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, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM to
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Commission file number 0-20620
MIDWEST BANCSHARES, INC.
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(Exact name of small business issuer as specified in its charter)
Delaware 42-1390587
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(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
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
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Securities Registered Pursuant to Section 12(b) of the Act:
None
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Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
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(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: $12.0 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 March 1, 1999, was $11.0 million.
(The exclusion from such amount of the market value of the shares owned by any
person shall not be deemed an admission by the registrant that such person is an
affiliate of the registrant.)
As of March 1, 1999, there were issued and outstanding 1,098,523 shares of
the Issuer's Common Stock.
Transitional Small Business Disclosure Format (check one): Yes __ No [X]
<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, 1998, the Company had total
assets of $162.3 million, deposits of $106.0 million, and stockholders' equity
of $12.0 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.
On February 2, 1999, the Company entered into an Agreement and Plan of
Merger by and between the Company and Mahaska Investment Company ("Mahaska"),
providing for the merger of the Company with Mahaska (the "Merger"). Upon
consummation of the Merger, the surviving corporation of the Merger will be
Mahaska. The Merger will be accomplished through a fixed exchange of one (1)
share of Mahaska common stock for each share of outstanding common stock of the
Company. The transaction is intended to qualify as a tax-free reorganization and
be accounted for as a pooling of interests. The transaction is expected to be
completed in the third quarter of 1999, after customary regulatory and
shareholder approvals have been received.
When used in this Form 10-KSB 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
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in the Company's market area, changes in policies by regulatory agencies,
fluctuations in interest rates, demand for loans in the Company's market area
and competition, that could cause actual results to differ materially from
historical earnings and those presently anticipated or projected. The Company
wishes to caution readers not to place undue reliance on any such
forward-looking statements which speak only as 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,
1998, the Association's net loan and mortgage-backed securities portfolio
totaled $123.5 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,
1998, the maximum amount which the Association could have lent to any one
borrower and the borrower's related entities was approximately $1.6 million. At
December 31, 1998, the Association had no loans which exceeded this amount.
At December 31, 1998, 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. This loan was prepaid in full on February
5, 1999. The second largest lending relationship with one borrower had a
principal balance of $948,000 at December 31, 1998, 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 $772,000 at December 31, 1998, 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 $588,000 at December
31, 1998, 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, 1998. At December 31, 1998, the Association had
no other loans to one borrower or group of related borrowers which had an
existing balance in excess of $500,000.
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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>
December 31,
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1998 1997 1996 1995 1994
---------------- ---------------- ---------------- ---------------- ----------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate Loans:
- ------------------
One- to four-family .............. $71,535 73.39% $66,549 71.75% $63,209 75.85% $61,839 80.03% $61,849 85.54%
Commercial/multi-family .......... 9,653 9.90 11,210 12.09 10,363 12.44 7,820 10.12 3,992 5.52
Construction or development(1) ... 1,863 1.91 818 .88 828 .99 1,151 1.49 2,342 3.24
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Total real estate loans ...... 83,051 85.20 78,577 84.72 74,400 89.28 70,810 91.64 68,183 94.30
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Consumer and Other Loans:
- -------------------------
Deposit account .................. 317 .33 306 .33 354 .43 383 .50 344 .47
Automobile ....................... 1,332 1.37 1,158 1.25 1,001 1.20 1,033 1.34 810 1.12
Home equity/home improvement ..... 6,394 6.56 5,464 5.89 4,093 4.91 3,886 5.03 2,745 3.80
Other(2) ......................... 6,380 6.54 7,239 7.81 3,484 4.18 1,155 1.49 224 .31
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Total consumer and other loans 14,423 14.80 14,167 15.28 8,932 10.72 6,457 8.36 4,123 5.70
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Total loans .................. 97,474 100.00% 92,744 100.00% 83,332 100.00% 77,267 100.00% 72,306 100.00%
====== ====== ====== ====== ======
Less:
- -----
Loans in process ................. 563 836 1,274 2,347 1,096
Deferred fees and discounts....... 83 64 147 209 216
Allowance for losses ............. 480 568 686 676 650
------- ------- ------- ------- -------
Total loans receivable, net....... $96,348 $91,276 $81,225 $74,035 $70,344
======= ======= ======= ======= =======
</TABLE>
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(1) Consists primarily of residential construction loans.
(2) Approximately $6.0 million and $7.0 million of these loans are
participations guaranteed by the Farmer's Home Administration for 1998 and
1997, respectively. See "- Consumer and Other Lending."
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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>
December 31,
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1998 1997 1996 1995 1994
----------------- ---------------- ---------------- ---------------- ----------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------- ------- ------ ------- ------ ------- ------ ------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FIXED-RATE LOANS:
Real estate:
One- to four-family .......... $34,819 35.72% $27,804 29.98% $26,595 31.91% $24,218 31.34% $25,319 35.01%
Commercial/multi-family ...... 1,567 1.61 1,285 1.38 1,230 1.48 1,522 1.97 1,603 2.22
Construction or development .. 969 .99 -- -- 65 .08 274 .36 504 .70
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Total real estate loans ... 37,355 38.32 29,089 31.36 27,890 33.47 26,014 33.67 27,426 37.93
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Consumer and other loans ..... 8,397 8.62 7,955 8.58 6,104 7.32 5,332 6.90 4,123 5.70
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Total fixed-rate loans .... 45,752 46.94 37,044 39.94 33,994 40.79 31,346 40.57 31,549 43.63
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
ADJUSTABLE-RATE LOANS:
Real estate:
One- to four-family .......... 36,716 37.67 38,745 41.78 36,614 43.94 37,621 48.69 36,530 50.52
Commercial/multi-family ...... 8,086 8.30 9,925 10.70 9,133 10.96 6,298 8.15 2,389 3.31
Construction or development .. 894 .91 818 .88 763 .92 877 1.13 1,838 2.54
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Total adjustable-rate
real estate loans ...... 45,696 46.88 49,488 53.36 46,510 55.82 44,796 57.97 40,757 56.37
Consumer and other loans ..... 6,026 6.18 6,212 6.70 2,828 3.39 1,125 1.46 -- --
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Total adjustable-rate loans 51,722 53.06 55,700 60.06 49,338 59.21 45,921 59.43 40,757 56.37
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Total loans ............... 97,474 100.00% 92,744 100.00% 83,332 100.00% 77,267 100.00% 72,306 100.00%
====== ====== ====== ====== ======
LESS:
Loans in process ............. 563 836 1,274 2,347 1,096
Deferred fees and discounts .. 83 64 147 209 216
Allowance for loan losses .... 480 568 686 676 650
------- ------- ------- ------- -------
Total loans receivable, net. $96,348 $91,276 $81,225 $74,035 $70,344
======= ======= ======= ======= =======
</TABLE>
5
<PAGE>
The following table illustrates the contractual maturity and amortization
of the Association's loan portfolio at December 31, 1998. Mortgages which have
adjustable or renegotiable interest rates are shown as repricing in the period
during which the contract is due. The schedule does not reflect the effects of
possible prepayments or enforcement of due-on-sale clauses.
<TABLE>
<CAPTION>
Real Estate
---------------------------------------------------------------
One- to four- Commercial/ Construction Consumer
Family Multi-family or Development and Other Total
------------------ ------------------- ------------------- ------------------ ------------------
Weighted Weighted Weighted Weighted Weighted
Average Average Average Average Average
Amount Rate Amount Rate Amount Rate Amount Rate Amount Rate
------ -------- ------ -------- ------ -------- ------ -------- ------ --------
(Dollars in Thousands)
Due During Year(s) Ended
December 31,
- ------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1999(1) .......... $ 3,757 7.62% $ 277 8.19% $ 49 6.99% $ 1,847 8.24% $ 5,930 7.83%
2000 ............. 4,057 7.63 301 8.19 52 6.99 2,005 8.24 6,415 7.84
2001 ............. 4,377 7.63 327 8.19 57 6.99 1,942 8.16 6,703 7.81
2002 and 2003 .... 9,818 7.64 739 8.20 125 6.99 3,361 7.93 14,043 7.73
2004 to 2008 ..... 26,496 7.64 2,473 8.20 401 6.99 5,268 7.61 34,638 7.67
2009 to 2018 ..... 21,298 7.58 5,536 8.09 680 6.98 -- -- 27,514 7.67
2019 and following 1,732 7.70 -- -- 499 6.94 -- -- 2,231 7.53
------- ------- ------- ------- -------
Total ........ $71,535 $ 9,653 $ 1,863 $14,423 $97,474
======= ======= ======= ======= =======
</TABLE>
(1) Includes demand loans, loans having no stated maturity and overdraft loans.
As of December 31, 1998, the total amount of loans due or repricing after
December 31, 1999 which had predetermined interest rates was $41.5 million,
while the total amount of loans due or repricing after such date which had
floating, adjustable or renegotiable interest rates was $50.0 million.
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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, 1998, the Association's one- to
four-family residential mortgage loans, excluding mortgage-backed securities,
totaled $71.5 million, or 73.39% 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."
Approximately 36.1% of the loans originated in 1998 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, 1998, approximately $3.3 million, or 4.6% 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.
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,
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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, 1998, the
Association had $9.7 million in commercial/multi-family real estate loans,
representing 9.90% 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, 1998, 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. This loan was prepaid in full on February 5, 1999.
The second largest lending relationship had a principal balance of $948,000
at December 31, 1998, 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 $3.4 million) and approximately 16% of the second loan (which had
an outstanding balance of approximately $2.9 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 $772,000
at December 31, 1998 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 $1.0 million)
and approximately 40% of the second loan (which had an outstanding balance
amount of approximately $0.9 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 $588,000
at December 31, 1998, 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, 1998.
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, 1998 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 1998, 1997 and 1996, the Association
purchased participations in commercial/multi-family real estate loans totaling
$0.2 million, $2.8 million and $3.4 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
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<PAGE>
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, 1998, the Association had loans to finance
the construction of single-family residences totaling $1.9 million, or 1.91% 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, 1998, the Association's consumer and other loan portfolio totaled $14.4
million, or 14.80% 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 44% of the Association's total
consumer loan portfolio at December 31, 1998. These loans are generally
originated in amounts, together with the amount of the existing first mortgage,
of up to 80% of the appraised value of the property securing the loan. The term
to maturity on such loans may be up to ten years. Other consumer loan terms vary
according to the type of collateral, length of contract and creditworthiness of
the borrower. The Association's consumer loans generally have a fixed-rate of
interest, except for the home-equity line of credit which adjusts monthly based
on the prime rate.
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 1998, 1997 and 1996, the
Association purchased FmHA participations totaling $1.0 million, $4.1 million
and $2.8 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, 1998, $89,000, or approximately 0.62% 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, 1998, mortgage-backed securities
totaled $27.1 million. At such date, $5.8 million of these mortgage-backed
securities (all of which were issued by Ginnie Mae) 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.
The Association purchases mortgage-backed securities in order to supplement
the Association's loan originations. At December 31, 1998, $3.5 million, or
13.1%, and $6.3 million, or 23.3%, of the Association's
9
<PAGE>
mortgage-backed securities carried adjustable rates of interest and balloon
maturities, respectively. Under the OTS' risk-based capital requirements, Ginnie
Mae mortgage-backed securities have a zero percent risk weighting for the risk-
based capital requirement of the OTS and Fannie Mae, Freddie Mac 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, 1998. The table does
not reflect normal monthly amortization payments or anticipated prepayments.
<TABLE>
<CAPTION>
Due in December
------------------------------------------------------------------------- 31, 1998
6 Months 6 Months 1 to 3 to 5 5 to 10 10 to 20 Over 20 Outstanding
or Less to 1 Year 3 Years Years Years Years Years Balance
------- --------- ------- ----- ----- ----- ----- -----------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Adjustable-rate mortgage-backed securities:
Federal Home Loan
Mortgage Corporation.................. $ -- $ -- $ -- $ -- $ -- $ -- $ 305 $ 305
Federal National
Mortgage Association.................. -- -- -- -- -- 1,992 915 2,907
Resolution Trust Corporation........... -- -- -- -- -- -- 337 337
---- ---- ------ ---- ------ ------- ------ -------
Total adjustable-rate............... -- -- -- -- -- 1,992 1,557 3,549
---- ---- ------ ---- ------ ------- ------ -------
Fixed-rate mortgage-backed securities:
Federal Home Loan
Mortgage Corporation.................. -- -- 1,531 -- 4,788 6,823 -- 13,142
Federal National
Mortgage Association.................. -- -- -- -- 1,050 2,166 1,463 4,679
Government National
Mortgage Corporation.................. -- -- -- -- 2,194 2,164 1,412 5,770
---- ---- ------ ---- ------ ------- ------ -------
Total fixed-rate.................... -- -- 1,531 -- 8,032 11,153 2,875 23,591
---- ---- ------ ---- ------ ------- ------ -------
Total mortgage-backed
securities.............................. $ -- $ -- $1,531 $ == $8,032 $13,145 $4,432 $27,140
===== ==== ====== ==== ====== ======= ====== =======
</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.
The Association sold no mortgage-backed securities in fiscal 1998. At
December 31, 1998, the Association had no commitments to sell loans.
The Association had no loans serviced for others as of December 31, 1998,
and $17.4 million in loans serviced by others at that date.
12
<PAGE>
The following table sets forth the loan origination, purchase, sale and
repayment activities of the Association for the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------
1998 1997 1996
-------- -------- --------
(In Thousands)
<S> <C> <C> <C>
ORIGINATIONS BY TYPE:
Adjustable-rate:
Real estate - one- to four-family ..... $ 10,409 $ 7,185 $ 6,469
- construction .......... 1,202 2,525 841
Consumer and other loans .............. 781 489 --
-------- -------- --------
Total adjustable-rate .......... 12,392 10,199 7,310
-------- -------- --------
Fixed-rate:
Real estate - one- to four-family ..... 14,809 5,979 7,445
- commercial/multi-family 468 -- --
- construction .......... 1,372 370 883
Consumer and other loans .............. 5,300 5,312 3,901
-------- -------- --------
Total fixed-rate ............... 21,949 11,661 12,229
-------- -------- --------
Total loans originated(1) ...... 34,341 21,860 19,539
-------- -------- --------
PURCHASES:
Real estate - commercial/multi-family . 180 2,841 3,434
Consumer and other loans .............. 985 4,114 2,846
Mortgage-backed securities ............ 12,023 3,484 4,051
-------- -------- --------
Total purchased ................ 13,188 10,439 10,331
-------- -------- --------
SALES:
Mortgage-backed securities ............ -- -- 1,285
-------- -------- --------
Principal repayments .................... 30,975 22,216 21,375
-------- -------- --------
Decrease in other items, net ............ (10,152) (3,553) (4,463)
-------- -------- --------
Net increase ................... $ 6,402 $ 6,530 $ 2,747
======== ======== ========
</TABLE>
- ---------------------
(1) $9,360,000, $3,122,000 and $4,104,000 of these originations for the
years ended December 31, 1998, 1997 and 1996, respectively, were to
refinance existing loans held by the Association.
13
<PAGE>
ASSET QUALITY
When a borrower fails to make a required payment on a loan, the Association
attempts to cause the delinquency to be cured by contacting the borrower. In the
case of residential loans, a late notice is sent 15 days after the due date. If
the delinquency is not cured by the 30th day, contact with the borrower is made
by phone. Additional written and verbal contacts are made with the borrower to
the extent the borrower appears to be cooperative. If not, the Association will
send a 30-day default letter and, once that period elapses, usually institutes
appropriate action to foreclose on the property. Interest income on loans at
this point is reduced by the full amount of accrued and uncollected interest. If
foreclosed, the property is sold at public auction and may be purchased by the
Association. Delinquent consumer loans are handled in a generally similar
manner, except that initial contacts are made when the payment is 10 days past
due and telephone contact begins when a loan is 25 days past due. If these
efforts fail to bring the loan current, appropriate action may be taken to
collect any loan payment that remains delinquent. The Association's procedures
for repossession and sale of consumer collateral are subject to various
requirements under Iowa consumer protection laws.
14
<PAGE>
DELINQUENT LOANS. The following table sets forth information concerning
delinquent mortgage and other loans at December 31, 1998 and 1997. 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 Total
------------------------ ------------------------ ----------------------- -----------------------
Number Amount Percent Number Amount Percent Number Amount Percent Number Amount Percent
------ ------ ------- ------ ------ ------- ------ ------ ------- ------ ------ -------
(Dollars in Thousands)
Loans delinquent for:
December 31, 1998:
- ------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
30-59 days ......... 24 $ 403 .56% 2 $ 489 5.07% 8 $ 66 .46% 34 $ 958 .98%
60-89 days ......... 4 121 .17 -- -- -- 1 16 .11 5 137 .14
90 days and over ... 6 173 .24 -- -- -- 3 7 .05 9 180 .19
------ ------ ---- ------ ------ ---- ------ ------ ---- ------ ------ ----
Total .......... 34 $ 697 .97% 2 $ 489 5.07% 12 $ 89 .62% 48 $1,275 1.31%
====== ====== ==== ====== ====== ==== ====== ====== ==== ====== ====== ====
December 31, 1997:
- ------------------
30-59 days ......... 25 $ 791 1.19% -- $ -- --% 6 $ 33 .23% 31 $ 824 .89%
60-89 days ......... 8 258 .39 -- -- -- 1 9 .07 9 267 .29
90 days and over ... 9 370 .55 2 399 3.56 -- -- -- 11 769 .83
------ ------ ---- ------ ------ ---- ------ ------ ---- ------ ------ ----
Total .......... 42 $1,419 2.13% 2 $ 399 3.56% 7 $ 42 .30% 51 $1,860 2.01%
====== ====== ==== ====== ====== ==== ====== ====== ==== ====== ====== ====
</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.
December 31,
------------------------------------
1998 1997 1996
------- ------- -------
(Dollars in Thousands)
Non-accruing loans:
One- to four-family ................... $ 165 $ 370 $ 245
Commercial/multi-family real estate.... -- 399 874
Consumer and other .................... 7 -- 1
------ ------ ------
Total .............................. 172 769 1,120
------ ------ ------
Real estate owned:
One- to four-family ................... 189 -- 12
Commercial/multi-family real estate.... 3 315 --
------ ------ ------
Total .............................. 192 315 12
------ ------ ------
Total non-performing assets ............. $ 364 $1,084 $1,132
====== ====== ======
Total as a percentage of total assets.... .22% .73% .83%
====== ====== ======
For the year ended December 31, 1998, gross interest income which would
have been recorded had the non-accruing loans been current in accordance with
their original terms totaled $15,000. The amount that was included in interest
income on such loans was $9,000 for the year ended December 31, 1998.
The Company's ratio of non-performing assets to total assets decreased to
0.22% at December 31, 1998 from 0.73% at December 31, 1997. Total non-performing
assets for 1998 decreased $720,000 primarily due to a $399,000 decrease in
non-accruing commercial/multi-family real estate loans as a result of two loans
which were foreclosed upon and sold, resulting in a charge-off of $120,000. Real
estate owned with a carrying value of $315,000 at December 31, 1997 was also
sold.
OTHER LOANS OF CONCERN. In addition to the non-performing assets set forth
in the table above, as of December 31, 1998 there was also an aggregate of
$1,741,000 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" 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
16
<PAGE>
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, 1998, 1997 and 1996 were as follows:
December 31,
------------------------------------------------
1998 1997 1996
---------- ---------- ----------
Special Mention ............ $1,289,000 $ 969,000 $ 876,000
Substandard ................ 816,000 1,524,000 1,543,000
Doubtful ................... -- 10,000 --
Loss ....................... -- -- --
---------- ---------- ----------
Total classified assets... $2,105,000 $2,503,000 $2,419,000
========== ========== ==========
The increase in loans designated "special mention" from 1997 to 1998 was
primarily the result of two multi-family loans placed on the watch list due to
lower occupancy than projected on one loan and slow pay on the other loan.
The increase in loans designated "special mention" from 1997 to 1998 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 decrease in loans designated "substandard" from 1997 to 1998 was
primarily the result of the three commercial/multi-family loans discussed under
"- Asset Quality - Non-Performing Assets."
ALLOWANCE FOR LOAN LOSSES. The allowance for loan losses is established
through a provision for loan losses based on management's evaluation of the risk
inherent in its loan portfolio and changes in the nature and volume of its loan
activity. Such evaluation, which includes a review of all loans of which full
collectibility may not be reasonably assured, considers among other matters, the
estimated fair value of the underlying collateral, economic conditions,
historical loan loss experience and other factors that warrant recognition in
providing for an adequate loan loss allowance. Although management believes it
uses the best information available to make such determinations, future
adjustments to reserves may be necessary, and net income could be significantly
affected, if circumstances differ substantially from the assumptions used in
making the initial determinations. At December 31, 1998, the Association had an
allowance for loan losses of $480,000. 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, 1998 and 1997 - Provision for Losses on Loans."
17
<PAGE>
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,
------------------------------------
1998 1997 1996
------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C>
Balance at beginning of period .................... $ 568 $ 686 $ 676
----- ----- -----
Charge-offs:
One- to four-family .............................. (14) (8) (37)
Commercial/Multi-family .......................... (120) (158) --
Consumer and other ............................... (2) -- (1)
----- ----- -----
(136) (166) (38)
One- to four-family ............................. -- -- --
----- ----- -----
-- -- --
----- ----- -----
Net (charge-offs) recoveries ...................... (136) (166) (38)
Additions charged to operations ................... 48 48 48
----- ----- -----
Balance at end of period .......................... $ 480 $ 568 $ 686
===== ===== =====
Ratio of net charge-offs (recoveries) during the
period to average loans, excluding mortgage-
backed securities outstanding during the period... .14% .19% .05%
===== ===== =====
Allowance for loan losses to non-performing
loans at end of period ........................... 279.07% 73.86% 61.25%
Allowance for loan losses to total loans,
excluding mortgage-backed securities
at end of period ................................. .49% .61% .82%
</TABLE>
The distribution of the Association's allowance for losses on loans at the
dates indicated is summarized as follows:
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------------------
1998 1997 1996
--------------------- ------------------- --------------------
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)
<S> <C> <C> <C> <C> <C> <C>
One- to four-family ....... $167 73.4% $163 71.7% $225 75.9%
Commercial/multi-family
real estate .............. 124 9.9 269 12.1 246 12.4
Construction or development 2 1.9 1 0.9 2 1.0
Consumer and other ........ 18 14.8 28 15.3 60 10.7
Unallocated ............... 169 -- 107 -- 153 --
---- ----- ---- ----- ---- -----
Total ................ $480 100.0% 568 100.0% $686 100.0%
==== ===== ==== ===== ==== =====
</TABLE>
18
<PAGE>
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, 1998, the Association's
liquidity ratio (liquid assets as a percentage of net withdrawable savings
deposits and current borrowings) was 8.52. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources" 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, 1998, Midwest Federal's interest-bearing deposits with
banks totaled $3.0 million, or 1.8% of total assets, and its investment
securities totaled $28.1 million, or 17.3% of total assets. As of such date, the
Association also had a $2.2 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, 1998, the
average term to maturity or repricing of the investment securities portfolio was
10.1 years. However, most of the securities have call features, and if called,
the remaining term would be aproximately 4.0 years. See also "- Mortgage-Backed
Securities" and Note 2 of the Notes to Consolidated Financial Statements.
19
<PAGE>
The following table sets forth the composition of the Association's
investment portfolio at the dates indicated.
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------------
1998 1997 1996
-----------------------------------------------------------
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 ....... $ 2,978 100.0% $ 1,088 100.0% $ 3,127 100.0%
======= ===== ======= ===== ======= =====
Investment securities:
U.S. Government securities ................ $ -- --% $ -- --% $ -- --%
Federal agency obligations ................ 15,521 50.5 18,375 75.7 16,535 86.1
Municipal bonds ........................... 12,622 41.1 3,108 12.8 -- --
Other marketable equity securities(1) ..... 387 1.2 824 3.4 710 3.7
------- ----- ------- ----- ------- -----
Subtotal .............................. 28,530 92.8 22,307 91.9 17,245 89.8
FHLBank stock .............................. 2,200 7.2 1,960 8.1 1,960 10.2
------- ----- ------- ----- ------- -----
Total investment securities and FHLBank
stock ................................ $30,730 100.0% $24,267 100.0% $19,205 100.0%
======= ===== ======= ===== ======= =====
Average remaining life or term to repricing,
excluding FHLBank stock and other
marketable equity securities (assuming call
feature are exercised)..................... 4.0 years 1.7 years 0.3 years
</TABLE>
- ---------------------
(1) Represents primarily investments in common stock of non-related
publicly-traded companies.
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, 1998
-------------------------------------------------------------------
1 Year 1 to 5 5 to 10 After 10 Total Investment
or Less Years Years Years Securities
--------- ------ ------- -------- -------------------
Book Book Book Book Book Market
Value Value Value Value Value Value
------- -------- ------- ------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Federal agency obligations $ 456 $10,072 $ 2,003 $ 2,990 $15,521 $15,521
Municipal bonds ............. -- 307 1,957 10,358 12,622 12,622
------- ------- ------- ------- ------- -------
Total investment securities.. $ 456 $10,379 $ 3,960 $13,348 $28,143 $28,143
======= ======= ======= ======= ======= =======
Weighted average yield ...... 5.79% 5.65% 6.42% 7.05% 6.42%
</TABLE>
In 1997, the Association began purchasing tax-exempt, rated or general
obligation bonds of municipalities. The Association's investment securities
portfolio at December 31, 1998 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.
20
<PAGE>
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.
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.
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,
----------------------------------------------------------------
1998 1997 1996
-------------------- -------------------- --------------------
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
--------- -------- -------- -------- -------- --------
(Dollars in Thousands)
Interest Rate Range:
- --------------------
<S> <C> <C> <C> <C> <C> <C>
Money Market Deposit
Accounts 2.25-4.00% ........... $ 14,798 14.0% $ 14,282 13.6% $ 13,590 13.3%
Passbook Accounts 2.25-3.00% ... 9,003 8.5 8,373 7.9 8,609 8.5
NOW Accounts 1.00-2.00% ........ 7,964 7.5 7,266 6.9 6,738 6.6
Non-interest checking accounts.. 579 .5 649 .6 399 .4
-------- ----- -------- ----- -------- -----
Total Non-Certificates ......... 32,344 30.5 30,570 29.0 29,336 28.8
-------- ----- -------- ----- -------- -----
Certificates:
- -------------
4.00 - 4.99% .................. 16,351 15.5 4,252 4.0 9,133 9.0
5.00 - 5.99% .................. 40,315 38.0 51,543 49.0 49,464 48.5
6.00 - 6.99% .................. 14,188 13.4 16,026 15.2 10,466 10.2
7.00 - 7.99% .................. 2,689 2.5 2,730 2.6 3,235 3.2
8.00 - 8.99% .................. 95 .1 157 .2 284 .3
-------- ----- -------- ----- -------- -----
Total Certificates ........... 73,638 69.5 74,708 71.0 72,582 71.2
-------- ----- -------- ----- -------- -----
Total Deposits ............... $105,982 100.0% $105,278 100.0% $101,918 100.0%
======== ===== ======== ===== ======== =====
</TABLE>
21
<PAGE>
The following table sets forth the savings flows at the Association during
the periods indicated. Net deposits (withdrawals) refers to the amount of
deposits during a period less the amount of withdrawals during the period.
Deposit flows at savings institutions may also be influenced by external factors
such as governmental credit policies and, particularly in recent periods,
depositors' perceptions of the adequacy of federal insurance of accounts.
Year Ended December 31,
----------------------------------------
1998 1997 1996
---------- ---------- ----------
(Dollars in Thousands)
Opening balance .......... $ 105,278 $ 101,918 $ 101,334
Net deposits (withdrawals) (3,310) (734) (3,260)
Interest credited ........ 4,014 4 ,094 3,844
--------- --------- ---------
Ending balance ........... $ 105,982 $ 105,278 $ 101,918
========= ========= =========
Net increase ............. $ 704 $ 3,360 $ 584
========= ========= =========
Percent increase ......... .67% 3.30% .58%
========= ========= =========
The following table shows rate and maturity information for the
Association's certificates of deposit as of December 31, 1998.
<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)
Certificate accounts maturing
In Quarter Ending:
- ------------------
<S> <C> <C> <C> <C> <C> <C> <C>
March 31, 1999 ...... $ 6,192 $ 6,530 $ 241 $ -- $ 4 $12,967 17.6%
June 30, 1999 ....... 4,477 5,905 3,530 -- -- 13,912 18.9
September 30, 1999 .. 659 4,978 2,067 -- 65 7,769 10.5
December 31, 1999 ... 2,722 2,926 2,504 2,635 26 10,813 14.7
March 31, 2000 ...... 55 5,092 1,302 5 -- 6,454 8.8
June 30, 2000 ....... 1,043 2,857 220 -- -- 4,120 5.6
September 30, 2000 .. -- 3,467 1,784 2 -- 5,253 7.1
December 31, 2000 ... 414 1,629 1,546 47 -- 3,636 4.9
March 31, 2001 ...... -- 1,925 226 -- -- 2,151 2.9
June 30, 2001 ....... 613 1,349 71 -- -- 2,033 2.8
September 30, 2001 .. 2 1,346 101 -- -- 1,449 2.0
December 31, 2001 ... 108 684 37 -- -- 829 1.1
Thereafter .......... 66 1,627 559 -- -- 2,252 3.1
------- ------- ------- ------- ------- ------- -----
Total .......... $16,351 $40,315 $14,188 $ 2,689 $ 95 $73,638 100.0%
======= ======= ======= ======= ======= ======= =====
Percent of total 22.2% 54.7% 19.3% 3.7% 0.1% 100.0%
======= ======= ======= ======= ======= ======
</TABLE>
22
<PAGE>
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, 1998.
<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 ................ $11,721 $12,894 $17,135 $27,169 $68,919
Certificates of deposit of
$100,000 or more ............. 1,246 1,018 1,447 1,008 4,719
------- ------- ------- ------- -------
Total certificates of deposit.. $12,967 $13,912 $18,582 $28,177 $73,638
======= ======= ======= ======= =======
</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 $753,000, $775,000 and $357,000 of such funds on deposit at
December 31, 1998, 1997 and 1996, respectively.
BORROWINGS. Although deposits are the Association's primary source of
funds, the Association's policy has been to utilize borrowings when they are a
less costly source of funds or can be invested at a positive rate of return. In
addition, the Association has relied upon selected borrowings for short-term
liquidity needs.
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, 1998, the Association had $43.0 million of
fixed-rate advances from the FHLBank of Des Moines. The Association also had a
$1.0 million open line of credit with the FHLBank with a zero balance at
December 31, 1998, which expires in March 1999. The Association does not intend
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.
At and For the Year Ended December 31,
---------------------------------------------
1998 1997 1996
------- ------- -------
(In Thousands)
Maximum Balance:
- ----------------
FHLBank advances....... $43,700 $34,000 $28,000
Average Balance:
- ----------------
FHLBank advances....... $40,755 $28,451 $25,256
23
<PAGE>
The following table sets forth certain information as to the Association's
FHLBank advances at the dates indicated.
<TABLE>
<CAPTION>
December 31,
---------------------------------------------
1998 1997 1996
----------- ----------- -----------
(Dollars in Thousands)
<S> <C> <C> <C>
FHLBank advances ........................ $ 43,000 $ 30,500 $ 24,000
---------- ---------- ----------
Total borrowings ................... $ 43,000 $ 30,500 $ 24,000
========== ========== ==========
Weighted average interest rate during the
period of FHLBank advances ............. 5.65% 5.91% 6.00%
Weighted average interest rate at end of
period of FHLBank advances ............. 5.50% 5.86% 5.87%
</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 $3.2 million
at December 31, 1998, 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
$26,273. Midwest Federal may invest an additional 1% of its assets in service
corporations where such additional funds are used for inner-city or community
development purposes.
Midwest Federal has one active wholly owned subsidiary, Midwest Financial
Products, Inc. ("MFP"), engaged in the sale of tax-deferred annuities and other
financial products. For the year ended December 31, 1998, MFP had a net loss of
$426. 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, 1998, the Association had an equity investment in MFP of
$26,273 (equal to its $100 capital plus $26,173 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. 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, 1998, was
$46,275.
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
24
<PAGE>
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, 1998, 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, 1998, the Association's lending
limit under this restriction was approximately $1.6 million. As of December 31,
1998, Midwest Federal is in compliance with the loans-to-one-borrower
limitation.
The OTS, as well as the other federal banking agencies, has adopted
guidelines establishing safety and soundness standards on 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. The OTS and the other federal banking agencies have also proposed
additional guidelines on asset quality and earnings standards. No assurance can
be given as to whether or in what form the proposed regulations will be adopted.
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.
Effective January 1, 1997, the premium schedule for BIF and SAIF insured
institutions ranged from 0 to 27 basis points. However, SAIF-insured
institutions are required to pay a Financing Corporation (FICO) assessment, in
order to fund the interest on bonds issued to resolve thrift failures in the
1980s, equal to approximately 6.48 basis points for each $100 in domestic
deposits, while BIF-insured institutions pay an assessment equal to
approximately 1.52 basis points for each $100 in domestic deposits. The
assessment is expected to be reduced to 2.43 basis points no later than January
1, 2000, when BIF-insured institutions fully participate in the assessment.
These assessments, which may be revised based upon the level of BIF and SAIF
deposits, will continue until the bonds mature in the year 2017.
25
<PAGE>
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,
1998, Midwest Federal had no unamortized purchased mortgage servicing rights
which were required to be deducted from tangible capital. At December 31, 1998,
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, 1998, the Association had tangible capital of $10.8
million, or 6.7% of adjusted total assets, which is approximately $8.4 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, 1998, the
Association had no intangibles which were subject to these tests.
At December 31, 1998, the Association had core capital equal to $10.8
million, or 6.7% of adjusted total assets, which is $6.0 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, 1998, Midwest
Federal had $480,000 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.
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, 1998.
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 Fannie Mae or Freddie Mac.
OTS regulations also require that savings associations 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
26
<PAGE>
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 risk-based capital ratio in excess of 12% is exempt from this requirement
unless the OTS determines otherwise.
On December 31, 1998, the Association had total risk-based capital of $11.3
million (including $10.8 million in core capital and $480,000 in qualifying
supplementary capital) and risk-weighted assets of $73.0 million (and no
converted off-balance sheet assets); or total capital of 15.5% of risk-weighted
assets. This amount was $5.5 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 receiver.
The OTS is also generally authorized to reclassify an association into a
lower capital category and impose the restrictions applicable to such category
if the institution is engaged in unsafe or unsound practices or is in an unsafe
or unsound condition.
The imposition by the OTS or the FDIC of any of these measures on Midwest
Federal may have a substantial adverse effect on its operations and
profitability. Stockholders of the Company do not have preemptive rights, and
therefore, if the Company is directed by the OTS or the FDIC to issue additional
shares of Common Stock, such issuance may result in the dilution in the
percentage of ownership of the Company.
LIMITATIONS ON DIVIDENDS AND OTHER CAPITAL DISTRIBUTIONS. OTS regulations
impose various restrictions on savings associations with respect to their
ability to make distributions of capital which include dividends, stock
redemptions or repurchases, cash-out mergers and other transactions charged to
the capital account. OTS regulations also prohibit a savings association from
declaring or paying any dividends or from repurchasing any of its stock if, as a
result, the regulatory 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."
27
<PAGE>
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.
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, 1998, the Association was in compliance
with the requirement, with an overall liquid asset ratio of 8.52%.
ACCOUNTING. An OTS policy statement applicable to all savings associations
clarifies and re-emphasizes that the investment activities of a savings
association must be in compliance with approved and documented investment
policies and strategies, and must be accounted for in accordance with generally
accepted accounting principles. Under the policy statement, management must
support its classification of and accounting for loans and securities (i.e.,
whether held for investment, sale or trading) with appropriate documentation.
Midwest Federal 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, 1998, 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
28
<PAGE>
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 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, 1998, 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."
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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 FHLBs, that administers the home
financing credit function of savings associations. Each FHLB serves as a reserve
or central bank for its members within its assigned region. It is funded
primarily from proceeds derived from the sale of consolidated obligations of the
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, 1998, Midwest Federal had $2.2 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 7.25% and were 6.63% for
calendar year 1998.
Under federal law the FHLBs 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, 1998, dividends paid by the FHLB of Des
Moines to Midwest Federal totaled $140,526, which constituted a $3,347 increase
from the amount of dividends received in 1997. The $36,044 dividend received for
the quarter ended December 31, 1998 reflects an annualized rate of 6.50%,
compared to a rate of 7.00% for calendar 1997.
FEDERAL AND STATE TAXATION.
FEDERAL TAXATION. Savings associations such as the Association that meet
certain conditions prescribed by the Internal Revenue Code of 1986, as amended
(the "Code"), are permitted to establish reserves for bad debts and to make
annual additions thereto which may, within specified formula limits, be taken as
a deduction in computing taxable income for federal income tax purposes. The
amount of the bad debt reserve deduction is computed under the experience
method.
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.
In August 1996, legislation was enacted that repealed 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 experience method
for tax years beginning after December 31, 1987. 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, 1998, provided the institution meets
certain residential lending requirements. At December 31, 1998, the Association
had approximately $3,745 in bad debt reserves subject to recapture for federal
income tax purposes. The deferred tax liability related to the recapture has
been previous established so there will be no effect on future net income.
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.
A portion of the Association's reserves for losses on loans 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, 1998, the portion of the Association's reserves
subject to this treatment for tax purposes totaled approximately $2,819,000.
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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 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.
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, at its office in Wal- Mart in West Burlington and at the Ft. Madison
and Wapello branches. The Association also has one off-site drive-up ATM located
at a convenience store in West Burlington. The Association estimates its share
of the savings market in its primary market area to be approximately 10%.
EXECUTIVE OFFICERS OF THE REGISTRANT WHO ARE NOT DIRECTORS
The following information as to the business experience during the last
five years is supplied with respect to executive officers of the Association who
do not serve on the Company's or Association's Board of Directors.
THOMAS A. JACOBS - Mr. Jacobs, age 49, 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.
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DENNIS L. DIETZMAN - Mr. Dietzman, age 49, 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 38, 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, 1998, the Association and its subsidiaries had a total of
43 employees, including 3 part-time employees. The Association's employees are
not represented by any collective bargaining group. Management considers its
employee relations to be good.
ITEM 2. PROPERTIES
The following table sets forth information relating to each of the
Association's current offices. The total net book value of the Association's
premises and equipment at December 31, 1998 was $2.4 million.
Date
Acquired/ Owned or Net Book Value
Location Lease Expires Leased At December 31, 1998
- -------- ------------- ------ --------------------
(In Thousands)
MAIN OFFICE:
3225 Division Street 1974 Owned $1,211
Burlington, IA
BRANCH OFFICES:
323 Jefferson Street 1974 Owned 177
Burlington, IA
926 Avenue G 1975 Owned 242
Ft. Madison IA
Highway 61 1974 Owned 29
Wapello, IA
Wal-Mart 2002(2) Leased 179
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, 1998 was $191,000.
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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,
1998.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
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, 1998, the
Company had approximately 320 stockholders of record and 1,077,738 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
- ------------- ------ -------- --------------
03/31/97 $10.00 $ 8.75 $0.05
06/30/97 10.67 9.33 0.05
09/30/97 13.58 10.42 0.06
12/31/97 18.37 13.50 0.06
03/31/98 18.25 16.00 0.07
06/30/98 17.00 14.50 0.08
09/30/98 15.25 10.75 0.09
12/31/98 12.75 11.75 0.10
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
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.
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YEAR 2000 COMPLIANCE
The Company has conducted a comprehensive review of its computer systems to
identify the systems that could be affected by the "Year 2000" problem. The Year
2000 problem is the result of computer programs using two digits rather than
four to define the year. Any of the Company's programs that are time sensitive
may recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in a major system failure or miscalculations. Management
anticipates that the enhancements necessary to prepare its mission critical
systems for the year 2000 will be completed in early 1999.
The Company is also aware of the risks to third parties, including vendors
(and to the extent appropriate, depositors and borrowers) and the potential
adverse impact on the Company resulting from failures by these parties to
adequately address the Year 2000 problem. The Company has been communicating
with its outside data processing service bureau, as well as other third party
service providers, to assess their progress in evaluating and implementing any
corrective measures required by them to be prepared for the year 2000. To date,
the Company has not been advised by any of its primary vendors that they do not
have plans in place to address and correct the Year 2000 problem; however, no
assurance can be given as to the adequacy of such plans or to the timeliness of
their implementation.
The Company anticipates that it will incur internal staff costs as well as
consulting and other expenses related to the enhancements necessary to prepare
its systems for the year 2000. Based on the Company's current knowledge, the
expense of the year 2000 project as well as the related potential effect on the
Company's earnings is not expected to have a material effect on the Company's
financial position or results of operations . The Company estimates that it has
spent approximately $20,000 through December 31, 1998 on the awareness,
assessment, renovation, and validation phases of its year 2000 effort. The
Company is well into the validation (testing) phase with its outside data
processing service bureau and will complete testing by the second quarter of
1999. To date, the test results from the data processing bureau have been used
to verify that all mission critical systems with the bureau are currently year
2000 compliant or to determine what needs to be done to make them compliant.
The worst-case year 2000 scenario for the Company is that major suppliers
of electricity, communication links, and data processing services may fail in
spite of their best efforts to remediate their systems and in spite of our best
effort to test their systems. The major risk as a result of these possibilities
would be the loss of customer confidence. The Company has developed a business
resumption contingency plan to address these possibilities and minimize the loss
of confidence.
FINANCIAL CONDITION
Total assets increased by $14.6 million to $162.3 million at December 31,
1998 compared to $147.7 million at December 31, 1997. Total loans receivable
increased $5.0 million to $96.3 million at December 31, 1998 from $91.3 million
at December 31, 1997. During 1998, the Association originated $34.3 million in
loans while loan repayments totaled $20.7 million. This compares with $21.9
million in originations and $15.8 million in repayments in fiscal 1997. Of the
loans originated in 1998 and 1997, $9.4 million and $3.1 million, respectively,
represented refinancings of existing loans. Loan originations were up due to
favorable lending rates and generally good economic conditions for borrowers
during 1998. The Company also purchased $1.2 million in loans in 1998 compared
with $7.0 million in 1997.
Investment securities held to maturity increased to $21.8 million at
December 31, 1998 from $19.8 million at December 31, 1997. Securities available
for sale increased to $33.8 million at December 31, 1998 from $27.9 million at
December 31, 1997, due to purchases of securities for both the held to maturity
portfolio and the available for sale portfolio.
Total deposits increased from $105.3 million at December 31, 1997 to $106.0
million at December 31, 1998. Advances from the FHLB increased from $30.5
million at December 31, 1997 to $43.0 million at December 31, 1998, due to new
advances of $33.7 million (net of $21.2 million of repayments).
The Company's ratio of non-performing assets to total assets decreased to
0.22% at December 31, 1998 from 0.73% at December 31, 1997. Total non-performing
assets decreased $720,000 to $364,000 at December 31, 1998. The majority of
non-performing assets consist of one- to four- family residential loans and real
estate owned.
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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, 1998 AND 1997
GENERAL. The Company had net earnings of $1,372,000 in 1998 compared to
$1,265,000 in 1997, an increase of approximately $107,000, or 8.5%. The increase
in net earnings was primarily a result of an increase in net interest income, an
increase in fees and service charges, and an increase in other non-interest
income as a result of recognizing a previously-deferred gain of $135,000
(pre-tax) on the sale of the Association's mortgage-banking subsidiary,
partially offset by an increase in non-interest expense and a decrease in gain
on the sale of securities.
NET INTEREST INCOME. Net interest income increased by $85,000 to $4,115,000
in 1998 from $4,030,000 in 1997. 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 2.89% in 1997 to 2.83% in 1998. For the
year ended December 31, 1998, the Company's interest rate spread decreased four
basis points from 2.63% in 1997 to 2.59% in 1998. The increase in net interest
income on a tax equivalent basis was approximately $276,000 due to the fact that
the 1998 period included considerably more interest income on tax-exempt
municipal bonds. (See also the discussion of "TAXES ON INCOME" below. The net
interest rate spread and net interest margin ratios have been calculated on a
tax-equivalent basis.
During fiscal 1998, average interest-earning assets increased by
approximately $12.6 million over the 1997 average balances. The increase in
average interest-earning assets was primarily due to an increase in loans
receivable and an increase in investment securities and was the result of a
planned growth strategy in an effort to increase net interest income. The
average yield on interest-earning assets decreased by twelve basis points during
1998 compared to 1997. The decrease in average yield was primarily due to loan
refinance activity and investment purchases at rates which were generally lower
in response to lower market interest rates.
During fiscal 1998, average interest-bearing liabilities increased by
approximately $12.3 million, primarily due to an increase in borrowings from the
FHLB. The average rate paid on interest-bearing liabilities decreased eight
basis points compared to 1997. The decrease in average rate paid was primarily
due to deposits and FHLB advances repricing to lower rates offered in response
to lower market interest rates. 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 1998 and 1997. 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, 1998 and
1997, the Company's allowance for losses on loans totaled $480,000 and $568,000,
respectively, or 0.49% and 0.61% of total loans, excluding mortgage-backed
securities, and 279.07% and 73.86% of total non-performing loans, respectively.
The decline in the former ratio was impacted by charge-offs in 1998, primarily
as a result of the foreclosure of two multi-family properties, with the first
resulting in a charge-off of $120,000. This property, combined with another
related multi-family participation loan, made up the majority of the
non-performing assets in 1997. These properties were sold in 1998 and accounted
for $120,000 and $158,000, respectively, of total net-charge-offs of $136,000
and $166,000 for the years ended December 31, 1998 and 1997, respectively.
Excluding these large, unusual charge-offs, the $48,000 provision appears
adequate to absorb normal loan losses when added to the remaining allowance.
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NON-INTEREST INCOME. Total non-interest income increased by $110,000 for
1998 compared to 1997. The increase was primarily due to (i) an increase of
$94,000 in fees and service charges, primarily as a result of increased
transaction volumes; and (ii) an increase in other non-interest income as a
result of recognizing a previously-deferred gain of $135,000 (pre-tax) on the
sale of the Association's mortgage-banking subsidiary; partially offset by a
$102,000 decrease in gain on the sale of securities.
NON-INTEREST EXPENSES. Total non-interest expenses increased by $228,000
for 1998 compared to 1997. The increase was primarily due to increases of
$63,000 in compensation and benefits expense, $58,000 in office property and
equipment, and $87,000 in other non-interest expenses. These increases were
primarily 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 decreased $140,000 for 1998 compared to
1997, primarily due to increased investment in tax-exempt securities, which
resulted in approximately $207,000 of tax benefit for 1998 compared to $16,000
for 1997. Taxes on income would have increased if not for the tax-exempt
interest income on investments discussed above at "NET INTEREST INCOME."
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.
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
36
<PAGE>
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.
37
<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,
-------------------------------------------------------------------------
1998 1997
------------------------------------- ----------------------------------
Yield/Rate at Average Interest Average Interest
December 31, Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
1998 Balance Paid Rate Balance Paid Rate
------------- ----------- --------- ------ ----------- --------- ------
(Dollars in Thousands)
Interest-Earning Assets:
<S> <C> <C> <C> <C> <C> <C> <C>
Loans receivable.......................... 7.79% $ 93,895 $ 7,537 8.03% $ 87,358 $ 7,075 8.10%
Mortgage-backed securities................ 6.71 23,501 1,672 7.11 27,612 1,951 7.07
Investment securities(1).................. 6.58 30,887 2,101 6.80 21,372 1,528 7.15
Deposits in other banks................... 4.56 2,037 99 4.84 1,562 75 4.82
Other interest-earning assets............ 6.50 2,121 140 6.62 1,960 137 7.00
-------- -------- -------- --------
Total interest-earning assets........... 7.31 152,441 11,549 7.58 139,864 10,766 7.70
----- -------- -------- ---- -------- -------- -----
Interest-Bearing Liabilities:
Savings deposits, money market
deposit and NOW accounts................ 2.63 $ 30,654 $ 844 2.75 30,162 870 2.88
Time deposits............................ 5.45 73,555 4,081 5.55 74,042 4,169 5.63
-------- -------- -------- --------
Total deposits......................... 4.62 104,209 4,925 4.73 104,204 5,039 4.84
FHLB advances and other borrowings....... 5.50 40,755 2,302 5.65 28,451 1,681 5.91
-------- -------- -------- --------
Total interest-bearing liabilities..... 4.90 $144,964 7,227 4.99 $132,655 $ 6,720 5.07
----- -------- -------- ---- -------- -------- -----
Net interest income; interest rate
spread................................... 2.41% $ 4,322 2.59% $ 4,046 2.63%
===== ======= ==== ======== =====
Net earning assets/net interest margin(2).. $ 7,477 2.83% $ 7,209 2.89%
========== ==== ======== =====
Average interest-earning assets to
average interest-bearing liabilities.... 105.2% 105.4%
===== ======
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------
1996
--------------------------------------------
Average Interest
Outstanding Earned/ Yield
Balance Paid Rate
----------- -------- ------
(Dollars in Thousands)
Interest-Earning Assets:
<S> <C> <C> <C>
Loans receivable.......................... $ 79,219 $ 6,444 8.13%
Mortgage-backed securities................ 30,841 2,162 7.01
Investment securities(1).................. 19,654 1,351 6.87
Deposits in other banks................... 1,401 69 4.90
Other interest-earning assets............ 1,960 137 7.00
-------- -------
Total interest-earning assets........... 133,075 10,163 7.64
-------- ------ ----
Interest-Bearing Liabilities:
Savings deposits, money market
deposit and NOW accounts................ $ 29,562 $ 864 2.92
Time deposits............................ 71,104 3,863 5.43
-------- ------
Total deposits......................... 100,666 4,727 4.70
FHLB advances and other borrowings....... 25,256 1,516 6.00
-------- ------
Total interest-bearing liabilities..... $125,922 6,243 4.96
-------- ------ ----
Net interest income; interest rate
spread................................... $ 3,920 2.68%
======= ====
Net earning assets/net interest margin(2).. $ 7,153 2.94%
======== ====
Average interest-earning assets to
average interest-bearing liabilities.... 105.7%
=====
</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 $207,000 for 1998, $16,000 for 1997 and none for
1996.
(2) Net interest margin is net interest income divided by average
interest-earning assets.
38
<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,
--------------------------------------------------------------------
1998 vs. 1997 1997 vs. 1996
-------------------------------- ---------------------------------
(Dollars in Thousands)
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 ..................... $ 524 $ (62) $ 462 $ 659 $ (28) $ 631
Mortgage-backed securities ........... (293) 14 (279) (228) 17 (211)
Investment securities ................ 643 (70) 573 121 56 177
Deposits in other banks .............. 23 1 24 8 (2) 6
Other interest-earning assets ........ 10 (7) 3 -- -- --
----- ----- ----- ----- ----- -----
Total interest-earning assets ...... 907 (124) 783 560 43 603
----- ----- ----- ----- ----- -----
Interest-Bearing Liabilities:
Savings deposits, money market deposit
and NOW accounts .................... 14 (40) (26) 17 (11) 6
Time deposits ........................ (27) (61) (88) 163 143 306
----- ----- ----- ----- ----- -----
Total deposits ..................... (13) (101) (114) 180 132 312
FHLB advances and other borrowings ... 691 (70) 621 188 (23) 165
----- ----- ----- ----- ----- -----
Total interest-bearing liabilities . 678 (171) 507 368 109 477
----- ----- ----- ----- ----- -----
Net change in net interest income ..... $ 229 $ 47 $ 276 $ 192 $ (66) $ 126
===== ===== ===== ===== ===== =====
</TABLE>
39
<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 decreased 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, 1998
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
10% to 33% 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%. 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%, 17%, 17%, 16% and
14%, 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%, 37%, 32%, 17% and 17%,
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, 1998.
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.
40
<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, 1998 on the
basis of the factors and assumptions set forth above.
<TABLE>
<CAPTION>
Maturing or Repricing
-------------------------------------------------------------------
Over 1-3
0-3 Months 4-12 Months Years
------------------------- ---------------------- ---------
Amount Rate Amount Rate Amount
------------------------- ---------- ------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Fixed-rate one- to four-family (including
mortgage-backed securities), commercial/multi-
family real estate and construction loans......................$ 3,928 7.22% $ 10,797 7.44% $ 26,925
Adjustable-rate one- to four-family (including
mortgage-backed securities), commercial/multi-
family real estate and construction loans...................... 7,217 7.68 15,392 7.80 10,657
Consumer and other loans......................................... 1,002 8.59 2,909 8.59 6,310
Investment securities and other.................................. 5,634 5.33 2,015 5.28 3,005
---------- --------- --------
Total interest-earning assets............................... 17,781 6.94 31,113 7.49 46,897
---------- --------- --------
Savings deposits, money market deposit and NOW
accounts, excluding non-interest bearing checking
accounts....................................................... 15,918 3.54 3,104 1.44 6,421
Time deposits.................................................... 12,967 5.00 32,494 5.51 25,925
---------- --------- --------
Total interest-bearing deposits................................ 28,885 4.20 35,598 5.16 32,346
FHLB advances.................................................... 2,000 6.15 -- -- 12,000
---------- --------- --------
Total interest-bearing liabilities.......................... 30,885 4.33 35,598 5.16 44,346
---------- --------- --------
Interest-earning assets less interest-bearing
liabilities....................................................$ (13,104) $ (4,485) $ 2,551
========== ========= ========
Cumulative interest rate sensitivity gap.........................$ (13,104) $ (17,589) $(15,038)
========== ========= ========
Cumulative interest rate sensitivity gap as a
percentage of total assets at December 31, 1998................ (8.1)% (10.8)% (9.3)%
===== ===== ====
Cumulative interest rate sensitivity gap as a percentage of
total assets 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%
==== ===
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Maturing or Repricing
-------------------------------------------------
Over 3-5 Over
Years 5 Years Total
-------- -------- ---------
Amount Amount Amount
-------- -------- ---------
(Dollars in Thousands)
<S> <C> <C> <C>
Fixed-rate one- to four-family (including
mortgage-backed securities), commercial/multi-
family real estate and construction loans...................... $ 8,036 $10,754 $ 60,440
Adjustable-rate one- to four-family (including
mortgage-backed securities), commercial/multi-
family real estate and construction loans...................... 2,692 12,880 48,838
Consumer and other loans......................................... 2,616 1,673 14,510
Investment securities and other.................................. 5,359 17,308 33,321
-------- ------ --------
Total interest-earning assets............................... 18,703 42,615 157,109
-------- ------ --------
Savings deposits, money market deposit and NOW
accounts, excluding non-interest bearing checking
accounts....................................................... 2,693 3,629 31,765
Time deposits.................................................... 1,046 1,206 73,638
-------- ------- --------
Total interest-bearing deposits................................ 3,739 4,835 105,403
FHLB advances.................................................... 10,000 19,000 43,000
-------- ------ --------
Total interest-bearing liabilities.......................... 13,739 23,835 148,403
-------- ------ --------
Interest-earning assets less interest-bearing
liabilities.................................................... $ 4,964 $18,780 $ 8,706
======== ======= ========
Cumulative interest rate sensitivity gap......................... $(10,074) $ 8,706
======== =======
Cumulative interest rate sensitivity gap as a
percentage of total assets at December 31, 1998................ (6.2)% 5.4%
==== ====
Cumulative interest rate sensitivity gap as a percentage of
total assets at December 31, 1997 ............................
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..............................
</TABLE>
41
<PAGE>
The shift in the Association's one-year gap from a negative 20.0% at
December 31, 1997 to a negative 10.8% at December 31, 1998 was primarily due to
the decrease in the amount of FHLB advances maturing or repricing in one year or
less to $2.0 million in 1998 from $14.5 million in 1997.
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, 1998, 2% of the present value of the
Association's assets was approximately $3.3 million, which was more than $0.9
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 not have been
required to make a 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, 1998, 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 $ 9,337 $(3,256) (26)%
+300 10,631 (1,962) (16)
+200 11,660 (932) (7)
+100 12,363 (229) (2)
0 12,592 -- --
-100 12,369 (223) (2)
-200 12,006 (586) (5)
-300 11,898 (695) (6)
-400 11,694 (898) (7)
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 7%
decrease in NPV in a declining rate environment and a 26% 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).
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.
42
<PAGE>
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 1998, the Association's
liquidity ratio was 8.5%, compared to 8.1% for December 1997. The increase in
the Association's liquidity ratio was the result, in part, of the increase in
cash and cash equivalents, as a result of the maturity and call of investment
securities which was temporarily not reinvested at year end. 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 1998, the primary source of cash from operating activities
was net income, and the net cash provided by operating activities was $1.4
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 $4.5 million during the year ended December
31, 1998. Loan purchases used $1.2 million during the year ended December 31,
1998. There were $12.0 million mortgage-backed securities purchased, while
mortgage-backed securities principal repayments totaled $10.2 million. Purchases
of investment securities of $33.2 million were partially offset by maturities of
$20.0 million during the year ended December 31, 1998. Proceeds from the sale of
investment securities provided $7.3 million. 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, 1998 deposits grew by $0.7 million. The Company also utilizes
advances from the FHLB, and increased such advances by $12.5 million in 1998.
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, 1998 the Company had outstanding
commitments to extend credit and purchase loans which amounted to $3.7 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, 1998 totaled approximately $45.5 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, 1998, the Company
had $43.0 million of advances outstanding from the FHLB of Des Moines.
At December 31, 1998, the Company's stockholders' equity totaled $12.0
million, or 7.41% 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, 1998, the Association was in
compliance with all three of its regulatory capital requirements.
43
<PAGE>
At December 31, 1998, the Association had tangible and core capital of
$10,847,000, or 6.72% of total adjusted assets which exceeded the regulatory
requirements of 1.5% and 3.0%, respectively, by $8,424,000 and $6,001,000,
respectively. The risk-based capital requirement is currently 8% of
risk-weighted assets. As of December 31, 1998, the Association had risk-
weighted assets of $72,977,000, a risk-based requirement of $5,838,000 and
risk-based capital of $11,327,000, or 15.52%, which exceeds the requirement by
$5,489,000.
Tangible Core Risk-based
Capital Capital Capital
------- ------- -------
(Dollars In Thousands)
Association's capital ................... $10,847 $10,847 $10,847
Additional capital - general allowances.. -- -- 480
------- ------- -------
Regulatory capital ...................... 10,847 10,847 11,327
Minimum capital requirement ............. 2,423 4,846 5,838
------- ------- -------
Excess regulatory capital ............... $ 8,424 $ 6,001 $ 5,489
======= ======= =======
The unrealized gain on investments available for sale, which is a component
of stockholders' equity, is a result of the application of Statement No. 115 of
the Financial Accounting Standards Board. At December 31, 1998, the net
unrealized gain of $420,000, up from $373,000 at December 31, 1997, consisted
primarily of the net unrealized market gain, net of tax, on certain
mortgage-backed securities and investment securities which have been identified
as available for sale by management.
IMPACT OF INFLATION AND CHANGING PRICES
The Consolidated Financial Statements and Notes thereto presented herein
have been prepared in accordance with generally accepted accounting principles,
which require the measurement of financial position and operating results in
terms of historical dollars without considering the change in the relative
purchasing power of money over time due to inflation. The impact of inflation is
reflected in the increased cost of the Company's operations. Unlike most
industrial companies, nearly all the assets and liabilities of the Company are
monetary. As a result, interest rates have a greater impact on the Company's
performance than do the effects of general levels of inflation. Interest rates
do not necessarily move in the same direction or to the same extent as the price
of goods and services.
EFFECT OF NEW ACCOUNTING STANDARDS
SFAS 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities," 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.
The Company adopted the provisions of SFAS No. 130, REPORTING COMPREHENSIVE
INCOME, effective January 1, 1998. SFAS No. 130 establishes the standards for
the reporting and display of comprehensive income in the financial statements.
Comprehensive income represents net income and certain amounts reported directly
in stockholders' equity, such as the net unrealized gain or loss on
available-for-sale securities. The statement requires additional disclosures in
the consolidated financial statements; it does not effect the Company's
financial positions or results of operations. Prior year consolidated financial
statements have been reclassified to conform to the requirements of SFAS No.
130.
The Company adopted the provisions of SFAS No. 131, Disclosure About
Segments of an Enterprise and Related Information, effective January 1, 1998.
SFAS No. 131 establishes disclosure requirements for segment operations. The
adoption had no effect on the Company's financial statement disclosures.
The Company adopted the provisions of SFAS No. 132, Employers' Disclosures
about Pensions and Other Postretirement Benefits, effective January 1, 1998.
SFAS No. 132 revises the disclosure requirements for pension and other
postretirement benefit plans. The adoption had no effect on the Company's
financial statement disclosures.
44
<PAGE>
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities,
will be effective for the Company for the year beginning January 1, 2000. The
Company expects to adopt SFAS No. 133 when required. Adoption is not expected to
have a material effect on the financial position and results of operations.
ITEM 7. FINANCIAL STATEMENTS
(A) FINANCIAL STATEMENTS
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, 1998 and 1997, and the
related consolidated statements of operations, stockholders' equity and
comprehensive income, and cash flows for each of the years in the
three-year period ended December 31, 1998. 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, 1998 and 1997, and the
results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 1998, in conformity with generally
accepted accounting principles.
/s/ KPMG Peat Marwick LLP
Des Moines, Iowa
January 22, 1999, except for note 16,
which is as of February 2, 1999
45
<PAGE>
MIDWEST BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1998 and 1997
ASSETS 1998 1997
------
------------ ------------
Cash and cash equivalents $ 4,087,677 2,523,983
Securities available for sale (note 2) 33,842,698 27,934,974
Securities held to maturity (estimated fair
value of $22,116,475 and $20,055,364) (notes 21,826,889 19,839,678
2 and 7)
Loans receivable, net (notes 3, 4, and 8) 96,347,716 91,276,434
Real estate acquired through foreclosure 191,741 314,583
Federal Home Loan Bank (FHLB) stock, at cost 2,200,000 1,959,700
Office property and equipment, net (note 5) 2,444,356 2,560,749
Accrued interest receivable (note 6) 1,237,155 1,203,471
Other assets 139,736 110,869
------------ -----------
Total assets $162,317,968 147,724,441
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits (note 7) $105,982,327 105,278,292
Advances from FHLB (note 8) 43,000,000 30,500,000
Advances from borrowers for taxes and 412,903 387,881
insurance
Accrued interest payable 65,566 80,175
Accrued expenses and other liabilities 822,428 802,632
----------- -----------
Total liabilities 150,283,224 137,048,980
----------- -----------
Stockholders' equity (notes 10 and 11):
Serial preferred stock, $.01 par value;
authorized 500,000 shares; none issued -- --
Common stock, $.01 par value;
2,000,000 shares authorized;
1,077,738 shares issued and outstanding in
1998 and 1,020,762 shares issued and
outstanding in 1997 10,777 10,208
Additional paid-in capital 1,771,495 1,530,430
Retained earnings, substantially restricted 9,832,094 8,821,782
Employee Stock Ownership Plan (ESOP) -- (60,000)
Accumulated other comprehensive income -
unrealized gains
on securities available for sale, net of
taxes on income
of $250,000 in 1998 and $222,000 in 1997 420,378 373,041
---------- -----------
Total stockholders' equity 12,034,744 10,675,461
Contingencies (note 15) ----------- -----------
Total liabilities and stockholders'
equity $162,317,968 147,724,441
============ ===========
See accompanying notes to consolidated financial statements.
46
<PAGE>
MIDWEST BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended December 31, 1998, 1997, and 1996
1998 1997 1996
----------- ----------- -----------
Interest income:
Loans receivable $ 7,536,716 7,074,649 6,444,056
Securities available for sale 2,361,999 2,073,271 1,902,576
Securities held to maturity 1,202,933 1,388,444 1,609,591
Deposits in other financial 100,210 75,365 68,717
institutions
Other interest-earning assets 140,526 138,271 137,496
---------- ---------- ----------
11,342,384 10,750,000 10,162,436
---------- ---------- ----------
Interest expense:
Deposits (note 7) 4,924,651 5,039,036 4,726,637
Advances from FHLB and other borrowings 2,302,514 1,681,261 1,516,060
---------- ---------- ----------
7,227,165 6,720,297 6,242,697
---------- ---------- ----------
Net interest income 4,115,219 4,029,703 3,919,739
Provision for losses on loans (note 4) 47,907 48,000 47,972
---------- ---------- ----------
Net interest income after
provision for losses on loans 4,067,312 3,981,703 3,871,767
---------- ---------- ----------
Noninterest income:
Fees and service charges 375,891 282,249 179,326
Gain on sale of securities available for 117,920 220,223 29,213
sale (note 2)
Other 170,078 51,214 140,481
---------- ---------- ----------
663,889 553,686 349,020
---------- ---------- ----------
Noninterest expenses:
Compensation and benefits (note 10) 1,348,638 1,285,960 1,181,748
Office property and equipment 423,224 364,804 349,156
Deposit insurance premiums 64,596 53,687 236,989
Deposit insurance special assessment -- -- 670,861
(note 12)
Data processing 173,964 164,087 164,939
Other 799,521 712,937 613,436
---------- ---------- ----------
2,809,943 2,581,475 3,217,129
---------- ---------- ----------
Earnings before taxes on income 1,921,258 1,953,914 1,003,658
Taxes on income (note 9) 549,000 689,000 374,000
---------- ---------- ----------
Net earnings $ 1,372,258 1,264,914 629,658
=========== ========== ==========
Earnings per share - basic $ 1.31 1.23 0.59
========== ========== ==========
Earnings per share - diluted $ 1.25 1.14 0.56
========== ========== ==========
See accompanying notes to consolidated financial statements.
47
<PAGE>
<TABLE>
<CAPTION>
MIDWEST BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity and Comprehensive Income
Years ended December 31, 1998, 1997, and 1996
- ------------------------------------------------------------------------------------------------------------------------------------
EMPLOYEE
STOCK
OWNERSHIP RECOGNITION ACCUMULATED
ADDITIONAL PLAN AND OTHER
COMMON PAID-IN RETAINED TREASURY BORROWING RETENTION COMPREHENSIVE
STOCK CAPITAL EARNINGS STOCK GUARANTEE PLAN INCOME TOTAL
- ---------------------------------- ---------- ----------- ----------- ----------- ----------- ---------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, $ 4,550 4,037,058 7,403,062 (1,699,533) (180,000) (9,725) 340,526 9,895,938
1995
Net earnings -- -- 629,658 -- -- -- -- 629,658
Unrealized losses during the year
on securities available for sale (307,852) (307,852)
Realized gains on securities
available for sale, net of taxes -- -- -- -- -- -- 19,800 19,800
------- ----------- ----------- ----------- --------- ---------- --------- -----------
Total comprehensive income -- -- 629,658 -- -- -- (288,052) 341,606
Dividends declared ($.187 per -- -- (195,912) -- -- -- -- (195,912)
share*)
Treasury stock acquired -- -- -- (511,109) -- -- -- (511,109)
ESOP loan payment -- -- -- -- 60,000 -- -- 60,000
Amortization of recognition
and retention plan -- -- -- -- -- 9,725 -- 9,725
------ ---------- ---------- ---------- -------- --------- -------- ----------
Balance at December 31, 1996 4,550 4,037,058 7,836,808 (2,210,642) (120,000) -- 52,474 9,600,248
Net earnings -- -- 1,264,914 -- -- -- -- 1,264,914
Unrealized gains during the year
on securities available for
sale -- -- -- -- -- -- 463,717 463,717
Realized gains on securities
available for sale, net of
taxes -- -- -- -- -- -- (143,150) (143,150)
------ ---------- ---------- ---------- -------- --------- -------- ----------
Total comprehensive income -- -- 1,264,914 -- -- -- 320,567 1,585,481
Dividends declared ($.22 per
share*) -- -- (225,624) -- -- -- -- (225,624)
Treasury stock acquired -- -- -- (393,659) -- -- -- (393,659)
ESOP loan payment -- -- -- -- 60,000 -- -- 60,000
Issuance of shares of common stock
under the stock option plan
(note 10) 28 26,237 (54,316) 77,066 -- -- -- 49,015
3-for-1 stock split effected in the
form of a 200% stock dividend
(note 11) 5,630 (2,532,865) -- 2,527,235 -- -- -- --
------ ---------- ---------- ---------- -------- --------- -------- ----------
Balance at December 31, 1997 10,208 1,530,430 8,821,782 -- (60,000) -- 373,041 10,675,461
Net earnings -- -- 1,372,258 -- -- -- -- 1,372,258
Unrealized gains during the year on
securities available for sale -- -- -- -- -- -- 123,987 123,987
Realized gains on securities
available for sale, net of
taxes -- -- -- -- -- -- (76,650) (76,650)
------ ---------- ---------- ---------- -------- --------- -------- ----------
Total comprehensive income -- -- 1,372,258 -- -- -- 47,337 1,419,595
Dividends declared ($.34 per share) -- -- (361,946) -- -- -- -- (361,946)
ESOP loan payment -- -- -- -- 60,000 -- -- 60,000
Issuance of shares of common stock
under the stock option plan
(note 10) 569 241,065 -- -- -- -- -- 241,634
------ ---------- ---------- ---------- -------- --------- -------- ----------
Balance at December 31, 1998 $ 10,777 1,771,495 9,832,094 -- -- -- 420,378 12,034,744
====== ========== ========== ========== ======== ========= ======== ==========
</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.
48
<PAGE>
<TABLE>
<CAPTION>
MIDWEST BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 1998, 1997, and 1996
- -------------------------------------------------------------------------------------------
1998 1997 1996
------------ ------------ -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings $ 1,372,258 1,264,914 629,658
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Provision for losses on loans 47,907 48,000 47,972
Depreciation 190,663 161,250 144,301
Provision for deferred taxes 170,000 96,000 24,000
Gain on sale of securities available for
sale (117,920) (220,223) (29,213)
Gain on sale of securities held to
maturity -- -- (15,950)
Amortization of recognition and retention
plan benefits -- -- 9,725
ESOP expense 60,100 56,482 53,938
Amortization of premiums and discounts (31,594) (25,496) 76,778
Increase in accrued interest receivable (33,684) (195,924) (133,035)
(Increase) decrease in other assets (28,867) (9,961) 90,050
(Decrease) increase in accrued interest
payable (14,609) 6,432 2,236
(Decrease) increase in accrued expenses and
other liabilities (224,832) 160,229 (194,335)
----------- ----------- ----------
Net cash provided by operating activities 1,389,422 1,341,703 706,125
----------- ----------- ----------
Cash flows from investing activities:
Purchase of securities (33,196,242) (14,680,737) (5,568,000)
Proceeds from maturities of securities 20,000,000 9,490,000 8,323,885
Proceeds from sale of securities available
for sale 7,297,627 798,473 550,239
Loans purchased (1,164,815) (6,955,215) (5,555,413)
Purchase of mortgage-backed securities (12,022,831) (3,484,096) (4,051,131)
Purchase of FHLB stock (240,300) -- --
Repayments of principal on mortgage-backed
securities 10,247,389 6,464,986 5,862,203
Increase in loans receivable (4,479,351) (3,505,057) (1,800,202)
Proceeds from sale of real estate owned, net 651,792 47,235 155,042
Purchase of office property and equipment (74,270) (275,016) (276,470)
----------- ----------- ----------
Net cash used in investing activities (12,981,001) (12,099,427) (2,359,847)
----------- ----------- ----------
Cash flows from financing activities:
Increase in deposits 704,035 3,360,527 583,328
Proceeds from advances from FHLB 33,700,000 8,500,000 8,000,000
Repayment of advances from FHLB (21,200,000) (2,000,000) (4,500,000)
Net increase (decrease) in advances from
borrowers for taxes and insurance 25,022 9,446 (33,992)
Treasury stock acquired -- (393,659) (511,109)
Stock options exercised 241,634 24,015 --
Payment of cash dividends (315,418) (216,785) (191,453)
----------- ----------- ----------
Net cash provided by financing activities 13,155,273 9,283,544 3,346,774
----------- ----------- ----------
Net increase (decrease) in cash and cash
equivalents 1,563,694 (1,474,180) 1,693,052
Cash and cash equivalents at beginning of year 2,523,983 3,998,163 2,305,111
----------- ----------- ----------
Cash and cash equivalents at end of year $ 4,087,677 2,523,983 3,998,163
=========== =========== ==========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 7,241,774 6,713,865 6,240,461
Taxes on 351,760 485,140 531,654
income
Transfers from loans to real estate acquired
through foreclosure 528,950 349,818 134,098
=========== =========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
49
<PAGE>
MIDWEST BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
(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, 1998, the
Association met the requirements, and management anticipates meeting the
requirements at December 31, 1999 (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, 1998 and
1997, were $2,977,766 and $1,088,237, respectively.
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 in 1997. The average number of
shares and dilutive
50
(Continued)
<PAGE>
MIDWEST BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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, 1998, 1997, and 1996.
1998 1997 1996
---------- ---------- ----------
Basic EPS Computation:
Numerator -
Net income $1,372,258 1,264,914 629,658
Denominator -
Weighted average
shares outstanding 1,048,233 1,032,310 1,061,442
---------- ---------- ----------
Basic EPS $ 1.31 1.23 0.59
========== ========== ==========
Diluted EPS Calculation:
Numerator -
Net income $1,372,258 1,264,914 629,658
---------- ---------- ----------
Denominator:
Weighted average
shares outstanding 1,048,233 1,032,310 1,061,442
Stock options 53,750 75,631 62,941
---------- ---------- ----------
1,101,983 1,107,941 1,124,383
---------- ---------- ----------
Diluted EPS $ 1.25 1.14 0.56
========== ========== ==========
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.
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' eSecurities 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).
51
(Continued)
<PAGE>
MIDWEST BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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.
Real estate acquired is carried at the lower of cost or fair value less
estimated costs of disposition. When a property is acquired through foreclosure
or a loan is considered impaired, any excess of the loan balance over fair value
of the property plus disposition costs is charged to the allowance for losses on
loans. When circumstances indicate additional loss on the property, a direct
charge to the provision for losses on real estate is made, and the real estate
is recorded net of such provision.
Accrued interest receivable in arrears which management believes is
doubtful of collection (generally when a loan becomes 90 days delinquent) is
charged to income. Subsequent interest income is not recognized on such loans
until collected or until determined by management to be collectible.
Under the Company's credit policies, all nonaccrual and restructured loans
are considered to meet the definition of impaired loans. Loan impairment is
measured based on the present value of expected future cash flows, discounted at
the loan's effective interest rate except, where more practical, at the
observable market price of the loan or the fair value of the collateral if the
loan is collateral dependent.
Unearned Loan Fees and Discounts
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.
52
(Continued)
<PAGE>
MIDWEST BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Financial Instruments with Off Balance Sheet Risk
In the normal course of business to meet the financing needs of its
customers, the Company is a party to financial instruments with off balance
sheet risk, which include commitments to extend credit. The Company's exposure
to credit loss in the event of nonperformance by the other party to the
commitments to extend credit is represented by the contractual amount of those
instruments. The Company uses the same credit policies in making commitments as
it does for on balance sheet instruments.
Commitments to extend credit are agreements to lend to a customer as long
as there are no violations of any conditions established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since some of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements (see note 3). The Company evaluates each
customer's creditworthiness on a case-by-case basis. The amount of collateral
obtained if deemed necessary by the Company upon extension of credit is based on
management's credit evaluation of the counterparty.
Office Property and Equipment
Office property and equipment are recorded at cost, and depreciation is
provided primarily using the straight-line basis over the estimated useful lives
of the related assets, which range from 25 to 50 years for office buildings and
from 5 to 15 years for furniture, fixtures, and equipment.
Maintenance and repairs are charged against income. Betterments are
capitalized and subsequently depreciated. The cost and accumulated depreciation
of properties retired or otherwise disposed of are eliminated from the asset and
accumulated depreciation accounts. Related profit or loss from such transactions
is credited or charged to income.
Taxes on Income
The Company files a consolidated federal income tax return. Federal income
taxes are allocated based on taxable income or loss included in the consolidated
return. For state tax purposes, the Association files a franchise tax return.
The Parent Company and the Association's subsidiary file corporate income tax
returns.
Under the asset and liability method, deferred tax assets and liabilities
are recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect of a change in tax rates on deferred tax assets and
liabilities is recognized in income in the period that includes the enactment
date.
Stock Option Plan
The company provides pro forma net income and pro forma earnings per share
disclosures for material employee stock option grants made in 1996 and future
years as if the fair-value-based method, which recognizes as expense over the
vesting period the fair value of stock-based at the date of grant, had been
applied.
53
(Continued)
<PAGE>
MIDWEST BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Fair Value of Financial Instruments
The Company discloses the estimated fair values for its financial
instruments. Fair value estimates, methods, and assumptions are set forth below.
Cash and Cash Equivalents
The carrying amount is a reasonable estimate of fair value.
Securities Available for Sale and Held to Maturity
The fair value of securities is estimated based on bid prices published in
financial newspapers, bid quotations received from securities dealers, or quoted
market prices of similar instruments, adjusted for differences between the
quoted instruments and the instruments being valued.
Loans
Fair values are estimated for portfolios of loans with similar financial
characteristics. Loans are segregated by type, such as real estate, consumer,
and commercial.
The fair value of single family residential loans is calculated by
obtaining quoted market prices of similar loans that are sold in conjunction
with securitization transactions.
The fair value of all other loans is calculated by discounting scheduled
cash flows through the estimated maturity using estimated market discount rates
that reflect the credit and interest rate risk inherent in the loan. The
estimate of maturity is based on the Company's historical experience, with
repayments for each loan classification, modified, as required, by an estimate
of the effect of current economic and lending conditions. The effect of
nonperforming loans is considered in assessing the credit risk inherent in the
fair value estimate.
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.
54
(Continued)
<PAGE>
MIDWEST BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Off Balance Sheet Assets (Liabilities)
The unrealized gains and losses of commitments to external credits are
estimated using the difference between current levels of interest rates and
committed rates. The unrealized gains and losses of letters of credit are based
on fees currently charged for similar agreements.
Limitations
Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial instrument.
Because no market exists for a significant portion of the Company's financial
instruments, fair value estimates are based on judgments regarding future
expected loss experience, current economic conditions, risk characteristics of
various financial instruments, and other factors. These estimates are subjective
in nature and involve uncertainties and matters of significant judgment and,
therefore, cannot be determined with precision. Changes in assumptions could
significantly affect the estimates.
Effect of New Financial Accounting Standards
The Company adopted the provisions of SFAS No. 130, Reporting Comprehensive
Income, effective January 1, 1998. SFAS No. 130 establishes the standards for
the reporting and display of comprehensive income in the financial statements.
Comprehensive income represents net income and certain amounts reported directly
in stockholders' equity, such as the net unrealized gain or loss on
available-for-sale securities. The statement requires additional disclosures in
the consolidated financial statements; it does not effect the Company's
financial positions or results of operations. Prior year consolidated financial
statements have been reclassified to conform to the requirements of SFAS No.
130.
The Company adopted the provisions of SFAS No. 131, Disclosures About
Segments of an Enterprise and Related Information, effective January 1, 1998.
SFAS No. 131 establishes disclosure requirements for segment operations. The
adoption had no effect on the Company's financial statement disclosures.
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 No. 133, Accounting for Derivative Instruments and Hedging Activities,
will be effective for the Company for the year beginning January 1, 2000.
Management is evaluating the impact the adoption will have on the Company's
consolidated financial statements. The Company expects to adopt SFAS No. 133
when required. Adoption is not expected to have a material effect on the
financial position and results of operations.
Reclassifications
Certain amounts previously reported have been reclassified to conform with
the presentation in these financial statements.
55
(Continued)
<PAGE>
MIDWEST BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(2) Debt and Equity Securities
Debt and 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, 1998 and 1997, follow.
Securities available for sale:
<TABLE>
<CAPTION>
Gross Gross
Amortized unrealized unrealized Fair
Description cost gains losses values
----------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
1998:
Government National Mortgage Association
(GNMA) mortgage-backed securities $ 5,461,021 309,023 -- 5,770,044
Marketable equity securities 308,750 137,500 59,825 386,425
Municipal bonds:
Due from one to five years 300,000 6,750 -- 306,750
Due from five to ten years 1,910,000 47,175 -- 1,957,175
Due after ten years 10,189,357 168,574 -- 10,357,931
U.S. agency obligations:
Due from one to five years 10,014,384 57,489 -- 10,071,873
Due from five to ten years 2,000,000 3,125 -- 2,003,125
Due after ten years 2,988,807 568 -- 2,989,375
----------- ------- ------ ----------
$33,172,319 730,204 59,825 33,842,698
=========== ======= ====== ==========
1997:
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 -- 1,040,787
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
=========== ======= ======= ==========
</TABLE>
56
(Continued)
<PAGE>
MIDWEST BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
There were no sales of mortgage-backed securities, which were held
available for sale, in 1998 or 1997. Proceeds from the sale of mortgage-backed
securities amounted to $550,239, resulting in gains of $29,213 during the year
ended December 31, 1996. Proceeds from the sale of marketable equity securities
amounted to $440,123, $798,473, and $-0-, resulting in gains of $93,550,
$220,223, and $-0- and losses of $28,707, $-0-, and $-0- during the three years
ended December 31, 1998, respectively. Proceeds from the sale of municipal bonds
amounted to $3,833,285, $-0-, and $-0-, resulting in gains of $20,820, $-0-, and
$-0- during the three years ended December 31, 1998, respectively. Proceeds from
the sale of U.S. agency obligations amounted to $3,024,219, $-0-, and $-0-,
resulting in gains of $32,257, $-0-, and $-0- during the three years ended
December 31, 1998, respectively.
57
(Continued)
<PAGE>
MIDWEST BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Securities held to maturity:
<TABLE>
<CAPTION>
Gross Gross
Amortized unrealized unrealized Fair
Description cost gains losses values
----------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
1998:
Mortgage-backed securities:
Federal Home Loan Mortgage
Corporation (FHLMC) $13,447,847 133,691 4,969 13,576,569
Federal National Mortgage
Association (FNMA) 7,585,614 176,020 15,156 7,746,478
Resolution Trust Corporation (RTC) 336,906 -- -- 336,906
U.S. agency obligations-
Due in one year or less 456,522 -- -- 456,522
----------- ----------- ----------- -----------
$21,826,889 309,711 20,125 22,116,475
=========== =========== =========== ===========
1997:
Mortgage-backed securities:
FHLMC $ 8,829,148 75,772 25,190 8,879,730
FNMA 8,115,716 175,497 -- 8,291,213
RTC 438,579 461 -- 439,040
U.S. agency obligations-
Due in one year 2,456,235 -- 10,854 2,445,381
----------- ----------- ----------- -----------
$19,839,678 251,730 36,044 20,055,364
=========== =========== =========== ===========
</TABLE>
At December 31, 1998 and 1997, mortgage-backed securities were comprised of
fixed rate securities of $11,501,289 and $6,673,987, respectively; adjustable
rate securities of $3,549,772 and $4,631,763, respectively; fixed rate
seven-year balloon securities of $6,319,306 and $2,273,558, respectively; and
fixed rate five-year balloon securities of $-0- and $3,804,135, respectively.
58
(Continued)
<PAGE>
MIDWEST BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(3) Loans Receivable
Loans receivable at December 31, 1998 and 1997, are summarized as follows:
1998 1997
----------- -----------
Real estate loans:
One- to four-family $71,535,021 66,549,359
Commercial/multi-family 9,653,163 11,209,675
Construction 1,862,300 817,905
----------- -----------
Total real estate loans 83,050,484 78,576,939
Consumer and other loans 14,423,441 14,167,194
----------- -----------
97,473,925 92,744,133
----------- -----------
Less:
Loans in process 563,542 835,737
Unearned discounts and
deferred loan fees 82,667 63,962
Allowance for losses on loans 480,000 568,000
----------- -----------
1,126,209 1,467,699
----------- -----------
$96,347,716 91,276,434
=========== ===========
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, 1998, the geographic location of
the Company's loan portfolio was as follows: local market area, 90.4 percent;
Wisconsin, 5.7 percent; California, 3.1 percent; and other states, 0.8 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, 1998, the Association had outstanding commitments to
originate loans totaling $740,000, which included fixed rate commitments of
$529,000 at 7.05 percent weighted-average interest rate and commitments to
purchase loans totaling $719,000. The Association also had unused lines of
credit totaling $2,228,000 at a variable rate indexed to the Bank Prime rate.
Loans on nonaccrual status and considered impaired amounted to $172,000 and
$769,000 at December 31, 1998 and 1997, respectively. The allowance for loan
losses related to these nonaccrual loans were $17,000 and $157,000,
respectively. There were no nonaccrual loans that were not subject to related
allowances for loan losses at December 31, 1998 and 1997. The average balances
of nonaccrual loans for the years ended December 31, 1998, 1997, and 1996, were
$355,000; $885,000; and $429,000, respectively. For the years ended December 31,
1998, 1997, and 1996, interest income which would have been recorded under the
original terms of the loans was approximately $15,000; $79,000; and $103,000,
respectively, and interest income actually recorded amounted to approximately
$9,000; $25,000; and $56,000, respectively.
59
(Continued)
<PAGE>
MIDWEST BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Loan customers 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, 1998 and 1997, amounted to $868,974 and $852,861,
respectively. During the year ended December 31, 1998, new loans totaled
$435,865 and repayments totaled $419,752.
(4) Allowance for Losses on Loans
A summary of the allowance for losses on loans for the three years ended
December 31, 1998, follows:
1998 1997 1996
---------- ---------- ---------
Balance at beginning of year $ 568,000 686,000 676,000
Provision for losses on loans 47,907 48,000 47,972
Charge-offs (135,907) (166,000) (37,972)
--------- --------- --------
Balance at end of year $ 480,000 568,000 686,000
========= ========= ========
(5) Office Property and Equipment
The cost and accumulated depreciation of office property and equipment at
December 31, 1998 and 1997, were as follows:
1998 1997
---------- ----------
Land $ 312,320 312,320
Office buildings 2,403,081 2,403,081
Furniture, fixtures, and equipment 1,390,707 1,316,437
Vehicles 41,905 41,905
---------- ----------
4,148,013 4,073,743
Less accumulated depreciation 1,703,657 1,512,994
---------- ----------
$2,444,356 2,560,749
========== ==========
(6) Accrued Interest Receivable
Accrued interest receivable at December 31, 1998 and 1997, is summarized as
follows:
1998 1997
---------- ----------
Loans receivable $ 778,481 768,460
Securities available for sale 332,444 305,645
Securities held to maturity 126,230 129,366
---------- ----------
$1,237,155 1,203,471
========== ==========
60
(Continued)
<PAGE>
MIDWEST BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(7) Deposits
Deposits at December 31, 1998 and 1997, are summarized as follows:
1998 1997
------------ ------------
Passbook $ 9,002,836 8,372,800
Noninterest checking 579,619 649,162
Money market investments 14,797,945 14,281,692
Regular checking 7,963,533 7,266,643
Certificates of deposit 73,638,394 74,707,995
------------ ------------
$105,982,327 105,278,292
============ ============
At December 31, 1998, the scheduled maturities of certificates of deposit
were as follows:
1999 $45,460,923
2000 19,462,813
2001 6,462,205
2002 683,516
2003 and thereafter 1,568,937
-----------
$73,638,394
===========
Interest expense on deposits for the three years ended December 31, 1998,
is summarized as follows:
1998 1997 1996
---------- ---------- ----------
Passbook $ 211,378 234,586 244,988
Money market and checking 632,695 635,551 618,377
Certificates of deposit 4,080,578 4,168,899 3,863,272
---------- ---------- ----------
$4,924,651 5,039,036 4,726,637
========== ========== ==========
The aggregate amount certificates of deposit with a minimum denomination of
$100,000 was approximately $4,719,000 and $4,844,000 at December 31, 1998 and
1997, respectively.
At December 31, 1998, mortgage-backed securities with carrying amounts of
$734,490 were pledged as collateral for deposits of approximately $753,000.
61
(Continued)
<PAGE>
MIDWEST BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(8) Advances from FHLB
A summary at December 31, 1998 and 1997, follows:
1998 1997
---------------------- ----------------------
Weighted- Weighted-
average average
Amount rate Amount rate
----------- --------- ----------- ---------
Advance maturity (A):
Within 1 year $ 2,000,000 6.15% $13,000,000 5.45%
Beyond 1 year but within
5 years 22,000,000 5.75 14,000,000 6.09
Beyond 5 years 19,000,000 5.14 2,000,000 5.62
----------- -----------
43,000,000 5.50 29,000,000 5.77
Line of credit with FHLB (B) -- Variable 1,500,000 Variable
----------- ======== ----------- ========
$43,000,000 $30,500,000
=========== ===========
(A) Advances from the FHLB are secured by stock in the FHLB. In addition,
the Bank has agreed to maintain unencumbered additional security in
the form of certain residential mortgage loans aggregating no less
than 150 percent of outstanding advances.
(B) Line of credit with the FHLB with a limit of $1,000,000 maturing in
March of 1999. The Bank does not intend to renew the agreement at that
time. The line has an interest rate which fluctuates daily. During
1998, the interest rate ranged from 4.70 percent to 6.25 percent and
at December 31, 1998, was 4.88 percent. The line is collateralized as
described in (A) above.
(9) Taxes on Income
Taxes on income for the three years ended December 31, 1998, were comprised
as follows:
1998 1997
-------------------------------- --------------------------------
Federal State Total Federal State Total
-------- -------- -------- -------- -------- --------
Current $322,000 57,000 379,000 524,000 69,000 593,000
Deferred 148,000 22,000 170,000 83,000 13,000 96,000
-------- -------- -------- -------- -------- --------
$470,000 79,000 549,000 607,000 82,000 689,000
======== ======== ======== ======== ======== ========
1996
--------------------------------
Federal State Total
-------- -------- --------
Current $307,000 43,000 350,000
Deferred 22,000 2,000 24,000
-------- -------- --------
$329,000 45,000 374,000
======== ======== ========
62
(Continued)
<PAGE>
MIDWEST BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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:
1998 1997 1996
--------- --------- ---------
Computed "expected" tax expense $ 653,228 664,331 341,126
State income tax 52,140 54,120 29,903
Tax-exempt investment income (132,460) (11,418) --
Other (23,908) (18,033) 2,971
--------- --------- ---------
$ 549,000 689,000 374,000
========= ========= =========
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, 1998 and 1997, are presented below:
1998 1997
--------- ---------
Deferred tax assets:
General allowance for loan losses $ 179,000 212,000
Accrued expenses not deducted 15,000 72,000
--------- ---------
Total gross deferred tax assets 194,000 284,000
--------- ---------
Deferred tax liabilities:
Unrealized gains on securities available for sale 250,000 222,000
Office property and equipment 195,000 167,000
FHLB stock 99,000 101,000
Tax bad debt reserve 86,000 32,000
--------- ---------
Total gross deferred tax liabilities 630,000 522,000
--------- ---------
Net deferred tax liability $(436,000) (238,000)
========= =========
There were no valuation allowances for deferred tax assets as of December
31, 1998 and 1997.
(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, 1998, 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 wer no pension contributions in 1998, 1997, and 1996,
because the plan was fully funded.
63
(Continued)
<PAGE>
MIDWEST BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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 and 1996, 18,000 shares (all shares amounts have
been restated for the 1997 stock split discussed in note 11), were committed to
be released and 18,000; and 36,000 shares, respectively, were unallocated. At
December 31, 1998, the were no unallocated shares. The fair value on unearned
shares at December 31, 1997, and 1996, was approximately $324,000 and $325,500,
respectively. ESOP expense was $60,100; $56,482; and $53,938 for the years ended
December 31, 1998, 1997, and 1996, 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 1998 and 1997 earnings per share was
approximately one cent, respectively.
Changes in options outstanding and exercisable during 1998, 1997, and 1996
(as restated for the 1997 stock split discussed in note 11) were as follows:
Exercisable Outstanding Option price
options options per share
----------- ----------- ------------
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
Vested 2,274 -- 9.08
Forfeited -- (4,548) 9.08
Exercised (59,537) (59,537) 3.33 - 9.08
------- -------
December 31, 1998 39,461 41,735 3.33 - 9.08
======= =======
64
(Continued)
<PAGE>
MIDWEST BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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 year ended December 31, 1996 was $9,725; there was no RRP expense for
the years ended December 31, 1998 and 1997.
(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.
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, 1998 and 1997.
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, 1998 and
1997.
65
(Continued)
<PAGE>
MIDWEST BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The Association's actual and required capital amounts and ratios as of
December 31, 1998, were as follows:
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED
FOR CAPITAL UNDER PROMPT
ADEQUACY CORRECTIVE
ACTUAL PURPOSES ACTION PROVISIONS
---------------------------------------------------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
----------- ------- ---------- ------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
Tangible capital $10,847,000 6.72% $2,423,000 1.50% n/a n/a
Tier I leverage (core) capital 10,847,000 6.72 4,846,000 3.00 $8,076,000 5.00%
Risk-based capital 11,327,000 15.52% 5,838,000 8.00 7,298,000 10.00
Tier I risk-based capital 10,847,000 14.86% n/a n/a 4,379,000 6.00
=========== ====== ========== ===== ========== ======
</TABLE>
At December 31, 1998 and 1997, the Association had federal income tax bad
debt reserves of approximately $2,819,000, 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, 1998 and 1997, 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.
66
(Continued)
<PAGE>
MIDWEST BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(13) Fair Value of Financial Instruments
The estimated fair values of the Company's financial instruments at
December 31, 1998 and 1997, were as follows:
<TABLE>
<CAPTION>
-------------------------------------------------
1998 1997
------------------------- ----------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------ ----------- --------- -----------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 4,087,677 4,087,677 2,523,983 2,523,983
Securities available for sale 33,842,698 33,842,698 27,934,974 27,934,974
Securities held to maturity 21,826,889 22,116,475 19,839,678 20,055,364
Loans receivable 96,347,716 98,056,675 91,276,434 92,552,734
FHLB stock 2,200,000 2,200,000 1,959,700 1,959,700
Accrued interest receivable 1,237,155 1,237,155 1,203,471 1,203,471
Financial liabilities:
Deposits 105,982,327 106,894,736 105,278,292 105,472,882
Advances from FHLB 43,000,000 42,632,130 30,500,000 30,376,708
Accrued interest payable 65,566 65,566 80,175 80,175
============ =========== ========== ==========
<CAPTION>
Notional Unrealized Notional Unrealized
Amount Gain (Loss) Amount Gain (Loss)
----------- ----------- --------- ------------
<S> <C> <C> <C> <C>
Off balance sheet commitments:
Commitments to extend credit $ 2,968,000 - 2,211,000 -
Commitments to purchase loans 719,000 - 410,000 -
Commitments to purchase
investments - - 1,110,000 -
=========== ========== ========== ==========
</TABLE>
67
(Continued)
<PAGE>
MIDWEST BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(14) Midwest Bancshares, Inc. (Parent Company Only) Financial Information
Condensed Balance Sheets
December 31, 1998 and 1997
1998 1997
------------- ------------
Cash and cash equivalents $ 503,789 $ 236,836
Securities available for sale 386,425 823,750
Loans receivable and other 63,001 60,965
Investment in subsidiary 11,218,303 9,680,915
------------ ------------
Total assets 12,171,518 10,802,466
============ ============
Dividends payable $ 107,774 $ 61,246
Income taxes payable
(deferred and current) 29,000 65,759
Stockholders' equity:
Common stock 10,777 10,208
Additional paid-in capital 1,771,495 1,530,430
Retained earnings 9,832,094 8,821,782
ESOP -- (60,000)
Accumulated other
comprehensive income 420,378 373,041
------------ ------------
Total stockholders' equity 12,034,744 10,675,461
------------ ------------
Total liabilities and
stockholders' equity $ 12,171,518 $ 10,802,466
============ ============
Condensed Statement of Operations
Years ended December 31, 1998, 1997, and 1996
1998 1997 1996
----------- ----------- -----------
Gain on sale of securities
available for sale $ 64,843 220,223 --
Interest income 3,449 11,609 16,366
Noninterest income 9,574 15,950 7,925
Income - equity in undistributed
earnings of subsidiary 1,373,006 1,151,475 657,200
Noninterest expenses (84,385) (76,375) (70,469)
----------- ----------- -----------
Net earnings before income
tax (benefit) expense 1,366,487 1,322,882 611,022
Income tax (benefit) expense (5,771) 57,968 (18,636)
----------- ----------- -----------
Net earnings $ 1,372,258 1,264,914 629,658
=========== =========== ===========
68
(Continued)
<PAGE>
MIDWEST BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Condensed Statements of Cash Flows
Years ended December 31, 1998, 1997, and 1996
1998 1997 1996
----------- ----------- -----------
Operating activities:
Net earnings $ 1,372,258 1,264,914 629,658
Equity in undistributed
earnings of subsidiary (1,373,006) (1,151,475) (657,200)
Gain on sale of investments (64,843) (220,223) --
Other, net (63,795) 28,675 (1,863)
----------- ----------- -----------
Net cash used in operating
activities (129,386) (78,109) (29,405)
----------- ----------- -----------
Investing activities:
Proceeds from sale of securities 440,123 798,473 --
Purchase of securities available
for sale (30,000) (661,530) (570,750)
Decrease in loans receivable 60,000 60,000 60,000
----------- ----------- -----------
Net cash provided by (used
in) investing activities 470,123 196,943 (510,750)
----------- ----------- -----------
Financing activities:
Dividends from subsidiary -- 500,000 1,200,000
Treasury stock acquired -- (393,659) (511,109)
Stock options exercised 241,634 24,015 --
Dividends paid (315,418) (216,785) (191,453)
----------- ----------- -----------
Net cash (used in) provided by
financing activities (73,784) (86,429) 497,438
----------- ----------- -----------
Net increase (decrease) in cash
and cash equivalents 266,953 32,405 (42,717)
Cash and cash equivalents at beginning
of year 236,836 204,431 247,148
----------- ----------- -----------
Cash and cash equivalents at end of year $ 503,789 236,836 204,431
=========== =========== ===========
(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) Subsequent Event
On February 2, 1999, the Company announced the execution of a definitive
merger agreement with Mahaska Investment Company. The merger will be
accomplished through a tax-free fixed exchange of one share of Mahaska
Investment Company common stock for each share of outstanding common stock of
the Company. The transaction is expected to be completed in the third quarter of
1999, after customary regulatory and shareholder approvals have been received.
69
<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
DIRECTORS
The business experience of each director is set forth below. All directors
have held their present positions for at least five years unless otherwise
indicated. Each individual has served as a director of the Company since its
organization in July 1992, with the exception of Directors Maschmann and Lin,
who joined the Company's Board later that same year. Information regarding each
person's term of office as a director and the period during which the person has
served contained in Item 11 of this Part III of the Form 10-KSB is incorporated
herein by reference.
HENRY L. HIRSCH, age 83, has been of counsel to the law firm of Hirsch,
Adams, Krekel, Putnam, Cahill & Miller since 1994, where he was previously a
partner since 1948. Mr. Hirsch has served as the Association's General Counsel
since 1958. Mr. Hirsch served as President of Midwest Federal from 1971 to 1977
and has served as Chairman of the Board since 1977.
WILLIAM D. HASSEL, age 50, joined the Association in 1972 as Comptroller,
before being promoted to Treasurer in 1974 and to Chief Financial Officer in
1983. Mr. Hassel has served as President and Chief Executive Officer of the
Association since 1989 and as President and Chief Executive Officer of the
Company since its organization in 1992.
ROBERT D. MASCHMANN, age 43, was appointed Executive Vice President of the
Company and the Association in April 1994. Prior thereto, Mr. Maschmann served
as Vice President and Treasurer of the Association since 1989 and of the Company
since 1992. Mr. Maschmann is the Company's and the Association's chief financial
and accounting officer, responsible for developing and implementing financial
plans and policies, supervising the accounting functions and overseeing
asset/liability activities. Mr. Maschmann served as Vice President and
Controller of the Association from 1985 to 1989.
YUH-FEN (BONI) LIN, age 51, has been a clinical dietician at Burlington
Medical Center since 1985. She has also been an owner/partner in several motels
in the state of Washington since 1979.
JAMES R. WALKER, age 51, has been a shareholder in the accounting firm of
Walker & Egerton, P.C. since 1973.
EDWARD C. WHITHAM, JR., age 59, has been the owner of Financial Management
Accounting, an accounting and tax consulting firm, since 1989. From 1987 to
1989, Mr. Whitham was the President of Financial Management Consultants, an
accounting and tax consulting firm. Since 1989, Mr. Whitham has also served as
the business manager/treasurer of Employee Benefit Systems, Inc., a firm that
administers employee benefit plans for governmental bodies, corporations and
businesses.
JAMES E. WITTE, age 64, has been employed by Komick Construction, a real
estate construction, management and maintenance company since 1988, for whom he
has been the maintenance supervisor for the Windsor Beach Homeowners'
Association since 1991. For the two years prior thereto, Mr. Witte was engaged
part-time in farming, and from 1965 to 1985 was the owner/manager of a grain and
livestock farming operation.
70
<PAGE>
EXECUTIVE OFFICERS
Information regarding the business experience of the executive officers of
the Company who are not also Directors contained in Part I of the Form 10-KSB is
incorporated herein by reference.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth the cash compensation paid or accrued by the
Association for services rendered during the fiscal year ended December 31, 1998
to the Association's Chief Executive Officer and Chief Financial Officer. No
other officer made in excess of $100,000 during fiscal 1998. The Company's
officers do not receive any compensation from the Company for services performed
in their capacities as officers of the Company.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
- -------------------------------------------------------------------------------------------------------------------
Long Term
Compensation
--------------------------
Annual Compensation Awards
- ----------------------------------------------------------------------- --------------------------
Securities
Restricted Underlying
Name and Stock Options/ All Other
Principal Salary Bonus Award(s) SARS Compensation
Position Year ($) ($)(1) ($) (#) ($)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
William D. Hassel 1998 $114,278 $25,152 -- -- $12,229(2)
President, Chief Executive 1997 115,119 6,152 -- -- 12,489
Officer and Director 1996 111,930 2,652 -- -- 12,733
Robert D. Maschmann 1998 $87,278 $20,152 -- -- $10,445(2)
Executive Vice President, 1997 85,143 3,152 -- -- 10,054
Treasurer and Director 1996 81,930 2,652 -- -- 10,407
</TABLE>
(1) Includes a Christmas bonus of $152 paid to all full-time employees in
1998, 1997 and 1996.
(2) Represents pre-tax medical insurance premiums of $4,222 and $4,222, and
ESOP allocations of $8,007 and $6,223 paid on behalf of Mr. Hassel and Mr.
Maschmann, respectively.
71
<PAGE>
The following table sets forth information concerning the number and value
of unexercised stock options held by the Company and the Association's Chief
Executive Officer and Chief Financial Officer at December 31, 1998. No stock
option awards were made under the Company's Stock Option Plan during fiscal
1998. All options granted to date expire ten years from the date of grant and
have exercise prices per share equal to the market price per share of the Common
Stock on the date of grant. The Stock Option Plan pursuant to which all options
were granted was ratified by stockholders on April 26, 1993.
<TABLE>
<CAPTION>
==============================================================================================================================
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END
OPTION/SAR VALUES
- ------------------------------------------------------------------------------------------------------------------------------
VALUE OF
NUMBER OF SECURITIES UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS/SARS AT OPTIONS/SARS AT
FY-END (#) FY-END ($)
--------------------------------- -------------------------------
SHARES
ACQUIRED
ON VALUE
EXERCISE REALIZED
NAME (#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ----------------------------- -------- ---------------- ------------- ------------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
William D. Hassel 10,000 $129,200 17,300 --- $158,641(1) $ ---
Robert D. Maschmann 16,000 201,845 --- --- --- ---
================================================================================================================================
</TABLE>
- --------------
(1) Represents the aggregate market value of incentive stock options to
purchase 17,300 shares of Common Stock (market price less the exercise
price of $3.33 per share), respectively, awarded to Mr. Hassel, based upon
the average of the bid and asked price of $12.50 per share of the Common
Stock on December 31, 1998.
EMPLOYMENT AGREEMENT
The Association has entered into employment agreements with Messrs. Hassel
and Maschmann. The employment agreements are designed to assist the Association
and the Company in maintaining a stable and competent management base. The
continued success of the Association and the Company depends to a significant
degree on the skills and competence of their officers. Each employment agreement
provides for an annual base salary in an amount not less than the employee's
current salary, and has an initial term of three years. The employment
agreements also provide for a one year extension on each anniversary date,
subject to review and approval of the extension by the disinterested members of
the Board of Directors of the Association. Each agreement provides for
termination upon the employee's death, for cause, or in certain events specified
by OTS regulations. The employment agreements are terminable by the employee
upon 90 days notice to the Association. Each employment agreement provides for
payment to the employee of up to 299% of the employee's then-current annual
compensation in the event there is a change in control of the Association where
employment terminates involuntarily in connection with such change in control or
within twelve months thereafter. This termination payment is subject to
reduction by the amount of all other compensation to the employee deemed for
purposes of the Internal Revenue Code of 1986, as amended, to be contingent on a
change in control. Such termination payment is provided on a similar basis in
connection with a voluntary termination of employment, where the change in
control was at any time opposed by the Company's Board of Directors. For the
purposes of the employment agreements, a change in control is defined to mean
any acquisition of control (other than by a trustee or other fiduciary holding
securities under an employee benefit plan of the Company or a subsidiary of the
Company) as defined in 12 C.F.R. ss.574.4, or any successor regulation . The
agreements provide, among other things, for participation in an equitable manner
in employee benefits applicable to executive personnel.
Based on their current salaries, if Mr. Hassel or Mr. Maschmann had been
terminated as of December 31, 1998, under circumstances entitling them to
severance pay as described above, they would have been entitled to receive a
lump sum cash payment of approximately $354,000 and $274,000, respectively.
72
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of March 1, 1999, certain information as
to those persons who (i) were known by management to be beneficial owners of
more than 5% of the Company's outstanding shares of Common Stock (except for Mr.
Hassel and Mr. Maschmann whose beneficial ownership is disclosed on the
following page) and (ii) the shares of Common Stock beneficially owned by all
directors and executive officers of the Company and the Association as a group.
<TABLE>
<CAPTION>
SHARES
NAME AND ADDRESS OF BENEFICIALLY PERCENT
BENEFICIAL OWNER OWNED OF CLASS
- --------------------------------------- ---------------- -------------
<S> <C> <C>
Midwest Bancshares, Inc.
Employee Stock Ownership Plan 91,279(1) 8.31%
3225 Division Street
Burlington, Iowa 52601
Jeffrey L. Gendell ET AL. 104,700(2) 9.53%
Tontine Partners, L.P.
31 West 52nd Street, 17th Floor
New York, New York 10019
All directors and executive
officers as a group (10 persons) 395,790(3) 35.36%
</TABLE>
- -----------------
(1) The trustee of the ESOP has shared voting power with respect to the 91,279
shares allocated to the account of ESOP participants.
(2) The above information regarding beneficial ownership by Jeffrey L. Gendell
and Tontine Partners, L.P. ("Tontine") is as reported by Mr. Gendell and
Tontine in an Amendment to Schedule 13D dated April 7, 1997. Mr. Gendell
reported sole voting and dispositive power with respect to 54,000 shares
and shared voting and dispositive power with Tontine with respect to 50,700
shares. Such shares have been adjusted to reflect the subsequent three for
one stock split. Mr. Gendell is the Managing Member of Tontine Management,
L.L.C. which is the general partner of Tontine.
(3) This amount includes shares held directly, shares held in retirement
accounts, including the ESOP, and held by certain members of the named
individuals' families, or held by trusts of which the named individual is a
trustee or substantial beneficiary, with respect to which shares the
respective directors and officers may be deemed to have sole or shared
voting and/or investment power. This amount also includes an aggregate of
20,950 shares subject to options granted to directors and executive
officers under the Company's 1992 Stock Option and Incentive Plan (the
"Stock Option Plan") which are exercisable within 60 days of March 1, 1999.
73
<PAGE>
The table below sets forth certain information, as of March 1, 1999,
regarding the shares of Common Stock beneficially owned by the Company's Board
of Directors.
<TABLE>
<CAPTION>
Shares of
Common Stock
Position(s) Director Term Beneficially Percent
Name Held with the Company Since(1) Expires Owned(2) of Class
- ------------------------- ----------------------------- -------------- ---------- ------------------- ----------------
<S> <C> <C> <C> <C> <C>
Henry L. Hirsch Chairman of the Board 1958 1999 29,325 2.67%
William D. Hassel President, Chief Executive 1985 2001 73,534 6.65
Officer and Director
Robert D. Maschmann Executive Vice President, 1992 1999 66,208 6.03
Treasurer and Director
Yuh-Fen (Boni) Lin Director 1992 2000 45,225 4.12
James R. Walker Director 1979 2001 43,077 3.92
Edward C Whitham, Jr. Director 1974 2001 13,281 1.21
James E. Witte Director 1979 2000 36,825 3.33
</TABLE>
- --------------------
(1) Includes service as a director of the Association.
(2) Amounts include shares held directly, as well as shares which are held in
retirement accounts, including the ESOP, or held by certain members of the
named individuals' families, or held by trusts of which the named
individual is a trustee or substantial beneficiary, with respect to which
shares the respective directors may be deemed to have sole or shared voting
and/or investment power. Included in the shares beneficially owned by the
named individuals are currently exercisable options to purchase shares of
Common Stock as follows: Mr. Hirsch - 0 shares; Mr. Hassel - 7,300 shares;
Mr. Maschmann - 0 shares; Ms. Lin - 0 shares; Mr. Walker - 0 shares; Mr.
Whitman - 0 shares; and Mr. Witte - 6,825 shares.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Association has followed a policy of granting consumer loans and loans
secured by the borrower's personal residence to officers, directors and
employees. Loans to officers, directors and their affiliates have been made in
the ordinary course of business and on the same terms and conditions as those of
comparable transactions prevailing at the time, in accordance with the
Association's underwriting guidelines, and do not involve more than the normal
risk of collectibility or present other unfavorable features. Loans to officers
and directors must be approved by a majority of the disinterested directors and
loans to other employees must be approved by the Association's loan committee.
All loans by the Association to its directors and executive officers are subject
to OTS regulations restricting loans and other transactions with affiliated
persons of the Association. Current law requires that all such loans be made on
terms and conditions comparable to those for similar transactions with
non-affiliates.
74
<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
Agreement and Plan of Merger *
Letter Agreement *
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
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 an exhibit to the Company's Current Report on form 8-K
filed on February 18, 1999.
** Filed as an 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, 1998.
75
<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.
MIDWEST BANCSHARES, INC.
Date: March 31, 1999 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 Chairman of the Board
Officer and Director
(PRINCIPAL EXECUTIVE OFFICER)
Date: March 31, 1999 Date: March 31, 1999
---------------------- --------------------------
/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 31, 1999 Date: March 31, 1999
---------------------- ----------------------------
/s/ James R. Walker /s/ James E. Witte
- ------------------------------ ---------------------------------------
James R. Walker James E. Witte
Director Director
Date: March 31, 1999 Date: March 31, 1999
--------------------- ---------------------------
/s/ Yuh-Fen Lin
- ----------------------------
Yuh-Fen Lin
Director
Date: March 31, 1999
------------------------
76
<PAGE>
EXHIBIT INDEX
SEQUENTIAL
EXHIBIT NO. DOCUMENT PAGE NUMBER
- --------------- --------------------------------------- ---------------
21 Subsidiaries of Registrant
23 Consent of KPMG Peat Marwick LLP
27 Financial Data Schedule
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
State of
Percentage Incorporation
of or
Parent Subsidiary Ownership Organization
- ------------------- ------------------ ------------ ---------------
<S> <C> <C> <C>
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.
Exhibit 23
Consent of Independent Auditors
The Board of Directors
Midwest Bancshares, Inc.:
We consented to the incorporation by reference in Registration Statement No.
33-65598 on Form S-8 of Midwest Bancshares, Inc. of our report dated January 22,
1999, except for note 16, which is as of February 2, 1999, relating to the
consolidated balance sheets of Midwest Bancshares, Inc. and subsidiaries as of
December 31, 1998 and 1997, and the related consolidated statements of income,
changes in shareholders' equity and comprehenive income, and cash flows for each
of the years in the three-year period ended December 31, 1998, which report
appears in the December 31, 1998, annual report on Form 10-KSB of Midwest
Bancshares, Inc.
/s/ KPMG Peat Marwick LLP
Des Moines, Iowa
March 26, 1999
<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, 1998 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-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 1,109,911
<INT-BEARING-DEPOSITS> 2,977,766
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 33,842,698
<INVESTMENTS-CARRYING> 21,826,889
<INVESTMENTS-MARKET> 22,116,475
<LOANS> 96,347,716
<ALLOWANCE> 480,000
<TOTAL-ASSETS> 162,317,968
<DEPOSITS> 105,982,327
<SHORT-TERM> 2,000,000
<LIABILITIES-OTHER> 1,600,897
<LONG-TERM> 41,000,000
0
0
<COMMON> 12,034,744
<OTHER-SE> 0
<TOTAL-LIABILITIES-AND-EQUITY> 162,317,968
<INTEREST-LOAN> 7,536,716
<INTEREST-INVEST> 3,805,668
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 11,342,384
<INTEREST-DEPOSIT> 4,924,651
<INTEREST-EXPENSE> 7,227,165
<INTEREST-INCOME-NET> 4,115,219
<LOAN-LOSSES> 47,907
<SECURITIES-GAINS> 117,920
<EXPENSE-OTHER> 2,809,943
<INCOME-PRETAX> 1,921,258
<INCOME-PRE-EXTRAORDINARY> 1,921,258
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,372,258
<EPS-PRIMARY> 1.31
<EPS-DILUTED> 1.25
<YIELD-ACTUAL> 2.83
<LOANS-NON> 172,000
<LOANS-PAST> 8,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 568,000
<CHARGE-OFFS> 135,907
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 480,000
<ALLOWANCE-DOMESTIC> 311,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 169,000
</TABLE>
