing on any stock exchange on which Shares may then be listed, and (ii) the
completion of such registration or other qualification of such Shares under any
state or Federal law, rule or regulation, as the Committee shall determine to be
necessary or advisable.
<PAGE>
18. Withholding Tax. Upon the termination of the Restricted Period with
respect to any shares of Restricted Stock (or at any such earlier time, if any,
that an election is made by the Participant under Section 83(b) of the Code, or
any successor provision thereto, to include the value of such shares in taxable
income), the Corporation shall have the right to require the Participant or
other person receiving such shares to pay the Corporation the amount of any
taxes which the Corporation is required to withhold with respect to such shares,
or, in lieu thereof, to retain or sell without notice, a sufficient number of
shares held by it to cover the amount required to be withheld. The Corporation
shall have the right to deduct from all dividends paid with respect to shares of
Restricted Stock the amount of any taxes which the Corporation is required to
withhold with respect to such dividend payments.
The Corporation shall have the right to deduct from all amounts paid in
cash with respect to the exercise of a Right under the Plan any taxes required
by law to be withheld with respect to such cash payments. Where a Participant or
other person is entitled to receive Shares pursuant to the exercise of an Option
or Right pursuant to the Plan, the Corporation shall have the right to require
the Participant or such other person to pay the Corporation the amount of any
taxes which the Corporation is required to withhold with respect to such Shares,
or, in lieu thereof, to retain, or sell without notice, a number of such Shares
sufficient to cover the amount required to be withheld.
19. Amendment or Termination. The Board of Directors of the Corporation may
amend, suspend or terminate the Plan or any portion thereof at any time, but
(except as provided in Section 12 hereof) no amendment shall be made without
approval of the stockholders of the Corporation which shall (i) materially
increase the aggregate number of Shares with respect to which Awards may be made
under the Plan, (ii) materially increase the aggregate number of Shares which
may be subject to Awards to Participants who are not Employees or (iii) change
the class of persons eligible to participate in the Plan; provided, however,
that no such amendment, suspension or termination shall impair the rights of any
Participant, without his consent, in any Award theretofore made pursuant to the
Plan.
20. Effective Date and Term of Plan. The Plan shall become effective upon
its adoption by the Board of Directors of the Corporation, subject to the
Association converting to a stock institution and approval of the Plan by
stockholders of the Corporation. It shall continue in effect for a term of ten
years unless sooner terminated under Section 19 hereof.
21. Initial Grant. By, and simultaneously with, the adoption of this Plan,
each member of the Board of Directors of the Corporation and/or the Association
at the time of the Association's conversion to stock form, and each newly
elected member as of the date of his election to the Board of Directors of the
Corporation and/or the Association, who is not a full-time Employee, is hereby
granted an Option to purchase 100 Shares. Each such Option shall be evidenced by
a Non-Qualified Stock Option Agreement in a form approved by the Board of
Directors and shall be subject in all respects to the terms and conditions of
this Plan, which are controlling. All options granted pursuant to this Section
21 shall be rounded down to the nearest whole share to the extent necessary to
ensure that no options to purchase representing fractional shares are issued.
<PAGE>
- -------------------------------------------------------------------------------
1996 ANNUAL REPORT
- -------------------------------------------------------------------------------
MIDWEST [LOGO]
[MAP]
<PAGE>
- -------------------------------------------------------------------------------
TABLE OF CONTENTS
- -------------------------------------------------------------------------------
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 .......................................... 40
Corporate Information............................................. 41
<PAGE>
MIDWEST [LOGO]
March 21, 1997
Dear Fellow Stockholder:
We are pleased to present the Annual Report of Midwest Bancshares, Inc.
for the 1996 fiscal year. For the fiscal year ended December 31, 1996, your
Company recorded net earnings of $630,000, or $1.68 per share. As discussed in
more detail in the Annual Report, the decrease in net earnings for the year was
primarily due to passage of the Deposit Insurance Funds Act of 1996. This
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 to recapitalize the SAIF insurance fund. Excluding this one-time
expense, net earnings for 1996 would have been approximately $1,050,000, or
$2.79 per share. As a result of the special assessment, the SAIF is fully-funded
and, therefore, we expect a reduction in our FDIC premiums which will provide
annual savings of approximately $170,000 before taxes on income, beginning in
1997.
We continue to be amazed at how technology is changing the way we do
banking. As evidence, we refer you to page 41 of this report which shows our new
Web Site and E-mail addresses. We also expect to introduce 24-hour telephone
access and remote banking in the not too distant future. If you have access to a
PC, please visit our Web site and feel free to offer suggestions or to send an
E-mail.
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 stay in business. We look to the future with
renewed confidence and optimism.
Sincerely,
/s/ William D. Hassel
--------------------------------------
William D. Hassel
President and Chief Executive Officer
/s/ Robert D. Maschmann
--------------------------------------
Robert D. Maschmann
Executive Vice President and
Chief Financial Officer
PARENT COMPANY OF
MIDWEST FEDERAL SAVINGS & LOAN ASSOCATION OF EASTERN IOWA
=======================================
P.O. Box 459 / Burlington, IA 52601
Phone 319/754-6526
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Selected Financial Condition Data:
Total assets ............................... $136,425 $132,964 $131,260 $130,815 $129,763
Cash and cash equivalents .................. 3,998 2,305 3,473 2,486 3,283
Securities available for sale .............. 23,784 19,711 6,139 7,467 ---
Securities held to maturity................. 21,811 31,509 45,892 50,434 61,468
Loans receivable, net....................... 81,125 74,035 70,344 65,214 59,439
Deposits.................................... 101,918 101,334 106,894 106,723 114,428
Total borrowings ........................... 24,000 20,500 14,000 14,279 6,318
Stockholders' equity ....................... 9,600 9,896 9,283 8,663 8,034
December 31,
------------------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Selected Operations Data:
Total interest income....................... $10,163 $9,573 $8,840 $8,874 $9,993
Total interest expense...................... 6,243 5,713 4,864 5,196 6,529
------- ------ ------ ------ ------
Net interest income........................ 3,920 3,860 3,976 3,678 3,464
Provision for loan losses................... 48 48 42 59 48
------- ------ ------ ------ ------
Net interest income after
provision for loan losses ................ 3,872 3,812 3,934 3,619 3,416
Fees and service charges.................... 179 171 162 133 96
Gain on sale of deposits ................... --- 493 --- --- ---
Gain on sales of mortgage-backed securities,
investment securities and office property and
equipment................................... 45 76 --- 14 134
Other non-interest income................... 125 107 73 191 52
Non-interest expense........................ 3,217 2,629 2,554 2,506 2,309
------- ------ ------ ------ ------
Income before taxes on income and discontinued
subsidiary operations ..................... 1,004 2,030 1,615 1,451 1,389
Taxes on income ............................ 374 680 545 509 303
Cumulative effect of accounting change...... --- --- --- 170 ---
Discontinued subsidiary operations.......... --- --- --- --- 193
------- ------ ------ ------ ------
Net earnings................................ $ 630 $1,350 $1,070 $1,112 $1,279
======= ====== ====== ====== ======
Earnings per share:
Before cumulative effect of accounting change
and discontinued subsidiary operations..... $ 1.68 $ 3.39 $ 2.49 $ 2.05 $ 2.34
Cumulative effect of accounting change...... --- --- --- .37 ---
Discontinued subsidiary operations.......... --- --- --- --- .41
------- ------ ------ ------ ------
Earnings per common share .................. $ 1.68 $ 3.39 $ 2.49 $ 2.42 $ 2.75
======= ====== ====== ====== ======
Cash dividends per common share ............ $ .56 $ .50 $ .48 $ .40 ---
======= ====== ====== ====== ======
</TABLE>
2
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA (cont'd)
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Selected Financial Ratios and Other Data:
Performance Ratios:
Return on assets (ratio of net earnings to
average total assets)............................ 0.46%(1) 1.02% 0.81% 0.86% 0.98%
Interest rate spread information:
Average during period ........................... 2.68 2.74 2.89 2.69 2.65
End of period ................................... 2.63 2.70 2.96 2.75 2.77
Net interest margin(2)............................ 2.94 2.99 3.11 2.92 2.74
Return on stockholders' equity(3) (ratio of net
income to average equity)........................ 6.59(1) 14.73 11.96 13.15 22.51
Average interest-earning assets to average
interest-bearing liabilities..................... 105.68 105.83 105.89 105.50 101.70
Ratio of operating expense to average
total assets..................................... 2.34(1) 1.98 1.94 1.99 1.76
Efficiency ratio(4) .............................. 76.23(1) 63.11 61.26 63.56 64.79
Asset Quality Ratios:
Non-performing assets(5) to total assets at
end of year...................................... 0.83 0.06 0.35 0.43 0.49
Allowance for loan losses to non-performing
loans(6) at end of year.......................... 61.25 1,325.49 396.34 118.98 165.82
Allowance for loan losses to total loans, excl.
mortgage-backed securities at end of year ....... 0.82 0.87 0.90 0.97 0.96
Capital Ratios:
Stockholders' equity(3) to total assets
(end of year).................................... 7.04 7.44 7.07 6.62 6.19
Average stockholders' equity(3) to average
total assets .................................... 6.93 6.89 6.79 6.53 4.37
Dividend payout ratio (dividends per share
divided by net earnings per share)............... 33.33(1) 14.75 19.35 16.60 ---
Number of full-service offices 4 4 5 5 5
</TABLE>
- ----------
(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) Prior to November 10, 1992, represents retained earnings, substantially
restricted, of the Association.
(4) Operating expense divided by total operating income; excluding gain on the
sale of deposits for 1995.
(5) Includes loans that are 90 days or more delinquent, as well as real estate
owned.
(6) Includes loans that are 90 days or more delinquent.
3
<PAGE>
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"). All references to the
Company prior to November 10, 1992, except where otherwise indicated, are to the
Association and its subsidiaries on a consolidated basis.
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.
Financial Condition
Total assets increased by $3.4 million to $136.4 million at December 31,
1996 compared to $133.0 million at December 31, 1995. Total loans receivable
increased $7.2 million to $81.2 million at December 31, 1996 from $74.0 million
at December 31, 1995. During 1996, the Association originated $19.5 million in
loans while loan repayments totaled $15.5 million. This compares with $14.5
million in originations and $14.6 in repayments in fiscal 1995. Of the loans
originated in 1996 and 1995, $4.1 million and $1.3 million, respectively,
represented refinancings. Loan originations were up due to favorable lending
rates and generally good economic conditions for borrowers during 1996. The
Company also purchased $6.3 million in loans in 1996 compared with $5.3 million
in 1995.
Investment securities held to maturity decreased to $21.8 million at
December 31, 1996 from $31.5 million at December 31, 1995, 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 $23.8 million at December 31, 1996 from $19.7 million at
December 31, 1995, due to purchases of securities available for sale.
Total deposits increased from $101.3 million at December 31, 1995 to
$101.9 million at December 31, 1996. Advances from the FHLB increased from
$20.5 million at December 31, 1995 to $24.0 million at December 31, 1996, due to
new advances of $8.0 million (net of $4.5 million of repayments). The Company
used $511,000 of liquid assets to repurchase 5% of the Company's common stock
in 1996.
The Company's ratio of non-performing assets to total assets increased to
0.83 % at December 31, 1996 from 0.06% at December 31, 1995. Total
non-performing assets increased $1.0 million primarily due to an $874,000
increase in non-accruing multi-family loans as a result of three participation
loans which were more than 90 days past due as of December 31, 1996. All three
loans 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.
4
<PAGE>
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, 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 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 0.97 % 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
5
<PAGE>
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 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.
Comparison of Years Ended December 31, 1995 and 1994
General. The Company had earnings of $1,350,000 in 1995 compared to
$1,070,000 in 1994, an increase of approximately $280,000. The increase in net
earnings was primarily due to a non-recurring 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. Management believes that the closing of
the Keokuk office will allow the Company to reduce operating expenses and to
concentrate its marketing efforts in its remaining, more profitable markets.
Also the gain on sale boosted the Company's capital position which may be used
to fund future asset growth. Also contributing to the increase in net earnings
was a one-time special distribution of $75,000 received from the Company's data
processor, which was included in non-interest income, and $76,000 of gains on
the sale of equity securities. Excluding these special items, the Company
experienced a decrease in net earnings of approximately $148,000 primarily due
to a decrease in net interest income, a decrease in noninterest income,
primarily resulting from a decrease in commissions from the sale of alternative
financial products sold through the Association's subsidiary, Midwest Financial
Products, Inc., and increases in non-interest expenses. The following paragraphs
discuss these comparisons in more detail as well as other components of net
earnings.
Net Interest Income. Net interest income decreased by $116,000 to
$3,860,000 in 1995 from $3,976,000 in 1994. The decrease in net interest income
was primarily the result of the Association's cost of funds increasing faster
than the increase in yield on earning assets in response to higher market
interest rates. The changing mix of funding sources also contributed to the
increase in the cost of funds as described in more detail below. For the year
ended December 31, 1995, the Company's interest rate spread decreased 15 basis
points to 2.74% compared to 2.89% in 1994. The Company's net interest margin
decreased 12 basis points to 2.99% compared to 3.11% in 1994.
During fiscal 1995, average interest-earning assets increased by
approximately $ 1.1 million over the 1994 average balances. The increase in
average interest-earning assets was primarily due to an increase in loans
receivable as the Association successfully redeployed cash flow into lending.
The average yield on interest-earning assets increased by 51 basis points during
1995 compared to 1994. The increase in average yield was primarily due to
adjustable-rate loans and mortgage-backed securities adjusting to higher rates
in response to higher market rates and
6
<PAGE>
reinvestment of maturing investments at higher market interest rates. Yield
adjustments on the Company's adjustable-rate portfolio occur periodically over
time and may tend to lag behind the changes experienced in the market.
During fiscal 1995, average interest-bearing liabilities also increased by
approximately $1.1 million, primarily due to an increase of $2.6 million in
average borrowings from the FHLB, partially offset by a decrease of $1.5 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 66 basis points compared to 1994. 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 depositors
shifted from transaction accounts to higher rate certificates of deposit, and
the Company increased its borrowing from the FHLB, in order to fund asset
growth, at rates which were generally higher than the overall cost of deposits.
Provision for Losses on Loans. The provision for losses on loans increased
by $6,000 in 1995 compared to 1994. This increase was the result of the
determination by management to maintain the allowance for losses on loans at
approximately 1% of total loans that have credit risk. At December 31, 1995
and 1994, the Company's allowance for losses on loans totaled $676,000 and
$650,000, respectively, or 0.87% and 0.90% of total loans, excluding
mortgage-backed securities, and 1,325.49% and 396.34% of total non-performing
loans, respectively. The improvement in the latter ratio was impacted by a
$113,000 decrease in non-performing loans, primarily due to a reduction in
delinquent loans in the Company's primary lending territory. The Company had net
charge-offs of $22,000 in 1995 compared to $44,000 in 1994.
Non-Interest Income. Total non-interest income increased by $613,000 in
1995 compared to 1994. The increase was primarily due to a non-recurring gain of
$493,000 on the sale of deposits, a $75,000 special distribution received from
the Company's data processor, and gains of $76,000 on the sale of marketable
equity securities, partially offset by a decrease of $42,000 in commissions on
the sale of alternative financial products sold through the Association's
subsidiary, Midwest Financial Products, Inc. The decrease in commissions on the
sale of alternative financial products was primarily due to such products
becoming less competitive in 1995 compared to the Bank's other traditional
investment products.
Non-Interest Expenses. Total non-interest expense increased by $75,000 in
1995 compared to 1994. The increase was primarily the result of increased net
personnel expense associated with decreased loan production. Higher market
interest rates in the first half of 1995 resulted in reduced loan originations
primarily due to a reduction in refinancing activity. Consequently, loan fees,
which offset the cost of originating loans, were $44,000 less in 1995 compared
to 1994, resulting in increased non-interest expenses. Increased real estate
owned expense of $9,000, related to the management and disposal of a
multi-family REO property, and data processing expense of $10,000 also
contributed to the increases in non-interest expenses.
Taxes on Income. Taxes on income increased $135,000 for 1995 compared to
1994, primarily due to increased taxable income.
7
<PAGE>
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 interest margin. The table does not
reflect any effect of income taxes. All average balances are monthly 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.
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------------------------------------------
1996 1995
--------------------------------------------------------- --------------------------------
Yield/Rate at Average Interest Average Interest
December 31, Outstanding Earned/ Yield/ Outstanding Earned/
1996 Balance Paid Rate Balance Paid
-------------- ----------- ---------- -------- ----------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-Earning Assets:
Loans receivable.................. 8.09% $ 79,219 $ 6,444 8.13% $ 71,784 $5,799
Mortgage-backed securities........ 6.97 30,841 2,162 7.01 33,981 2,366
Investment securities ............ 7.06 19,654 1,351 6.87 18,307 1,107
Deposits in other banks........... 5.00 1,401 69 4.90 2,923 162
Other interest-earning assets..... 7.00 1,960 137 7.00 1,921 139
---- -------- ------- ---- -------- ------
Total interest-earning assets... 7.63 133,075 10,163 7.64 128,916 9,573
---- -------- ------- ---- -------- ------
Interest-Bearing Liabilities:
Savings deposits, money market
deposit and NOW accounts....... 2.92 $ 29,562 $ 864 2.92 $31,597 $ 910
Time deposits.................... 5.52 71,104 3,863 5.43 73,621 3,826
---- -------- ------- ---- -------- ------
Total deposits................. 4.77 100,666 4,727 4.70 105.218 4,736
---- -------- ------- ---- -------- ------
FHLB advances and other
borrowings...................... 5.92 25,256 1,516 6.00 16,596 977
---- -------- ------- ---- -------- ------
Total interest-bearing
liabilities.................. 5.00 $125,922 6,243 4.96 $121,814 5,713
---- -------- ------- ---- -------- ------
Net interest income; interest
rate spread....................... 2.63% $3,920 2.68% $3,860
==== ====== ==== ======
Net earning assets/net
interest margin (1)............... $7,153 2.94% $7,102
Average interest-earning assets to ====== ==== ======
average interest-bearing liabilities 105.7% 105.8%
====== ======
</TABLE>
[BROKEN TABLE]
<PAGE>
<TABLE>
<CAPTION>
------------------------------------------------
1994
-------- ------------------------------------
Average Interest
Yield/ Outstanding Earned/ Yield/
Rate Balance Paid Rate
-------- ----------- --------- -------
<S> <C> <C> <C> <C>
Interest-Earning Assets:
Loans receivable.................. 8.08% $ 69,185 $5,242 7.58%
Mortgage-backed securities........ 6.96 36,672 2,392 6.52
Investment securities ............ 6.05 18,261 969 5.30
Deposits in other banks........... 5.57 1,788 76 4.23
Other interest-earning assets..... 7.25 1,921 161 8.40
---- -------- ------ ----
Total interest-earning assets... 7.43 127,827 8,840 6.92
---- -------- ------ ----
Interest-Bearing Liabilities:
Savings deposits, money market
deposit and NOW accounts....... 2.88 $ 34,797 $ 889 2.56%
Time deposits.................... 5.20 71,923 3,252 4.52
---- -------- ------ ----
Total deposits................. 4.50 106,720 4,141 3.88
---- -------- ------ ----
FHLB advances and other
borrowings...................... 5.89 13,996 723 5.18
---- -------- ------ ----
Total interest-bearing
liabilities.................. 4.69 $120,716 4,864 4.03
---- -------- ------ ----
Net interest income; interest
rate spread....................... 2.74% $3,976 2.89%
==== ====== ====
Net earning assets/net
interest margin(1) .................. 2.99% $ 7,111 3.11%
==== ======== ====
Average interest-earning assets to
average interest-bearing liabilities 105.9%
=====
</TABLE>
- -------
(1) Net interest margin is net interest income divided by average
interest-earning assets.
8
<PAGE>
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.
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------------------------------
1996 vs. 1995 1995 vs. 1994
-------------------------------------- ------------------------------------
Increase Increase
(Decrease) (Decrease)
Due to Total Due to Total
------------------- Increase --------------------- Increase
Volume Rate (Decrease) Volume Rate (Decrease)
------- ---- -------- -------- ---- --------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-Earning Assets:
Loans receivable........................ $ 604 $ 41 $ 645 $ 202 $355 $557
Mortgage-backed securities.............. (220) 16 (204) (182) 156 (26)
Investment securities................... 85 159 244 2 136 138
Deposits in other banks................. (76) (17) (93) 58 28 86
Other interest-earning assets .......... 3 (5) (2) --- (22) (22)
----- ---- ----- ----- ---- ----
Total interest-earning assets.......... 396 194 590 80 653 733
----- ---- ----- ----- ---- ----
Interest-Bearing Liabilities:
Savings deposits, money market deposit
and NOW accounts........................ (59) 13 (46) (86) 107 21
Time deposits........................... (113) 150 37 78 496 574
----- ---- ----- ----- ---- ----
Total deposits......................... (172) 163 (9) (8) 603 595
FHLB advances and other borrowings...... 520 19 539 145 109 254
----- ---- ----- ----- ---- ----
Total interest-bearing liabilities .... 348 182 530 137 712 849
----- ---- ----- ----- ---- ----
Net change in net interest income....... $ 48 $ 12 $ 60 $(57) $(59) $(116)
===== ==== ===== ===== ==== =====
</TABLE>
9
<PAGE>
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 mortgage-backed
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, 1996
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 6%
to 18% 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%. 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. 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. The 1995 gap table
assumed callable securities would be redeemed at the first call date since all
were "in the money" calls at December 31, 1995. 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, 1996.
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.
10
<PAGE>
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, 1996 on the
basis of the factors and assumptions set forth above.
<TABLE>
<CAPTION>
Maturing or Repricing
-----------------------------------------------------------------------------------
Over 1-3 Over 3-5 Over
0-3 Months 4-12 Months Years Years 5 Years Total
--------------- --------------- ------ -------- -------- --------
Amount Rate Amount Rate Amount Amount Amount Amount
------ ---- ------ ---- ------ ------ ------ ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed-rate one- to four-family (including
mortgage-backed securities),
commercial/multi-family real estate and
construction loans.......................... $ 3,104 7.04% $8,729 7.34% $16,393 $ 7,620 $14,309 $ 50,155
Adjustable-rate one- to four-family
(including mortgage-backed securities),
commercial/multi-family real estate
and construction loans ..................... 10,407 7.68 19,366 8.30 11,628 4,930 3,667 49,998
Consumer and other loans .................... 655 8.27 1,895 8.27 3,516 1,693 1,229 8,988
Investment securities and other ............. 5,087 5.77 --- --- 2,456 --- 14,079 21,622
------- ---- ------- ---- ------- ------- ------- --------
Total interest-earning assets............ 19,253 7.09 29,990 8.02 33,993 14,243 33,284 130,763
------- ---- ------- ---- ------- ------- ------- --------
Savings deposits, money market deposit
and NOW accounts, excluding
non-interest bearing checking accounts ..... 14,579 3.63 2,748 1.98 5,714 2,464 3,432 28,937
Time deposits ............................... 17,170 5.20 28,590 5.48 25,838 726 258 72,582
------- ---- ------- ---- ------- ------- ------- --------
Total interest-bearing deposits ............ 31,749 4.48 31,338 5.17 31,552 3,190 3,690 101,519
FHLB advances ............................... --- --- 1,000 5.49 9,000 12,000 2,000 24,000
------- ---- ------- ---- ------- ------- ------- --------
Total interest-bearing liabilities...... 31,749 4.48 32,338 5.18 40,552 15,190 5,690 125,519
------- ---- ------- ---- ------- ------- ------- --------
Interest-earning assets less
interest-bearing liabilities ............... $(12,496) $(2,348) $ (6,559) $ (947) $27,594 $ 5,244
======== ======== ======== ======== ======= ========
Cumulative interest rate sensitivity gap .... $(12,496) $(14,844) $(21,403) $(22,350) $ 5,244
======== ======== ======== ======== =======
Cumulative interest rate sensitivity gap
as a percentage of total assets at
December 31, 1996........................... (9.2)% (10.9)% (15.7)% (16.4)% 3.8%
==== ===== ===== ===== ===
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(1)..................... 4.0% 1.8%
==== =====
Cumulative interest rate sensitivity gap
as a percentage of total assets at
December 31, 1992(1)........................ (4.4)% (4.7)%
==== =====
</TABLE>
- -------------------
(1) Using Office of Thrift Supervision ("OTS") calculations for these dates.
Such calculations are no longer provided by the OTS.
11
<PAGE>
The shift in the Association's one-year gap from a positive 1.9% at
December 31, 1995 to a negative 10.9% at December 31, 1996 was due in part to
the types of loans originated and funds borrowed during 1996, but primarily due
to the change in assumption that U.S. Agency securities with call features will
extend to maturity as opposed to being redeemed at the first call date. This had
the effect of increasing the 1996 negative gap by $14.1 million, or 10. 4 % of
total assets. During 1996 and 1995, loan originations and purchases were
primarily fixed-rate and longer-term adjustable-rate mortgages. In addition, the
amount of FHLB advances maturing or repricing in one year or less decreased to
$1.0 million in 1996 from $4.5 million in 1995.
Office of Thrift Supervision ("OTS") regulations 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, 1996, 2.0% of the present value of the Association's assets was
approximately $2.8 million, which was less than $3.8 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 $0.5
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, 1996, 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 $5,742 $-8,267 -59%
+300 7,994 -6,015 -43
+200 10,226 -3,783 -27
+100 12,286 -1,723 -12
0 14,009 --- ---
-100 15,267 1,258 9
-200 16,092 2,083 15
-300 16,988 2,979 21
-400 18,490 4,481 32
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 32%
increase in NPV in a declining rate environment and a 59% 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).
12
<PAGE>
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 OTS model, in management's
opinion. 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 5% 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 1996, the Association's
liquidity ratio was 9.8%, compared to 23.4% for December 1995. 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 1996, the primary source of cash from operating activities
was net income, and the net cash provided by operating activities was $706,000.
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 $1.8 million during the year ended December
31, 1996. Loan purchases used $5.6 million during the year ended December 31,
1996. There were $4.1 million mortgage-backed securities purchases, while
mortgage-backed securities principal repayments totaled $5.9 million. Purchases
of investment securities of $5.6 million were more than offset by maturities of
$7.5 million during the year ended December 31, 1996. 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, 1996 deposits grew by $583,000. The Company also utilizes
advances from the FHLB, and increased such advances by $3.5 million in 1996.
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, (h) the projected
13
<PAGE>
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. Although the Company has used reverse
repurchase agreements as a source of funds in the past, it has no present
intention to use them in the future.
The Company anticipates that it will have sufficient funds available to
meet current loan commitments. At December 31, 1996 the Company had outstanding
commitments to extend credit which amounted to $350,000 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, 1996 totaled approximately $45.8 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, 1996, the Company had $24.0 million advances outstanding from the FHLB of
Des Moines.
At December 31, 1996, the Company's stockholders' equity totaled $9.6
million, or 7.0% 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, 1996, the Association was in
compliance with all three of its regulatory capital requirements.
At December 31, 1996, the Association had tangible and core capital of
$8,702,000, or 6.41 % of total adjusted assets which exceeded the regulatory
requirements of 1.5% and 3.0%, respectively, by $6,665,000 and $4,628,000,
respectively. The risk-based capital requirement is currently 8% of
risk-weighted assets. As of December 31, 1996, the Association had risk-weighted
assets of $59,063,000 a risk-based requirement of $4,725,000 and risk-based
capital of $9,388,000, or 15.89%, which exceeds the requirement by $4,663,000.
Tangible Core Risk-based
Capital Capital Capital
-------- ------- ----------
(Dollars In Thousands)
Association's capital.......... $8,702 $8,702 $8,702
Additional capital -
general allowances............ --- --- 686
------ ------ ------
Regulatory capital............. 8,702 8,702 9,388
Minimum capital requirement.... 2,037 4,074 4,725
------ ------ ------
Excess regulatory capital...... $6,665 $4,628 $4,663
====== ====== ======
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,
1996, the unrealized gain of $52,000 down from $341,000 at December 31, 1995,
consisted primarily of the unrealized market gain, net of tax, on certain GNMA
mortgage-backed securities, U.S. Agency securities and marketable equity
securities which have been identified as available for sale by management.
Regulatory Action Regarding Insurance Assessments
The deposits of the Association are presently insured by the Savings
Association Insurance Fund (the "SAIF"), which together with the Bank Insurance
Fund (the "BIF"), are the two insurance funds administered by the Federal
Deposit Insurance Corporation (the "FDIC").
For the first six months of 1995, the assessment schedule for BIF members
and SAIF members ranged from .23 % to .31 % of deposits. As is the case with the
SAIF, the FDIC is authorized to adjust the insurance premium rates for banks
that are insured by the BIF of the FDIC in order to maintain the reserve ratio
of the BIF
14
<PAGE>
at 1.25% of BIF insured deposits. As a result of the BIF reaching its statutory
reserve ratio the FDIC revised the premium schedule for BIF insured institutions
to provide a range of .04% to .31 % of deposits. The revisions became effective
in the third quarter of 1995. In addition, the BIF rates were further revised,
effective January 1996, to provide a range of 0% to .27%. The SAIF rates,
however, were not adjusted. At the time the FDIC revised the BIF premium
schedule, it noted that, absent legislative action (as discussed below), the
SAIF would not attain its designated reserve ratio until the year 2002. As a
result, SAIF insured members would continue to be generally subject to higher
deposit insurance premiums than BIF insured institutions until, all things being
equal, the SAIF attained its required reserve ratio.
In order to eliminate this disparity and any competitive disadvantage
between BIF and SAIF member institutions with respect to deposit insurance
premiums, legislation to recapitalize the SAIF was enacted in September 1996.
The legislation provides for a one-time assessment to be imposed on all deposits
assessed at the SAIF rates; as of March 31, 1995, in order to recapitalize the
SAIF. It also provides for the merger of the BIF and the SAIF on January 1, 1999
if no savings associations then exist. The special assessment rate has been
established at .657 % of deposits by the FDIC and the resulting assessment of
$670,861 was paid in November 1996. This special assessment significantly
increased noninterest expense and adversely affected the Association's results
of operations for the year ended December 31, 1996. As a result of the special
assessment, the Association's deposit insurance premiums were reduced to
approximately $65,000 annually, based upon its current risk classification and
the new assessment schedule for SAIF insured institutions. These premiums are
subject to change in future periods.
Prior to the enactment of the legislation, a portion of the SAIF
assessment imposed on savings associations was used to repay obligations issued
by a federally chartered corporation to provide financing ("FICO") for resolving
the thrift crisis in the 1980s. Although the FDIC has proposed that the SAIF
assessment be equalized with the BIF assessment schedule, effective October 1,
1996, SAIF-insured institutions will continue to be subject to a FICO assessment
as a result of this continuing obligation. Although the legislation also now
requires assessments to be made on BIF-assessable deposits for this purpose,
effective January 1, 1997, that assessment will be limited to 20% of the rate
imposed on SAIF assessable deposits until the earlier of December 31, 1999 or
when no savings association continues to exist, thereby imposing a greater
burden on SAIF member institutions such as the Association. Thereafter, however,
assessments on BIF-member institutions will be made on the same basis as
SAIF-member institutions. The rates to be established by the FDIC to implement
this requirement for all FDIC-insured institutions is uncertain at this time,
but are anticipated to be about a 6.5 basis points assessment on SAIF deposits
and 1.5 basis points on BIF deposits until BIF insured institutions participate
fully in the assessment.
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.
Effect of New Accounting Standards
SFAS 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities", will be effective for the Association for
transactions occurring after December 31, 1996, and provides standards for
accounting recognition or derecognition of assets and liabilities. The
Association expects to adopt SFAS 125 when required, and management believes
adoption will not have a material effect on the financial position and results
of operations, nor will adoption require additional capital resources.
15
<PAGE>
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, 1996 and 1995, 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, 1996.
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, 1996 and 1995, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1996, in conformity with generally accepted accounting
principles.
/s/ KPMG Peat Marwick, LLP
KPMG Peat Marwick, LLP
Des Moines, Iowa
January 10, 1997
<PAGE>
MIDWEST BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Assets
Cash and cash equivalents $ 3,998,163 2,305,111
Securities available for sale (note 2) 23,783,968 19,711,494
Securities held to maturity (estimated fair
value of $21,763,670 and $31,425,346) (notes 2 and 8) 21,810,592 31,508,882
Loans receivable, net (notes 3, 4, and 9) 81,225,412 74,034,914
Real estate owned and in judgment, net (note 5) 12,000 32,944
Federal Home Loan Bank (FHLB) stock, at cost 1,959,700 1,959,700
Office property and equipment, net (note 6) 2,446,983 2,314,814
Accrued interest receivable (note 7) 1,007,547 874,512
Other assets 180,908 221,958
-------------------- --------------------
Total assets $ 136,425,273 132,964,329
==================== ====================
Liabilities and Stockholders' Equity
Liabilities:
Deposits (note 8) $ 101,917,765 101,334,437
Advances from FHLB (note 9) 24,000,000 20,500,000
Advances from borrowers for taxes and insurance 378,435 412,427
Accrued interest payable 73,743 71,507
Accrued expenses and other liabilities 455,082 750,020
-------------------- --------------------
Total liabilities 126,825,025 123,068,391
-------------------- --------------------
Stockholders' equity:
Serial preferred stock, $.01 par value;
authorized 500,000 shares; none issued - -
Common stock, $.01 par value; 2,000,000 shares authorized;
455,000 shares issued and outstanding in 1996 and 1995 4,550 4,550
Additional paid-in capital 4,037,058 4,037,058
Retained earnings, substantially restricted (notes 12 and 16) 7,836,808 7,403,062
Treasury stock, at cost; 105,621 shares in 1996 and 86,170 in 1995 (2,210,642) (1,699,533)
Employee Stock Ownership Plan (note 11) (120,000) (180,000)
Recognition and retention plan (note 11) - (9,725)
Unrealized appreciation on securities available for sale, net of
taxes on income of $31,000 in 1996 and $203,000 in 1995 52,474 340,526
-------------------- --------------------
Total stockholders' equity 9,600,248 9,895,938
Contingencies (note 16).
-------------------- --------------------
Total liabilities and stockholders' equity $ 136,425,273 132,964,329
==================== ====================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
MIDWEST BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended December 31, 1996, 1995, and 1994
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Interest income:
Loans receivable $ 6,444,056 5,798,577 5,242,464
Securities available for sale 1,902,576 655,606 591,175
Securities held to maturity 1,609,591 2,816,738 2,769,534
Deposits in other financial institutions 68,717 162,756 75,693
Other interest-earning assets 137,496 139,452 161,282
---------------- -------------- --------------
10,162,436 9,573,129 8,840,148
---------------- -------------- --------------
Interest expense:
Deposits (note 8) 4,726,637 4,736,154 4,141,064
Advances from FHLB and other borrowings 1,516,060 977,375 723,033
---------------- -------------- --------------
6,242,697 5,713,529 4,864,097
---------------- -------------- --------------
Net interest income 3,919,739 3,859,600 3,976,051
Provision for losses on loans (note 4) 47,972 48,000 41,733
---------------- -------------- --------------
Net interest income after provision for losses on loans 3,871,767 3,811,600 3,934,318
---------------- -------------- --------------
Noninterest income:
Fees and service charges 179,326 171,378 161,554
Gain on sale of deposits (note 17) - 493,345 -
Gain on sale of securities available for sale 29,213 75,816 -
Gain on sale of mortgage-backed securities held to maturity 15,950 - -
Other 124,531 107,091 73,038
---------------- -------------- --------------
349,020 847,630 234,592
---------------- -------------- --------------
Noninterest expenses:
Compensation and benefits (note 11) 1,181,748 1,170,425 1,152,379
Office property and equipment 349,156 337,615 353,562
Deposit insurance premiums 236,989 238,777 245,498
Deposit insurance special assessment (note 13) 670,861 - -
Data processing 164,939 169,201 159,116
Other 613,782 712,917 643,188
---------------- -------------- --------------
3,217,475 2,628,935 2,553,743
---------------- -------------- --------------
Earnings before taxes on income 1,003,312 2,030,295 1,615,167
Taxes on income (note 10) 373,654 680,452 545,400
---------------- -------------- --------------
Net earnings $ 629,658 1,349,843 1,069,767
================ ============== ==============
Earnings per share - primary $ 1.68 3.41 2.49
Earnings per share - fully diluted 1.68 3.39 2.49
================ ============== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
MIDWEST BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years ended December 31, 1996, 1995, and 1994
<TABLE>
<CAPTION>
Additional ESOP
Common paid-in Retained Treasury borrowing
stock capital earnings stock guarantee
----------- ---------------- ---------------- ----------------- ---------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1993 $ 4,550 4,037,058 5,364,452 (407,166) (278,687)
Net earnings - - 1,069,767 - -
Dividends declared ($.48 per share) - - (196,709) - -
Treasury stock acquired - - - (399,322) -
ESOP loan payment - - - - 48,687
Amortization of recognition
and retention plan - - - - -
Adoption of SFAS 115 - - - - -
Net change in unrealized appreciation
on securities available for sale - - - - -
----------- ---------------- ---------------- ----------------- ---------------
Balance at December 31, 1994 4,550 4,037,058 6,237,510 (806,488) (230,000)
Net earnings - - 1,349,843 - -
Dividends declared ($.50 per share) - - (184,291) - -
Treasury stock acquired - - - (893,045) -
ESOP loan payment - - - - 50,000
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) (180,000)
Net earnings - - 629,658 - -
Dividends declared ($.56 per share) - - (195,912) - -
Treasury stock acquired - - - (511,109) -
ESOP loan payment - - - - 60,000
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) (120,000)
=========== ================ ================ ================= ===============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Recognition Net unrealized
and appreciation on
retention securities available
plan for sale Total
--------------- --------------- ----------------
<S> <C> <C> <C>
Balance at December 31, 1993 (57,005) - 8,663,202
Net earnings - - 1,069,767
Dividends declared ($.48 per share) - - (196,709)
Treasury stock acquired - - (399,322)
ESOP loan payment - - 48,687
Amortization of recognition
and retention plan 30,285 - 30,285
Adoption of SFAS 115 - 368,013 368,013
Net change in unrealized appreciation
on securities available for sale - (301,058) (301,058)
--------------- --------------- ----------------
Balance at December 31, 1994 (26,720) 66,955 9,282,865
Net earnings - - 1,349,843
Dividends declared ($.50 per share) - - (184,291)
Treasury stock acquired - - (893,045)
ESOP loan payment - - 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 (9,725) 340,526 9,895,938
Net earnings - - 629,658
Dividends declared ($.56 per share) - - (195,912)
Treasury stock acquired - - (511,109)
ESOP loan payment - - 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 - 52,474 9,600,248
=============== =============== ================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
MIDWEST BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 1996, 1995, and 1994
<TABLE>
<CAPTION>
1996 1995 1994
----------------- ---------------- -----------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings $ 629,658 1,349,843 1,069,767
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Provision for losses on loans 47,972 48,000 41,733
Proceeds from sale of loans originated for resale - 128,243 520,452
Disbursements on loans originated for resale - (95,143) (553,552)
Depreciation 144,301 127,451 106,811
Provision for deferred taxes 24,000 7,000 47,000
Gain on sale of deposits - (493,345) -
Gain on sale of securities available for sale (29,213) (75,816) -
Gain on sale of securities held to maturity (15,950) - -
Loss on sale of assets - - 8,892
Amortization of recognition and retention plan benefits 9,725 16,995 30,285
ESOP expense 53,938 39,058 48,687
Amortization of premiums and discounts 76,778 146,825 197,461
FHLB stock dividend - (38,700) -
(Increase) decrease in accrued interest receivable (133,035) (71,523) 56,444
Decrease (increase) in other assets 90,050 (91,214) 6,241
Increase (decrease) in accrued interest payable 2,236 42,027 (22,215)
(Decrease) increase in accrued expenses and other liabilities (194,335) 169,567 (113,249)
----------------- ---------------- -----------------
Net cash provided by operating activities 706,125 1,209,268 1,444,757
----------------- ---------------- -----------------
Cash flows from investing activities:
Purchase of securities (5,568,000) 15,488,160 (1,209,617)
Proceeds from maturities of securities 7,543,478 11,000,000 6,000,000
Proceeds from sale of securities available for sale 550,239 285,433 -
Proceeds from sale of securities held to maturity 780,407 - -
Loans purchased (5,555,413) 4,002,260 (2,099,000)
Purchase of mortgage-backed securities (4,051,131) - (6,240,713)
Repayments of principal on mortgage-backed securities 5,862,203 5,344,786 7,194,976
(Increase) decrease in loans receivable (1,800,202) 132,800 (3,315,277)
Proceeds from sale of real estate owned, net 155,042 398,621 28,816
Purchase of office property and equipment (276,470) (265,261) (181,400)
----------------- ---------------- -----------------
Net cash (used in) provided by investing activities (2,359,847) 2,594,041 177,785
----------------- ---------------- -----------------
Cash flows from financing activities:
Payment on sale of deposits, net - 7,279,871 -
Increase in deposits 583,328 2,148,772 171,451
Proceeds from advances from FHLB 8,000,000 6,500,000 -
Repayment of advances from FHLB (4,500,000) - -
Repayment of ESOP loan - - (278,687)
Net (decrease) increase in advances from
borrowers for taxes and insurance (33,992) (73,585) 70,363
Treasury stock acquired (511,109) (893,045) (399,322)
Payment of cash dividends (191,453) (185,520) (199,296)
----------------- ---------------- -----------------
Net cash provided by (used in) financing activities 3,346,774 216,751 (635,491)
----------------- ---------------- -----------------
Net increase (decrease) in cash and cash equivalents 1,693,052 1,168,002 987,051
Cash and cash equivalents at beginning of year 2,305,111 3,473,133 2,486,082
----------------- ---------------- -----------------
Cash and cash equivalents at end of year $ 3,998,163 2,305,111 3,473,133
================= ================ =================
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 6,240,461 5,671,502 4,886,312
Taxes on income 531,654 558,866 523,255
Transfers from loans to real estate acquired through foreclosure 134,098 154,608 309,697
Transfers of mortgage-backed securities to available for sale - 3,864,506 -
================= ================ =================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
27 (Continued)
MIDWEST BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1996 and 1995
(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 four 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,
1996, the Association met the requirements, and management
anticipates meeting the requirements at December 31, 1997 (see note
12).
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, 1996 and 1995, were $3,126,659 and
$1,861,290, respectively.
<PAGE>
MIDWEST BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(1) Summary of Significant Accounting Policies, Continued
Earnings Per Share
Earnings per share - primary is computed using the 353,814, 376,297, and
412,940 weighted-average common shares outstanding at December 31,
1996, 1995, and 1994, respectively, and giving effect to additional
shares assumed to be issued in relation to the Company's stock
options. Such additional shares are assumed to be issued after
acquisition of shares at the average price per share for the period
under the treasury stock method with the assumed proceeds from
exercise of outstanding stock options and were 20,967, 19,695, and
17,057 for the years ended December 31, 1996, 1995, and 1994,
respectively.
Earnings per share - fully diluted is computed in a similar manner but
using the ending price per share for the period. Such additional
shares were 21,937, 21,716, and 17,679 for the years ended December
31, 1996, 1995, and 1994, respectively.
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. In December 1995, the Company
reclassified certain mortgage-backed securities to available for sale
as permitted by the issuance of a special report entitled "A Guide to
Implementation of Statement No. 115 on Accounting for Certain
Investments in Debt Securities."
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 held to
maturity are recorded at cost, adjusted for amortization of premiums
and accretion of discounts.
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.
<PAGE>
MIDWEST BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(1) Summary of Significant Accounting Policies, Continued
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.
Unearned Loan Fees and Discounts
Loanorigination 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.
<PAGE>
MIDWEST BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(1) Summary of Significant Accounting Policies, Continued
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.
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.
<PAGE>
MIDWEST BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(1) Summary of Significant Accounting Policies, Continued
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.
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.
Federal Home Loan Bank Stock
The fair value of Federal Home Loan Bank (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.
<PAGE>
MIDWEST BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(1) Summary of Significant Accounting Policies, Continued
Fair Value of Financial Instruments, Continued
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.
Effect of New Financial Accounting Standards
SFAS125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities," will be effective for the
Association for transactions occurring after December 31, 1996, and
provides standards for accounting recognition or derecognition of
assets and liabilities. The Association expects to adopt SFAS 125
when required, and management believes adoption will not have a
material effect on the financial position and results of operations,
nor will adoption require additional capital resources.
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.
(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, 1996
and 1995, follow.
Available for sale securities:
<TABLE>
<CAPTION>
1996
-----------------------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
Description cost gains losses values
<S> <C> <C> <C> <C>
Government National Mortgage Association
(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
============ ========= ========= ===========
</TABLE>
<PAGE>
MIDWEST BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(2) Debt and Equity Securities, Continued
<TABLE>
<CAPTION>
1995
------------------------------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
Description cost gains losses values
<S> <C> <C> <C> <C>
GNMA mortgage-backed securities $ 8,679,804 538,118 - 9,217,922
U.S. agency obligations 10,488,164 21,072 15,664 10,493,572
----------- --------- -------- -----------
$ 19,167,968 559,190 15,664 19,711,494
=========== ========= ======== ===========
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. Proceeds from the sale of marketable equity
securities amounted to $285,433, resulting in gains of $75,816 during
the year ended December 31, 1995. There were no sales of securities
available for sale during the year ended December 31, 1994.
Securities held to maturity:
1996
---------------------------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
Description cost gains losses value
<S> <C> <C> <C> <C>
Mortgage-backed securities:
Federal Home Loan Mortgage
Corporation (FHLMC) $ 10,291,636 22,634 147,131 10,167,139
Federal National Mortgage
Association (FNMA) 8,502,102 103,710 2,910 8,602,902
Resolution Trust Corporation (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
============ ========= ======== ===========
</TABLE>
<PAGE>
MIDWEST BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(2) Debt and Equity Securities, Continued
<TABLE>
<CAPTION>
1995
---------------------------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
Description cost gains losses value
<S> <C> <C> <C> <C>
Mortgage-backed securities:
FHLMC $ 14,194,358 34,440 142,301 14,086,497
FNMA 7,575,948 122,603 62,384 7,636,167
RTC 680,107 - 9,300 670,807
U.S. government and agency obligations 9,058,469 6,562 33,156 9,031,875
------------- --------- --------- -------------
$ 31,508,882 163,605 247,141 31,425,346
============= ========= ========= =============
</TABLE>
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, 1995
and 1994.
At December 31, 1996 and 1995, mortgage-backed securities were comprised
of fixed rate securities of $3,959,416 and $2,570,201, respectively;
adjustable rate securities of $5,950,700 and $7,709,336,
respectively; fixed rate seven-year balloon securities of $2,689,272
and $3,058,616, respectively; and fixed rate five-year balloon
securities of $6,755,471 and $9,112,260, respectively.
(3) Loans Receivable
Loans receivable at December 31, 1996 and 1995, are summarized as
follows:
1996 1995
---- ----
Real estate loans:
One- to four-family $ 63,208,484 61,838,710
Commercial/multi-family 10,363,426 7,819,929
Construction 827,676 1,151,650
------------- -------------
Total real estate loans 74,399,586 70,810,289
Consumer and other loans 8,932,386 6,457,168
------------- -------------
83,331,972 77,267,457
------------- -------------
Less:
Loans in process 1,273,281 2,347,445
Unearned discounts and deferred loan fees 147,279 209,098
Allowance for losses on loans 686,000 676,000
------------- -------------
2,106,560 3,232,543
------------- -------------
$ 81,225,412 74,034,914
============= =============
<PAGE>
MIDWEST BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(3) Loans Receivable, Continued
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,
1996, the geographic location of the Company's loan portfolio was as
follows: local market area, 85.7 percent; Wisconsin, 6.7 percent;
California, 6.0 percent; and other states, 1.6 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, 1996 and 1995, loans 90 days or more delinquent totaled
approximately $1,120,000 and $51,000, respectively. At December 31,
1996, the Association had outstanding commitments to originate loans
totaling $350,050, which included fixed rate commitments of $209,650
at 8.60 percent weighted-average interest rate and commitments to
purchase loans totaling $767,000. The Association also had unused
lines of credit totaling $193,000 at a variable rate of Prime rate
plus one percent.
Loans and leases on nonaccrual status and considered impaired amounted to
$1,120,000 and $51,000 at December 31, 1996 and 1995, respectively.
The allowance for loan and lease losses related to these nonaccrual
loans were $156,000 and $5,000, respectively. There were no
nonaccrual loans that were not subject to related allowances for loan
and lease losses at December 31, 1996 and 1995. The average balances
of nonaccrual loans for the years ended December 31, 1996, 1995, and
1994 were $429,000; $113,000; and $352,000, respectively. For the
years ended December 31, 1996, 1995, and 1994, interest income which
would have been recorded under the original terms of the loans was
approximately $103,000; $5,000; and $14,000, respectively, and
interest income actually recorded amounted to approximately $56,000;
$2,000; and $9,000, respectively.
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, 1996 and 1995,
amounted to $692,411 and $597,084, respectively. During the year
ended December 31, 1996, new loans totaled $490,000 and repayments
totaled $394,673.
(4) Allowance for Losses on Loans
A summary of the allowance for losses on loans for the three years ended
December 31, 1996, follows:
1996 1995 1994
---- ---- ----
Balance at beginning of year $ 676,000 650,000 652,000
Provision for losses on loans 47,972 48,000 41,733
Charge-offs (37,972) (22,000) (45,255)
Recoveries - - 1,522
---------- ---------- ----------
Balance at end of year $ 686,000 676,000 650,000
========== ========== ==========
(5) Real Estate Owned and in Judgment
Real estate owned and in judgment is comprised of real estate acquired
through foreclosure.
<PAGE>
MIDWEST BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(6) Office Property and Equipment
The cost and accumulated depreciation of office property and equipment at
December 31, 1996 and 1995, were as follows:
1996 1995
---- ----
Land $ 312,320 312,320
Office buildings 2,403,081 2,403,081
Furniture, fixtures, and equipment 1,041,421 841,178
Vehicles 41,905 38,342
------------- --------------
3,798,727 3,594,921
Less accumulated depreciation 1,351,744 1,280,107
------------- --------------
$ 2,446,983 2,314,814
============= ==============
(7) Accrued Interest Receivable
Accrued interest receivable at December 31, 1996 and 1995, is summarized
as follows:
1996 1995
---- ----
Loans receivable $ 622,247 482,946
Securities available for sale 243,601 109,875
Securities held to maturity 141,699 281,691
------------- --------------
$ 1,007,547 874,512
============= ==============
(8) Deposits
Deposits at December 31, 1996 and 1995, are summarized as follows:
1996 1995
---- ----
Passbook $ 8,608,433 8,886,900
Noninterest checking 398,933 351,219
Money market investments 13,590,014 13,281,639
Regular checking 6,738,035 7,841,840
Certificates of deposit 72,582,350 70,972,839
-------------- --------------
$ 101,917,765 101,334,437
============== ==============
At December 31, 1996, the scheduled maturities of certificates of deposit
were as follows:
1997 $ 45,760,751
1998 14,685,534
1999 11,151,939
2000 374,465
2001 and thereafter 609,661
-------------
$ 72,582,350
<PAGE>
MIDWEST BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(8) Deposits, Continued
Interest expense on deposits for the three years ended December 31, 1996,
is summarized as follows:
1996 1995 1994
---- ---- ----
Passbook $ 244,988 272,603 239,892
Money market and checking 618,377 637,198 649,248
Certificates of deposit 3,863,272 3,826,353 3,251,924
------------ ------------ ------------
$ 4,726,637 4,736,154 4,141,064
============ ============ ============
The aggregate amount of jumbo certificates of deposit with a minimum
denomination of $100,000 was approximately $3,202,000 and $1,984,000
at December 31, 1996 and 1995, respectively.
At December 31, 1996, three GNMA mortgage-backed securities with
carrying amounts of $792,546 were pledged as collateral for deposits
of approximately $586,000.
(9) Advances from FHLB
A summary at December 31, 1996 and 1995, follows:
<TABLE>
<CAPTION>
1996 1995
---------------------------------- ---------------------------------
Weighted- Weighted-
average average
Amount rate Amount rate
<S> <C> <C> <C> <C>
Advance maturity (A):
Within 1 year $ 1,000,000 5.49% $ 4,000,000 6.82%
Beyond 1 year but within 5 years 21,000,000 5.91 14,000,000 5.87
Beyond 5 years 2,000,000 5.62 2,000,000 5.62
------------- -------------
24,000,000 5.87 20,000,000 6.04
Line of credit with FHLB (B) - Variable 500,000 Variable
------------- ======== ------------- ========
$ 24,000,000 $ 20,500,000
============= =============
</TABLE>
(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 matured
in December of 1996. The Bank may renew the agreement at any
time. The line has an interest rate which fluctuates daily.
During 1996, the interest rate ranged from 5.13 percent to 7.10
percent and at December 31, 1996, was 6.35 percent. The line is
collateralized as described in (A) above.
<PAGE>
MIDWEST BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(10) 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, 1996, were
comprised as follows:
<TABLE>
<CAPTION>
1996 1995
----------------------------------------------- --------------------------------------------
Federal State Total Federal State Total
<S> <C> <C> <C> <C> <C> <C>
Current $ 306,347 43,307 349,654 585,018 88,434 673,452
Deferred 22,000 2,000 24,000 6,000 1,000 7,000
---------- -------- --------- ---------- -------- ---------
$ 328,347 45,307 373,654 591,018 89,434 680,452
========== ======== ========= ========== ======== =========
1994
--------------------------------------------------------
Federal State Total
Current $ 431,500 66,900 498,400
Deferred 40,000 7,000 47,000
---------- --------- ------------
$ 471,500 73,900 545,400
========== ========= ============
</TABLE>
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:
1996 1995 1994
---- ---- ----
Computed "expected" tax expense $ 341,126 690,300 549,157
State income tax 29,903 59,026 48,774
Bad debt deduction - (55,919) (44,234)
Other 2,625 (12,955) (8,297)
---------- ---------- ----------
$ 373,654 680,452 545,400
========== ========== ==========
<PAGE>
MIDWEST BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(10) Taxes on Income, Continued
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, 1996 and 1995, are presented below:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses for
financial reporting purposes $ 256,000 253,000
Accrued expenses not deducted 73,000 76,000
---------- ----------
Total gross deferred tax assets 329,000 329,000
---------- ----------
Deferred tax liabilities:
Unrealized gains on securities available for sale 31,000 203,000
Office property and equipment 148,000 124,000
FHLB stock 101,000 101,000
---------- ----------
Total gross deferred tax liabilities 280,000 428,000
---------- ----------
Net deferred tax asset (liability) $ 49,000 (99,000)
========== ==========
</TABLE>
There was no valuation allowance for deferred tax assets during the three
years ended December 31, 1996.
(11) 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, 1996, 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 1996, 1995, and
1994 because the plan was fully funded.
Employee Stock Ownership Plan
All employees meeting the age and service requirements are eligible to
participate in an Employee Stock Ownership Plan (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. ESOP expense was $53,938; $39,058; and $50,600 for the years
ended December 31, 1996, 1995, and 1994, respectively.
At December 31, 1996, the fair value of the 12,000 unearned shares was
approximately $325,500.
<PAGE>
MIDWEST BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(11) Employee Benefit Plans, Continued
Employment Agreements
The Association has entered into employment agreements, which expire in
November 1998, with two of its executive officers. The agreements
provide, among other things, for payment to the officers of up to 299
percent of the respective officer's then current annual compensation
in the event there is a change of control of the Association where
employment terminates involuntarily in connection with such change of
control or within twelve months thereafter.
Stock Options
The Company's stock option plan permits the board of directors to grant
options to purchase up to 45,500 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. Changes in options outstanding and exercisable
during 1996, 1995, and 1994 were as follows:
Exercisable Outstanding Option price
options options per share
December 31, 1993 15,925 34,125 $ 10.00
Vested 4,550 - 10.00
-------- --------
December 31, 1994 20,475 34,125 10.00
Vested 4,550 - 10.00
-------- --------
December 31, 1995 25,025 34,125 10.00
Vested 4,550 - 10.00
-------- --------
December 31, 1996 29,575 34,125 10.00
======== ========
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 will become fully vested in the
shares of stock during 1997. RRP expense for the years ended December
31, 1996, 1995, and 1994 was $9,725; $16,995; and $30,285,
respectively.
<PAGE>
MIDWEST BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(12) 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.
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, 1996 and 1995.
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, 1996 and 1995.
The Association's actual and required capital amounts and ratios as of
December 31, 1996, were as follows:
<TABLE>
<CAPTION>
For capital To be well capitalized
adequacy under prompt corrective
Actual action provisions purposes
Amount Percent Amount Percent Amount Percent
<S> <C> <C> <C> <C> <C> <C>
Tangible capital $ 8,702,000 6.%1 2,037,000 1.%0 n/a n/a
$
Tier I leverage (core) capital 8,702,000 6.41 4,074,000 3.00 $ 6,790,000 5.%0
Risk-based capital 9,388,000 15.89 4,725,000 8.00 5,906,000 10.00
Tier I risk-based capital 8,702,000 14.73 n/a n/a 3,544,000 6.00
============== ========== ============== ======== ============== =========
</TABLE>
At December 31, 1996 and 1995, the Association had federal income tax
bad debt reserves of approximately $2,781,000 and $2,724,000,
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, 1996 and
1995, were substantially restricted because of the effect of these
tax bad debt reserves.
<PAGE>
MIDWEST BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(12) Stockholders' Equity, Continued
Regulatory Capital Requirements, Continued
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.
(13) 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. In the
future, it is expected the FDIC premium for all SAIF-insured deposits
will be reduced to the now-effective Bank Insurance Fund rate of $.04
per $100 of insured deposits, thus reducing FDIC insurance expense
for the Association.
(14) Fair Value of Financial Instruments
The estimated fair values of the Company's financial instruments at
December 31, 1996 and 1995, were as follows:
<TABLE>
<CAPTION>
1996 1995
----------------------------------------------------------------------------------------
Carrying Fair Carrying Fair
amount value amount value
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 3,998,163 3,998,163 2,305,111 2,305,111
Securities available for sale 23,783,968 23,783,968 19,711,494 19,711,494
Securities held to maturity 21,810,592 21,763,670 9,058,469 9,031,875
Loans receivable 81,225,412 81,869,104 74,034,914 75,177,848
FHLB stock 1,959,700 1,959,700 31,508,882 31,425,346
Accrued interest receivable 1,007,547 1,007,547 874,512 874,512
Financial liabilities:
Deposits 101,917,765 101,825,024 101,334,437 101,619,371
Advances from FHLB 24,000,000 23,716,947 20,500,000 20,591,083
Accrued interest payable 73,743 73,743 71,507 71,507
===================== =================== ==================== ===================
Notional Unrealized Notional Unrealized
amount gain (loss) amount gain (loss)
Off balance sheet liabilities:
Commitments to extend credit $ 543,050 - 740,250 -
Commitments to purchase loans 767,000 - - -
===================== =================== ==================== ===================
</TABLE>
<PAGE>
MIDWEST BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(15) Midwest Bancshares, Inc. (Parent Company Only) Financial Information
Condensed Balance Sheets
December 31, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Cash and cash equivalents $ 204,431 247,148
Securities available for sale 709,500 -
Loans receivable and related accrued interest 121,881 182,974
Investment in subsidiary 8,667,843 9,515,720
------------ ------------
Total assets $ 9,703,655 9,945,842
============ ============
Dividends payable $ 52,407 47,948
Income taxes payable (deferred and current) 51,000 1,956
Stockholders' equity:
Common stock 4,550 4,550
Additional paid-in capital 4,037,058 4,037,058
Retained earnings 7,836,808 7,403,062
Treasury stock (2,210,642) (1,699,533)
ESOP (120,000) (180,000)
Recognition and retention plan - (9,725)
Unrealized gain on securities available for sale, net 52,474 340,526
------------ ------------
Total stockholders' equity 9,600,248 9,895,938
------------ ------------
Total liabilities and stockholders' equity $ 9,703,655 9,945,842
============ ============
Condensed Statement of Operations
Years ended December 31, 1996, 1995, and 1994
1996 1995 1994
---- ---- ----
Gain on sale of marketable equity securities $ - 75,816 -
Interest income 16,366 24,082 -
Noninterest income 7,925 550 2,872
Income - equity in undistributed earnings of subsidiary 657,200 1,337,988 1,123,356
Noninterest expenses (70,469) (84,908) (93,377)
----------- ----------- -----------
Net earnings before income
tax (benefit) expense 611,022 1,353,528 1,032,851
Income tax (benefit) expense (18,636) 3,685 (36,916)
----------- ----------- -----------
Net earnings $ 629,658 1,349,843 1,069,767
========== =========== ===========
</TABLE>
<PAGE>
39
MIDWEST BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(15) Midwest Bancshares, Inc. (Parent Company Only) Financial Information,
Continued
Condensed Statements of Cash Flows
Years ended December 31, 1996, 1995, and 1994
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Operating activities:
Net earnings $ 629,658 1,349,843 1,069,767
Equity in undistributed earnings of subsidiary (657,200) (1,337,988) (1,123,356)
Decrease (increase) in accrued interest receivable 1,093 (2,974) -
Gain on sale of investments - (75,816) -
(Decrease) increase in income tax payable (2,956) 1,244 712
----------- ---------- ----------
Net cash used in operating activities (29,405) (65,691) (52,877)
----------- ---------- ----------
Investing activities:
Proceeds from sale of securities - 285,433 -
Purchase of securities available for sale (570,750) - (209,617)
Decrease (increase) in loans receivable 60,000 50,000 (230,000)
---------- ---------- ----------
Net cash (used in)
provided by investing activities (510,750) 335,433 (439,617)
----------- ---------- ----------
Financing activities:
Dividends from subsidiary 1,200,000 1,050,000 1,050,000
Treasury stock acquired (511,109) (893,045) (399,322)
Dividends paid (191,453) (185,520) (199,296)
----------- ---------- ----------
Net cash provided by (used in)
financing activities 497,438 (28,565) 451,382
---------- ---------- ----------
Net (decrease) increase in cash
and cash equivalents (42,717) 241,177 (41,112)
Cash and cash equivalents at beginning of year 247,148 5,971 47,083
---------- ---------- ----------
Cash and cash equivalents at end of year $ 204,431 247,148 5,971
========== ========== ==========
</TABLE>
(16) 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.
(17) 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.
<PAGE>
MIDWEST BANCSHARES, INC.
STOCKHOLDER INFORMATION
ANNUAL MEETING
The Annual Meeting of Stockholders will be held at 1:00 p.m., on April 28th,
1997, at the main offices of the Company located at 3225 Division Street,
Burlington, Iowa.
MARKET INFORMATION
The Association converted from mutual to stock form effective November 10,
1992. 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, 1996, the
Company had approximately 310 stockholders of record and 349,379 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. 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
------------- ------------- ------------- --------------
3/31/95 $22-1/2 $19-1/2 $0.12
6/30/95 22-1/4 22 0.12
9/30/95 25-1/2 22 0.13
12/31/95 25-3/4 25-1/2 0.13
3/31/96 26 25-3/4 0.13
6/30/96 26 25-3/4 0.13
9/30/96 25 24-3/4 0.15
12/31/96 26-1/2 25-1/2 0.15
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, 1996, 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
40
<PAGE>
MIDWEST BANCSHARES, INC.
CORPORATE INFORMATION
<TABLE>
<CAPTION>
<S> <C>
CORPORATE OFFICE
3225 Division Street WEB SITE ADDRESS
Burlington, Iowa 52601 http:\\www.mwbi.com
(319) 754-6526 E-MAIL ADDRESS
[email protected]
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 Partner, Hirsch, Adams, Krekel, James E. Witte
Putnam & Cahill Supervisor, Komick Construction
Robert D. Maschmann
William D. Hassel Executive Vice President, Treasurer and
President and Chief Executive Officer, Chief Financial Officer, Midwest Federal
Midwest Federal Savings and Loan Savings and Loan Association of Eastern
Association of Eastern Iowa Iowa
James R. Walker Yuh-Fen (Boni) Lin
Shareholder, Walker & Egerton, P. C, Clinical Dietician, Burlington
Accountants 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, Putnam & Silver, Freedman & Taff, L.L.P.
2500 Ruan Center Cahill 1100 New York Avenue, N. W.
Des Moines, Iowa 50309 101 Jefferson Street Washington, D.C. 20005
2nd Floor
Burlington, Iowa 52601
</TABLE>
41
<PAGE>
[MIDWEST] LOGO]
HOLDING COMPANY FOR MIDWEST FEDERAL SAVINGS AND
LOAN ASSOCIATION OF EASTERN IOWA
3225 DIVISION STREET
BURLINGTON, IOWA 52601
<PAGE>
SUBSIDIARY OF THE REGISTRANT
<TABLE>
<CAPTION>
Percentage of State of Incorporation
Parent Subsidiary Ownership or Organization
- ------------------------ ----------------------- ------------- ----------------------
<S> <C> <C> <C>
Midwest Bancshares, Inc. Midwest Federal Savings 100% Federal
and Loan Association of
Eastern Iowa
Midwest Federal Savings Midwest Financial 100% Iowa
and Loan Association of Products, Inc.
Eastern Iowa
</TABLE>
<PAGE>
INDEPENDENT AUDITORS' CONSENT
The Board of Directors and Stockholders
Midwest Bancshares, Inc.:
We consent to incorporation by reference in the Registration Statement on Form
S-8 of Midwest Bancshares, Inc. of our report dated January 10, 1997, relating
to the consolidated balance sheets of Midwest Bancshares, Inc. and subsidiaries
as of December 31, 1996 and 1995, 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, 1996, which report appears in the December
31, 1996, annual report on Form 10-KSB of Midwest Bancshares, Inc. and
subsidiaries.
/s/ KPMG Peat Marwick, LLP
KPMG Peat Marwick, LLP
Des Moines, Iowa
March 25, 1997
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ANNUAL
REPORT ON FORM 10-KSB FOR THE YEAR ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 871,504
<INT-BEARING-DEPOSITS> 3,126,659
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 23,783,968
<INVESTMENTS-CARRYING> 21,810,592
<INVESTMENTS-MARKET> 21,763,670
<LOANS> 81,225,412
<ALLOWANCE> 686,000
<TOTAL-ASSETS> 136,425,273
<DEPOSITS> 101,917,765
<SHORT-TERM> 1,000,000
<LIABILITIES-OTHER> 907,260
<LONG-TERM> 23,000,000
0
0
<COMMON> 9,600,248
<OTHER-SE> 0
<TOTAL-LIABILITIES-AND-EQUITY> 136,425,273
<INTEREST-LOAN> 6,444,056
<INTEREST-INVEST> 3,718,380
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 10,162,436
<INTEREST-DEPOSIT> 4,726,637
<INTEREST-EXPENSE> 6,242,697
<INTEREST-INCOME-NET> 3,919,739
<LOAN-LOSSES> 47,972
<SECURITIES-GAINS> 45,163
<EXPENSE-OTHER> 3,217,475
<INCOME-PRETAX> 1,003,312
<INCOME-PRE-EXTRAORDINARY> 1,003,312
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 629,658
<EPS-PRIMARY> 1.68
<EPS-DILUTED> 1.68
<YIELD-ACTUAL> 2.94
<LOANS-NON> 1,120,000
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 676,000
<CHARGE-OFFS> 37,972
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 686,000
<ALLOWANCE-DOMESTIC> 533,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 153,000
</TABLE>
