<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, 1997
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
------------------- -----------------
Commission file number 0-20620
MIDWEST BANCSHARES, INC.
- --------------------------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
<TABLE>
<CAPTION>
<S> <C>
Delaware 42-1390587
- --------------------------------------------- ------------------------------------
(State or other jurisdiction of incorporation (I.R.S. Employer Identification No.)
or organization)
</TABLE>
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: $11.3 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 20, 1998, was
$12.5 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 February 20, 1998, there were issued and outstanding 1,028,199
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, 1997.
Part III of Form 10-KSB - Proxy Statement for1998 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"). 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 five retail banking offices
located in Burlington, Wapello and Ft. Madison, Iowa. At December 31, 1997,
the Company had total assets of $147.7 million, deposits of $105.3 million,
and stockholders' equity of $10.7 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 and
purchases 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.
When used in this Form 10-K and in future filings by the Company with
the Securities and Exchange Commission (the "SEC"), in the Company's press
releases or other public or shareholder communications, and in oral statements
made with the approval of an authorized executive officer, the words or
phrases "will likely result," "are expected to," "will continue," "is
anticipated," "estimate," "project" or similar expressions are intended to
identify "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Such statements are subject to
certain risks and uncertainties, including, among other things, changes in
economic conditions in the Company's market area, changes in policies by
regulatory agencies, fluctuations in interest rates, demand for loans in the
Company's market area and competition, that could cause actual results to
differ materially from historical
2
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earnings and those presently anticipated or projected. The Company wishes to
caution readers not to place undue reliance on any such forward-looking
statements, which speak only as of the date made. The Company wishes to advise
readers that the factors listed above could affect the Company's financial
performance and could cause the Company's actual results for future periods to
differ materially from any opinions or statements expressed with respect to
future periods in any current statements.
The Company does not undertake--and specifically declines any
obligation--to publicly release the result of any revisions which may be made
to any forward-looking statements to reflect events or circumstances after the
date of such statements or to reflect the occurrence of anticipated or
unanticipated events.
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, 1997, the Association's net loan and
mortgage-backed securities portfolio totalled $116.7 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, 1997, the maximum amount which the Association could have lent to
any one borrower and the borrower's related entities was approximately $1.4
million. At December 31, 1997, the Association had no loans which exceeded
this amount.
At December 31, 1997, the principal balance of the largest lending
relationship with any one borrower or group of related borrowers, was $1.3
million and consists of one participation loan secured by a 192-unit apartment
building located in Bettendorf, Iowa. The second largest lending relationship
with one borrower had a principal balance of $960,000 at December 31, 1997,
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 third
largest lending relationship with one borrower had a principal balance of
$793,000 at December 31, 1997, and consists of two participation loans,
secured by two apartment complexes located in Madison, Wisconsin, one 20-unit
and one 23-unit. The fourth largest lending relationship with one borrower had
a principal balance of $686,000 at December 31, 1997, and consists of two
participation loans, secured by two apartment complexes located in Madison,
Wisconsin, one 18-unit and one 15-unit. The fifth largest lending relationship
with one borrower had a principal balance of $599,000 at December 31, 1997,
and consists of one participation loan secured by a 61-unit motel in
Germantown, Wisconsin. 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, 1997. At December 31, 1997, the Association had
no other loans to one borrower or group of related borrowers which had an
existing balance at December 31, 1997, in excess of $500,000.
3
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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>
--------------------------------------------
1997 1996
----------------------- --------------------
Amount Percent Amount Percent
------- ------- ------- -------
<S> <C> <C> <C> <C>
Real Estate Loans:
One- to four-family.................... $66,549 71.75% $63,209 75.85%
Commercial/multi-family................ 11,210 12.09 10,363 12.44
Construction or development(1)......... 818 .88 828 .99
------- ------ ------- ------
Total real estate loans............ 78,577 84.72 74,400 89.28
------- ----- ------- ------
Consumer and Other Loans:
Deposit account........................ 306 .33 354 .43
Automobile............................. 1,158 1.25 1,001 1.20
Home equity/home improvement........... 5,464 5.89 4,093 4.91
Other.................................. 7,239(2) 7.81 3,484 4.18
------- ------ ------- ------
Total consumer and other loans..... 14,167 15.28 8,932 10.72
------- ------ ------- ------
Total loans........................ 92,744 100.00% 83,332 100.00%
====== ======
Less:
Loans in process....................... 836 1,274
Deferred fees and discounts............ 64 147
Allowance for losses................... 568 686
------- - -------
Total loans receivable, net............ $91,276 $81,225
======= =======
- ------------------
(1) Consists primarily of residential construction loans.
(2) Approximately $7.0 million of these loans are participations guaranteed by the Farmer's Home Administration.
See "- Consumer and Other Lending."
</TABLE>
<PAGE>
[RESTUBED TABBLE FOR ABOVE]
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------------------
1995 1994 1993
------------------------------------------------------------------
Amount Percent Amount Percent Amount Percent
------- ------- ------- ------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Real Estate Loans: $61,839 80.03% $61,849 85.54% 58,405 86.64%
One- to four-family.................... 7,820 10.12 3,992 5.52 4,535 6.73
Commercial/multi-family................ 1,151 1.49 2,342 3.24 1,677 2.49
Construction or development(1)......... ------- ----- ------- ------ ------- ------
70,810 91.64 68,183 94.30 64,617 95.86
Total real estate loans............ ------- ------ ------- ------ ------- ------
Consumer and Other Loans: 383 .50 344 .47 257 .38
Deposit account........................ 1,033 1.34 810 1.12 568 .84
Automobile............................. 3,886 5.03 2,745 3.80 1,798 2.67
Home equity/home improvement........... 1,155 1.49 224 .31 168 .25
Other.................................. ------- ------ ------- ------ --------
6,457 8.36 4,123 5.70 2,791 4.14
Total consumer and other loans..... ------- ------ ------- ------ ------- ------
77,267 100.00% 72,306 100.00% 67,408 100.00%
Total loans........................ ====== ====== ======
Less: 2,347 1,096 1,417
Loans in process....................... 209 216 125
Deferred fees and discounts............ 676 650 652
Allowance for losses................... ------- ------- -------
$74,035 $70,344 $65,214
Total loans receivable, net............ ======= ======= =======
</TABLE>
4
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The following table shows the composition of the Association's loan
portfolio by fixed- and adjustable-rate categories at the dates indicated.
<TABLE>
<CAPTION>
1997 1996
-----------------------------------------------
Amount Percent Amount Percent
<S> <C> <C> <C> <C>
Fixed-Rate Loans:
Real estate:
One- to four-family.................................. $27,804 29.98% $26,595 31.91%
Commercial/multi-family.............................. 1,285 1.38 1,230 1.48
Construction or development.......................... --- --- 65 .08
------- ------ ------- ------
Total real estate loans........................... 29,089 31.36 27,890 33.47
------- ------ ------- ------
Consumer and other loans............................. 7,955 8.58 6,104 7.32
-------- ------ ------- ------
Total fixed-rate loans............................ 37,044 39.94 33,994 40.79
------- ------ ------- ------
Adjustable-Rate Loans:
Real estate:
One- to four-family.................................. 38,745 41.78 36,614 43.94
Commercial/multi-family.............................. 9,925 10.70 9,133 10.96
Construction or development.......................... 818 .88 763 .92
--------- ------- ------- ------
Total adjustable-rate real estate loans........... 49,488 53.36 46,510 55.82
Consumer and other loans............................. 6,212 6.70 2,828 3.39
-------- ------- ------- ------
Total adjustable-rate loans....................... 55,700 60.06 49,338 59.21
------- ------- ------- -------
Total loans....................................... 92,744 100.00% 83,332 100.00%
====== ======
Less:
Loans in process..................................... 836 1,274
Deferred fees and discounts.......................... 64 147
Allowance for loan losses............................ 568 686
--------- --------
Total loans receivable, net........................ $91,276 $81,225
======= =======
</TABLE>
<PAGE>
[RESTUBED FOR ABOVE]
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------------------
1995 1994 1993
-----------------------------------------------------------------
Amount Percent Amount Percent Amount Percent
------- ------- ------- ------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Fixed-Rate Loans:
Real estate:
One- to four-family.................................. $24,218 31.34% $25,319 35.01% $25,279 37.50%
Commercial/multi-family.............................. 1,522 1.97 1,603 2.22 4,294 6.37
Construction or development.......................... 274 .36 504 .70 458 .68
------- ------ ------- ------ ------- ------
Total real estate loans........................... 26,014 33.67 27,426 37.93 30,031 44.55
------- ------ -------- ------ ------- ------
Consumer and other loans............................. 5,332 6.90 4,123 5.70 2,791 4.14
------- ------ -------- ------ ------- ------
Total fixed-rate loans............................ 31,346 40.57 31,549 43.63 32,822 48.69
------- ------ -------- ------- ------- ------
Adjustable-Rate Loans:
Real estate:
One- to four-family.................................. 37,621 48.69 36,530 50.52 33,126 49.14
Commercial/multi-family.............................. 6,298 8.15 2,389 3.31 241 .36
Construction or development.......................... 877 1.13 1,838 2.54 1,219 1.81
------- ------ ------- ------ ------- ------
Total adjustable-rate real estate loans........... 44,796 57.97 40,757 56.37 34,586 51.31
Consumer and other loans............................. 1,125 1.46 --- --- --- ---
------- ------ --------- ---- ------- ------
Total adjustable-rate loans....................... 45,921 59.43 40,757 56.37 34,586 51.31
------- ------ ------- ------ ------- ------
Total loans....................................... 77,267 100.00% 72,306 100.00% 67,40 100.00%
====== ====== ======
Less:
Loans in process..................................... 2,347 1,096 1,417
Deferred fees and discounts.......................... 209 216 125
Allowance for loan losses............................ 676 650 652
------- ------- -------
Total loans receivable, net........................ $74,035 $70,344 $65,214
======= ======= =======
</TABLE>
5
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The following table illustrates the contractual maturity and
amortization of the Association's loan portfolio at December 31, 1997.
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/
Family Multi-family
-----------------------------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
------- -------- ------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Due During Year(s) Ended
December 31,
1998(1)................................ $ 2,810 8.04% $ 265 8.45%
1999................................... 3,044 8.04 289 8.45
2000................................... 3,298 8.05 315 8.45
2001 and 2002.......................... 7,447 8.06 715 8.46
2003 to 2007........................... 22,672 8.06 2,415 8.46
2008 to 2017........................... 24,742 7.86 7,047 8.29
2018 and following..................... 2,536 7.77 164 8.25
------- ------
Total.............................. $66,549 $11,210
======= =======
- ------------------
(1) Includes demand loans, loans having no stated maturity and overdraft loans.
As of December 31, 1997, the total amount of loans due or repricing after December 31, 1998 which had predetermined
interest rates was $32.7 million, while the total amount of loans due or repricing after such date which had floating,
adjustable or renegotiable interest rates was $54.1 million.
</TABLE>
[RESTUBED TABLE FOR ABOVE]
<TABLE>
<CAPTION>
Construction Consumer
or Development and Other Total
---------------------- ---------------------- ----------------------
Weighted Weighted Weighted
Average Average Average
Amount Rate Amount Rate Amount Rate
------ -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Due During Year(s) Ended
December 31,
1998(1)................................ $ 9 7.87% $ 2,830 8.44% $ 5,914 8.25%
1999................................... 10 7.87 3,077 8.45 6,420 8.25
2000................................... 11 7.87 1,527 8.16 5,151 8.11
2001 and 2002.......................... 24 7.87 2,660 8.00 10,846 8.07
2003 to 2007........................... 81 7.87 4,073 7.79 29,241 8.05
2008 to 2017........................... 297 7.87 --- --- 32,086 7.95
2018 and following..................... 386 7.87 --- --- 3,086 7.81
---- ------- -------
Total.............................. $818 $14,167 $92,744
==== ======= =======
</TABLE>
6
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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, 1997, the
Association's one- to four-family residential mortgage loans, excluding
mortgage-backed securities, totalled $66.5 million, or 71.75% 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. The annual and lifetime caps on interest rate
increases for these loans 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 46.7% of the loans originated in
1997 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, 1997, approximately $4.5 million, or 6.8% 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 $5.5 million in 1996,
$5.9 million in 1995 and $6.9 million in 1994, the level of delinquencies in
this portion of the Association's portfolio was higher than that of the one-
to four-family loans originated and retained by the Association at December
31, 1997 and accounted for 44.0% of the total dollar amount of delinquent one-
to four-family loans at that date, compared to 31.0% at December 31, 1996. The
Association believes that the higher level of delinquencies, when compared to
the rest of the loan portfolio, was due to general
7
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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."
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, 1997,
the Association had $11.2 million in commercial/multi-family real estate
loans, representing 12.09% 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 Bettendorf, Dubuque and Cedar Rapids,
Iowa, and the States of Wisconsin and Washington.
At December 31, 1997, the principal balance of the largest lending
relationship with any one borrower or group of related borrowers, was $1.3
million and consists of one participation loan originated in 1996 and
refinanced in 1997, secured by a 192-unit apartment building located in
Bettendorf, Iowa. The Association's participation represents approximately
15.0% of the loan (which had an outstanding balance of approximately $8.6
million). The loan is being amortized over 30 years, at a rate of 8.625% 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 largest lending relationship had a principal balance of
$960,000 at December 31, 1997, and consists of two participation loans
originated in 1995, secured by two assisted, congregate-care facilities. The
first 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 (which had an outstanding
balance of approximately $3.5 million) and approximately 16% of the second
loan (which had an outstanding balance 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 third largest lending relationship had a principal balance of
$793,000 at December 31, 1997 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 (which had an outstanding
balance of approximately $1.1 million) and approximately 40% of the second
loan (which had an outstanding balance 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 years and thereafter at a rate equal to the Federal Cost of
Funds index plus 3.50%.
The fourth largest lending relationship had a principal balance of
$686,000 at December 31, 1997 and consists of two participation loans, secured
by two apartment complexes located in Madison, Wisconsin; one 18-unit and one
8
<PAGE>
15-unit. The Association's participation represents 22% of the first loan
(which had an outstanding balance of approximately $1.9 million) and 19% of
the second loan (which had an outstanding balance of approximately $1.4
million). The first loan is amortized over 25 years, at a rate of 9.0% for the
first three years and thereafter, adjusts annually to 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 8.875% for the first three years and thereafter adjusts
annually to a rate equal to the Federal Cost of Funds index plus 3.50%.
The fifth largest lending relationship had a principal balance of
$599,000 at December 31, 1997, and consists of one participation loan, secured
by a 61-unit motel in Germantown, Wisconsin. The Association's participation
represents 40% of the loan (which had an outstanding balance of approximately
$1.5 million). The loan is amortized over 20 years, at a rate of 9.375% for
the first three years and thereafter adjusts annually to a rate equal to the
Federal Cost of Funds index plus 3.75%. Each of these loans was current as of
December 31, 1997.
The Association has no other commercial/multi-family real estate
loans to one borrower, or group of borrowers, which have an existing net
balance at December 31, 1997 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 1997, 1996 and
1995, the Association purchased participations in commercial/multi-family real
estate loans totaling $2.8 million, $3.4 million and $4.3 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, 1997, the Association had
loans to finance the construction of single-family residences totaling
$818,000, or 0.88% 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.
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, 1997, the Association's consumer and other loan portfolio
totalled $14.2 million, or 15.28% 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 lines of credit, home improvement, auto, boat and recreational
vehicle loans and loans secured by savings deposits. 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 39% of the
Association's total consumer loan portfolio at December 31, 1997. 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
9
<PAGE>
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).
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 Farmer's
Home Administration ("FmHA") loans. Generally, the Association only purchases
the 90% guaranteed portion of the loan. For the years 1997, 1996 and 1995, the
Association purchased FmHA participations totaling $4.1 million, $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, 1997, $42,000, or
approximately 0.30% 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, 1997,
mortgage-backed securities totalled $25.5 million. At such date, $8.1 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, 1997, $4.6
million, or 18.2%, and $6.1 million, or 23.9%, 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, 1997. The table does
not reflect normal monthly amortization payments or anticipated prepayments.
<TABLE>
<CAPTION>
Due in
6 Months 6 Months 1 to 3 to 5 5 to 10 10 to 20 Over 20
or Less to 1 Year 3 Years Years Years Years Years
------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Adjustable-rate mortgage-
backed securities:
Federal Home Loan
Mortgage Corporation................. $ --- $ --- $ --- $ --- $ --- $ --- $ 513
Federal National
Mortgage Association................. --- --- --- --- --- 691 2,989
Resolution Trust Corporation.......... --- --- --- --- --- --- 439
------- ------- ------- ------- ------ ------- ------
Total adjustable-rate.............. --- --- --- --- --- 691 3,941
------- ------- ------- ------- ------ ------- ------
Fixed-rate mortgage-backed securities:
Federal Home Loan
Mortgage Corporation................. 3,804 --- --- 2,274 --- 2,238 ---
Federal National
Mortgage Association................. --- --- --- --- 1,560 2,876 ---
Government National
Mortgage Corporation................. --- --- --- --- 1,930 4,211 1,943
------ ------- ------- ------- ------ ------ ------
Total fixed-rate................... 3,804 --- --- 2,274 3,490 9,325 1,943
------ ------- ------- ------- ------ ------- ------
Total mortgage-backed
securities............................. $3,804 $ --- $ --- $ 2,274 $3,490 $10,016 $5,884
====== ======= ======= ======= ====== ======= ======
</TABLE>
[RESTUBED TABLE FOR ABOVE]
<TABLE>
<CAPTION>
December 31,
1997
Balance
Outstanding
-------------
<S> <C>
Adjustable-rate mortgage-
backed securities:
Federal Home Loan
Mortgage Corporation................. $ 513
Federal National
Mortgage Association................. 3,680
Resolution Trust Corporation.......... 439
-------
Total adjustable-rate.............. 4,632
-------
Fixed-rate mortgage-backed securities:
Federal Home Loan
Mortgage Corporation................. 8,316
Federal National
Mortgage Association................. 4,436
Government National
Mortgage Corporation................. 8,084
-------
Total fixed-rate................... 20,836
-------
Total mortgage-backed
securities............................. $25,468
=======
</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. The Association sold no
mortgage-backed securities in fiscal 1997. At December 31, 1997, the
Association had no commitments to sell loans.
The Association had no loans serviced for others as of December 31,
1997, and $22.0 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,
---------------------------------------
1997 1996 1995
-------- ------- -------
(In Thousands)
<S> <C> <C> <C>
Originations by Type:
Adjustable-rate:
Real estate - one- to four-family........................... $ 7,185 $ 6,469 $ 4,462
- construction................................ 2,525 841 1,450
Consumer and other loans.................................... 489 --- ---
------- ------- -------
Total adjustable-rate................................ 10,199 7,310 5,912
------- ------- -------
Fixed-rate:
Real estate - one- to four-family........................... 5,979 7,445 4,333
- construction................................ 370 883 134
Consumer and other loans.................................... 5,312 3,901 4,112
------- ------- -------
Total fixed-rate..................................... 11,661 12,229 8,579
------- ------- -------
Total loans originated(1)............................ 21,860 19,539 14,491
------- ------- -------
Purchases:
Real estate - commercial/multi-family....................... 2,841 3,434 4,261
Consumer and other loans.................................... 4,114 2,846 1,052
Mortgage-backed securities.................................. 3,484 4,051 ---
------- ------- -------
Total purchased...................................... 10,439 10,331 5,313
------- ------- -------
Sales:
Real estate - one- to four-family........................... --- --- 95
Mortgage-backed securities.................................. --- 1,285 ---
------- ------- -------
Total sales ................................................ --- 1,285 95
------- ------- -------
Principal repayments.......................................... 22,216 21,375 18,198
------- ------- -------
(Decrease) in other items, net................................ (3,553) (4,463) (1,462)
------- ------- -------
Net increase......................................... $ 6,530 $ 2,747 $ 49
======= ======= =======
- -------------------
(1) $3,122,000, $4,104,000 and $1,285,000 of these originations for the years ended December 31, 1997, 1996 and
1995, respectively, were to refinance existing loans held by the Association.
</TABLE>
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, 1997 and 1996.
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 Consumer and Other
--------------------------- --------------------------- --------------------------
Number Amount Percent Number Amount Percent Number Amount Percent
------ ------ ------- ------ ------ ------- ------ ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans delinquent for:
December 31, 1997:
- -----------------
30-59 days.......................... 25 $ 791 1.19% --- $--- ---% 6 $ 33 .23%
60-89 days.......................... 8 258 .39 --- --- --- 1 9 .07
90 days and over.................... 9 370 .55 2 399 3.56 --- --- ---
--- ------ ---- --- ---- ---- --- ----- ---
Total........................... 42 $1,419 2.13% 2 $399 3.56% 7 $42 .30%
=== ====== ==== === ==== ==== === === ===
December 31, 1996:
- ------------------
30-59 days.......................... 23 $ 263 .42% --- $--- ---% 8 $49 .55%
60-89 days.......................... 11 399 .63 --- --- --- --- --- ---
---
90 days and over.................... 7 245 .38 3 874 8.43 1 1 .01
---- ------- ---- --- ---- ---- --- ---- ---
Total........................... 41 $ 907 1.43% 3 $874 8.43% 9 $50 .56%
=== ======= ==== === ==== ==== === === ===
</TABLE>
[RESTUBED TABLE FOR ABOVE]
<TABLE>
<CAPTION>
Total
-----------------------------
Number Amount Percent
------ ------ -------
<S> <C> <C> <C>
Loans delinquent for:
December 31, 1997:
- ------------------
30-59 days.......................... 31 $ 824 .89%
60-89 days.......................... 9 267 .29
90 days and over.................... 11 769 .83
-- ------ ----
Total........................... 51 $1,860 2.01%
== ====== ====
December 31, 1996:
- ------------------
31 $ 312 .37%
30-59 days.......................... 11 399 .48
60-89 days..........................
11 1,120 1.35
90 days and over.................... -- ------ ----
53 $1,831 2.20%
Total........................... == ====== ====
</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,
--------------------------------
1997 1996 1995
------ ------ ------
(Dollars in Thousands)
<S> <C> <C> <C>
Non-accruing loans:
One- to four-family............................ $ 370 $ 245 $ 51
Commercial/multi-family real estate............ 399 874 ---
Consumer and other............................. --- 1 ---
------ ------ ----
Total....................................... 769 1,120 51
------ ------ ----
Real estate owned:
One- to four-family............................ --- 12 28
Commercial/multi-family real estate............ 315 --- ----
Residential land............................... --- --- 5
------ ------ ----
Total....................................... 315 12 33
------ ------ ----
Total non-performing assets...................... $1,084 $1,132 $ 84
====== ====== ====
Total as a percentage of total assets............ .73% .83% .06%
====== ====== ====
</TABLE>
For the year ended December 31, 1997, gross interest income which
would have been recorded had the non-accruing loans been current in accordance
with their original terms totalled $79,000. The amount that was included in
interest income on such loans was $25,000 for the year ended December 31,
1997.
The Company's ratio of non-performing assets to total assets
decreased to 0.73% at December 31, 1997 from 0.83% at December 31, 1996. Total
non-performing assets for 1997 and 1996 increased $1.0 million above 1995
levels 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 now in real
estate owned with a carrying value of $315,000 at December 31, 1997 and is a
104 unit apartment complex in Madison, Wisconsin. The Association owns
approximately 17% of the property valued at approximately $1.9 million. The
other two loans are participation loans to one borrower, which totaled
approximately $399,000 at December 31, 1997 and are secured by a 96-unit
apartment complex in Madison, Wisconsin. The Association's participation
represents approximately 8% of the total $5.1 million loan. These two loans
are in the foreclosure process, however, the Association believes there is
adequate allowance for loan losses to absorb any anticipated losses on
disposition.
Other Loans of Concern. In addition to the non-performing assets set
forth in the table above, as of December 31, 1997 there was also an aggregate
of $1,419,000 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 "doubtful"
16
<PAGE>
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, 1997, 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------
1997 1996 1995
-----------------------------------------------
<S> <C> <C> <C>
Special Mention.......................... $ 969,000 $ 876,000 $302,000
Substandard.............................. 1,524,000 1,543,000 455,000
Doubtful................................. 10,000 --- ---
Loss..................................... --- --- ---
---------- ---------- --------
Total classified assets................ $2,503,000 $2,419,000 $757,000
========== ========== ========
</TABLE>
The increase in loans designated "special mention" from 1996 to 1997
was primarily the result of including in this category one multi-family loan
participation amounting to $493,000 which is secured by a 128-unit apartment
complex in Madison, Wisconsin. The loan was classified based on a recent
property inspection and concerns about occupancy and renovation progress.
The increase in loans designated "special mention" from 1995 to 1996
was primarily the result of including in this category one
commercial/multi-family loan participation amounting to $492,000 which is
secured by a 68-unit retirement facility in Cedar Rapids, Iowa. The loan was
designated "special mention" since several mechanics liens had been filed on
the property. The liens have been cured, and consequently this loan was
removed from special mention in July of 1997. As of December 31, 1997, the
loan payments continued to be current.
The increase in loans designated "substandard" from 1995 to 1996 and
1997 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,
17
<PAGE>
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, 1997,
the Association had an allowance for loan losses of $568,000. 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, 1997 and 1996 - Provision for Losses on
Loans" in the Annual Report.
The following table sets forth an analysis of the Association's
allowance for loan losses at the dates indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1997 1996 1995
------- ------ --------
(Dollars in Thousands)
<S> <C> <C> <C>
Balance at beginning of period....................... $ 686 $ 676 $ 650
------- ------ --------
Charge-offs:
One- to four-family................................. (8) (37) (22)
Commercial/Multi-family............................. (158) ------ ---
Consumer and other.................................. --- (1) ---
------- ------ --------
(166) (38) (22)
------- ------ --------
Recoveries:
One- to four-family................................ --- --- ---
------- ------ --------
--- --- ---
------- ------ --------
Net (charge-offs) recoveries......................... (166) (38) (22)
------- ------ --------
Additions charged to operations...................... 48 48 48
------- ------ --------
Balance at end of period............................. $ 568 $ 686 $ 676
======= ====== ========
Ratio of net charge-offs (recoveries) during the
period to average loans, excluding mortgage-
backed securities outstanding during the period..... .19% .05% .03%
====== ====== ====
Allowance for loan losses to non-performing
loans at end of period.............................. 73.86% 61.25% 1,325.49%
Allowance for loan losses to total loans,
excluding mortgage-backed securities
at end of period.................................... .61% .82% .87%
</TABLE>
18
<PAGE>
The distribution of the Association's allowance for losses on loans
at the dates indicated is summarized as follows:
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------------------
1997 1996 1995
------------------------------------------------------------------
<S> <C> <C> <C> <C>
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......................... $163 71.7% $225 75.9% $ 199 80.0%
Commercial/multi-family
real estate................................ 269 12.1 246 12.4 47 10.1
Construction or development................. 1 0.9 2 1.0 3 1.5
Consumer and other.......................... 28 15.3 60 10.7 66 8.4
Unallocated................................. 107 --- 153 --- 361 ---
---- ----- ---- ----- ----- -----
Total.................................. 568 100.0% $686 100.0% $ 676 100.0%
==== ===== ==== ===== ===== =====
</TABLE>
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 31,
1997, the Association's liquidity ratio (liquid assets as a percentage of net
withdrawable savings deposits and current borrowings) was 8.07. 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, 1997, Midwest Federal's interest-bearing deposits
with banks totalled $1.1 million, or 0.7% of total assets, and its investment
securities totalled $21.5 million, or 14.6% 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 federal agency obligations, municipal bonds and
other issues that are rated investment grade or have credit enhancements. At
December 31, 1997, the average term to maturity or repricing of the investment
securities portfolio was 9.8 years. However, most of the securities have call
features, and if called, the remaining term would be 20 months. See also "-
Mortgage-Backed Securities" and Note 2 of the Notes to Consolidated Financial
Statements in the Annual Report.
19
<PAGE>
The following table sets forth the composition of the Association's
investment portfolio at the dates indicated.
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------------------------
1997 1996 1995
-------------------- ---------------------- --------------------
Book % of Book % of Book % of
Value Total Value Total Value Total
------- ------- -------- ------ ------- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-bearing deposits with banks............ $ 1,088 100.0% $ 3,127 100.0% $ 1,861 100.0%
======= ===== ======= ===== ======= =====
Investment securities:
U.S. Government securities..................... $ --- ---% $ --- ---% $ 1,007 4.7%
Federal agency obligations..................... 18,375 75.7 16,535 86.1 18,545 86.2
Municipal bonds................................ 3,108 12.8 --- --- --- ---
Other marketable equity securities(1).......... 824 3.4 710 3.7 --- ---
------- ----- ------- ----- ------- -----
Subtotal................................... 22,307 91.9 17,245 89.8 19,552 90.9
FHLBank stock................................... 1,960 8.1 1,960 10.2 1,960 9.1
------- ----- ------- ----- ------- -----
Total investment securities and FHLBank
stock..................................... $24,267 100.0% $19,205 100.0% $21,512 100.0%
======= ===== ======= ===== ======= =====
Average remaining life or term to repricing,
excluding FHLBank stock and other marketable equity securities (assuming call
feature are exercised)......................... 1.7 years 0.3 years 0.8 years
- ----------------------------
(1) Represents primarily investments in common stock of non-related publicly-traded companies.
</TABLE>
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. Weighted average yields are calculated on a taxable
equivalent basis.
<TABLE>
<CAPTION>
December 31, 1997
------------------------------------------------------------------
1 Year 1 to 5 5 to 10 After 10 Total Investment
or Less Years Years Years Securities
------- ------ ------- -------- -----------------
Book Book Book Book Book Book
Value Value Value Value Value Value
------- ------ ------- -------- ----- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Federal agency obligations.................. $ 2,456 $ 3,011 $ 1,990 $10,918 $18,375 $18,364
Municipal bonds............................. --- 444 1,624 1,040 3,108 3,108
------- ------- ------- ------- ------- -------
Total investment securities................. $ 2,456 $ 3,455 $ 3,614 $11,958 $21,483 $21,472
======= ======= ======= ======= ======= =======
Weighted average yield...................... 5.44% 6.44% 7.04% 7.24% 6.87%
</TABLE>
20
<PAGE>
In 1997, the Association began purchasing tax-exempt, rated or
general obligation bonds of municipalities. The Association's investment
securities portfolio at December 31, 1997 did not contain 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.
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,
-----------------------------------------------
1997 1996 1995
------------------------ --------------------- ----------------------
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
------- --------- -------- ---------- -------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest Rate Range:
Money Market Deposit
Accounts 2.50-4.00%................... $ 14,282 13.6$ 13,590 13.3% $ 13,282 13.1%
Passbook Accounts 2.50-3.00%........... 8,373 7.9 8,609 8.5 8,887 8.8
NOW Accounts 1.25-2.00%................ 7,266 6.9 6,738 6.6 7,841 7.8
Non-interest checking accounts......... 649 .6 399 .4 351 .3
-------- ----- --------- ------ -------- -----
Total Non-Certificates................. 30,570 29.0 29,336 28.8 30,361 30.0
-------- ----- -------- ------ -------- -----
Certificates:
4.00 - 4.99%.......................... 4,252 4.0 9,133 9.0 20,609 20.3
5.00 - 5.99%.......................... 51,543 49.0 49,464 48.5 40,357 39.8
6.00 - 6.99%.......................... 16,026 15.2 10,466 10.2 6,564 6.5
7.00 - 7.99%.......................... 2,730 2.6 3,235 3.2 3,161 3.1
8.00 - 8.99%.......................... 157 .2 284 .3 282 .3
-------- ----- -------- ------ -------- -----
Total Certificates..................... 74,708 71.0 72,582 71.2 70,973 70.0
-------- ----- -------- ----- -------- -----
Total Deposits......................... $105,278 100.0% $101,918 100.0% $101,334 100.0%
======== ===== ======== ===== ======== =====
</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.
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------- -----
1997 1996 1995
--------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C>
Opening balance...................... $101,918 $101,334 $106,894
Deposits sold........................ --- --- (7,709)
Net deposits (withdrawals)........... (734) (3,260) (1,558)
Interest credited.................... 4 ,094 3,844 3,707
-------- --------- ---------
Ending balance....................... $105,278 $101,918 $101,334
======== ======== ========
Net increase (decrease).............. $ 3,360 $ 584 $ (5,560)
======== ======== ========
Percent increase (decrease).......... 3.30% .58% (5.20)%
======== ======== ========
</TABLE>
22
<PAGE>
The following table shows rate and maturity information for the
Association's certificates of deposit as of December 31, 1997.
<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
------ ------ ----- ----- ----- ------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Certificate accounts maturing
in quarter ending :
- ------------------------------
March 31, 1998..................... $2,381 $13,459 $ 999 $ 152 $ --- $16,991 22.7%
June 30, 1998...................... 1,439 11,715 453 9 --- 13,616 18.2
September 30, 1998................. 106 7,861 578 --- 53 8,598 11.5
December 31, 1998.................. 271 6,429 457 --- 10 7,167 9.6
March 31, 1999..................... 55 3,171 229 --- 4 3,459 4.6
June 30, 1999...................... --- 2,308 3,522 --- --- 5,830 7.8
September 30, 1999................. --- 1,544 2,001 --- 65 3,610 4.8
December 31, 1999.................. --- 1,817 2,409 2,518 25 6,769 9.1
March 31, 2000..................... --- 1,115 1,286 4 --- 2,405 3.2
June 30, 2000...................... --- 785 215 --- --- 1,000 1.3
September 30, 2000................. --- 531 1,729 2 --- 2,262 3.0
December 31, 2000.................. --- 185 1,481 45 --- 1,711 2.4
Thereafter......................... --- 623 667 --- --- 1,290 1.8
------- ------- ------- ------ ------ -------- -----
Total......................... $4,252 $51,543 $16,026 $2,730 $ 157 $74,708 100.0%
====== ======= ======= ====== ====== ======= ======
Percent of total.............. 5.7% 69.0 % 21.5% 3.7% 0.1% 100.00%
====== ====== ===== ==== ==== ======
</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, 1997.
<TABLE>
<CAPTION>
Maturity
---------------------------------------------------------------
Over Over
3 Months 3 to 6 6 to 12 Over
or Less Months Months 12 months Total
-------- ------- ------- --------- -------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Certificates of deposit less
than $100,000.............................. $15,458 $12,616 $14,861 $26,929 $69,864
Certificates of deposit of
$100,000 or more........................... 1,533 1,000 904 1,407 4,844
-------- -------- --------- -------- --------
Total certificates of deposit............... $16,991 $13,616 $15,765 $28,336 $74,708
======= ======= ======= ======= =======
</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 $775,000, $357,000 and $211,000 of such
funds on deposit at December 31, 1997, 1996 and 1995, respectively.
23
<PAGE>
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.
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, 1997, the Association
had $29.0 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 with
a $1.5 million balance at December 31, 1997, which expires in March 1998. The
Association intends to renew the line of credit at that 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.
<TABLE>
<CAPTION>
At and For the Year Ended December 31,
--------------------------------------------
1997 1996 1995
------- ------- -------
(In Thousands)
<S> <C> <C> <C>
Maximum Balance:
FHLBank advances............................. $34,000 $28,000 $20,500
Average Balance:
FHLBank advances............................. $28,451 $25,256 $16,596
</TABLE>
The following table sets forth certain information as to the
Association's FHLBank advances at the dates indicated.
<TABLE>
<CAPTION>
December 31,
-------------------------------------------
1997 1996 1995
--------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C>
FHLBank advances............................. $30,500 $24,000 $20,500
------- ------- -------
Total borrowings........................ $30,500 $24,000 $20,500
======= ======= =======
Weighted average interest rate during the
period of FHLBank advances.................. 5.91% 6.00% 5.89%
Weighted average interest rate at end of
period of FHLBank advances.................. 5.86% 5.87% 6.03%
</TABLE>
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
$2.9 million at December 31, 1997, 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 $26,699. 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.
24
<PAGE>
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, 1997,
MFP had net earnings of $142. 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.
At December 31, 1997, the Association had an equity investment in MFP
of $26,699 (equal to its $100 capital plus $26,599 retained earnings), with no
loans outstanding.
Regulation
General. Midwest Federal is a federally chartered stock savings and
loan association, the deposits of which are federally insured and 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"),
which together with the Bank Insurance Fund (the "BIF"), are the two deposit
insurance funds administered by the FDIC, and the deposits of Midwest Federal
are insured by 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. The last
regular examinations of the Association by the OTS and the FDIC were as of
October 2, 1997 and November 30, 1991, respectively. 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, 1997, was $42,763.
The OTS also has extensive enforcement authority over all savings
institutions and their holding companies, including Midwest Federal and 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, 1997, 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, 1997, the Association's
lending limit under this restriction was approximately $1.4 million. As of
December 31, 1997, Midwest Federal is in compliance with the
loans-to-one-borrower limitation.
25
<PAGE>
The OTS, as well as the other federal banking agencies, has adopted
guidelines establishing safety and soundness standards on such matters 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.
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
up 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 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 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 is made by the FDIC for each semi-annual
assessment period.
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.
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 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 provided 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 provided for the merger of the BIF and the SAIF
on January 1, 1999 if no savings associations then exist. The special
assessment rate was 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 $53,687 for 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.
All SAIF-insured institutions are required to pay an assessment for
the repayment of interest on obligations issued by a federally chartered
corporation to provide financing ("FICO") for resolving the thrift crisis in
the 1980s,
26
<PAGE>
in an amount equal to 6.48 basis points for each $100 in domestic deposits. As
a result of the recent legislation discussed above, BIF-insured institutions
are also required to pay an assessment for the repayment of interest on the
FICO bonds, in an amount equal to 1.52 basis points for each $100 in domestic
deposits. The assessment on SAIF-insured institutions is expected to be
reduced to 2.43 basis points for each $100 in domestic deposits no later than
January 1, 2000, by which point BIF-insured institutions will participate
fully in the FICO bond interest repayment. These assessments, which may be
revised based upon the level of BIF and SAIF deposits, will continue until the
bonds mature in 2017.
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, 1997, Midwest Federal had no unamortized purchased mortgage servicing
rights which were required to be deducted from tangible capital. At December
31, 1997, 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. In determining compliance with the
capital requirements, all subsidiaries engaged solely in activities
permissible for national banks 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.
For excludable subsidiaries the debt and equity investments in such
subsidiaries are deducted from assets and capital. All subsidiaries of the
Association are includable subsidiaries.
At December 31, 1997, the Association had tangible capital of $9.4
million, or 6.4% of adjusted total assets, which is approximately $7.2 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. Core capital generally consists of tangible capital
plus certain intangible assets, including a limited amount of purchased 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, 1997, the Association had no intangibles which were subject to these
tests.
At December 31, 1997, the Association had core capital equal to $9.4
million, or 6.4% of adjusted total assets, which is $5.0 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% 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,
1997, Midwest Federal had $568,000 of general loss reserves, which was less
than 1.25% of risk-weighted assets that qualify as supplementary capital. 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, 1997.
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 the FNMA
or FHLMC.
OTS regulations also require that every savings association with more
than normal interest rate risk exposure 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 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% is exempt from this
requirement unless the OTS determines otherwise.
On December 31, 1997, the Association had total capital of $10.0
million (including $9.4 million in core capital and $568,000 in qualifying
supplementary capital) and risk-weighted assets of $67.4 million (and no
converted off-balance sheet assets); or total capital of 14.8% of
risk-weighted assets. This amount was $4.6 million above the 8% requirement in
effect on that date.
The OTS and the FDIC are authorized and, under certain circumstances
required, to take certain actions against savings associations that fail to
meet their 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 capital 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 conservator or a receivor.
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.
28
<PAGE>
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 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.
Generally, savings associations, such as the Association, that before
and after the proposed distribution meet their 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 capital
requirement for such capital component, as measured at the beginning of the
calendar year, or 75% of their net income for the most recent four quarter
period. However, an association deemed to be in need of more than normal
supervision by the OTS may have its dividend authority restricted by the OTS.
The Association may pay dividends in accordance with this general authority.
Savings associations proposing to make any capital distribution need
only submit written notice to the OTS 30 days prior to such distribution.
Savings associations that do not, or would not meet their current minimum
capital requirements following a proposed capital distribution, however, must
obtain OTS approval prior to making such distribution. 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. If adopted, the regulation would have the effect of relieving the
Association of the responsibility of notifying the OTS prior to making a
capital distribution.
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 4%.
Penalties may be imposed upon associations for violations of the
liquid asset ratio requirement. At December 31, 1997, the Association was in
compliance with requirements, with an overall liquid asset ratio of 8.1%.
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
29
<PAGE>
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 amended 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 (as defined by
regulation) 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 7701 (a)(19) of the Internal Revenue Code. Under either test, such
assets primarily consist of residential housing related loans and investments.
At December 31, 1997, 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 an 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 BIF. If such an association has not yet requalified or
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 FHLB
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 FHLB 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 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 1997 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, such as loans to an affiliate, 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
30
<PAGE>
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. 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, 1997,
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 FHLB borrowings, before borrowing from the Federal Reserve Bank.
Federal Home Loan Bank System. The Association is a member of the
FHLB of Des Moines, which is one of 12 regional FHLB, that administers the
home financing credit function of savings associations. Each FHLB serves
31
<PAGE>
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 FHLB System. It makes loans to members (i.e., advances) in
accordance with policies and procedures established by the board of directors
of the FHLB. These policies and procedures are subject to the regulation and
oversight of the Federal Housing Finance Board. All advances from the FHLB are
required to be fully secured by sufficient collateral as determined by the
FHLB. 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 FHLB of Des Moines. At December 31, 1997, Midwest Federal had
$2.0 million in FHLB stock, which was in compliance with this requirement. In
the past years, the Association has received substantial dividends on its FHLB
stock. Over the past five calendar years such dividends have averaged 7.53%
and were 7.00% for calendar year 1997.
Under federal law, the FHLB 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
FHLB dividends paid and could continue to do so in the future. These
contributions could also have an adverse effect on the value of FHLB stock in
the future. A reduction in value of the Association's FHLB stock may result in
a corresponding reduction in Midwest Federal's capital.
For the year ended December 31, 1997, dividends paid by the FHLB of
Des Moines to Midwest Federal totalled $137,179, which constituted a $13
decrease from the amount of dividends received in 1996. The $34,577 dividend
received for the quarter ended December 31, 1997 reflects an annualized rate
of 7.00%, compared to a rate of 7.00% for calendar 1996.
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"), had been 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.
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).
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.
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
32
<PAGE>
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, 1997, 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 Association.
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, 1997, the Association's Excess for
tax purposes totalled approximately $2.8 million.
The Company and its subsidiaries 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
33
<PAGE>
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," was effective for the Company for the
year beginning January 1, 1997, and did not have a material effect on the
financial position and results of operations, nor did the adoption require
additional capital resources.
SFAS 128, "Earnings Per Share," was adopted by the Company effective
December 31, 1997. This statement replaces the primary earnings per share
(EPS) disclosure with basic and diluted EPS disclosures to simplify the
calculation and improve international comparability. The adoption of SFAS 128
did not have a material effect on the financial position and results of
operations, nor did the adoption require additional capital resources.
SFAS 130, "Reporting Comprehensive Income," will be effective for the
Company for the year beginning January 1, 1998, and establishes the standards
for the reporting and display of comprehensive income in the financial
statements. Comprehensive income represents net earnings and certain amounts
reported directly in stockholders' equity, such as the net unrealized gain or
loss on available-for-sale securities.
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.
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%.
34
<PAGE>
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 48, 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 48, 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 37, 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, 1997, the Association and its subsidiaries had a
total of 43 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.
35
<PAGE>
Item 2. Properties
The following table sets forth information relating to each of the
Association's current offices. The total net book value of the Association's
premises and equipment at December 31, 1997 was $2.6 million.
Date
Acquired/ Owned or Net Book Value
Location Lease Expires Leased at December 31, 1997
- -------------------- ------------- -------- --------------------
(In Thousands)
Main Office:
3225 Division Street 1974 Owned $1,246
Burlington, IA
Branch Offices:
323 Jefferson Street 1974 Owned 181
Burlington, IA
926 Avenue G 1975 Owned 246
Ft. Madison IA
Highway 61 1974 Owned 32
Wapello, IA
Wal-Mart 2002(2) Leased 178
324 W. Agency Road
West Burlington, IA
- ------------------
(1) Includes 319 Jefferson Street.
(2) Plus a five year option to extend.
The Association maintains depositor and borrower customer files on an
on-line basis with the FiServ, West Des Moines, Iowa. The net book value of
the data processing and computer equipment utilized by the Association at
December 31, 1997 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,
1997.
36
<PAGE>
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
- -----------------------------------------------------------------
Page 43 of the Annual Report is herein incorporated by reference.
Item 6. Management's Discussion and Analysis or Plan of Operation
- ------------------------------------------------------------------
Pages 4 through 16 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, 1997, 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 43
Selected Financial and Other Data 2-3
Management's Discussion and Analysis 4-16
of Financial Condition and Results
of Operations
Independent Auditors' Report 17
Consolidated Balance Sheets as of 18
December 31, 1997 and 1996
Consolidated Statements of Operations 19
for Years Ended December 31, 1997,
1996 and 1995
Consolidated Statements of Stockholders' 20
Equity for Years Ended December 31,
1997, 1996 and 1995
Consolidated Statements of Cash Flows 21
for Years Ended December 31, 1997,
1996 and 1995
Notes to Consolidated Financial 22-42
Statements
With the exception of the aforementioned information, the
Corporation's Annual Report to Stockholders for the year ended December 31,
1997 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 1998, 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 1998, 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 1998, 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 1998, 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 ***
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.
*** Filed as Exhibit 10.1 to the Company's Annual Report on Form 10-KSB
filed on March 31, 1997 (File No. 0-20620). All 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, 1997.
39
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act
of 1934, the Registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
<TABLE>
<CAPTION>
MIDWEST BANCSHARES, INC.
<S> <C>
Date: March 30, 1998 By: /s/ William D. Hassel
-------------------------------- ---------------------
William D. Hassel
President, Chief Executive
Officer and Director
(Duly Authorized Representative)
In accordance with the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant in
the capacities and on the dates indicated.
/s/ William D. Hassel /s/ Henry L. Hirsch
- ------------------------------------------- --------------------------------------
William D. Hassel Henry L. Hirsch
President, Chief Executive Officer and Chairman of the Board
Director (Principal Executive Officer)
Date: March 30, 1998 Date: March 30, 1998
------------------------------------- --------------------------------
/s/ Edward C. Whitham, Jr. /s/ Robert D. Maschmann
- ------------------------------------------- --------------------------------------
Edward C. Whitham, Jr. Robert D. Maschmann
Director Executive Vice President and
Treasurer (Principal Financial
and Accounting Officer)
Date: March 30, 1998 Date: March 30, 1998
------------------------------------- -------------------------------
/s/ James R. Walker /s/ james E. Witte
- ------------------------------------------- -------------------------------------
James R. Walker James E. Witte
Director Director
Date: March 30, 1998 Date: March 30, 1998
------------------------------------- -------------------------------
/s/ Yuh-Fen Lin
- -------------------------------------------
Yuh-Fen Lin
Director
Date: March 30, 1998
-------------------------------------
</TABLE>
40
<PAGE>
Exhibit Index
Sequential
Exhibit No. Document Page Number
- ------------ --------------------------------------- ------------
13 Annual Report
21 Subsidiaries of Registrant
23 Consent of KPMG Peat Marwick LLP
27 Financial Data Schedule
<PAGE>
Exhibit 13
Annual Report
1997 ANNUAL REPORT
MIDWEST BANCSHARES, INC.
<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............................................43
Corporate Information..............................................44
<PAGE>
March 20, 1998
Dear Fellow Stockholder:
We are pleased to present the Annual Report of Midwest Bancshares,
Inc. for the 1997 fiscal year. For the fiscal year ended December 31, 1997,
our Company recorded net earnings of $1.26 million, or $1.14 per share on a
diluted basis. This represents a return on assets of 0.87% and a return on
equity of 12.56%. Stockholders' equity grew to $10.7 million, or 7.23% of
total assets as of December 31, 1997.
Two events stand out as highlights of 1997. On November 18, 1997, we
completed a 3-for-1 stock split effected in the form of a dividend. The stock
split had a significant effect on the market price of our stock, reflected by
the increase in price from a low bid in the first quarter of 1997 of $8.75
(adjusted for the split) to a high bid of $18.37 at the end of 1997. The
second major event was the opening of our in-store branch in the Wal-Mart
Supercenter in West Burlington, Iowa. We view the Wal-Mart branch as a
supplement to our marketing focus by bringing our banking products to where
our customers shop for groceries and other goods.
We want to thank you, our stockholders, for your support. We also
want to thank our employees and our customers for their support and loyalty to
the Company without whom we could not have achieved the excellent results of
1997. We are looking forward to a profitable 1998, and we remind you to visit
our Web Site address (shown on page 44) and drop us an E-mail if you have a
question or need some information. Technology is changing the way we do
banking, but there will always be a need for innovative, efficient and
courteous customer service.
We are ready for the challenge.
Sincerely yours,
William D. Hassel
President and Chief Executive Officer
Robert D. Maschmann
Executive Vice President and
Chief Financial Officer
1
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Selected Financial Condition Data:
Total assets........................................ $147,724 $136,425 $132,964 $131,260 $130,815
Cash and cash equivalents........................... 2,524 3,998 2,305 3,473 2,486
Securities available for sale....................... 27,935 23,784 19,711 6,139 7,467
Securities held to maturity......................... 19,840 21,811 31,509 45,892 50,434
Loans receivable, net............................... 91,276 81,225 74,035 70,344 65,214
Deposits............................................ 105,278 101,918 101,334 106,894 106,723
Total borrowings.................................... 30,500 24,000 20,500 14,000 14,279
Stockholders' equity................................ 10,675 9,600 9,896 9,283 8,663
</TABLE>
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Selected Operations Data:
Total interest income............................... $10,750 $10,163 $9,573 $8,840 $8,874
Total interest expense.............................. 6,720 6,243 5,713 4,864 5,196
------- ------- ------ ------ ------
Net interest income.............................. 4,030 3,920 3,860 3,976 3,678
Provision for loan losses........................... 48 48 48 42 59
------- ------- ------ ------ ------
Net interest income after 3,982 3,872 3,812 3,934 3,619
provision for loan losses.......................
Fees and service charges............................ 282 179 171 162 133
Gain on sale of deposits............................ --- --- 493 --- ---
Gain on sales of securities and office property and 220 45 76 --- 14
equipment..........................................
Other non-interest income........................... 51 125 107 73 191
Non-interest expense................................ 2,581 3,217 2,629 2,554 2,506
------- ------- ------ ------ ------
Income before taxes on income..................... 1,954 1,004 2,030 1,615 1,451
Taxes on income..................................... 689 374 680 545 509
Cumulative effect of accounting change.............. --- --- --- --- 170
------- ------- ------ ------ ------
Net earnings........................................ $ 1,265 $ 630 $1,350 $1,070 $1,112
======= ======= ====== ====== ======
Earnings per share(1):
Basic............................................. $1.225 $0.593 $1.196 $0.864 $0.833
======= ======= ====== ====== ======
Diluted........................................... 1.142 0.560 1.136 0.829 0.803
======= ======= ====== ====== ======
Cash dividends per common share(1).................. $0.220 $0.187 $0.167 $0.160 $0.133
======= ======= ====== ====== ======
</TABLE>
(1) Reflects the 3-for-1 stock split effected in the form of a 200% stock
dividend in November 1997.
2
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA (cont'd)
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
<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)............................ 0.87% 0.46%(1) 1.02% 0.81% 0.86%
Interest rate spread information:
Average during period........................... 2.63 2.68 2.74 2.89 2.69
End of period................................... 2.62 2.63 2.70 2.96 2.75
Net interest margin(2)............................ 2.89 2.94 2.99 3.11 2.92
Return on stockholders' equity (ratio of net
income to average equity)........................ 12.56 6.59(1) 14.73 11.96 13.15
Average interest-earning assets to average
interest-bearing liabilities..................... 105.43 105.68 105.83 105.89 105.50
Ratio of operating expense to average
total assets..................................... 1.78 2.34(1) 1.98 1.94 1.99
Efficiency ratio(3)............................... 56.92 76.23(1) 63.11 61.26 63.56
Asset Quality Ratios:
Non-performing assets(4) to total assets at
end of year...................................... 0.73 0.83 0.06 0.35 0.43
Allowance for loan losses to non-performing
loans(5) at end of year.......................... 73.86 61.25 1,325.49 396.34 118.98
Allowance for loan losses to total loans, excl.
mortgage-backed securities at end of year......... 0.61 0.82 0.87 0.90 0.97
Capital Ratios:
Stockholders' equity to total assets
(end of year).................................... 7.23 7.04 7.44 7.07 6.62
Average stockholders' equity to average
total assets..................................... 6.95 6.93 6.89 6.79 6.53
Dividend payout ratio (dividends per share
divided by net earnings per share)............... 17.89 33.33(1) 14.75 19.35 16.60
Number of full-service offices.................... 5 4 4 5 5
</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) Operating expense divided by total operating income; excluding gain on
the sale of deposits for 1995.
(4) Includes loans that are 90 days or more delinquent, as well as real
estate owned.
(5) Includes loans that are 90 days or more delinquent.
3
<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").
Historically, the primary business of the Company has consisted of
attracting deposits from the general public and using such funds, along with
other borrowed funds, as necessary, to provide financing for the purchase of
residential properties. The operations of the Company are significantly
affected by prevailing economic conditions, as well as by government policies
and regulations relating to monetary and fiscal affairs, housing and financial
institutions.
Forward-Looking Statements
When used in this Annual Report or in filings by the Company with the
Securities and Exchange Commission, in the Company's press releases or other
public or shareholder communications, or in oral statements made with the
approval of an authorized executive officer, the words or phrases "will likely
result," "are expected to," "will continue," "is anticipated," "estimate,"
"project," "believe" or similar expressions are intended to identify
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. The Company wishes to caution readers not to
place undue reliance on any such forward-looking statements, which speak only
as of the date made, and to advise readers that various factors, including
regional and national economic conditions, changes in levels of market
interest rates, credit risks of lending activities, and competitive and
regulatory factors, could affect the Company's financial performance and could
cause the Company's actual results for future periods to differ materially
from those anticipated or projected.
The Company does not undertake, and specifically disclaims any
obligations, to revise any forward-looking statements to reflect the
occurrence of anticipated or unanticipated events or circumstances after the
date of such statements.
Year 2000 Compliance
As the year 2000 approaches, a critical business issue has emerged
regarding how existing application software programs and operating systems can
accommodate the date value "2000." Many existing application software products
were designed to only accommodate a two digit date position which represents
the year (e.g., the number "95" is stored on the system and represents the
year 1995). As a result, the year 1999 (i.e., "99") is the maximum date value
many systems will be able to accurately process. Management has formed a year
2000 working group to address potential problems posed by this development to
assure that the Company is prepared for the year 2000. Management does not
anticipate that the Company will incur significant operating expenses or be
required to invest heavily in computer system improvements to address the year
2000 issues. However, if modifications and conversions to deal with year 2000
issues are not completed on a timely basis or are not fully effective, the
year 2000 problem may have a significant effect on the operations of the
Company. All costs associated with year 2000 modifications and conversions
will be expensed as incurred.
Financial Condition
Total assets increased by $11.3 million to $147.7 million at December
31, 1997 compared to $136.4 million at December 31, 1996. Total loans
receivable increased $10.1 million to $91.3 million at December 31, 1997 from
$81.2 million at December 31, 1996. During 1997, the Association originated
$21.9 million in loans while loan repayments totaled $15.8 million. This
compares with $19.5 million in originations and $15.5 in repayments in fiscal
1996. Of the loans originated in 1997 and 1996, $3.1 million and $4.1 million,
respectively, represented refinancings of existing loans. Loan originations
were up due to favorable lending rates and generally good economic conditions
for borrowers during 1997. The Company also purchased $7.0 million in loans in
1997 compared with $6.3 million in 1996.
4
<PAGE>
Investment securities held to maturity decreased to $19.8 million at
December 31, 1997 from $21.8 million at December 31, 1996, due to the
investment of a portion of the repayments on such securities in securities
available for sale, mortgage loans and loan purchases during the year.
Securities available for sale increased to $27.9 million at December 31, 1997
from $23.8 million at December 31, 1996, due to purchases of securities
available for sale.
Total deposits increased from $101.9 million at December 31, 1996 to
$105.3 million at December 31, 1997. Advances from the FHLB increased from
$24.0 million at December 31, 1996 to $30.5 million at December 31, 1997, due
to new advances of $8.5 million (net of $2.0 million of repayments). The
Company used $394,000 of liquid assets to repurchase 3.5% of the Company's
common stock in 1997.
The Company's ratio of non-performing assets to total assets
decreased to 0.73% at December 31, 1997 from 0.83% at December 31, 1996. Total
non-performing assets decreased $48,000. The majority of non-performing assets
consist of one multi-family property with three related participation loans.
One of the loans is now real estate owned with a carrying value of $315,000.
The other two loans totaling $399,000 are currently in foreclosure.
Results of Operations
The Company's net income is primarily dependent upon the difference
(or "spread") between the average yield earned on loans, mortgage-backed
securities and investments and the average rate paid on deposits and
borrowings, as well as the relative amounts of such assets and liabilities.
The interest rate spread is affected by regulatory, economic and competitive
factors that influence interest rates, loan demand and deposit flows. The
Association, like other thrift institutions, is subject to interest rate risk
to the degree that its interest-bearing liabilities mature or reprice at
different times, or on a different basis, than its interest-earning assets.
The Company's interest expense has been a product of the interest
paid on deposits and borrowed funds. The Association emphasizes and promotes
its consumer and passbook, money market and NOW accounts, principally from its
market area. The NOW accounts tend to be less susceptible to rapid changes in
volume and interest rate.
The Company's net income has also been affected by, among other
things, gains and losses on sales of loans, mortgage-backed securities and
investments, provisions for possible loan losses, service charge fees,
subsidiary activities, operating expenses and income taxes. Midwest Financial
Products, Inc., a wholly owned subsidiary of the Association, generates
revenues through the sale of tax-deferred annuities and other financial
products to its customers.
Comparison of Years Ended December 31, 1997 and 1996
General. The Company had net earnings of $1,265,000 in 1997 compared
to $630,000 in 1996, an increase of approximately $635,000. The increase in
net earnings was primarily due to: (i) reduced operating expenses as a result
of the $671,000 FDIC special assessment in the quarter ended September 30,
1996, and subsequent reduction in FDIC insurance premiums; (ii) increased net
interest income, due to earning asset growth; and (iii) increased non-interest
income, primarily due to pre-tax gain of $220,000 on the sale of securities
for 1997 compared to $45,000 for 1996, and increased fee income due to a
revised fee structure, partially offset by a $50,000 reduction in the $59,000
pre-tax gain distribution from the Company's data processor reported in 1996,
which totaled $9,000 in 1997.
Excluding the unusual or non-recurring items from net earnings, such
as the $671,000 FDIC special assessment, the gains on sales of securities, and
the distributions from the Company's data processor, "core" net earnings would
have been approximately $1,112,000 in 1997, compared to $986,000 in 1996.
Net Interest Income. Net interest income increase by $110,000 to
$4,030,000 in 1997 from $3,920,000 in 1996. The increase in net interest
income was primarily the result of the Association's growth in earning assets
as the net interest margin actually decreased from 2.94% in 1996 to 2.89% in
1997. For the year ended December 31, 1997, the Company's average interest
rate spread decreased five basis points from 2.68% in 1996 to 2.63% in 1997.
5
<PAGE>
During fiscal 1997, average interest-earning assets increased by
approximately $6.8 million over the 1996 average balances. The increase in
average interest-assets was primarily due to an increase in loans receivable
as the Association successfully deployed cash flow into lending. The average
yield on interest-earning assets increased by six basis points during 1997
compared to 1996. The increase in average yield was primarily due to loan
originations and purchases at rates which are generally higher than investment
securities.
During fiscal 1997, average interest-bearing liabilities increased by
approximately $6.7 million, primarily due to an increase of $3.5 million in
average deposits and an increase of $3.2 million in average borrowings from
the FHLB. The average rate paid on interest-bearing liabilities increased
eleven basis points compared to 1996. The increase in average rate paid was
primarily due to time deposits repricing to higher rates offered in response
to marketplace competition and due to increased FHLB advances. The Company
increased its borrowing from the FHLB to fund asset growth, at rates which
were generally higher than the overall cost of deposits.
Provision for Losses on Loans. The provision for losses on loans
remained constant at $48,000 for both 1997 and 1996. The amount of provision
was a result of the determination by management to maintain the allowance for
losses on loans at an adequate level to absorb potential loan losses. At
December 31, 1997 and 1996, the Company's allowance for losses on loans
totaled $568,000 and $686,000, respectively, or 0.61% and 0.82% of total
loans, excluding mortgage-backed securities, and 73.86% and 61.25% of total
non-performing loans, respectively. The decline in the former ratio was
impacted by charge-offs in 1997, primarily a result of foreclosure of one
multi-family property, resulting in a charge-off of $158,000. This property,
now in real estate owned, with a carrying value of $315,000 combined with two
related multi-family participation loans totaling $399,000, also in
foreclosure, makes up the majority of the nonperforming assets. The Company
had net charge-offs of $166,000 and $38,000 for the years ended December 31,
1997 and 1996, respectively.
Non-interest Income. Total non-interest income increased by $205,000
for 1997 compared to 1996. The increase was primarily due to an increase of
$175,000 in gains on the sales of securities and due to an increase of
$103,000 in fees and service charges, primarily as a result of a new fee
schedule implemented in September 1996. These increases were partially offset
by a $50,000 decrease in the amount recognized as gain from the sale of the
Association's share of their data processing cooperative.
Non-interest Expenses. Total non-interest expenses decreased by
$636,000 for 1997 compared to 1996. The decrease was primarily due to the
Deposit Insurance Funds Act of 1996 passed on September 30, 1996. The
legislation resulted in a one-time pre-tax charge of approximately $671,000 in
1996, representing a special assessment of 65.7 basis points on the
Association's deposits held as of March 31, 1995 to recapitalize the SAIF
insurance fund. As a result of the special assessment, the SAIF is fully
funded. Therefore, the Company's ongoing FDIC premiums were reduced, resulting
in a $183,000 decrease in premiums in 1997 as compared to 1996. Partially
offsetting these decreases were increases of $104,000 in compensation and
benefits expense, $16,000 in office property and equipment, and $99,000 in
other non-interest expenses. These increases in expenses are, in part, due to
start-up costs of the Company's new branch office in the Wal-Mart Supercenter
located in West Burlington, Iowa, which opened for business in December of
1997.
Taxes on Income. Taxes on income increased $315,000 for 1997 compared
to 1996, primarily due to increased taxable income, partially offset by the
effect of investing in tax-exempt municipal bonds for the first time in 1997,
resulting in approximately $16,000 of tax benefit for 1997.
Comparison of Years Ended December 31, 1996 and 1995
General. The Company had net earnings of $630,000 in 1996 compared to
$1,350,000 in 1995, a decrease of approximately $720,000. The decrease in net
earnings was primarily due to two non-recurring events. In 1995, the Company
recognized a pre-tax gain of $493,000 included in non-interest income
resulting from the sale of $7.7 million of deposits of the Association's
Keokuk, Iowa branch, with no comparable gain in 1996, resulting in decreased
6
<PAGE>
reported net earnings in 1996 of approximately $310,000. The second event
occurred on September 30, 1996, when the Deposit Insurance Funds Act of 1996
was passed. The legislation resulted in a one-time pre-tax charge of
approximately $671,000, representing a special assessment of 65.7 basis points
on the Association's deposits held as of March 31, 1995, to recapitalize the
SAIF insurance fund. This one-time expense, net of tax, resulted in decreased
reported net earnings of approximately $420,000 in 1996. Excluding these
one-time items, net earnings would have been consistent between 1995 and 1996.
Net Interest Income. Net interest income increased by $60,000 to
$3,920,000 in 1996 from $3,860,000 in 1995. The increase in net interest
income was primarily the result of the Association's growth in earning assets
as the net interest margin actually decreased from 2.99% in 1995 to 2.94% in
1996. For the year ended December 31, 1996, the Company's interest rate spread
decreased six basis points from 2.74% in 1995 to 2.68% in 1996.
During fiscal 1996, average interest-earning assets increased by
approximately $4.2 million over the 1995 average balances. The increase in
average interest-earning assets was primarily due to an increase in loans
receivable, as the Association successfully deployed cash flow into lending.
The average yield on interest-earning assets increased by 21 basis points
during 1996 compared to 1995. The increase in average yield was primarily due
to loan originations and purchases at higher rates and adjustable-rate loans
and mortgage-backed securities in portfolio, some of which having below-market
initial teaser rates, adjusting to higher rates in response to higher market
rates. Yield adjustments on the Company's adjustable-rate portfolio occur
periodically over time and may tend to lag behind the changes experienced in
the market. These adjustments may also be limited by periodic and lifetime
caps on such adjustments.
During fiscal 1996 average interest-bearing liabilities also increased
by approximately $4.1 million, primarily due to an increase of $8.7 million in
average borrowings from the FHLB. This increase was partially offset by a
decrease of $4.6 million in average deposits (primarily resulting from the
sale of $7.7 million of deposits in December, 1995). The average rate paid on
interest-bearing liabilities increased 27 basis points compared to 1995. The
increase in average rate paid was primarily due to deposits and FHLB advances
repricing to higher rates as a result of higher market interest rates. The
changing mix of funding sources also contributed to the increase in the cost
of funds as the Company increased its borrowing from the FHLB to fund asset
growth, at rates which were generally higher than the overall cost of
deposits.
Provision for Losses on Loans. The provision for losses on loans
remained constant at $48,000 for both 1996 and 1995. The amount of the
provision was a result of the determination by management to maintain the
allowance for losses on loans at an adequate level to absorb potential loan
losses. At December 31, 1996 and 1995, the Company's allowance for losses on
loans totaled $686,000 and $676,000, respectively, or 0.82% and 0.87% of total
loans, excluding mortgage-backed securities, and 61.25% and 1,325.49% of total
nonperforming loans, respectively. The decline in the latter ratio was
impacted by a $1.1 million increase in non-performing loans, primarily due to
three multi-family participation loans totaling $874,000 which were more than
90 days past due as of December 31, 1996. All three loans are in foreclosure,
however the foreclosure has been delayed as one of the borrowers has filed
bankruptcy. It is unknown how long the foreclosure process will be delayed,
however the Association believes there is adequate collateral in the
properties to minimize the losses on disposition. The Association had net
charge-offs of $38,000 and $22,000 for the years ended December 31, 1996 and
1995, respectively.
Non-interest Income. Total non-interest income decreased by $499,000
for 1996 compared to 1995. The decrease was primarily due to a non -recurring
gain of $493,000 in 1995, resulting from the sale of $7.7 million of deposits
from the Association's Keokuk, Iowa branch in December 1995, with no
comparable gain in 1996. Also contributing to the decrease was a $31,000
decrease in the amount of gains recognized on the sale of securities and a
$14,000 decrease in the amount recognized as gain from the sale of the
Association's share of their data processing cooperative, partially offset by
an increase of $22,000 in commissions on the sale of alternative financial
products (a result of increased sales of annuities and credit life and
disability insurance), and an increase of $11,000 in fee income (as a result
of a new fee schedule implemented in September 1996).
Non-interest Expenses. Total non-interest expenses increased by
$589,000 for 1996 compared to 1995. The increase was primarily due to the
Deposit Insurance Funds Act of 1996 passed on September 30, 1996. The
7
<PAGE>
legislation resulted in a one-time pre-tax charge of approximately $671,000
representing a special assessment of 65.7 basis points on the Association's
deposits held as of March 31, 1995 to recapitalize the SAIF insurance fund.
Partially offsetting this increase were decreases of $43,000 in net REO
operations expense (resulting from net gains of the sale of REO properties),
and $39,000 in net reductions in other non-interest expenses. As a result of
the special assessment, the SAIF is fully-funded and, therefore, the
Association expects a reduction in FDIC premiums which will provide annual
savings of approximately $170,000 before income taxes, based on current
deposit levels, beginning in January 1997.
Taxes on Income. Taxes on income decreased $307,000 for 1996 compared
to 1995, primarily due to decreased taxable income.
8
<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 net interest margin.
All average balances are daily average balances and include the balances of
non-accruing loans. The yields and costs for the periods indicated include
fees which are considered adjustments to yields.
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------------------------------------
1997 1996
--------------------------------- -------------------------------------
Yield/Rate at Average Interest Average Interest
December 31, Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
1997 Balance Paid Rate Balance Paid Rate
------------- ----------- -------- ------ ----------- -------- ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-Earning Assets:
Loans receivable................... 8.13% $ 87,358 $ 7,075 8.10% $ 79,219 $ 6,444 8.13%
Mortgage-backed securities......... 7.18 27,612 1,951 7.07 30,841 2,162 7.01
Investment securities(1)........... 6.88 21,372 1,528 7.15 19,654 1,351 6.87
Deposits in other banks............ 4.59 1,562 75 4.82 1,401 69 4.90
Other interest-earning assets..... 7.00 1,960 137 7.00 1,960 137 7.00
---- -------- --------- ---- -------- ------- ----
Total interest-earning assets.... 7.70 139,864 10,766 7.70 133,075 10,163 7.64
---- -------- --------- ---- -------- ------- ----
Interest-Bearing Liabilities:
Savings deposits, money market
deposit and NOW accounts........ 2.80 30,162 870 2.88 $ 29,562 $ 864 2.92
Time deposits..................... 5.65 74,042 4,169 5.63 71,104 3,863 5.43
---- -------- --------- ---- -------- ------- ----
Total deposits.................. 4.83 104,204 5,039 4.84 100,666 4,727 4.70
----
FHLB advances and other borrowings 5.86 28,451 1,681 5.91 25,256 1,516 6.00
---- -------- --------- ---- -------- ------- ----
Total interest-bearing
liabilities.................... 5.08 $132,655 $ 6,720 5.07 $125,922 6,243 4.96
---- -------- --------- ---- -------- ------- ----
Net interest income; interest rate
spread............................ 2.62% $ 4,046 2.63% $3,920 2.68%
==== ======== ==== ====== ====
Net earning assets/net interest
margin(2)......................... $ 7,209 2.89% $7,153 2.94%
======= ==== ====== ====
Average interest-earning assets to
average interest-bearing
liabilities....................... 105.4% 105.7%
===== =====
</TABLE>
<PAGE>
[RESTUBBED FROM TABLE ABOVE]
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------
1995
---------------------------------------
Average Interest
Outstanding Earned/ Yield/
Balance Paid Rate
----------- --------- ------
(Dollars in Thousands)
<S> <C> <C> <C>
Interest-Earning Assets:
Loans receivable................... $ 71,784 $5,799 8.08%
Mortgage-backed securities......... 33,981 2,366 6.96
Investment securities(1)........... 18,307 1,107 6.05
Deposits in other banks............ 2,923 162 5.57
Other interest-earning assets..... 1,921 139 7.25
--------- ------ ----
Total interest-earning assets.... 128,916 9,573 7.43
--------- ------ ----
Interest-Bearing Liabilities:
Savings deposits, money market
deposit and NOW accounts........ $ 31,597 $ 910 2.88
Time deposits..................... 73,621 3,826 5.20
--------- ------ ----
Total deposits.................. 105,218 4,736 4.50
FHLB advances and other borrowings 16,596 977 5.89
--------- ------ ----
Total interest-bearing
liabilities.................... $121,814 5,713 4.69
--------- ------ ----
Net interest income; interest rate
spread............................ $3,860 2.74%
====== ====
Net earning assets/net interest
margin(2)......................... $ 7,102 2.99%
========= ====
Average interest-earning assets to
average interest-bearing
liabilities....................... 105.8%
=====
</TABLE>
- ------------
(1) Interest income and yield/rate on tax-exempt securities are presented on
a tax-equivalent basis utilizing a federal tax rate of 34%, resulting in
additional earnings of $16,000 for 1997 and none for 1996 or 1995.
(2) Net interest margin is net interest income divided by average
interest-earning assets.
9
<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,
--------------------------------------------------------------------
1997 vs. 1996 1996 vs. 1995
--------------------------------- --------------------------------
Increase Increase
(Decrease) (Decrease)
Due to Total Due to Total
--------------------- Increase ------------------- Increase
Volume Rate (Decrease) Volume Rate (Decrease)
-------- -------- ---------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Interest-Earning Assets:
Loans receivable ................................... $ 659 $ (28) $ 631 $ 604 $ 41 $ 645
Mortgage-backed securities ......................... (228) 17 (211) (220) 16 (204)
Investment securities .............................. 121 56 177 85 159 244
Deposits in other banks ............................ 8 (2) 6 (76) (17) (93)
Other interest-earning assets ...................... -- -- -- 3 (5) (2)
----- ----- ----- ----- ----- -----
Total interest-earning assets .................... 560 43 603 396 194 590
----- ----- ----- ----- ----- -----
Interest-Bearing Liabilities:
Savings deposits, money market deposit ............. 17 (11) 6 (59) 13 (46)
and NOW accounts
Time deposits ...................................... 163 143 306 (113) 150 37
----- ----- ----- ----- ----- -----
Total deposits ................................... 180 132 312 (172) 163 (9)
FHLB advances and other borrowings ................. 188 (23) 165 520 19 539
----- ----- ----- ----- ----- -----
Total interest-bearing liabilities ............... 368 109 477 348 182 530
----- ----- ----- ----- ----- -----
Net change in net interest income ................... $ 192 $ (66) $ 126 $ 48 $ 12 $ 60
===== ===== ===== ===== ===== =====
</TABLE>
10
<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 securities. As a continuing part of its strategy, the Association
considers methods of managing this asset/liability mismatch, consistent with
maintaining acceptable levels of net interest income.
The Association has an Asset/Liability Committee composed principally
of its President and the lending and finance department heads. The
responsibilities of this Committee are to assess the Association's
asset/liability mix and to recommend strategies to the Board of Directors that
will enhance income while managing the Association's vulnerability to changes
in interest rates.
In managing its asset/liability mix, the Association, at times,
depending on the relationship between long- and short-term interest rates,
market conditions and consumer preference, may place greater emphasis on
maximizing its net interest margin than on matching the interest rate
sensitivity of its assets and liabilities, in an effort to improve its spread.
Management believes that the increased net income resulting from a mismatch in
the maturity of its asset and liability portfolios can, during periods of
declining or stable interest rates, provide high enough returns to justify the
increased vulnerability to sudden and unexpected increases in interest rates
which can result from such a mismatch.
A negative gap for a given period means that the amount of
interest-earning assets maturing or otherwise repricing within such period is
less than the amount of interest-bearing liabilities maturing or otherwise
repricing within the same period. Accordingly, in a declining interest rate
environment, an institution with a negative gap generally experiences a
greater decrease in the cost of its liabilities than in the yield on its
assets. Conversely, a rising interest rate environment will generally have an
unfavorable impact on an institution with a negative gap because its cost of
funds will generally increase more than the yield on its assets. Changes in
interest rates generally have the opposite effect on an institution with a
positive gap. A declining interest rate environment imposes risks on an
institution with a positive gap, because the increased yield on its assets
generally will exceed the decreased cost of its liabilities.
The following table sets forth the repricing periods of the
Association's interest-earning assets and interest-bearing liabilities at
December 31, 1997 and the Association's interest rate sensitivity "gap"
percentages at the dates indicated. The interest rate sensitivity gap is
defined as the amount by which assets repricing within the respective periods
exceed liabilities repricing within such periods. One- to four-family
fixed-rate mortgage loans and mortgage-backed securities are assumed to prepay
at annual rates ranging from 7% to 24% per year, depending on the stated
interest rate. Adjustable-rate mortgage loans are assumed to prepay at a rate
of 8% to 9% per year, depending on the property type and index rate the loan
is priced on. All other loans are assumed to prepay at a rate of 8.0%.
Securities with call features are assumed to be extended to maturity and not
called, which is unlikely over the life of the security. However, it presents
a worst case scenario for gap analysis. Passbook accounts are assumed to be
withdrawn at annual rates of 17.0%, 17.0%, 17.0%, 16.0% and 14.0%,
respectively, during the periods shown. Money market deposit accounts are
assumed to reprice immediately in the first period. Finally, transaction
accounts are assumed to decay at annual rates of 37.0%, 37.0%, 32.0%, 17.0%
and 17.0%, respectively, in each of the periods shown. All prepayment and
liability repricing assumptions are the most recent supplied by the FHLB of
Des Moines, Iowa, based on a model for the quarter ended December 31, 1997.
The effect of these assumptions is to quantify the dollar amount of
items that are interest-sensitive and can be repriced within each of the
periods specified. Such repricing can occur in one of three ways: (1) the rate
of interest to be paid on an asset or liability may adjust periodically on the
basis of an index, (2) an asset or liability such as a mortgage loan may
amortize, permitting reinvestment of cash flows at the then-prevailing
interest rates, or (3) an asset or liability may mature, at which time the
proceeds can be reinvested at current market rates.
11
<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, 1997 on
the basis of the factors and assumptions set forth above.
<TABLE>
<CAPTION>
Maturing or Repricing
-------------------------------------------------
0-3 Months 4-12 Months
----------------------- ----------------------
Amount Rate Amount Rate
------------ -------- ----------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Fixed-rate one- to four-family (including
mortgage-backed securities), commercial/multi-
family real estate and construction loans...... $ 3,594 7.01% $ 9,898 7.26%
Adjustable-rate one- to four-family (including
mortgage-backed securities), commercial/multi-
family real estate and construction loans....... 8,623 7.79 18,124 7.97
Consumer and other loans.......................... 965 8.35 2,793 8.35
Investment securities and other................... 3,048 6.29 2,456 5.44
------- ----- --------- -----
Total interest-earning assets................ 16,230 7.37 33,271 7.60
------- ----- --------- -----
Savings deposits, money market deposit and NOW
accounts, excluding non-interest bearing
checking accounts............................... 15,310 3.61 2,852 1.70
Time deposits..................................... 16,991 5.47 29,381 5.44
------- ----- --------- -----
Total interest-bearing deposits................. 32,301 4.59 32,233 5.11
FHLB advances..................................... 3,500 5.79 11,000 5.45
------- ----- --------- -----
Total interest-bearing liabilities........... 35,801 4.71 43,233 5.20
------- ----- --------- -----
Interest-earning assets less interest-bearing
liabilities..................................... $(19,571) $ (9,962)
========= ========
Cumulative interest rate sensitivity gap.......... $(19,571) $(29,533)
========= ========
Cumulative interest rate sensitivity gap as a
percentage of totalassets at December 31, 1997.. (13.2)% (20.0)%
===== =====
Cumulative interest rate sensitivity gap as a
percentage of total assets at December 31, 1996.. (9.2)% (10.9)%
==== =====
Cumulative interest rate sensitivity gap as a
percentage of total assets at December 31, 1995.. 7.1% 1.9%
=== ===
Cumulative interest rate sensitivity gap as a
percentage of total assets at December 31, 1994.. (.5)% 9.1%
=== ===
Cumulative interest rate sensitivity gap as a
percentage of total assets at December 31, 1993.. 4.0% 1.8%
=== ===
</TABLE>
<PAGE>
[RESTUBBED FROM TABLE ABOVE]
<TABLE>
<CAPTION>
Maturing or Repricing
-----------------------------------------------------
Over 1-3 Over 3-5 Over
Years Years 5 Years Total
-------- ------- ------- --------
Amount Amount Amount Amount
-------- ------- ------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Fixed-rate one- to four-family (including
mortgage-backed securities), commercial/multi-
family real estate and construction loans...... $ 16,080 $ 7,510 $12,544 $ 49,626
Adjustable-rate one- to four-family (including
mortgage-backed securities), commercial/multi-
family real estate and construction loans....... 13,545 4,776 7,569 52,637
Consumer and other loans.......................... 5,267 2,963 2,292 14,280
Investment securities and other................... 1,222 2,233 15,572 24,531
-------- ------- ------- --------
Total interest-earning assets................ 36,114 17,482 37,977 141,074
-------- ------- ------- --------
Savings deposits, money market deposit and NOW
accounts, excluding non-interest bearing
checking accounts............................... 5,903 2,487 3,369 29,921
Time deposits..................................... 27,046 772 518 74,708
-------- ------- ------- --------
Total interest-bearing deposits................. 32,949 3,259 3,887 104,629
FHLB advances..................................... 10,000 4,000 2,000 30,500
-------- ------- ------- --------
Total interest-bearing liabilities........... 42,949 7,259 5,887 135,129
-------- ------- ------- --------
Interest-earning assets less interest-bearing
liabilities..................................... $ (6,835) $ 10,223 $32,090 $5,945
========= ======== ======= ======
Cumulative interest rate sensitivity gap.......... $ (36,368) $(26,145) $ 5,945
========= ======== =======
Cumulative interest rate sensitivity gap as a
percentage of totalassets at December 31, 1997.. (24.6)% (17.7)% 4.0%
===== ===== ===
Cumulative interest rate sensitivity gap as a
percentage of total assets at December 31, 1996..
Cumulative interest rate sensitivity gap as a
percentage of total assets at December 31, 1995..
Cumulative interest rate sensitivity gap as a
percentage of total assets at December 31, 1994..
Cumulative interest rate sensitivity gap as a
percentage of total assets at December 31, 1993..
</TABLE>
12
<PAGE>
The shift in the Association's one-year gap from a negative 10.9% at
December 31, 1996 to a negative 20.0% at December 31, 1997 was primarily due
to the increase in the amount of FHLB advances maturing or repricing in one
year or less to $14.5 million in 1997 from $1.0 million in 1996.
Office of Thrift Supervision ("OTS") regulations currently provide a
Net Portfolio Value ("NPV") approach to the quantification of interest rate
risk. In essence, this approach calculates the difference between the present
value of expected cash flows from assets and the present value of expected
cash flows from liabilities, as well as cash flows from off balance sheet
contracts. Under OTS regulations, an institution's "normal" level of interest
rate risk in the event of this assumed change in interest rates is a decrease
in the institution's NPV in an amount not exceeding 2% of the present value of
its assets. Beginning July 1, 1994, thrift institutions with greater than
"normal" interest rate exposure must take a deduction from their total capital
available to meet their risk-based capital requirement. The amount of that
deduction is one-half of the difference between (a) the institution's actual
calculated exposure to the 200 basis point interest rate increase or decrease
(whichever results in the greater pro forma decrease in NPV) and (b) its
"normal" level of exposure which is 2% of the present value of its assets. Any
savings association with less than $300 million in assets and a total capital
ratio in excess of 12%, such as Midwest Federal, is exempt from this
requirement unless the OTS determines otherwise. At December 31, 1997, 2.0% of
the present value of the Association's assets was approximately $3.0 million,
which was less than $3.4 million, the amount of the greatest decrease in NPV
resulting from a 200 basis point change in interest rates. As a result, the
Association would have been required to make a $0.2 million deduction from
total capital in calculating its risk-based capital requirement, had the
requirement been applicable to the Association.
The Board of Directors dictates acceptable limits on the amount of
change in NPV given certain changes in interest rates. Presented below, as of
December 31, 1997, is an analysis of the Association's interest rate risk as
measured by changes in NPV for instantaneous and sustained parallel shifts in
the yield curve, in 100 basis point increments, up and down 400 basis points.
Assumptions used in calculating the amounts in this table are OTS assumptions.
Change In Net Portfolio Value
Interest Rate ---------------------------------------------------
(Basis Points) $ Amount $ Change % Change
-------------- ------------ ------------ ------------
(Dollars in Thousands)
+400 $5,994 $(7,791) (57)%
+300 8,226 (5,559) (40)
+200 10,354 (3,431) (25)
+100 12,249 (1,536) (11)
0 13,785 --- ---
-100 14,799 1,013 7
-200 15,458 1,673 12
-300 16,227 2,442 18
-400 17,512 3,727 27
Management's policy involves structuring the Company's assets and
liabilities to accept modest exposure to interest rate risk. In the event of a
400 basis point change in interest rates, the Association would experience a
27% increase in NPV in a declining rate environment and a 57% decrease in a
rising rate environment. During periods of rising rates, the value of monetary
assets and monetary liabilities decline. Conversely, during periods of falling
rates, the value of monetary assets and liabilities increase. However, the
amount of change in value of specific assets and liabilities due to changes in
rates is not the same in a rising rate environment as in a falling rate
environment (i.e., the amount of value increase under a specific rate decline
may not equal the amount of value decrease under an identical upward rate
movement due to embedded options in loan contracts and callable securities).
13
<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 gap
table or the OTS model. Further, in the event of a change in interest rates,
prepayments and early withdrawal levels would likely deviate significantly
from those assumed in calculating the tables. Finally, the ability of many
borrowers to service their debt may decrease in the event of an interest rate
increase. As a result, the actual effect of changing interest rates may differ
from that presented in the foregoing tables.
Liquidity and Capital Resources
The Company's principal sources of funds are deposits, borrowings
(including FHLB advances), amortization and prepayment of loan principal
(including mortgage-backed securities), sales or maturities of investment
securities, mortgage-backed securities and short-term investments and
operations. While scheduled loan repayments and maturing investments are
relatively predictable, deposit flows and early loan repayments are more
influenced by interest rates, general economic conditions, competition, and,
most recently, the restructuring of the thrift industry. The Company generally
manages the pricing of its deposits to maintain a steady deposit balance, but
has from time to time decided not to pay deposit rates that are as high as
those of its competitors, and, when necessary, to supplement deposits with
longer term and/or less expensive alternative sources of funds.
Federal regulations require the Association to maintain a minimum
level of liquid assets. The required percentage has varied from time to time
based upon economic conditions and savings flows and is currently 4% of net
withdrawable savings deposits and borrowings payable on demand or in one year
or less during the preceding calendar quarter. Liquid assets for purposes of
this ratio include cash, certain time deposits, U.S. Government, government
agency and corporate securities and other obligations generally having
remaining maturities of less than five years. The Association has historically
maintained its liquidity ratio at levels in excess of those required. For
December 1997, the Association's liquidity ratio was 8.1%, compared to 9.8%
for December 1996. The decrease in the Association's liquidity ratio was the
result, in part, of the investment of cash flow into assets which have terms
to maturity or balloon payments longer than five years, in accordance with the
Association's asset/liability management policy based on the current interest
rate environment. It is management's intent to continue its efforts to deploy
excess liquidity into mortgage and other loans and participations; however,
the success of such efforts is dependent upon the availability of favorable
lending opportunities.
During fiscal 1997, the primary source of cash from operating
activities was net income, and the net cash provided by operating activities
was $1.3 million.
The primary investing activities of the Company are lending and
purchasing loans, mortgage-backed securities and investment securities. Loan
originations, net of principal repayments, used $3.5 million during the year
ended December 31, 1997. Loan purchases used $7.0 million during the year
ended December 31, 1997. There were $3.5 million mortgage-backed securities
purchased, while mortgage-backed securities principal repayments totaled $6.5
million. Purchases of investment securities of $14.7 million were partially
offset by maturities of $9.5 million during the year ended December 31, 1997.
If general interest rates decline, the Company would expect to experience an
increase in prepayments, particularly in its investment securities with call
option features, adjustable-rate mortgage loans and adjustable-rate
mortgage-backed securities. The increased funds from this source could not
necessarily be re-invested at yields and on terms which would allow the
Company to maintain the net interest margins the Company has experienced
during recent periods.
The primary financing activity of the Company is deposits. For the
year ended December 31, 1997 deposits grew by $3.4 million. The Company also
utilizes advances from the FHLB, and increased such advances by $6.5 million
in 1997.
14
<PAGE>
Liquidity management is both a daily and long-term responsibility of
management. The Company adjusts its investments in liquid assets based upon
management's assessment of (i) expected loan demand, (ii) the projected amount
of loans and mortgage-backed securities held for sale by the Company, (iii)
expected deposit flows, (iv) yields available on interest-bearing deposits,
and (v) the objective of its asset/liability management program. Excess
liquidity is invested generally in interest-bearing overnight deposits and
other short-term government and agency obligations. If the Company requires
funds beyond its ability to generate them internally, it has additional
borrowing capacity with the FHLB.
The Company anticipates that it will have sufficient funds available
to meet current loan commitments. At December 31, 1997 the Company had
outstanding commitments to extend credit and purchase loans which amounted to
$2.6 million and no commitments to sell loans or participations in loans. See
Note 3 of the Notes to Consolidated Financial Statements.
Certificates of deposit scheduled to mature in one year or less at
December 31, 1997 totaled approximately $46.4 million. Based on the level of
retention of such deposits in the recent past, management believes that a
significant portion of such deposits will remain with the Company. At December
31, 1997, the Company had $30.5 million advances outstanding from the FHLB of
Des Moines.
At December 31, 1997, the Company's stockholders' equity totaled
$10.7 million, or 7.23% of assets. During the past several years, the capital
requirements applicable to all savings institutions, including the
Association, have been substantially increased. At December 31, 1997, the
Association was in compliance with all three of its regulatory capital
requirements.
At December 31, 1997, the Association had tangible and core capital
of $9,414,000, or 6.42% of total adjusted assets which exceeded the regulatory
requirements of 1.5% and 3.0%, respectively, by $7,215,000 and $5,015,000,
respectively. The risk-based capital requirement is currently 8% of
risk-weighted assets. As of December 31, 1997, the Association had
risk-weighted assets of $67,364,000, a risk-based requirement of $5,389,000
and risk-based capital of $9,982,000, or $14.82%, which exceeds the
requirement by $4,593,000.
Tangible Core Risk-based
Capital Capital Capital
------- ------- -------
(Dollars In Thousands)
Association's capital ................. $9,414 $9,414 $9,414
Additional capital - general allowances -- -- 568
------ ------ ------
Regulatory capital .................... 9,414 9,414 9,982
Minimum capital requirement ........... 2,199 4,399 5,389
------ ------ ------
Excess regulatory capital ............. $7,215 $5,015 $4,593
====== ====== ======
The unrealized gain on investments available for sale, which is a
component of stockholders' equity, is a result of the implementation of
Statement No. 115 of the Financial Accounting Standards Board. At December 31,
1997, the unrealized gain of $373,000, up from $52,000 at December 31, 1996,
consisted primarily of the net unrealized market gain, net of tax, on certain
GNMA mortgage-backed securities, U.S. Agency securities, municipal bond
securities and marketable equity securities which have been identified as
available for sale by management.
Impact of Inflation and Changing Prices
The Consolidated Financial Statements and Notes thereto presented
herein have been prepared in accordance with generally accepted accounting
principles, which require the measurement of financial position and operating
results in terms of historical dollars without considering the change in the
relative purchasing power of money over time due to inflation. The impact of
inflation is reflected in the increased cost of the Company's operations.
Unlike most industrial companies, nearly all the assets and liabilities of the
Company are monetary. As a result, interest rates have a greater impact on the
Company's performance than do the effects of general levels of inflation.
Interest rates do not necessarily move in the same direction or to the same
extent as the price of goods and services.
15
<PAGE>
Effect of New Accounting Standards
SFAS 125, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities," was effective for the Company for the
year beginning January 1, 1997, and did not have a material effect on the
financial position and results of operations, nor did the adoption require
additional capital resources.
SFAS 128, "Earnings Per Share," was adopted by the Company effective
December 31, 1997. This statement replaces the primary earnings per share
(EPS) disclosure with basic and diluted EPS disclosures to simplify the
calculation and improve international comparability. The adoption of SFAS 128
did not have a material effect on the financial position and results of
operations, nor did the adoption require additional capital resources.
SFAS 130, "Reporting Comprehensive Income," will be effective for the
Company for the year beginning January 1, 1998, and establishes the standards
for the reporting and display of comprehensive income in the financial
statements. Comprehensive income represents net earnings and certain amounts
reported directly in stockholders' equity, such as the net unrealized gain or
loss on available-for-sale securities.
16
<PAGE>
MIDWEST BANCSHARES, INC.
AND SUBSIDIARIES
Consolidated Financial Statements
December 31, 1997 and 1996
(With Independent Auditors' Report Thereon)
<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, 1997 and 1996, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the years in the three-year period ended December 31, 1997.
These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Midwest
Bancshares, Inc. and subsidiaries as of December 31, 1997 and 1996, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1997, in conformity with generally
accepted accounting principles.
KPMG Peat Marwick LLP
Des Moines, Iowa
January 9, 1998
17
<PAGE>
MIDWEST BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
---- ----
Assets
<S> <C> <C>
Cash and cash equivalents $ 2,523,983 3,998,163
Securities available for sale (note 2) 27,934,974 23,783,968
Securities held to maturity (estimated fair
value of $20,055,364 and $21,763,670) (notes 2 and 7) 19,839,678 21,810,592
Loans receivable, net (notes 3, 4, and 9) 91,276,434 81,225,412
Real estate acquired through foreclosure 314,583 12,000
Federal Home Loan Bank (FHLB) stock, at cost 1,959,700 1,959,700
Office property and equipment, net (note 5) 2,560,749 2,446,983
Accrued interest receivable (note 6) 1,203,471 1,007,547
Other assets 110,869 180,908
------------- -------------
Total assets $ 147,724,441 136,425,273
============= =============
Liabilities and Stockholders' Equity
Liabilities:
Deposits (note 7) $ 105,278,292 101,917,765
Advances from FHLB (note 8) 30,500,000 24,000,000
Advances from borrowers for taxes and insurance 387,881 378,435
Accrued interest payable 80,175 73,743
Accrued expenses and other liabilities 802,632 455,082
------------- -------------
Total liabilities 137,048,980 126,825,025
------------- -------------
Stockholders' equity:
Serial preferred stock, $.01 par value;
authorized 500,000 shares; none issued -- --
Common stock, $.01 par value; 2,000,000 shares authorized;
1,020,762 shares issued and outstanding in 1997 and
455,000 shares issued and outstanding in 1996 10,208 4,550
Additional paid-in capital 1,530,430 4,037,058
Retained earnings, substantially restricted (notes 11 and 15) 8,821,782 7,836,808
Treasury stock, at cost; none in 1997 and 105,621 shares in 1996 -- (2,210,642)
Employee Stock Ownership Plan (ESOP) (note 10) (60,000) (120,000)
Unrealized appreciation on securities available for sale, net of
taxes on income of $222,000 in 1997 and $31,000 in 1996 373,041 52,474
------------- -------------
Total stockholders' equity 10,675,461 9,600,248
Contingencies (note 15)
------------- -------------
Total liabilities and stockholders' equity $ 147,724,441 136,425,273
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
18
<PAGE>
MIDWEST BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended December 31, 1997, 1996, and 1995
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Interest income:
Loans receivable $ 7,074,649 6,444,056 5,798,577
Securities available for sale 2,073,271 1,902,576 655,606
Securities held to maturity 1,388,444 1,609,591 2,816,738
Deposits in other financial institutions 75,365 68,717 162,756
Other interest-earning assets 138,271 137,496 139,452
----------- ----------- -----------
10,750,000 10,162,436 9,573,129
----------- ----------- -----------
Interest expense:
Deposits (note 7) 5,039,036 4,726,637 4,736,154
Advances from FHLB and other borrowings 1,681,261 1,516,060 977,375
----------- ----------- -----------
6,720,297 6,242,697 5,713,529
----------- ----------- -----------
Net interest income 4,029,703 3,919,739 3,859,600
Provision for losses on loans (note 4) 48,000 47,972 48,000
----------- ----------- -----------
Net interest income after provision for losses on loans 3,981,703 3,871,767 3,811,600
----------- ----------- -----------
Noninterest income:
Fees and service charges 282,249 179,326 171,378
Gain on sale of deposits (note 16) -- -- 493,345
Gain on sale of securities available for sale (note 2) 220,223 29,213 75,816
Gain on sale of mortgage-backed securities -- 15,950 --
held to maturity (note 2)
Other 51,214 124,531 107,091
----------- ----------- -----------
553,686 349,020 847,630
----------- ----------- -----------
Noninterest expenses:
Compensation and benefits (note 10) 1,285,960 1,181,748 1,170,425
Office property and equipment 364,804 349,156 337,615
Deposit insurance premiums 53,687 236,989 238,777
Deposit insurance special assessment (note 12) -- 670,861 --
Data processing 164,087 164,939 169,201
Other 712,937 613,782 712,917
----------- ----------- -----------
2,581,475 3,217,475 2,628,935
----------- ----------- -----------
Earnings before taxes on income 1,953,914 1,003,312 2,030,295
Taxes on income (note 9) 689,000 373,654 680,452
----------- ----------- -----------
Net earnings $ 1,264,914 629,658 1,349,843
=========== =========== ===========
Earnings per share - basic $ 1.23 0.59 1.20
=========== =========== ===========
Earnings per share - diluted $ 1.14 0.56 1.14
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
19
<PAGE>
MIDWEST BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years ended December 31, 1997, 1996, and 1995
<TABLE>
<CAPTION>
Additional
Common paid-in Retained Treasury
stock capital earnings stock
----- ------- -------- -----
<S> <C> <C> <C> <C>
Balance at December 31, 1994 $ 4,550 4,037,058 6,237,510 (806,488)
Net earnings -- -- 1,349,843 --
Dividends declared ($.167 per share*) -- -- (184,291) --
Treasury stock acquired -- -- -- (893,045)
ESOP loan payment -- -- -- --
Amortization of recognition
and retention plan -- -- -- --
Net change in unrealized appreciation
on securities available for sale -- -- -- --
----------- ----------- ----------- -----------
Balance at December 31, 1995 4,550 4,037,058 7,403,062 (1,699,533)
Net earnings -- -- 629,658 --
Dividends declared ($.187 per share*) -- -- (195,912) --
Treasury stock acquired -- -- -- (511,109)
ESOP loan payment -- -- -- --
Amortization of recognition
and retention plan -- -- -- --
Net change in unrealized appreciation
on securities available for sale -- -- -- --
----------- ----------- ----------- -----------
Balance at December 31, 1996 4,550 4,037,058 7,836,808 (2,210,642)
Net earnings -- -- 1,264,914 --
Dividends declared ($.22 per share*) -- -- (225,624) --
Treasury stock acquired -- -- -- (393,659)
ESOP loan payment -- -- -- --
Issuance of shares of common stock
under the stock option plan (note 10) 28 26,237 (54,316) 77,066
3-for-1 stock split effected in the
form of a 200% stock dividend (note 11 ) 5,630 (2,532,865) -- 2,527,235
Net change in unrealized appreciation
on securities available for sale -- -- -- --
----------- ----------- ----------- -----------
Balance at December 31, 1997 $ 10,208 1,530,430 8,821,782 --
=========== =========== =========== ===========
</TABLE>
<PAGE>
[RESTUBBED FROM TABLE ABOVE]
<TABLE>
<CAPTION>
Employee
Stock
Ownership Recognition Net unrealized
Plan and appreciation on
borrowing retention securities available
guarantee plan for sale Total
--------- ---- -------- -----
<S> <C> <C> <C> <C>
Balance at December 31, 1994 (230,000) (26,720) 66,955 9,282,865
Net earnings -- -- -- 1,349,843
Dividends declared ($.167 per share*) -- -- -- (184,291)
Treasury stock acquired -- -- -- (893,045)
ESOP loan payment 50,000 -- -- 50,000
Amortization of recognition
and retention plan -- 16,995 -- 16,995
Net change in unrealized appreciation
on securities available for sale -- -- 273,571 273,571
----------- ----------- ----------- -----------
Balance at December 31, 1995 (180,000) (9,725) 340,526 9,895,938
Net earnings -- -- -- 629,658
Dividends declared ($.187 per share*) -- -- -- (195,912)
Treasury stock acquired -- -- -- (511,109)
ESOP loan payment 60,000 -- -- 60,000
Amortization of recognition
and retention plan -- 9,725 -- 9,725
Net change in unrealized appreciation
on securities available for sale -- -- (288,052) (288,052)
----------- ----------- ----------- -----------
Balance at December 31, 1996 (120,000) -- 52,474 9,600,248
Net earnings -- -- -- 1,264,914
Dividends declared ($.22 per share*) -- -- -- (225,624)
Treasury stock acquired -- -- -- (393,659)
ESOP loan payment 60,000 -- -- 60,000
Issuance of shares of common stock
under the stock option plan (note 10) -- -- -- 49,015
3-for-1 stock split effected in the
form of a 200% stock dividend (note 11 ) -- -- -- --
Net change in unrealized appreciation
on securities available for sale -- -- 320,567 320,567
----------- ----------- ----------- -----------
Balance at December 31, 1997 (60,000) -- 373,041 10,675,461
=========== =========== =========== ===========
</TABLE>
* Reflects the 3-for-1 stock split effected in the form of a 200 percent
dividend in November 1997.
See accompanying notes to consolidated financial statements.
20
<PAGE>
MIDWEST BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 1997, 1996, and 1995
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings $ 1,264,914 629,658 1,349,843
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Provision for losses on loans 48,000 47,972 48,000
Proceeds from sale of loans originated for resale -- -- 128,243
Disbursements on loans originated for resale -- -- (95,143)
Depreciation 161,250 144,301 127,451
Provision for deferred taxes 96,000 24,000 7,000
Gain on sale of deposits -- -- (493,345)
Gain on sale of securities available for sale (220,223) (29,213) (75,816)
Gain on sale of securities held to maturity -- (15,950) --
Amortization of recognition and retention plan benefits -- 9,725 16,995
ESOP expense 56,482 53,938 39,058
Amortization of premiums and discounts (25,496) 76,778 146,825
FHLB stock dividend -- -- (38,700)
Increase in accrued interest receivable (195,924) (133,035) (71,523)
(Increase) decrease in other assets (9,961) 90,050 (91,214)
Increase in accrued interest payable 6,432 2,236 42,027
Increase (decrease) in accrued expenses and other liabilities 160,229 (194,335) 169,567
------------ ------------ ------------
Net cash provided by operating activities 1,341,703 706,125 1,209,268
------------ ------------ ------------
Cash flows from investing activities:
Purchase of securities (14,680,737) (5,568,000) (15,488,160)
Proceeds from maturities of securities 9,490,000 7,543,478 11,000,000
Proceeds from sale of securities available for sale 798,473 550,239 285,433
Proceeds from sale of securities held to maturity -- 780,407 --
Loans purchased (6,955,215) (5,555,413) (4,002,260)
Purchase of mortgage-backed securities (3,484,096) (4,051,131) --
Repayments of principal on mortgage-backed securities 6,464,986 5,862,203 5,344,786
(Increase) decrease in loans receivable (3,505,057) (1,800,202) 132,800
Proceeds from sale of real estate owned, net 47,235 155,042 398,621
Purchase of office property and equipment (275,016) (276,470) (265,261)
------------ ------------ ------------
Net cash used in investing activities (12,099,427) (2,359,847) (2,594,041)
------------ ------------ ------------
Cash flows from financing activities:
Payment on sale of deposits, net -- -- (7,279,871)
Increase in deposits 3,360,527 583,328 2,148,772
Proceeds from advances from FHLB 8,500,000 8,000,000 6,500,000
Repayment of advances from FHLB (2,000,000) (4,500,000) --
Net increase (decrease) in advances from
borrowers for taxes and insurance 9,446 (33,992) (73,585)
Treasury stock acquired (393,659) (511,109) (893,045)
Stock options exercised 24,015 -- --
Payment of cash dividends (216,785) (191,453) (185,520)
------------ ------------ ------------
Net cash provided by financing activities 9,283,544 3,346,774 216,751
------------ ------------ ------------
Net (decrease) increase in cash and cash equivalents (1,474,180) 1,693,052 (1,168,022)
Cash and cash equivalents at beginning of year 3,998,163 2,305,111 3,473,133
------------ ------------ ------------
Cash and cash equivalents at end of year $ 2,523,983 3,998,163 2,305,111
============ ============ ============
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 6,713,865 6,240,461 5,671,502
Taxes on income 485,140 531,654 558,866
Transfers from loans to real estate acquired through foreclosure 349,818 134,098 154,608
Transfers of mortgage-backed securities to available for sale -- -- 3,864,506
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
21
<PAGE>
MIDWEST BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1997 and 1996
(1) Summary of Significant Accounting Policies
Description of Business
Midwest Bancshares, Inc. (the Company or Parent Company) is a Delaware
corporation operating as a savings and loan holding company. The
Company owns all of the outstanding stock of Midwest Federal
Savings and Loan Association of Eastern Iowa (the Association).
The Association serves Des Moines, Lee, and Louisa Counties in
southeastern Iowa through its five retail banking offices located
in Burlington, Wapello, and Ft. Madison, Iowa. The Association is
primarily engaged in attracting retail deposits from the general
public and investing those funds in first mortgages on
owner-occupied, single-family residential loans and mortgage-backed
securities. Midwest Financial Products, Inc., a wholly owned
subsidiary of the Association, is engaged in the marketing of
financial products.
Principles of Consolidation
The consolidated financial statements include the accounts of Midwest
Bancshares, Inc. and its wholly owned subsidiary; Midwest Federal
Savings and Loan Association of Eastern Iowa and its subsidiary;
Midwest Financial Products, Inc. All material intercompany accounts
and transactions have been eliminated.
The consolidated financial statements have been prepared in accordance
with generally accepted accounting principles. In preparing such
financial statements, management is required to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities as
of the date of the balance sheet and revenues and expenses for the
period. Actual results could differ significantly from those
estimates. Material estimates that are particularly susceptible to
significant change relate to the determination of the allowance for
loan losses.
Regulatory Capital
The Association is required by the Office of Thrift Supervision (OTS)
to maintain prescribed levels of regulatory capital. At December
31, 1997, the Association met the requirements, and management
anticipates meeting the requirements at December 31, 1998 (see note
11).
Cash and Cash Equivalents
For purposes of reporting cash flows, the Company includes cash and due
from other financial institutions and interest-bearing deposits
with original maturities of three months or less in cash and cash
equivalents. Amounts of interest-bearing deposits included as cash
equivalents at December 31, 1997 and 1996, were $1,088,237 and
$3,126,659, respectively.
22
<PAGE>
MIDWEST BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(1) Summary of Significant Accounting Policies, Continued
Earnings Per Share
Basic earnings per share amounts are computed by dividing net income by
the weighted average number of common shares outstanding during the
year. Diluted earnings per share amounts are computed by dividing
net income by the weighted average number of shares and all
dilutive potential shares outstanding during the year. As further
discussed in note 11, the Company declared a 3-for-1 stock split
effected in the form of a stock dividend. The average number of
shares and dilutive potential shares have been restated for the
stock split. The following information was used in the computation
of earnings per share on both a basic and diluted basis for the
years ended December 31, 1997, 1996, and 1995.
1997 1996 1995
---- ---- ----
Basic EPS Computation:
Numerator -
Net income $1,264,914 629,658 1,349,843
Denominator -
Weighted average
shares outstanding 1,032,310 1,061,442 1,128,891
---------- ---------- ----------
Basic EPS $ 1.23 0.59 1.20
========== ========== ==========
Diluted EPS Calculation:
Numerator -
Net income $1,264,914 629,658 1,349,843
---------- ---------- ----------
Denominator:
Weighted average
shares outstanding 1,032,310 1,061,442 1,128,891
Stock options 75,631 62,941 59,127
---------- ---------- ----------
1,107,941 1,124,383 1,188,018
---------- ---------- ----------
Diluted EPS $ 1.14 0.56 1.14
========== ========== ==========
Securities
The Company's method of classifying debt securities is based on the
intended holding period. Securities which may be sold prior to
maturity to meet liquidity needs, to respond to market changes, or
to adjust the asset-liability position are classified as available
for sale. Securities which the Company intends to hold to maturity
are classified as held to maturity.
23
<PAGE>
MIDWEST BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(1) Summary of Significant Accounting Policies, Continued
Securities, Continued
Securities available for sale are recorded at fair value. The aggregate
unrealized gains or losses, net of the effect of taxes on income
are recorded as a component of stockholders' equity. Securities for
which the Company has the positive intent and ability to hold to
maturity are reported at cost, adjusted for amortization of premium
or accretion of discount, over the term of the security using the
interest method. Original issue discounts on short-term securities
are accreted as accrued interest receivable over the lives of such
securities.
Mortgage-backed securities for which the Company has the positive
intent and ability to hold to maturity are reported at amortized
cost. Premiums and discounts are amortized and accreted using the
interest method over the remaining period to contractual maturity,
adjusted for prepayments. Actual prepayment experience is
periodically reviewed, and the amortization and accretion is
adjusted accordingly. In 1996, certain mortgage-backed securities
with remaining principal balances of less than 15 percent of
original purchase amounts were sold (see note 2).
Gain or loss on sale is recognized in the statement of operations using
the specific identification method.
Allowances for Losses on Loans and Real Estate
The allowance for losses on loans is increased by charges to operations
and decreased by net charge-off and is maintained at an amount
considered adequate to provide for such losses. The allowance for
losses on loans is based on management's periodic evaluation of the
loan portfolio and reflects an amount that, in management's
opinion, is adequate to absorb losses in the existing portfolio. In
evaluating the portfolio, management takes into consideration
numerous factors, including current economic conditions, prior loan
loss experience, the composition of the loan portfolio, and
management's estimate of anticipated credit losses.
Realestate acquired is carried at the lower of cost or fair value less
estimated costs of disposition. When a property is acquired through
foreclosure or a loan is considered impaired, any excess of the
loan balance over fair value of the property plus disposition costs
is charged to the allowance for losses on loans. When circumstances
indicate additional loss on the property, a direct charge to the
provision for losses on real estate is made, and the real estate is
recorded net of such provision.
Accrued interest receivable in arrears which management believes is
doubtful of collection (generally when a loan becomes 90 days
delinquent) is charged to income. Subsequent interest income is not
recognized on such loans until collected or until determined by
management to be collectible.
Under the Company's credit policies, all nonaccrual and restructured
loans are considered to meet the definition of impaired loans. Loan
impairment is measured based on the present value of expected
future cash flows, discounted at the loan's effective interest rate
except, where more practical, at the observable market price of the
loan or the fair value of the collateral if the loan is collateral
dependent.
24
<PAGE>
MIDWEST BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(1) Summary of Significant Accounting Policies, Continued
Unearned Loan Fees and Discounts
Loan origination and commitment fees charged to borrowers and certain
direct costs related to originations are deferred and amortized
into interest income using the interest method. Direct loan
origination costs for other loans are expensed, as such costs are
not material in amount.
Premiums and discounts on loans are amortized primarily over the
expected remaining life of the related loans using the interest
method.
Concentrations of Credit Risk
The Association grants residential and commercial real estate loans and
other consumer and commercial loans, primarily in its central Iowa
market area. Although the Company has a diversified loan portfolio,
a substantial portion of its borrowers' ability to repay their
loans is dependent upon economic conditions in the Company's market
area.
Financial Instruments with Off Balance Sheet Risk
In the normal course of business to meet the financing needs of its
customers, the Company is a party to financial instruments with off
balance sheet risk, which include commitments to extend credit. The
Company's exposure to credit loss in the event of nonperformance by
the other party to the commitments to extend credit is represented
by the contractual amount of those instruments. The Company uses
the same credit policies in making commitments as it does for on
balance sheet instruments.
Commitments to extend credit are agreements to lend to a customer as
long as there are no violations of any conditions established in
the contract. Commitments generally have fixed expiration dates or
other termination clauses and may require payment of a fee. Since
some of the commitments are expected to expire without being drawn
upon, the total commitment amounts do not necessarily represent
future cash requirements (see note 3). The Company evaluates each
customer's creditworthiness on a case-by-case basis. The amount of
collateral obtained if deemed necessary by the Company upon
extension of credit is based on management's credit evaluation of
the counterparty.
Office Property and Equipment
Office property and equipment are recorded at cost, and depreciation is
provided primarily using the straight-line basis over the estimated
useful lives of the related assets, which range from 25 to 50 years
for office buildings and from 5 to 15 years for furniture,
fixtures, and equipment.
Maintenance and repairs are charged against income. Betterments are
capitalized and subsequently depreciated. The cost and accumulated
depreciation of properties retired or otherwise disposed of are
eliminated from the asset and accumulated depreciation accounts.
Related profit or loss from such transactions is credited or
charged to income.
25
<PAGE>
MIDWEST BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(1) Summary of Significant Accounting Policies, Continued
Taxes on Income
The Company files a consolidated federal income tax return. Federal
income taxes are allocated based on taxable income or loss included
in the consolidated return. For state tax purposes, the Association
files a franchise tax return. The Parent Company and the
Association's subsidiary file corporate income tax returns.
Under the asset and liability method, deferred tax assets and
liabilities are recognized for the future tax consequences
attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are
expected to be recovered or settled. The effect of a change in tax
rates on deferred tax assets and liabilities is recognized in
income in the period that includes the enactment date.
Stock Option Plan
Prior to December 31, 1995, the Company accounted for its stock option
plan (the Plan) in accordance with the provisions of Accounting
Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued
to Employees," and related interpretations. As such, compensation
expense would be recorded on the date of grant only if the current
market price of the underlying stock exceeded the exercise price.
On December 31, 1995, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based
Compensation," which permits entities to recognize as expense over
the vesting period the fair value of all stock-based compensation
awards on the date of grant. Alternatively, SFAS 123 also allows
entities to continue to apply the provisions of APB Opinion 25 and
provide pro forma net earnings and pro forma net earnings per share
disclosures for employee stock option grants made in the years
ended December 31, 1996, and future years as if the
fair-value-based method defined in SFAS 123 had been applied. The
Company has elected to continue to apply the provisions of APB
Opinion 25 and provide the pro forma disclosure provisions of SFAS
123.
Fair Value of Financial Instruments
The Company discloses the estimated fair values for its financial
instruments. Fair value estimates, methods, and assumptions are set forth
below.
Cash and Cash Equivalents
The carrying amount is a reasonable estimate of fair value.
Securities Available for Sale and Held to Maturity
The fair value of securities is estimated based on bid prices
published in financial newspapers, bid quotations received from
securities dealers, or quoted market prices of similar instruments,
adjusted for differences between the quoted instruments and the
instruments being valued.
26
<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
Loans
Fair values are estimated for portfolios of loans with similar
financial characteristics. Loans are segregated by type, such as
real estate, consumer, and commercial.
The fair value of single family residential loans is calculated by
obtaining quoted market prices of similar loans that are sold in
conjunction with securitization transactions.
The fair value of all other loans is calculated by discounting
scheduled cash flows through the estimated maturity using estimated
market discount rates that reflect the credit and interest rate
risk inherent in the loan. The estimate of maturity is based on the
Company's historical experience, with repayments for each loan
classification, modified, as required, by an estimate of the effect
of current economic and lending conditions. The effect of
nonperforming loans is considered in assessing the credit risk
inherent in the fair value estimate.
FHLB Stock
The fair value of FHLB stock is equivalent to its carrying value,
because it is redeemable at par value.
Deposits
The fair value of deposits with no stated maturity, such as
passbook; money market; noninterest-bearing checking; and checking
accounts, is estimated to be the amount payable on demand. The fair
value of certificates of deposit is based on the discounted value
of contractual cash flows. The discount rate is estimated using the
rates currently offered for deposits of similar remaining
maturities. The fair value estimates do not include the benefit
that results from the low-cost funding provided by the deposit
liabilities compared to the cost of borrowing funds in the market.
Advances from FHLB
The fair value of advances from the FHLB is calculated by
discounting the scheduled payments through maturity. The discount
rate is estimated using the rates currently offered for similar
instruments.
Limitations
Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial
instrument. Because no market exists for a significant portion of
the Company's financial instruments, fair value estimates are based
on judgments regarding future expected loss experience, current
economic conditions, risk characteristics of various financial
instruments, and other factors. These estimates are subjective in
nature and involve uncertainties and matters of significant
judgment and, therefore, cannot be determined with precision.
Changes in assumptions could significantly affect the estimates.
27
<PAGE>
MIDWEST BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(1) Summary of Significant Accounting Policies, Continued
Effect of New Financial Accounting Standards
SFAS 125, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities," was effective for the Company
for the year beginning January 1, 1997, and did not have a
material effect on the financial position and results of
operations, nor did the adoption require additional capital
resources.
SFAS 128, "Earnings Per Share," was adopted by the Company effective
December 31, 1997. This statement replaces the primary earnings
per share (EPS) disclosure with basic and diluted EPS disclosures
to simplify the calculation and improve international
comparability. The adoption of SFAS 128 did not have a material
effect on the financial position and results of operations, nor
did the adoption require additional capital resources.
SFAS 130, "Reporting Comprehensive Income," will be effective for the
Company for the year beginning January 1, 1998, and establishes
the standards for the reporting and display of comprehensive
income in the financial statements. Comprehensive income
represents net earnings and certain amounts reported directly in
stockholders' equity, such as the net unrealized gain or loss on
available-for-sale securities.
Reclassifications
Certain amounts previously reported have been reclassified to conform
with the presentation in these financial statements. These
reclassifications did not affect previously reported net income or
retained earnings.
28
<PAGE>
MIDWEST BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(2) Debt and Equity Securities
Debtand equity securities have been classified in the consolidated
balance sheets according to management's intent. The carrying
amount of securities and their approximate fair values at December
31, 1997 and 1996, follow.
Securities available for sale:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized unrealized unrealized fair
Description cost gains losses values
----------- ---- ----- ------ ------
<S> <C> <C> <C> <C>
1997:
Government National Mortgage Association
(GNMA) mortgage-backed securities $ 7,641,683 442,566 - 8,084,249
Marketable equity securities 654,030 253,750 84,030 823,750
Municipal bonds:
Due from one to five years 440,000 3,850 - 443,850
Due from five to ten years 1,605,000 18,638 - 1,623,638
Due after ten years 1,021,115 19,622 - 1,040,737
U.S. agency obligations:
Due from one to five years 2,990,163 24,865 3,778 3,011,250
Due from five to ten years 2,000,000 - 10,000 1,990,000
Due after ten years 10,987,943 1,202 71,645 10,917,500
------------ ---------- --------- -----------
$ 27,339,934 764,493 169,453 27,934,974
============ ========= ========= ===========
1996:
GNMA mortgage-backed securities $ 8,644,039 351,477 - 8,995,516
Marketable equity securities 570,750 138,750 - 709,500
U.S. agency obligations:
Due from five to ten years 2,000,000 - 23,474 1,976,526
Due after ten years 12,485,705 - 383,279 12,102,426
------------ --------- --------- -----------
$ 23,700,494 490,227 406,753 23,783,968
============ ========= ========= ===========
</TABLE>
29
<PAGE>
MIDWEST BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(2) Debt and Equity Securities, Continued
Proceeds from the sale of mortgage-backed securities amounted to
$550,239, resulting in gains of $29,213 during the year ended
December 31, 1996. There were no sales of mortgage-backed
securities, which were held available for sale, in 1997 or 1995.
Proceeds from the sale of marketable equity securities amounted to
$798,473, $-0-, and $285,433, resulting in gains of $220,223, $-0-,
and $75,816 during the three years ended December 31, 1997,
respectively.
Securities held to maturity:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized unrealized unrealized fair
Description cost gains losses value
----------- --------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
1997:
Mortgage-backed securities:
Federal Home Loan Mortgage
Corporation (FHLMC) $ 8,829,148 75,772 25,190 8,879,730
Federal National Mortgage
Association (FNMA) 8,115,716 175,497 - 8,291,213
Resolution Trust Corporation (RTC) 438,579 461 - 439,040
U.S. agency obligations -
Due in one year or less 2,456,235 - 10,854 2,445,381
------------ --------- -------- -----------
$19,839,678 251,730 36,044 20,055,364
=========== ========= ======== ===========
1996:
Mortgage-backed securities:
FHLMC $10,291,636 22,634 147,131 10,167,139
FNMA 8,502,102 103,710 2,910 8,602,902
RTC 561,121 1,018 - 562,139
U.S. agency obligations -
Due from one to five years 2,455,733 - 24,243 2,431,490
----------- --------- -------- -----------
$21,810,592 127,362 174,284 21,763,670
=========== ========= ======== ===========
</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, 1997 and 1995.
At December 31, 1997 and 1996, mortgage-backed securities were
comprised of fixed rate securities of $6,673,987 and $3,959,416,
respectively; adjustable rate securities of $4,631,763 and
$5,950,700, respectively; fixed rate seven-year balloon securities
of $2,273,558 and $2,689,272, respectively; and fixed rate
five-year balloon securities of $3,804,135 and $6,755,471,
respectively.
30
<PAGE>
MIDWEST BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(3) Loans Receivable
Loans receivable at December 31, 1997 and 1996, are summarized as
follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Real estate loans:
One- to four-family $66,549,359 63,208,484
Commercial/multi-family 11,209,675 10,363,426
Construction 817,905 827,676
----------- -----------
Total real estate loans 78,576,939 74,399,586
Consumer and other loans 14,167,194 8,932,386
----------- -----------
92,744,133 83,331,972
----------- -----------
Less:
Loans in process 835,737 1,273,281
Unearned discounts and deferred loan fees 63,962 147,279
Allowance for losses on loans 568,000 686,000
----------- -----------
1,467,699 2,106,560
----------- -----------
$91,276,434 81,225,412
=========== ===========
</TABLE>
The Company originates residential and commercial real estate loans and
other consumer and commercial loans, primarily in its Iowa market
area and adjacent counties in Illinois. In addition, the Company
purchases residential loans located in other states. At December
31, 1997, the geographic location of the Company's loan portfolio
was as follows: local market area, 85.9 percent; Wisconsin, 8.5
percent; California, 4.5 percent; and other states, 1.1 percent.
Although the Company has a diversified loan portfolio, a
substantial portion of its borrowers' ability to repay their loans
is dependent upon economic conditions in the Company's market area.
At December 31, 1997, the Association had outstanding commitments to
originate loans totaling $502,000, which included fixed rate
commitments of $274,250 at 7.80 percent weighted-average interest
rate and commitments to purchase loans totaling $410,000. The
Association also had unused lines of credit totaling $1,709,000 at
a variable rate indexed to the Bank Prime rate.
Loans on nonaccrual status and considered impaired amounted to $769,000
and $1,120,000 at December 31, 1997 and 1996, respectively. The
allowance for loan losses related to these nonaccrual loans were
$157,000 and $156,000, respectively. There were no nonaccrual loans
that were not subject to related allowances for loan losses at
December 31, 1997 and 1996. The average balances of nonaccrual
loans for the years ended December 31, 1997, 1996, and 1995, were
$885,000; $429,000; and $113,000, respectively. For the years ended
December 31, 1997, 1996, and 1995, interest income which would have
been recorded under the original terms of the loans was
approximately $79,000; $103,000; and $5,000, respectively, and
interest income actually recorded amounted to approximately
$25,000; $56,000; and $2,000, respectively.
31
<PAGE>
MIDWEST BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(3) Loans Receivable, Continued
Loancustomers of the Association include certain executive officers and
directors and their related interests and associates. All loans to
this group were made in the ordinary course of business at
prevailing terms and conditions. Such loans at December 31, 1997
and 1996, amounted to $852,861 and $692,411, respectively. During
the year ended December 31, 1997, new loans totaled $235,000 and
repayments totaled $74,550.
(4) Allowance for Losses on Loans
A summary of the allowance for losses on loans for the three years
ended December 31, 1997, follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Balance at beginning of year $686,000 676,000 650,000
Provision for losses on loans 48,000 47,972 48,000
Charge-offs (166,000) (37,972) (22,000)
-------- ---------- ----------
Balance at end of year $568,000 686,000 676,000
======== ========== ==========
</TABLE>
(5) Office Property and Equipment
The cost and accumulated depreciation of office property and equipment
at December 31, 1997 and 1996, were as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Land $ 312,320 312,320
Office buildings 2,403,081 2,403,081
Furniture, fixtures, and equipment 1,316,437 1,041,421
Vehicles 41,905 41,905
---------- ----------
4,073,743 3,798,727
Less accumulated depreciation 1,512,994 1,351,744
---------- ----------
$2,560,749 2,446,983
========== ==========
</TABLE>
(6) Accrued Interest Receivable
Accrued interest receivable at December 31, 1997 and 1996, is
summarized as follows:
1997 1996
---- ----
Loans receivable $ 768,460 622,247
Securities available for sale 305,645 243,601
Securities held to maturity 129,366 141,699
---------- ----------
$1,203,471 1,007,547
========== ==========
32
<PAGE>
MIDWEST BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(7) Deposits
Deposits at December 31, 1997 and 1996, are summarized as follows:
1997 1996
---- ----
Passbook $ 8,372,800 8,608,433
Noninterest checking 649,162 398,933
Money market investments 14,281,692 13,590,014
Regular checking 7,266,643 6,738,035
Certificates of deposit 74,707,995 72,582,350
------------ ------------
$105,278,292 101,917,765
============ ============
At December 31, 1997, the scheduled maturities of certificates of
deposit were as follows:
1998 $46,371,385
1999 19,668,053
2000 7,378,013
2001 486,816
2002 and thereafter 803,728
-----------
$74,707,995
===========
Interest expense on deposits for the three years ended December 31,
1997, is summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Passbook $ 234,586 244,988 272,603
Money market and checking 635,551 618,377 637,198
Certificates of deposit 4,168,899 3,863,272 3,826,353
---------- ---------- ----------
$5,039,036 4,726,637 4,736,154
========== ========== ==========
</TABLE>
The aggregate amount certificates of deposit with a minimum denomination
of $100,000 was approximately $4,844,000 and $3,202,000 at December
31, 1997 and 1996, respectively.
At December 31, 1997, mortgage-backed securities with carrying amounts
of $2,020,144 were pledged as collateral for deposits of
approximately $1,534,000.
33
<PAGE>
MIDWEST BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(8) Advances from FHLB
A summary at December 31, 1997 and 1996, follows:
<TABLE>
<CAPTION>
1997 1996
---------------------------------- ---------------------------------
Weighted- Weighted-
average average
Amount rate Amount rate
------ ---- ------ ----
<S> <C> <C> <C> <C>
Advance maturity (A):
Within 1 year $ 13,000,000 5.45% $ 1,000,000 5.49%
Beyond 1 year but within 5 years 14,000,000 6.09 21,000,000 5.91
Beyond 5 years 2,000,000 5.62 2,000,000 5.62
------------- -------------
29,000,000 5.77 24,000,000 5.87
Line of credit with FHLB (B) 1,500,000 Variable - Variable
-------------- ======== -------------- ========
$ 30,500,000 $ 24,000,000
============= =============
</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
maturing in March of 1998. The Bank intends to renew the
agreement at that time. The line has an interest rate which
fluctuates daily. During 1997, the interest rate ranged from
5.07 percent to 6.90 percent and at December 31, 1997, was
6.25 percent. The line is collateralized as described in (A)
above.
(9) Taxes on Income
Effective in 1996, the Association is no longer allowed the special bad
debt deduction based on 8 percent of taxable income. The
Association may, alternatively, utilize an experience method which
is based on actual net charge-offs, similar to the method allowed
for small commercial banking entities.
Taxes on income for the three years ended December 31, 1997, were
comprised as follows:
<TABLE>
<CAPTION>
1997 1996
----------------------------------------------- --------------------------------------------
Federal State Total Federal State Total
<S> <C> <C> <C> <C> <C> <C>
Current $ 524,000 69,000 593,000 306,347 43,307 349,654
Deferred 83,000 13,000 96,000 22,000 2,000 24,000
---------- -------- --------- ---------- -------- ---------
$ 607,000 82,000 689,000 328,347 45,307 373,654
========== ======== ========= ========== ======== =========
</TABLE>
<TABLE>
<CAPTION>
1995
------------------------------------------------
Federal State Total
<S> <C> <C> <C>
Current $ 585,018 88,434 673,452
Deferred 6,000 1,000 7,000
---------- --------- ---------
$ 591,018 89,434 680,452
========== ========= =========
</TABLE>
34
<PAGE>
MIDWEST BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(9) Taxes on Income, Continued
Taxes on income differ from the amounts computed by applying the federal
income tax rate of 34 percent to earnings before taxes on income for
the following reasons:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Computed "expected" tax expense $ 664,331 341,126 690,300
State income tax 54,120 29,903 59,026
Bad debt deduction -- -- (55,919)
Tax-exempt investment income (11,418) -- --
Other (18,033) 2,625 (12,955)
--------- --------- ---------
$ 689,000 373,654 680,452
========= ========= =========
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities as
of December 31, 1997 and 1996, are presented below:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses for
financial reporting purposes $ 180,000 256,000
Accrued expenses not deducted 72,000 73,000
--------- ---------
Total gross deferred tax assets 252,000 329,000
--------- ---------
Deferred tax liabilities:
Unrealized gains on securities available for sale 222,000 31,000
Office property and equipment 167,000 148,000
FHLB stock 101,000 101,000
--------- ---------
Total gross deferred tax liabilities 490,000 280,000
--------- ---------
Net deferred tax (liability) asset $(238,000) 49,000
========= =========
</TABLE>
There was no valuation allowance for deferred tax assets during the
three years ended December 31, 1997.
35
<PAGE>
MIDWEST BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(10) Employee Benefit Plans
Pension Plan
The Company is a participant in the Financial Institutions Retirement
Fund (FIRF), and substantially all of its officers and employees
are covered by the plan. FIRF does not segregate the assets,
liabilities, or costs by participating employer. According to
FIRF's administrators, as of June 30, 1997, the date of the latest
actuarial valuation, the book and market values of the fund assets
exceeded the value of vested benefits in the aggregate. In
accordance with FIRF's instructions, there were no pension
contributions in 1997, 1996, and 1995, because the plan was fully
funded.
ESOP
All employees meeting the age and service requirements are eligible to
participate in an ESOP established in September 1992. Contributions
made by the Association to the ESOP are allocated to participants
by a formula based on compensation. Participant benefits become 100
percent vested after five years of service. At December 31, 1997,
1996, and 1995, 18,000; 18,000; and 15,000 shares (all shares
amounts have been restated for the 1997 stock split discussed in
note 11), respectively, were committed to be released and 18,000;
36,000; and 51,000 shares were unallocated. The fair value on
unearned shares at December 31, 1997, 1996, and 1995, was
approximately $324,000; $325,500; and $468,000, respectively. ESOP
expense was $56,482; $53,938; and $39,058 for the years ended
December 31, 1997, 1996, and 1995, respectively.
Stock Options
The Company's stock option plan (the Plan) permits the board of
directors to grant options to purchase up to 136,500 shares of the
Company's $.01 par value common stock. The options may be granted
to directors and officers of the Company. The price at which
options may be exercised cannot be less than the fair market value
of the shares at the date the options are granted. The options are
subject to certain vesting requirements and maximum exercise
periods, as established by the board of directors.
The Company applies APB Opinion 25 in accounting for the Plan, and,
accordingly, no compensation expense has been recognized for its
stock options in the consolidated financial statements. Under SFAS
123, the Company determined compensation cost based on the fair
value of options granted in 1997 using the Black-Scholes method,
using a risk-free interest rate of approximately 6.64 percent, an
expected life of 6 years, and historical dividend rates. The pro
forma effect of the compensation cost on 1997 earnings per share
was approximately one cent.
36
<PAGE>
MIDWEST BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(10) Employee Benefit Plans, Continued
Stock Options, Continued
Changes in options outstanding and exercisable during 1997, 1996, and
1995 (as restated for the 1997 stock split discussed in note 11)
were as follows:
<TABLE>
<CAPTION>
Exercisable Outstanding Option price
options options per share
<S> <C> <C> <C>
December 31, 1994 61,425 102,375 $ 3.33
Vested 13,650 - 3.33
-------- --------
December 31, 1995 75,075 102,375 3.33
Vested 13,650 - 3.33
-------- --------
December 31, 1996 88,725 102,375 3.33
Granted - 13,650 9.08
Vested 18,204 - 3.33 - 9.08
Exercised (10,205) (10,205) 3.33
-------- --------
December 31, 1997 96,724 105,820 3.33 - 9.08
======== ========
</TABLE>
Recognition and Retention Plan
The Association has a recognition and retention plan (RRP) for certain
executive officers. The Association contributed funds to the RRP,
which acquired approximately 3 percent of shares of the common
stock of the Parent Company. The employees became fully vested in
the shares of stock during 1997. RRP expense for the years ended
December 31, 1996 and 1995 was $9,725 and $16,995, respectively;
there was no RRP expense for the year ended December 31, 1997.
37
<PAGE>
MIDWEST BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(11) Stockholders' Equity
Stock Conversion
At the time of the conversion from a mutual to a stock savings and
loan association, the Association established a liquidation account
in an amount equal to the regulatory capital as of December 31,
1991, to grant priority to eligible account holders in the event of
future liquidation. In the event of such liquidation, eligible
account holders who continue to maintain their deposit accounts
shall be entitled to receive a distribution from the liquidation
account. The total amount of the liquidation account will be
decreased as the balance of eligible account holders is reduced
subsequent to the conversion, based on an annual determination of
such balances.
Stock Split Effected in the Form of a Dividend
In October 1997, the Company declared a 3-for-1 stock split effected
in the form of a 200 percent stock dividend. The dividend was paid
out of treasury shares and authorized but unissued shares,
resulting in the issuance of 562,933 new shares and reissuance of
115,689 treasury shares on November 18, 1997 to stockholders of
record on November 4, 1997. As of December 31, 1997, there were
1,020,762 shares issued and outstanding.
Regulatory Capital Requirements
The Financial Institution Reform, Recovery, and Enforcement Act of 1989
(FIRREA), and the capital regulations of the OTS promulgated
thereunder, require institutions to have a minimum regulatory
tangible capital equal to 1.5 percent of total assets; a minimum 3
percent core capital ratio; and, after December 31, 1992, a minimum
8 percent risk-based capital ratio. These capital standards set
forth in the capital regulations must generally be no less
stringent than the capital standards applicable to national banks.
FIRREA also specifies the required ratio of housing-related assets
in order to qualify as a savings institution. The Association met
the regulatory capital requirements at December 31, 1997 and 1996.
The Federal Deposit Insurance Corporation Improvement Act of 1991
(FIDICIA) established additional capital requirements which require
regulatory action against depository institutions in one of the
undercapitalized categories defined in implementing regulations.
Institutions, such as the Association, which are defined as well
capitalized, must generally have a leverage capital (core) ratio of
at least 5 percent, a tier 1 risk-based capital ratio of at least 6
percent, and a total risk-based capital ratio of at least 10
percent. FIDICIA also provides for increased supervision by federal
regulatory agencies, increased reporting requirements for insured
depository institutions, and other changes in the legal and
regulatory environment for such institutions. The Association met
the regulatory capital requirements at December
31, 1997 and 1996.
38
<PAGE>
MIDWEST BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(11) Stockholders' Equity, Continued
Regulatory Capital Requirements, Continued
The Association's actual and required capital amounts and ratios as of
December 31, 1997, were as follows:
<TABLE>
<CAPTION>
For capital To be well capitalized
adequacy under prompt corrective
Actual purposes action provisions
--------------------- --------------------- -----------------------
Amount Percent Amount Percent Amount Percent
<S> <C> <C> <C> <C>
Tangible capital $9,414,000 6.42% $2,199,000 1.50% n/a n/a
Tier I leverage (core) capital 9,414,000 6.42 4,399,000 3.00 $7,332,000 5.00%
Risk-based capital 9,982,000 14.82 5,389,000 8.00 6,736,000 10.00
Tier I risk-based capital 9,414,000 13.97 n/a n/a 4,042,000 6.00
========== ===== ========== ==== ========== =====
</TABLE>
At December 31, 1997 and 1996, the Association had federal income tax
bad debt reserves of approximately $2,819,000 and $2,781,000,
respectively, which constitute allocations to bad debt reserves for
federal income tax purposes for which no provision for taxes on
income had been made. If such allocations are charged for other
than bad debt losses, taxable income is created to the extent of
the charges. The Association's retained earnings at December 31,
1997 and 1996, were substantially restricted because of the effect
of these tax bad debt reserves.
Dividend Restrictions
Federal regulations impose certain limitations on the payment of
dividends and other capital distributions by the Association. Under
the regulations, a savings institution, such as the Association,
that will meet the fully phased-in capital requirements (as defined
by the OTS regulations) subsequent to a capital distribution is
generally permitted to make such capital distribution without OTS
approval, subject to certain limitations and restrictions as
described in the regulations. A savings institution with total
capital in excess of current minimum capital requirements but not
in excess of the fully phased-in requirements is permitted by the
regulations to make, without OTS approval, capital distributions of
between 25 and 75 percent of its net earnings for the previous four
quarters less dividends already paid for such period. A savings
institution that fails to meet current minimum capital requirements
is prohibited from making any capital distributions without prior
approval from the OTS.
(12) Federal Deposit Insurance Corporation (FDIC) Special Assessment
On September 30, 1996, the United States Congress passed, and the
President signed, legislation that imposed a one-time assessment of
65.7 basis points on deposits insured by the Savings Association
Insurance Fund (SAIF). Substantially all of the deposits of the
Association are SAIF-insured. The Association incurred a one-time
pre-tax expense of $670,861 that is recorded in the Association's
statement of operations for the year ended December 31, 1996.
39
<PAGE>
MIDWEST BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(13) Fair Value of Financial Instruments
The estimated fair values of the Company's financial instruments at
December 31, 1997 and 1996, were as follows:
<TABLE>
<CAPTION>
1997 1996
------------------------------ -----------------------------
Carrying Fair Carrying Fair
amount value amount value
-------- ------ -------- -------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 2,523,983 2,523,983 3,998,163 3,998,163
Securities available for sale 27,934,974 27,934,974 23,783,968 23,783,968
Securities held to maturity 19,839,678 20,055,364 21,810,592 21,763,670
Loans receivable 91,276,434 92,552,734 81,225,412 81,869,104
FHLB stock 1,959,700 1,959,700 1,959,700 1,959,700
Accrued interest receivable 1,203,471 1,203,471 1,007,547 1,007,547
Financial liabilities:
Deposits 105,278,292 105,472,882 101,917,765 101,825,024
Advances from FHLB 30,500,000 30,376,708 24,000,000 23,716,947
Accrued interest payable 80,175 80,175 73,743 73,743
============ ============ ============ ============
Notional Unrealized Notional Unrealized
amount gain (loss) amount gain (loss)
-------- ---------- -------- ----------
Off balance sheet liabilities:
Commitments to extend credit $ 2,211,000 -- 543,050 --
Commitments to purchase loans 410,000 -- 767,000 --
Commitments to
purchase investments 1,110,000 -- -- --
============ ============ ============ ============
</TABLE>
40
<PAGE>
MIDWEST BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(14) Midwest Bancshares, Inc. (Parent Company Only) Financial Information
Condensed Balance Sheets
December 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Cash and cash equivalents $ 236,836 204,431
Securities available for sale 823,750 709,500
Loans receivable and related accrued interest 60,965 121,881
Investment in subsidiary 9,680,915 8,667,843
------------ ------------
Total assets $ 10,802,466 9,703,655
============ ============
Dividends payable $ 61,246 52,407
Income taxes payable (deferred and current) 65,759 51,000
Stockholders' equity:
Common stock 10,208 4,550
Additional paid-in capital 1,530,430 4,037,058
Retained earnings 8,821,782 7,836,808
Treasury stock -- (2,210,642)
ESOP (60,000) (120,000)
Unrealized gain on securities available for sale, net 373,041 52,474
------------ ------------
Total stockholders' equity 10,675,461 9,600,248
------------ ------------
Total liabilities and stockholders' equity $ 10,802,466 9,703,655
============ ============
</TABLE>
Condensed Statement of Operations
Years ended December 31, 1997, 1996, and 1995
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Gain on sale of marketable equity securities $ 220,223 -- 75,816
Interest income 11,609 16,366 24,082
Noninterest income 15,950 7,925 550
Income - equity in undistributed earnings of subsidiary 1,151,475 657,200 1,337,988
Noninterest expenses (76,375) (70,469) (84,908)
----------- ----------- -----------
Net earnings before income
tax expense (benefit) 1,322,882 611,022 1,353,528
Income tax expense (benefit) 57,968 (18,636) 3,685
----------- ----------- -----------
Net earnings $ 1,264,914 629,658 1,349,843
=========== =========== ===========
</TABLE>
41
<PAGE>
MIDWEST BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(14) Midwest Bancshares, Inc. (Parent Company Only) Financial Information,
Continued
Condensed Statements of Cash Flows
Years ended December 31, 1997, 1996, and 1995
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Operating activities:
Net earnings $ 1,264,914 629,658 1,349,843
Equity in undistributed earnings of subsidiary (1,151,475) (657,200) (1,337,988)
Gain on sale of investments (220,223) -- (75,816)
Other, net 28,675 (1,863) (1,730)
----------- ----------- -----------
Net cash used in operating activities (78,109) (29,405) (65,691)
----------- ----------- -----------
Investing activities:
Proceeds from sale of securities 798,473 -- 285,433
Purchase of securities available for sale (661,530) (570,750) --
Decrease in loans receivable 60,000 60,000 50,000
----------- ----------- -----------
Net cash provided by
(used in) investing activities 196,943 (510,750) 335,433
----------- ----------- -----------
Financing activities:
Dividends from subsidiary 500,000 1,200,000 1,050,000
Treasury stock acquired (393,659) (511,109) (893,045)
Stock options exercised 24,015 -- --
Dividends paid (216,785) (191,453) (185,520)
----------- ----------- -----------
Net cash (used in) provided by
financing activities (86,429) 497,438 (28,565)
----------- ----------- -----------
Net increase (decrease) in cash
and cash equivalents 32,405 (42,717) 241,177
Cash and cash equivalents at beginning of year 204,431 247,148 5,971
----------- ----------- -----------
Cash and cash equivalents at end of year $ 236,836 204,431 247,148
=========== =========== ===========
</TABLE>
(15) Contingencies
The Company is involved with various claims and legal actions arising
in the ordinary course of business. In the opinion of management,
the ultimate disposition of these matters will not have a material
adverse effect on the Company's consolidated financial statements.
(16) Sale of Deposits
On December 15, 1995, the Association sold the deposits of its Keokuk
branch to a local bank. The sale resulted in the Association paying
$7,279,871 to the bank and recognizing a gain of $493,345.
42
<PAGE>
MIDWEST BANCSHARES, INC.
STOCKHOLDER INFORMATION
ANNUAL MEETING
The Annual Meeting of Stockholders will be held at 1:00 p.m., on April 27,
1998, at the main offices of the Company located at 3225 Division Street,
Burlington, Iowa.
MARKET INFORMATION
The Company's stock is traded on the Nasdaq Small Cap Market tier of
the Nasdaq Stock Market under the symbol "MWBI." As of December 31, 1997, the
Company had approximately 310 stockholders of record and 1,020,762 outstanding
shares of common stock.
The table below shows the range of high and low bid prices for the
common stock as well as information regarding the Company's payment of
dividends with all such prices and dividends adjusted to reflect the
three-for-one stock split effective November 18, 1997. The bid prices do not
necessarily represent actual transactions and do not include retail markups,
markdowns or commissions. Beginning with the first quarter of 1993, the
Company has paid quarterly cash dividends to stockholders and intends to
continue paying quarterly dividends, dependent on the future earnings and
financial condition of the Company as well as other relevant factors. The
Company's ability to pay dividends is dependent on the dividend payments it
receives from its subsidiary, Midwest Federal Savings and Loan Association of
Eastern Iowa, which are subject to regulation and the Association's continued
compliance with all regulatory capital requirements. The Company is also
subject to the requirements of Delaware law, which generally limits dividends
to an amount in excess of a corporation's net assets over paid-in capital, or,
if there is no such excess, to its net profits for the current and immediately
preceding fiscal year.
Bid
------------------------- Dividends Per
Quarter Ended High Low Share Declared
------------- -------- ------- --------------
3/31/96 $8.66 $8.58 $ 0.043
6/30/96 8.66 8.58 0.043
9/30/96 8.33 8.25 0.050
12/31/96 8.83 8.50 0.050
3/31/97 10.00 8.75 0.050
6/30/97 10.67 9.33 0.050
9/30/97 13.58 10.42 0.060
12/31/97 18.37 13.50 0.060
TRANSFER AGENT STOCKHOLDER AND GENERAL INQUIRIES
First Bankers Trust Company William D. Hassel Robert D. Maschmann
1201 Broadway Midwest Bancshares, Inc. Midwest Bancshares, Inc.
Quincy, Illinois 62301 3225 Division Street 3225 Division Street
(217) 228-8000 Burlington, Iowa 52601 Burlington, Iowa 52601
(319) 754-6526 (319) 754-6526
ANNUAL AND OTHER REPORTS
The Company is required to file an annual report on Form 10-KSB for its fiscal
year ended December 31, 1997, with the Securities and Exchange Commission.
Copies of the Form 10-KSB annual report and the Company's quarterly reports
may be obtained without charge by contacting:
Thomas A. Jacobs
Midwest Bancshares, Inc.
3225 Division Street
Burlington, Iowa 52601
(319) 754-6526
43
<PAGE>
MIDWEST BANCSHARES, INC.
CORPORATE INFORMATION
CORPORATE OFFICE
3225 Division Street WEB SITE ADDRESS
Burlington, Iowa 52601 http:\\www.mwbi.com
(319) 754-6526 E-MAIL ADDRESS
[email protected]
BOARD OF DIRECTORS
Midwest Bancshares, Inc. and
Midwest Federal Savings and Loan Association of Eastern Iowa
<TABLE>
<S> <C>
Henry L. Hirsch Edward C. Whitham, Jr.
Chairman of the Board, Midwest Federal Owner, Financial Management Accounting
Savings and Loan Association of Eastern
Iowa and of counsel to Hirsch, Adams, James E. Witte
Krekel, Putnam, Cahill & Miller Supervisor, Komick Construction
William D. Hassel Robert D. Maschmann
President and Chief Executive Officer, Executive Vice President, Treasurer and
Midwest Federal Savings and Loan Chief Financial Officer, Midwest Federal
Association of Eastern Iowa Savings and Loan Association of Eastern
Iowa
James R. Walker
Shareholder, Walker & Egerton, P.C., Yuh-Fen (Boni) Lin
Accountants Clinical Dietician, Burlington
Medical Center
MIDWEST BANCSHARES, INC. OFFICERS
Henry L. Hirsch Robert D. Maschmann
Chairman of the Board Executive Vice President, Treasurer
and Chief Financial Officer
William D. Hassel
President and Chief Executive Officer Thomas A. Jacobs
Vice President and Corporate
Secretary
</TABLE>
<TABLE>
<S> <C> <C>
INDEPENDENT AUDITORS CORPORATE COUNSEL SPECIAL COUNSEL
KPMG Peat Marwick LLP Hirsch, Adams, Krekel, Silver, Freedman & Taff, L.L.P.
2500 Ruan Center Putnam, Cahill & Miller 1100 New York Avenue, N.W.
Des Moines, Iowa 50309 101 Jefferson Street Washington, D.C. 20005
2nd Floor
Burlington, Iowa 52601
</TABLE>
<PAGE>
Exhibit 21
Subsidiaries of Registrant
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
<S> <C> <C> <C>
State of
Percentage Incorporation
of or
Parent Subsidiary Ownership Organization
- ------------------- ----------------- ---------- -------------
Midwest Bancshares, Midwest Federal 100% Federal
Inc. Savings and Loan
Association of
Eastern Iowa
Midwest Federal Midwest Financial 100% Iowa
Savings and Loan Products, Inc.
Association of
Eastern Iowa
</TABLE>
The financial statements of Midwest Bancshares, Inc. are consolidated
with those of its subsidiaries.
<PAGE>
Exhibit 23
Consent of KPMG Peat Marwick LLP
<PAGE>
The Board of Directors
Mudwest Bancshares, Inc.:
We consented to incorporation by reference in the Registration Statement on
Form S-8 of Midwest Bancshares, Inc, of our report dated January 9, 1998,
relating to the consolidated balance sheets of Midwest Bancshares, Inc. and
subsidiaries as of December 31, 1997 and 1996, and the related consolidated
statements of income. changes in shareholders' equity, and cash flows for each
of the years in the three-year period ended December 31, 1997, which report
appears in the December 31, 1997, annual report on Form 10-K of Midwest
Bancshare, Inc.
KPMG Peat Marwick LLP
Des Moines, Iowa
March 11, 1998
<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, 1997 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-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 1,435,746
<INT-BEARING-DEPOSITS> 1,088,237
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 27,934,974
<INVESTMENTS-CARRYING> 19,839,678
<INVESTMENTS-MARKET> 20,055,364
<LOANS> 91,276,434
<ALLOWANCE> 568,000
<TOTAL-ASSETS> 147,724,441
<DEPOSITS> 105,278,292
<SHORT-TERM> 14,500,000
<LIABILITIES-OTHER> 1,270,688
<LONG-TERM> 16,000,000
0
0
<COMMON> 10,675,461
<OTHER-SE> 0
<TOTAL-LIABILITIES-AND-EQUITY> 147,724,441
<INTEREST-LOAN> 7,074,649
<INTEREST-INVEST> 3,675,351
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 10,750,000
<INTEREST-DEPOSIT> 5,039,036
<INTEREST-EXPENSE> 6,720,297
<INTEREST-INCOME-NET> 4,029,703
<LOAN-LOSSES> 48,000
<SECURITIES-GAINS> 220,223
<EXPENSE-OTHER> 2,581,475
<INCOME-PRETAX> 1,953,914
<INCOME-PRE-EXTRAORDINARY> 1,953,914
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,264,914
<EPS-PRIMARY> 1.23
<EPS-DILUTED> 1.14
<YIELD-ACTUAL> 2.89
<LOANS-NON> 769,000
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 686,000
<CHARGE-OFFS> 166,000
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 568,000
<ALLOWANCE-DOMESTIC> 461,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 107,000
</TABLE>
