UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[x] Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 [NO FEE REQUIRED]
For the Fiscal Year ended September 30, 1996
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 [NO FEE REQUIRED]
For the transition period from ___ to ___
Commission File No. 000-23318
Mid-Central Financial Corporation
(Exact name of registrant as specified in its charter)
Minnesota 41-1765962
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
520 South Jefferson Street, Wadena, Minnesota 56482
(Address and Zip Code of principal executive offices)
Registrant's telephone number, including area code: (218) 631-1414
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.10 per share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes _X_ No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not 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-K or any amendment to this
Form 10-K. [X]
As of November 19, 1996 the aggregate market value of the voting stock held by
non-affiliates of the registrant, computed by reference to the average bid and
asked prices at same date ($16.50), was approximately $3,194,252 (for purposes
of this calculation, directors, executive officers and beneficial owners of more
than 10% of the registrant's outstanding voting stock are treated as
affiliates).
As of November 19, 1996 there were issued and outstanding 233,018 shares of the
registrant's common stock.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the Annual Report to Stockholders for the Fiscal Year Ended
September 30, 1996 (the "Annual Report"). (Parts I, II and IV)
2. Portions of the Proxy Statement for the 1996 Annual Meeting of Stockholders
(the "Proxy Statement"). (Part III)
MID-CENTRAL FINANCIAL CORPORATION
FORM 10-K
FISCAL YEAR ENDED SEPTEMBER 30, 1996
Pages
PART I.
Item 1. Business................................................ 3
Item 2. Properties.............................................. 10
Item 3. Legal Proceedings ...................................... 10
Item 4. Submission of Matters to a Vote of Security Holders..... 11
PART II.
Item 5. Market for Registrants's Common Equity and
Related Stockholder Matters............................. 11
Item 6. Selected Financial Data ................................ 11
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations..................... 11
Item 8. Financial Statements and Supplementary Data............. 11
Item 9. Changes in and Disagreements With Accountants
on Accounting and Financial Disclosure ................. 11
PART III.
Item 10. Directors and Executive Officers of the Registrant ..... 12
Item 11. Executive Compensation.................................. 12
Item 12. Security ownership of Certain Beneficial Owners
and Management ......................................... 12
Item 13. Certain Relationships and Related Transactions.......... 12
PART IV.
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K .................................... 13
Signatures................................................................ 14
Index to Exhibits......................................................... 15
PART I
ITEM 1. BUSINESS
Mid-Central Financial Corporation (the "Company") owns 100% of
Mid-Central Federal Savings Bank (the "Savings Bank"), a federal stock chartered
savings bank. The Company has not engaged in any significant activity other than
that of holding the stock of the Saving Bank and operating the business of a
savings association through the Savings Bank. Below is a discussion of the major
business activities of the Savings Bank.
ONE- TO FOUR-FAMILY RESIDENTIAL LOANS. The primary lending activity of
the Savings Bank is the origination of mortgage loans to enable borrowers to
purchase existing homes or to construct new one- to four-family homes at
purchase prices up to approximately $150,000. At September 30, 1996,
approximately $31.8 million, or 71.7% of the total loan portfolio, consisted of
loans secured by one- to four-family residential real estate, including
$203,000, or 0.5% of which are insured or guaranteed by the Veterans
Administration or the Federal Housing Administration.
The Savings Bank originates both fixed-rate mortgage loans and ARM
loans secured by single-family properties with terms of 10 to 30 years. Borrower
demand for ARM loans versus fixed-rate mortgage loans is a function of the level
of interest rates, the expectations of changes in the level of interest rates
and the difference between the initial interest rates and fees charged for each
type of loan. The relative amount of fixed-rate mortgage loans and ARM loans
that can be originated at any time is largely determined by the demand for each
in a competitive environment.
The Savings Bank began offering ARM loans in the early 1980s. The
Savings Bank currently offers a one year ARM loan and a 3/1 ARM loan which
changes to a one year ARM after an initial fixed rate for three years. At
September 30, 1996, the initial interest rate on the ARM loans ranged from 6.50%
to 7.50% per annum. The periodic interest rate cap (the maximum amount by which
the interest rate may be increased or decreased in a given period) on the ARM
loan is generally 2% per adjustment period and the lifetime interest rate cap is
generally 6% over the initial interest rate of the loan. The interest rate floor
is 6% less than the initial interest rate of the loan. The Savings Bank does not
originate negative amortization loans. The terms and conditions of the ARM loan
offered by the Savings Bank, including the index for interest rates, may vary
from time to time. However, the Savings Bank intends, subject to market
conditions, to emphasize the origination of ARM loans which adjust annually. The
Savings Bank believes that ARM loans provide adequate protection to the Savings
Bank against increases in interest rates. At September 30, 1996, ARM loans
accounted for approximately 66.5% of the total mortgage loan portfolio.
The Savings Bank qualifies the borrower based on the borrower's ability
to repay the loan using the fully-indexed interest rate on the one-year ARM
loan. As a result, management believes the potential for delinquencies and
defaults on ARM loans is lessened.
The loan fees charged, interest rates and other provisions of the ARM
loan are determined by the Savings Bank on the basis of its own pricing criteria
and competitive market conditions. At September 30, 1996, the Savings Bank
charged a 1% origination fee on its ARM loans. Interest rates and payments on
the ARM loans originated are adjusted annually to a rate equal to the one-year
National Average Contract Rate for the Purchase of Previously Occupied Homes by
Combined Lenders (National Average Contract Rate). During the fiscal year ended
September 30, 1996, the National Average Contract Rate ranged from 7.13% to
7.87%.
The retention of ARM loans in portfolio helps reduce the Savings Bank's
exposure to changes in the interest rates. There are, however, unquantifiable
credit risks resulting from the potential of increased costs due to changed
rates to be paid by the customer. It is possible that, during periods of rising
interest rates, the risk of default on ARM loans may increase as a result of
repricing and the increased costs to the borrower. Although ARM loans allow the
Savings Bank to increase the sensitivity of its asset base to changes in the
interest rates, the extent of this interest sensitivity is limited by the
periodic and lifetime interest rate adjustment limits. Because of these
considerations, the Savings Bank has no assurance that yields on ARM loans will
be sufficient to offset increases in the Savings Bank's cost of funds.
Mid-Central also originates conventional fixed-rate mortgage loans on
one- to four-family residential properties with terms of 10 or 15 years. The
Savings Bank originates and holds its fixed-rate mortgage loans as long-term
portfolio investments. Management intends to hold all loans to maturity.
The Savings Bank requires an attorney's title opinion confirming the
status of its lien on all of the real estate secured loans and also requires
that the fire and extended coverage casualty insurance (and, if appropriate,
flood insurance) be maintained in an amount at least equal to the outstanding
loan balance.
The Savings Bank's lending policies generally limit the maximum
loan-to-value ratio on mortgage loans secured by owner-occupied properties to
80% of the lesser of the appraisal value or the purchase price, with the
condition that private mortgage insurance is required on loans with
loan-to-value ratios of greater than 80%. The maximum financing on refinance
loans is limited to 80% of the appraised value and such loans require private
mortgage insurance above 80% loan to value.
At September 30, 1996, the Savings Bank had $195,000 in investments in
real estate sold on contract. These contracts represent either financing
arrangements for the sale of the Savings Bank's real estate owned or the
purchase of contracts from third party contract holders. Under the latter
arrangement, the Savings Bank purchases a real estate contract at a discount
from the seller of property. The Savings Bank holds title to the property until
the buyer fulfills the terms of the contract, at which time the Savings Bank
delivers title to the buyer.
COMMERCIAL REAL ESTATE LOANS. Mid-Central has engaged in limited
commercial real estate lending. At September 30, 1996, commercial real estate
loans totalled $738,000 with most of the properties securing these loans located
in the Savings Bank's primary market area. This lending has involved loans
secured principally by motels, nursing homes and owner occupied/rental
commercial buildings. Generally, these loans are made for a period of 20 years
or less, with a loan-to-value ratio of 75% or less, with an adjustable interest
rate.
Loans secured by commercial real estate generally are larger and
involve greater risks than one- to four- family residential mortgage loans.
Payments on loans secured by such properties are often dependent on successful
operation or management of the properties. Repayment of such loans may be
subject to a greater extent to adverse conditions in the real estate market or
the economy. The Savings Bank seeks to minimize these risks in a variety of
ways, including limiting the size of such loans and strictly scrutinizing the
financial condition of the borrower, the quality of the collateral and the
management of the property securing the loan. The Savings Bank also obtains loan
guarantees from financially capable parties. Substantially all of the properties
securing the Savings Bank's commercial and multi-family real estate loans are
inspected by the Savings Bank's lending personnel before the loan is made. The
Savings Bank also obtains appraisals on each property in accordance with
applicable regulations.
MULTI-FAMILY RESIDENTIAL LOANS. The Savings Bank also originates loans
secured by multi-family dwelling units (five or more units). At September 30,
1996, the Savings Bank had $2,081,000 of loans, or 4.7% of the total loan
portfolio, secured by multi-family dwelling units located primarily in the
Savings Bank's primary market area. Multi-family real estate loans are generally
originated at 75% of the appraised value of the property or selling price,
whichever is less, and are generally originated for 25-year terms. Loans secured
by multi-family residential real estate are generally larger and involve a
greater degree of risk than one- to four-family residential mortgage loans. The
credit risks associated with multi-family residential loans are similar to the
risks associated with commercial real estate loans. At September 30, 1996 no
multi-family residential loans were on a nonaccrual basis.
CONSUMER LOANS. Consumer lending has been an important part of
Mid-Central's business. Consumer loans generally have shorter terms to maturity
or repricing and higher interest rates than the long-term, fixed-rate mortgage
loans. The Savings Bank's consumer loans consist primarily of automobile loans,
but also include home improvement loans secured by mortgages on residences,
savings account loans, student loans, boat and mobile home loans, and unsecured
loans for any personal or household purposes. At September 30, 1996 consumer
loans totalled approximately $8.5 million, or 19.3% of the total loan portfolio.
Subject to market conditions, management expects to continue to market and
originate consumer loans as part of its strategy to provide a wide range of
personal financial services to its depository customer base and as a means to
enhance the interest rate sensitivity of the Savings Bank's interest-earning
assets and its interest rate spread.
Automobile loans are secured by both new and used cars and light trucks
and are generally limited to 85% of the "sticker price" or dealer invoice for
new cars, or 75% of the loan value as published by National Automobile Dealers
Association or National Automobile Research "Blue Book." Automobile loans are
primarily made to the borrower-owners on a direct basis. New cars are financed
for a period of up to 60 months while used cars are financed for 48 months or
less depending on the year and model. Collision and comprehensive insurance and
vendor single interest coverage is required on all automobile loans.
Consumer loans entail greater risk than do residential mortgage loans,
particularly in the case of consumer loans which are unsecured or secured by
rapidly depreciating 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. The remaining deficiency often does not warrant
further substantial collection efforts against the borrower beyond obtaining a
deficiency judgment. In addition, consumer loan collections are dependent on the
borrower's continuing financial stability, and thus are more likely to be
adversely affected by job loss, divorce, illness or personal bankruptcy.
Furthermore, the application of various federal and state laws, including
federal and state bankruptcy and insolvency laws, may limit the amount which can
be recovered on such loans. At September 30, 1996 only one loan of the Savings
Bank's consumer loan portfolio was 90 days or more past due. In accordance with
OTS regulations, the Savings Bank charges off consumer loans delinquent 120 days
or more.
During the past fiscal year the Company sold $864,000 in student loans,
effectively its whole portfolio. The Company decided that due to decreasing
yields and increasing servicing expenses, it will not hold student loans in its
portfolio in the future. However, the Company will continue to originate student
loans for immediate sale.
COMMERCIAL BUSINESS LOANS. As a federally chartered savings
institution, the Savings Bank is authorized to invest up to 10% of its assets in
commercial loans not secured by real property. Mid-Central does not actively
solicit commercial loans but provides them as an accommodation to existing
customers. Commercial loans generally are secured by real estate, equipment, or
vehicles. At September 30, 1996, commercial loans amounted to $1.2 million or
2.6% of the total loan portfolio.
LOAN MATURITY AND REPRICING. The following table sets forth certain
information at September 30, 1996 regarding the dollar amount of loans maturing
based on their scheduled contractual payment to maturity, but does not include
potential prepayments. Demand loans, loans having no stated schedule of
repayments and no stated maturity, and overdrafts are reported as due in one
year or less. Mortgage loans which have adjustable rates are shown maturing
according to their scheduled contractual payments irrespective of their next
repricing date. Loan balances do not include undisbursed loan proceeds, unearned
discounts, unearned income and allowance for loan losses.
<TABLE>
<CAPTION>
After 1 Year After 3 Years After 5 Years
Within Through Through Through Beyond
One Year 3 Years 5 Years 10 Years 10 Years Total
-------- ------- ------- -------- -------- -----
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Real estate mortgage...... $2,093 $3,939 $4,259 $10,973 $10,505 $31,769
Commercial real estate
and multi-family......... 85 466 539 1,435 294 2,819
Home improvement.......... 129 247 224 340 64 1,004
Commercial................ 272 576 165 134 9 1,156
Automobile................ 1,359 1,742 390 2 -- 3,493
Savings account........... 282 -- -- -- -- 282
Other..................... 880 1,345 881 637 9 3,752
------- ------ ------ ------- ------ ------
Total loans.......... $5,100 $8,315 $6,458 $13,521 $10,881 $44,275
======= ======= ====== ======= ======= =======
</TABLE>
The following table sets forth the dollar amount of all loans due after
September 30, 1996, which have fixed interest rates and have floating or
adjustable interest rates.
Fixed Floating or
Rates Adjustable Rates
-------- ----------------
(In thousands)
Real estate mortgage...... $ 9,598 $20,078
Commercial real estate
and multi-family......... 806 1,928
Home improvement.......... 875 --
Commercial................ 884 --
Automobile................ 2,134 --
Savings account........... -- --
Other..................... 2,872 --
------- -------
Total................ $17,169 $22,006
======= =======
LOAN SOLICITATION AND PROCESSING. Loan applicants result from direct
solicitation by Savings Bank personnel, previous and present customers and
various newspaper and radio advertising promotions. Except for certain
residential mortgage and commercial real estate loans purchased before fiscal
1992, the Savings Bank does not solicit loans from brokers. All types of loans
may be originated in any office of the Savings Bank. Loan applications are
underwritten and closed based on FNMA and FHLMC documentation and guidelines.
Residential mortgage loans are required to have an attorney's title opinion, as
well as fire and extended coverage insurance. All mortgage loans require fire
and extended coverage on appurtenant structures.
Upon receipt of a loan application from a prospective borrower, a
credit report and other data are obtained by a loan officer to verify specific
information relating to the applicant's employment, income and credit standing.
An appraisal of the real estate offered as collateral is undertaken by a fee
appraiser approved by Mid-Central and licensed or certified by the State of
Minnesota.
Residential mortgage loans less than $200,000 are reviewed and approved
by the Loan Committee and ratified after closing by the Board of Directors.
Individual loan officers have approval authority over consumer loan applications
which fall within parameters of the Savings Bank's consumer loan policy.
Consumer loan applications not within the loan policy are reviewed and approved
by the Loan Committee and ratified after closing by the Board of Directors.
Commercial real estate loans in excess of $50,000 and any other real estate loan
greater than or equal to $200,000 require Board approval.
LOAN ORIGINATIONS, SALES AND PURCHASES. The Savings Bank originates
fixed and adjustable rate residential mortgage loans based on its own
underwriting guidelines. During the years ended September 30, 1996, 1995, and
1994, the Savings Bank's total mortgage loan originations were $7.4 million,
$5.4 million and $4.6 million, respectively.
During the past fiscal year the Company sold $864,000 in student loans,
effectively its whole portfolio. See "Consumer Loans" above.
The Savings Bank services its own loans from its main office in Wadena.
At September 30, 1996 and 1995, the Savings Bank serviced $0.6 million and $1.2
million loans for FNMA. These loans were originated by the Savings Bank and
sold, servicing retained, to FNMA.
The Savings Bank has purchased loans from mortgage lenders outside of
its primary market area when customer deposits exceeded the demand for loans in
its primary market area. Residential, multi-family and commercial real estate
loans were purchased from mortgage lenders in Montgomery, Alabama;
Minneapolis/St. Paul, Minnesota; Des Moines, Iowa; and Traverse City, Michigan.
The Savings Bank has also purchased whole loans and loan participation interests
secured by residential and commercial properties in and around Fargo, North
Dakota, which, because of its geographical proximity, the Savings Bank considers
a secondary market area for loans when sufficient loan demand is not present in
its primary market area.
During the year ended September 30, 1996, the Savings Bank purchased
approximately $3.1 million in single family residential mortgage loans on
properties located throughout the state of Minnesota and in and around Des
Moines, Iowa. All of the loans purchased were adjustable-rate mortgages
repricing annually.
LOAN COMMITMENTS. The Savings Bank issues commitments for fixed- and
adjustable-rate single-family residential mortgage loans conditioned upon the
occurrence of certain events. Such commitments are made in writing on specified
terms and conditions and are honored for up to 60 days from the date of
issuance. The Savings Bank had outstanding net loan commitments of approximately
$235,100 at September 30, 1996.
LOAN ORIGINATION AND OTHER FEES. The Savings Bank, in most instances,
receives loan origination fees which are a percentage of the principal amount
(generally 1%) of the mortgage loan which are charged to the borrower for
funding the loan. Current accounting standards require fees received (net of
certain loan origination costs) for originating loans to be deferred and
amortized into interest income over the contractual life of the loan. Net
deferred fees associated with loans that are prepaid are recognized as income at
the time of prepayment.
The Savings Bank also earns fees on loans it services for other
institutions.
NON-PERFORMING ASSETS AND DELINQUENCIES. When a mortgage loan borrower
fails to make a required payment when due, the Savings Bank institutes
collection procedures. The borrower is sent a late payment notice after the
fifteenth day of delinquency. After the thirtieth day of delinquency, the
borrower is sent a personal letter followed by a telephone call. After the
forty-fifth day of delinquency, the borrower receives a second telephone call
and personal letter regarding loan counseling services and outlining what legal
remedies are available to the Savings Bank if the delinquency persists. Upon
authorization by the Savings Bank's President, the delinquent borrower is sent a
notice of intent to foreclose after the sixtieth day. Foreclosure proceedings
are instituted after the loan is ninety days delinquent.
In most cases, delinquencies are cured promptly; however, if by the
ninetieth day of delinquency, or sooner if the borrower is chronically
delinquent and all reasonable means of obtaining payment on time have been
exhausted, foreclosure, according to the terms of the security instrument and
applicable law, is initiated. Interest income on loans is reduced by the full
amount of accrued and uncollected interest.
When a consumer loan borrower fails to make a required payment on a
consumer loan by the payment due date, the Savings Bank institutes collection
procedures. A late payment notice is sent to the delinquent borrower after the
tenth day of delinquency and a second notice is sent after the fifteenth day.
The borrower is contacted by telephone after the forty-fifth day to schedule a
personal interview regarding the loan status. After the sixtieth day, a letter
of intent to repossess or commence legal action is sent to the borrower.
Procedures to repossess collateral are instituted after the ninetieth day.
Depending on the type of property held as collateral, the Savings Bank
either obtains a judgment in small claims court or takes action to repossess the
collateral. The Board of Directors is informed monthly as to the status of all
mortgage and consumer loans that are delinquent 30 days or more, the status on
all loans currently in foreclosure, and the status of all foreclosed and
repossessed property owned by the Savings Bank.
REAL ESTATE OWNED. Real estate acquired as a result of foreclosure or
by deed in lieu of foreclosure is classified as real estate owned until it is
sold. When property is acquired it is recorded at the lower of fair value minus
estimated cost to sell, or cost. Subsequent to foreclosure, the property is
carried at the lower of the foreclosed amount or net realizable value. Upon
receipt of a new appraisal and market analysis, the carrying value is written
down to the anticipated sales price less selling and holding costs. At September
30, 1996, the Savings Bank had $53,477 of real estate owned, net of reserves of
$8,022, consisting of one single family condominium located outside of the
Bank's primary market area. This property was redeemed by the original owner and
the whole amount of real estate owned balance plus accrued interest was paid in
full in October.
ASSET CLASSIFICATION. The OTS has adopted various regulations regarding
problem assets of savings institutions. The regulations require that each
insured institution review and classify its assets on a regular basis. In
addition, in connection with examinations of insured institutions, OTS examiners
have authority to identify problem assets and, if appropriate, require them to
be classified. There are three classifications for problem assets: substandard,
doubtful and loss. Substandard assets must have one or more defined weaknesses
and are characterized by the distinct possibility that the insured institution
will sustain some loss if the deficiencies are not corrected. Doubtful assets
have the weaknesses of substandard assets with the additional characteristic
that the weaknesses make collection or liquidation in full on the basis of
currently existing facts, conditions and values questionable, and there is a
high possibility of loss. An asset classified loss is considered uncollectible
and of such little value that continuance as an asset of the institution is not
warranted. The regulations have also created a special mention category,
described as assets which do not currently expose an insured institution to a
sufficient degree of risk to warrant classification but do possess credit
deficiencies or potential weaknesses deserving management's close attention. If
an asset or portion thereof is classified loss, the insured institution
establishes specific allowances for loan losses for the full amount of the
portion of the asset classified loss. A portion of general loan loss allowances
established to cover possible losses related to assets classified substandard or
doubtful may be included in determining an institution's regulatory capital,
while specific valuation allowances for loan losses generally do not qualify as
regulatory capital.
The management of the Savings Bank meets monthly to review all
classified assets, to approve action plans developed to resolve the problems
associated with the assets and to review recommendations for new
classifications, any changes in classifications and recommendations for
reserves.
ALLOWANCE FOR LOAN LOSSES. The Savings Bank has established a
systematic methodology for the determination of provisions for loan losses which
takes into consideration the need for an overall general valuation allowance as
well as specific allowances that are tied to individual loans.
In originating loans, the Savings Bank recognizes that losses will be
experienced and that the risk of loss will vary with among other things, the
type of loan being made, the creditworthiness of the borrower over the term of
the loan, general economic conditions and, in the case of a secured loan, the
quality of the security for the loan. The Savings Bank increases its allowance
for loan losses by charging provisions for possible loan losses against the
Savings Bank's income.
The general valuation allowance is maintained to cover possible but
unidentified losses in the portfolio of performing loans. Management reviews the
adequacy of the allowance at least quarterly based on its knowledge of the
portfolio, including current asset classifications and inherent portfolio risks,
adverse situations that may affect the borrower's ability to repay, the
estimated value of any underlying collateral, the Savings Bank's write-off
history, and current economic conditions affecting the real estate markets and
industry standards.
Specific valuation allowances are established to absorb losses on loans
for which full collectibility may not be reasonably assured. The amount of the
allowance is based on the estimated value of the collateral securing the loan
and other analyses pertinent to each situation.
A provision for losses is charged against income on a monthly basis to
maintain the allowances. The provisions for losses charged against income for
the years ended September 30, 1996, 1995 and 1994 were $63,000, $23,000, and
$(17,000), respectively. At September 30, 1996, the Savings Bank had allowances
for loan losses of $209,000 which represented 0.48% of total loans.
Management believes that the amount maintained in the allowances will
be adequate to absorb possible losses in the portfolio. Although management
believes that it uses the best information available to make such
determinations, future adjustments to the allowance for loan losses may be
necessary and results of operations could be significantly and adversely
affected if circumstances differ substantially from the assumptions used in
making the determinations.
Charge-offs occur when loans with specific reserves are foreclosed. The
specific reserve, along with any additional amounts necessary to reduce the
carrying value to lower of fair value minus estimated cost to sell the asset, or
cost, is charged-off. The book value of the foreclosed asset is thereafter
carried at the lower of the asset's book value or its net realizable value. When
the asset is sold, any excess/(deficiency) over the book value is reflected on
the books as a gain/(loss) on the sale of real estate owned.
The Savings Bank operates in a rural area and, based on management's
observation of local home sales, real estate values have been stable to slightly
increasing over the past three years. There can be no assurance as to the future
performance of real estate markets, including those in the Savings Bank's
primarily market area. A downturn in the Minnesota real estate markets could
have a material adverse effect on the Savings Bank's operations. For example,
depressed real estate values may result in increases in non-performing assets,
hamper disposition of such non-performing assets and result in losses upon such
disposition.
As a result of the declines in real estate market values and the
significant losses experienced by many financial institutions, there has been a
greater level of scrutiny by regulatory authorities of the loan portfolios of
financial institutions nationwide, undertaken as part of the examination of the
institutions by the FDIC, OTS or other federal or state regulators. Results of
recent examinations indicate that these regulators may be applying more
conservative criteria in evaluating real estate values, requiring significantly
increased provisions for potential loan losses. While the Savings Bank believes
it has established its existing allowance for loan losses in accordance with
GAAP, there can be no assurance that regulators, in reviewing the Savings Bank's
loan portfolio, will not request the Savings Bank to increase significantly its
allowance for loan losses. In addition, because future events affecting
borrowers and collateral cannot be predicted with certainty, there can be no
assurance that the existing allowance for loan losses is adequate or that
substantial increases will not be necessary should the quality of any loans
deteriorate as a result of the factors discussed above. Any material increase in
the allowance for loan losses may adversely affect the Savings Bank's financial
condition and results of operations.
MORTGAGE-BACKED SECURITIES. To supplement lending activities in periods
of deposit growth and/or declining loan demand, the Savings Bank has invested in
residential mortgage-backed securities guaranteed by the Federal Home Loan
Mortgage Corporation ("FHLMC") and the Federal National Mortgage Association
("FNMA"). Although such securities are held for investment, they can serve as
collateral for borrowings and, through repayments, as a source of liquidity. At
September 30, 1996, the Savings Bank had FNMA and FHLMC mortgage-backed
securities with an estimated aggregate market value of $1.1 million and
aggregate amortized cost of approximately $1.1 million.
INVESTMENT ACTIVITIES. Federal savings banks have authority to invest
in various types of liquid assets, including United States Treasury obligations,
securities of various federal agencies and of state and municipal governments,
deposits at the FHLB, certificates of deposit of federally insured institutions,
certain bankers' acceptances and federal funds. Subject to various restrictions,
such savings institutions may also invest a portion of their assets in
commercial paper, corporate debt securities and ARM funds, the assets of which
conform to the investments that federally chartered savings institutions are
otherwise authorized to make directly. Savings institutions are also required to
maintain minimum levels of liquid assets which vary from time to time. The
Savings Bank may decide to increase its liquidity above the required levels
depending upon the availability of funds and comparative yields on investments
in relation to return on loans.
The balance of the Savings Bank's investments in short-term securities
in excess of regulatory requirements reflects management's response to the
significantly increasing percentage of deposits with short maturities. At
September 30, 1996, the Savings Bank's regulatory liquidity was 10.0% which is
significantly in excess of the 5% required by OTS regulations and the 5% target
level established by the Savings Bank. Management intends to hold securities
with short-term maturities in the investment portfolio in order to provide
liquidity and to match more closely the interest-rate sensitivities of its
assets and liabilities.
The executive officers of the Savings Bank determine appropriate
investments in accordance with the Board of Directors' approved investment
policies and procedures. Investments are made following certain considerations,
which include the Savings Bank's liquidity position and anticipated cash needs
and sources (which in turn include outstanding commitments, upcoming maturities,
estimated deposits, anticipated loan amortization and repayments, and
amortization of mortgage-backed securities). Further, the effect that the
proposed investment would have on the Savings Bank's "gap" position, credit and
interest rate risk, and risk-based capital is given consideration during the
evaluation. The interest rate, yield, settlement date and maturity are also
reviewed.
DEPOSIT ACCOUNTS. GENERAL. Deposits, securities maturities, and loan
repayments are the major sources of the Savings Bank's funds for lending and
investment. Scheduled loan repayments are a relatively stable source of funds,
while deposit inflows and outflows and loan prepayments are influenced
significantly by general interest rates and money market conditions. Borrowings
may be used on a short-term basis to compensate for reductions in the
availability of funds from other sources. They may also be used on a longer-term
basis for general business purposes.
Deposits are attracted from within the Savings Bank's primary market
area through the offering of a broad selection of deposit instruments, including
NOW accounts, money market deposit accounts, regular savings accounts,
certificates of deposit and retirement savings plans. Deposit account terms
vary, according to the minimum balance required, the time periods the funds must
remain on deposit and the interest rate, among other factors. In determining the
terms of its deposit accounts, the Savings Bank considers current market
interest rates, profitability to the Savings Bank, matching deposit and loan
products and its customer preferences and concerns. The Savings Bank generally
reviews its deposit mix and pricing weekly.
Other information required by this item is incorporated herein by
reference to the section captioned "The Company and the Bank" in the Annual
Report.
ITEM 2. PROPERTIES
The information required by this item is incorporated herein by
reference to the section captioned "Properties" in the Annual Report.
ITEM 3. LEGAL PROCEEDINGS
There are no material legal proceedings to which the Company or the
Bank or the Bank's subsidiary are a party to or which any of their property is
subject. From time to time, the Bank is a party to various legal proceedings
incident to its business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter ending September 30, 1996.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
As of November 19, 1996 there were approximately 208 holders of record
of the one class of the Company's common stock. All other information required
by this item is incorporated herein by reference to the section captioned
"Market for Registrant's Common Equity and Related Stockholder Matters" in the
Annual Report. The "bid" prices of the Company's stock referenced to in the
above mentioned section represent prices between broker-dealers and do not
include retail mark-ups and mark-downs or any commission to the broker-dealer
and do not reflect prices in actual transactions.
ITEM 6. SELECTED FINANCIAL DATA
Year Ended September 30,
1996 1995
----- -----
Cash dividends declared
per common share....................... $0.30 $0.30
Earnings per share..................... $0.91 $1.25
Dividend payout ratio.................. 32.2% 24.0%
All other information required by this item is incorporated herein by
reference to the tables captioned "Selected Consolidated Financial Condition,
Operating and Other Data" in the Annual Report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Other information required by this item is incorporated herein by
reference to the section captioned "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in the Annual Report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is incorporated herein by
reference to the Consolidated Financial Statements together with the related
notes and independent auditors' report contained in the Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
EXECUTIVE OFFICERS OF THE REGISTRANT
Robert D. Iken, II Vice President and Assistant Secretary of the
Company and Executive Vice President of the Bank
since January 1995. Treasurer of the Company from its
inception to January 1995 and Vice President and
Treasurer of the Bank to January 1995. Robert D.
Iken, II is the son of Robert D. Iken, Sr., Director
and Retired President and Chief Executive Officer of
the Company and the Bank.
All other information required by this item with respect to directors
and executive officers is incorporated herein by reference to the section
captioned "Proposal 1 - Election of Directors" in the Proxy Statement. The only
other executive officer of the Company is Gary W. Sellman, President and Chief
Executive Officer, who is included in such section of the proxy statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated herein by
reference to the section captioned "Executive Compensation" in the Proxy
Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
All other information required by this item is incorporated herein by
reference to the section captioned "Security Ownership of Principal Shareholders
and Management" in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated herein by
reference to the section captioned "Certain Transactions" in the Proxy
Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are part of this report and appear on the pages
indicated.
(1) The following financial statements are incorporated herein by
reference in the Annual Report on the sequentially numbered pages as
indicated below. The remaining information appearing in the Annual
Report is not deemed to be filed as part of this report, except as
expressly provided herein.
1. Report of Independent Auditors
2. Consolidated Balance Sheets as of
September 30, 1996 and 1995
3. Consolidated Statements of Income for the Years
Ended September 30, 1996, 1995 and 1994
4. Consolidated Statements of Stockholders' Equity for
the Years Ended September 30, 1996, 1995 and 1994
5. Consolidated Statements of Cash Flows for the Years
Ended September 30, 1996, 1995 and 1994
6. Notes to Consolidated Financial Statements
(2) Financial Statement Schedules
Schedules are omitted because the information is either not
required, not applicable or is incorporated by reference into
Part II, Items 6-8 of this report.
(3) Exhibits
The exhibits listed on the Index to Exhibits on page 16 of
this report are filed herewith or are incorporated by reference.
(b) No reports on Form 8-K were filed during the last quarter of the fiscal
year covered by this report.
(c) Exhibits to this Form 10-K are attached or incorporated by reference as
stated above.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized on November 19, 1996.
MID-CENTRAL FINANCIAL CORPORATION
(Registrant)
By: /s/ Gary W. Sellman
-----------------------------
Gary W. Sellman
President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities indicated on November 19, 1996.
By: /s/ Gary W. Sellman
----------------------------------------
Gary W. Sellman
President, Director and Chief Executive Officer
(Principal Executive Officer, Principal Financial Officer
and Principal Accounting Officer)
By: /s/ Alfred H. Neitzke
----------------------------------------
Alfred H. Neitzke
Chairman and Director
By: /s/ Duane J. Polman
----------------------------------------
Duane J. Polman
Director
By: /s/ Michael J. Ebner
----------------------------------------
Michael J. Ebner
Director
By: /s/ Robert D. Iken, Sr.
----------------------------------------
Robert D. Iken, Sr.
Director
MID-CENTRAL FINANCIAL CORPORATION
INDEX TO EXHIBITS
FOR FORM 10-K
Exhibit
Number Exhibit
- ------- -------
3.1 Articles of Incorporation (1)
3.2 Bylaws (1)
10.1 Executive Salary Continuation Agreement
with Robert D. Iken, Sr. (1)
10.2 Amended and Restated 1994 Stock Option Plan (subject
to shareholder approval)
10.3 Management Recognition and Development
Plan and Trust Agreement (2)
10.4 Tax Allocation Agreement (2)
10.5 Reimbursement Agreement (2)
11 Computation of Earnings per Share
13 1996 Annual Report to Stockholders
21 Principal Subsidiaries (1)
27 Financial Data Schedule
(1) Incorporated by reference to Exhibits 3.1, 3.2, 10.1, and 22,
respectively, of the Company's Registration Statement on Form S-1 dated
December 30, 1993 (Registration Number 33-73654).
(2) Incorporated by reference to Exhibits 10.3, 10.4, and 10.5,
respectively, of the Company's Form 10-K dated December 20, 1994.
MID-CENTRAL FINANCIAL CORPORATION
AMENDED AND RESTATED 1994 STOCK OPTION PLAN
Table of Contents
Page
SECTION 1.
General Purpose of Plan; Definitions................................ 1
SECTION 2.
Administration...................................................... 3
SECTION 3.
Stock Subject to Plan............................................... 4
SECTION 4.
Eligibility......................................................... 4
SECTION 5.
Stock Options....................................................... 4
SECTION 6.
Transfer, Leave of Absence, Etc..................................... 8
SECTION 7.
Amendments and Termination.......................................... 8
SECTION 8.
Unfunded Status of Plan............................................. 9
SECTION 9.
General Provisions.................................................. 9
SECTION 10.
Effective Date of Plan..............................................10
MID-CENTRAL FINANCIAL CORPORATION
AMENDED AND RESTATED 1994 STOCK OPTION PLAN
SECTION 1. General Purpose of Plan; Definitions
The name of this plan is the Mid-Central Financial Corporation Amended
and Restated 1994 Stock Option Plan (the "Plan"). The purpose of the Plan is to
enable Mid-Central Financial Corporation (the "Company") and its Subsidiaries to
retain and attract executives, other key employees and non-employee directors
who contribute to the Company's success by their ability, ingenuity and
industry, and to enable such individuals to participate in the long-term success
and growth of the Company by giving them a proprietary interest in the Company.
For purposes of the Plan, the following terms shall be defined as set
forth below:
(a) "Board" means the Board of Directors of the Company as it may be
comprised from time to time.
(b) "Cause" means a felony conviction of a participant or the failure
of a participant to contest prosecution for a felony, or a
participant's willful misconduct or dishonesty, any of which is
directly and materially harmful to the business or reputation of
the Company.
(c) "Code" means the Internal Revenue Code of 1986, as amended.
(d) "Committee" means the Committee referred to in Section 2 of the
Plan. If at any time no Committee shall be in office, then the
functions of the Committee specified in the Plan shall be
exercised by the Board, unless the Plan specifically states
otherwise.
(e) "Company" means Mid-Central Financial Corporation, a corporation
organized under the laws of the State of Minnesota (or any
successor corporation).
(f) "Disability" means permanent and total disability as determined
by the Committee.
(g) "Early Retirement" means retirement, with consent of the
Committee at the time of retirement, from active employment with
the Company and any Subsidiary or Parent Corporation of the
Company.
(h) "Fair Market Value" of Stock on any given date shall be
determined by the Committee as follows: (a) if the Stock is
listed for trading on one of more national securities exchanges,
or is traded on the Nasdaq Stock Market, the last reported sales
price on the principal such exchange or the Nasdaq Stock Market
on the date in question, or if such Stock shall not have been
traded on such principal exchange on such date, the last
reported sales price on such principal exchange or the Nasdaq
Stock Market on the first day prior thereto on which such Stock
was so traded; or (b) if the Stock is not listed for trading on
a national securities exchange or the Nasdaq Stock Market, but
is traded in the over-the-counter market, including the Nasdaq
Small Cap Market, the closing bid price for such Stock on the
date in question, or if there is no such bid price for such
Stock on such date, the closing bid price for such Stock on such
date, the closing bid price on the first day prior thereto on
which such price existed; or (c) if neither (a) nor (b) is
applicable, by any means fair and reasonable by the Committee,
which determination shall be final and binding on all parties.
(i) "Incentive Stock Option" means any Stock Option intended to be
and designated as an "Incentive Stock Option" within the meaning
of Section 422 of the Code.
(j) "Non-Employee Director" means a "Non-Employee Director" within
the meaning of Rule 16b-3(b)(3) under the Securities Exchange Act
of 1934.
(k) "Non-Qualified Stock Option" means any Stock Option that is not
an Incentive Stock Option, and is intended to be and is
designated as a "Non-Qualified Stock Option."
(l) "Normal Retirement" means retirement from active employment with
the Company and any Subsidiary or Parent Corporation of the
Company on or after age 65.
(m) "Parent Corporation" means any corporation (other than the
Company) in an unbroken chain of corporations ending with the
Company if each of the corporations (other than the Company) owns
stock possessing 50% or more of the total combined voting power
of all classes of stock in one of the other corporations in the
chain.
(n) "Retirement" means Normal Retirement or Early Retirement.
(o) "Stock" means the Common Stock, $.10 par value per share, of the
Company.
(p) "Stock Option" means any option to purchase shares of Stock
granted pursuant to Section 5 below.
(q) "Subsidiary" means any corporation (other than the Company) in an
unbroken chain of corporations beginning with the Company if each
of the corporations (other than the last corporation in the
unbroken chain) owns stock possessing 50% or more of the total
combined voting power of all classes of stock in one of the other
corporations in the chain.
SECTION 2. Administration
The Plan shall be administered by the Board of Directors or by a
Committee appointed by the Board of Directors of the Company consisting of at
least two Directors, all of whom shall be Non-Employee Directors, who shall
serve at the pleasure of the Board. Any or all of the functions of the Committee
specified in the Plan may be exercised by the Board, unless the Plan
specifically provides otherwise.
The Committee shall have the power and authority to grant Stock Options
to eligible employees and members of the Board, pursuant to the terms of the
Plan.
In particular, the Committee shall have the authority:
(i) to select the officers and other key employees of
the Company and its Subsidiaries and other eligible
persons to whom Stock Options may from time to time
be granted hereunder;
(ii) to determine whether and to what extent Incentive
Stock Options, Non-Qualified Stock Options, or a
combination of the foregoing, are to be granted
hereunder;
(iii) to determine the number of shares to be covered by
each such award granted hereunder;
(iv) to determine the terms and conditions, not
inconsistent with the terms of the Plan, of any
award granted hereunder (including, but not limited
to, any restriction on any Stock Option and/or the
shares of Stock relating thereto); and
(v) to determine whether, to what extent and under what
circumstances Stock and other amounts payable with
respect to an award under this Plan shall be
deferred either automatically or at the election of
the participant.
The Committee shall have the authority to adopt, alter and repeal such
administrative rules, guidelines and practices governing the Plan as it shall,
from time to time, deem advisable; to interpret the terms and provisions of the
Plan and any award issued under the Plan (and any agreements relating thereto);
and to otherwise supervise the administration of the Plan. The Committee may
delegate to executive officers of the Company the authority to exercise the
powers specified in (i), (ii), (iii), (iv) and (v) above with respect to persons
who are not either the chief executive officer of the Company or the four
highest paid officers of the Company other than the chief executive officer.
All decisions made by the Committee pursuant to the provisions of the
Plan shall be final and binding on all persons, including the Company and Plan
participants.
SECTION 3. Stock Subject to Plan
The total number of shares of Stock reserved and available for
distribution under the Plan shall be 51,038. Such shares may consist, in whole
or in part, of authorized and unissued shares. If any shares that have been
optioned cease to be subject to Stock Options, such shares shall again be
available for distribution in connection with future awards under the Plan.
In the event of any merger, reorganization, consolidation,
recapitalization, stock dividend, other change in corporate structure affecting
the Stock, or spin-off or other distribution of assets to shareholders, such
substitution or adjustment shall be made in the aggregate number of shares
reserved for issuance under the Plan, in the number and option price of shares
subject to outstanding options granted under the Plan, as may be determined to
be appropriate by the Committee, in its sole discretion, provided that the
number of shares subject to any award shall always be a whole number.
SECTION 4. Eligibility
Officers, other key employees of the Company and Subsidiaries and
members of the Board who are responsible for or contribute to the management,
growth and profitability of the business of the Company and its Subsidiaries are
eligible to be granted Stock Options under the Plan. The optionees and
participants under the Plan shall be selected from time to time by the
Committee, in its sole discretion, from among those eligible, and the Committee
shall determine, in its sole discretion, the number of shares covered by each
award.
SECTION 5. Stock Options
Any Stock Option granted under the Plan shall be in such form as the
Committee may from time to time approve.
The Stock Options granted under the Plan may be of two types: (i)
Incentive Stock Options and (ii) Non-Qualified Stock Options. No Incentive Stock
Options shall be granted under the Plan after December 22, 2003.
The Committee shall have the authority to grant any optionee Incentive
Stock Options, Non-Qualified Stock Options, or both types of options. To the
extent that any option does not qualify as an Incentive Stock Option, it shall
constitute a separate Non-Qualified Stock Option.
Anything in the Plan to the contrary notwithstanding, no term of this
Plan relating to Incentive Stock Options shall be interpreted, amended or
altered, nor shall any discretion or authority granted under the Plan be so
exercised, so as to disqualify either the Plan or any Incentive Stock Option
under Section 422 of the Code. The preceding sentence shall not preclude any
modification or amendment to an outstanding Incentive Stock Option, whether or
not such modification or amendment results in disqualification of such Stock
Option as an Incentive Stock Option, provided the optionee consents in writing
to the modification or amendment.
Stock Options granted under the Plan shall be subject to the following
terms and conditions and shall contain such additional terms and conditions, not
inconsistent with the terms of the Plan, as the Committee shall deem desirable.
(a) Option Price. The option price per share of Stock
purchasable under a Stock Option shall be determined by the
Committee at the time of grant and may, except as provided
in this paragraph, be less than the Fair Market Value of the
Stock on the date the Stock Option is granted. In the event
that the Committee does not determine the exercise price per
share of Stock purchasable under a Stock Option, the
exercise price shall be the Fair Market Value of the Stock
on the date the Stock Option is granted except as otherwise
required in this paragraph. In no event shall the Stock
Option price per share of Stock purchasable under an
Incentive Stock Option or a Non-Qualified Stock Option be
less than 100% or 85%, respectively, of the Fair Market
Value of the Stock on the date the Stock Option is granted.
If an employee owns or is deemed to own (by reason of the
attribution rules applicable under Section 424(d) of the
Code) more than 10% of the combined voting power of all
classes of stock of the Company or any Parent Corporation or
Subsidiary and an Incentive Stock Option is granted to such
employee, the exercise price shall be no less than 110% of
the Fair Market Value of the Stock on the date the Stock
Option is granted.
(b) Option Term. The term of each Stock Option shall be fixed by
the Committee, but no Incentive Stock Option shall be
exercisable more than ten years after the date the Stock
Option is granted. In the event that the Committee does not
fix the term of a Stock Option, the term shall be ten years
from the date the Stock Option is granted. Notwithstanding
the foregoing, if an employee owns or is deemed to own (by
reason of the attribution rules of Section 424(d) of the
Code) more than 10% of the combined voting power of all
classes of stock of the Company or any Parent Corporation or
Subsidiary and an Incentive Stock Option is granted to such
employee, the term of such Stock Option shall be no more
than five years from the date of grant.
(c) Exercisability. Stock Options shall be exercisable at such
time or times as determined by the Committee at or after
grant, subject to the restrictions stated in Section 5(b)
above. In the event that the Committee does not determine
the time at which a Stock Option shall be exercisable, such
Stock Option shall be exercisable one year after the date of
grant. If the Committee provides, in its discretion, that
any Stock Option is exercisable only in installments, the
Committee may waive such installment exercise provisions at
any time. Notwithstanding the foregoing, unless the Stock
Option provides otherwise, any Stock Option granted under
this Plan shall be exercisable in full, without regard to
any installment exercise provisions, for a period specified
by the Committee, but not to exceed sixty (60) days, prior
to the occurrence of any of the following events: (i)
dissolution or liquidation of the Company other than in
conjunction with a bankruptcy of the Company or any similar
occurrence, (ii) any merger, consolidation, acquisition,
separation, reorganization, or similar occurrence, where the
Company will not be the surviving entity, (iii) the transfer
of substantially all of the assets of the Company or the
acquisition of beneficial ownership of more than 50% of any
class of equity security of the Company or its Subsidiaries.
The grant of a Stock Option pursuant to the Plan shall not
limit in any way the right or power of the Company to make
adjustments, reclassifications, reorganizations or changes
of its capital or business structure or to merge, exchange
or consolidate or to dissolve, liquidate or transfer all or
any part of its business or assets.
(d) Method of Exercise. Stock Options may be exercised in whole
or in part at any time during the option period by giving
written notice of exercise to the Company specifying the
number of shares to be purchased. Such notice shall be
accompanied by payment in full of the purchase price, either
by certified or bank check, or by any other form of legal
consideration deemed sufficient by the Committee and
consistent with the Plan's purpose and applicable law,
including promissory notes or a properly executed exercise
notice together with irrevocable instructions to a broker
acceptable to the Company to promptly deliver to the Company
the amount of sale or loan proceeds to pay the exercise
price. As determined by the Committee at the time of grant
or exercise, in its sole discretion, payment in full or in
part may also be made in the form of unrestricted Stock
already owned by the optionee (which in the case of Stock
acquired upon exercise of an option have been owned for more
than six months on the date of surrender based on the Fair
Market Value of the Stock on the date the option is
exercised, as determined by the Committee), provided,
however, that, in the case of an Incentive Stock Option, the
right to make a payment in the form of already owned shares
may be authorized only at the time the option is granted. If
the terms of a Stock Option so permit, an optionee may elect
to pay all or part of the exercise price by having the
Company withhold from the shares of Stock that would
otherwise be issued upon exercise that number of shares of
Stock having a Fair Market Value equal to the aggregate
exercise price for the shares with respect to which such
election is made. No shares of Stock shall be issued until
full payment therefor has been made. An optionee shall
generally have the rights to dividends and other rights of a
shareholder with respect to shares subject to the option
when the optionee has given written notice of exercise, has
paid in full for such shares, and, if requested, has given
the representation described in paragraph (a) of Section 9.
(e) Non-Transferability of Options. No Stock Option shall be
transferable by the optionee otherwise than by will or by
the laws of descent and distribution, and all Stock Options
shall be exercisable, during the optionee's lifetime, only
by the optionee.
(f) Termination by Death. If an optionee's employment by the
Company and any Subsidiary or Parent Corporation terminates
by reason of death, the Stock Option may thereafter be
immediately exercised, to the extent then exercisable (or on
such accelerated basis as the Committee shall determine at
or after grant), by the legal representative of the estate
or by the legatee of the optionee under the will of the
optionee, for a period of three years (or such shorter
period as the Committee shall specify at grant) from the
date of such death or until the expiration of the stated
term of the option, whichever period is shorter. In the
event of termination of employment by reason of death, if an
Incentive Stock Option is exercised after the expiration of
the exercise periods that apply for purposes of Section 422
of the Code, the option will thereafter be treated as a
Non-Qualified Stock Option.
(g) Termination by Reason of Disability. If an optionee's
employment by the Company and any Subsidiary or Parent
Corporation terminates by reason of Disability, any Stock
Option held by such optionee may thereafter be exercised, to
the extent it was exercisable at the time of termination due
to Disability (or on such accelerated basis as the Committee
shall determine at or after grant), but may not be exercised
after three years (or such shorter period as the Committee
shall specify at grant) from the date of such termination of
employment or the expiration of the stated term of the
option, whichever period is shorter. In the event of
termination of employment by reason of Disability, if an
Incentive Stock Option is exercised after the expiration of
the exercise periods that apply for purposes of Section 422
of the Code, the option will thereafter be treated as a
Non-Qualified Stock Option.
(h) Termination by Reason of Retirement. If an optionee's
employment by the Company and any Subsidiary or Parent
Corporation terminates by reason of Retirement, any Stock
Option held by such optionee may thereafter be exercised, to
the extent it was exercisable at the time of such
Retirement, until the expiration of the stated term of the
option (or such shorter period as the Committee shall
specify at grant). In the event of termination of employment
by reason of Retirement, if an Incentive Stock Option is
exercised after the expiration of the exercise periods that
apply for purposes of Section 422 of the Code, the option
will thereafter be treated as a Non-Qualified Stock Option.
(i) Other Termination. Unless otherwise determined by the
Committee, if an optionee's employment by the Company and
any Subsidiary or Parent Corporation terminates for any
reason other than death, Disability or Retirement, the Stock
Option shall thereupon terminate, except that the option may
be exercised to the extent it was exercisable at such
termination for the lesser of three months or the balance of
the option's term if the optionee is involuntarily
terminated without Cause by the Company and any Subsidiary
or Parent Corporation. In the event an optionee's employment
is terminated for Cause, all unexercised Stock Options
granted to such Optionee shall immediately terminate.
(j) Annual Limit on Incentive Stock Options. The aggregate Fair
Market Value (determined as of the time the Stock Option is
granted) of the Common Stock with respect to which an
Incentive Stock Option under this Plan or any other plan of
the Company and any Subsidiary or Parent Corporation is
exercisable for the first time by an optionee during any
calendar year shall not exceed $100,000.
(k) Directors Who Are Not Employees. Each person who is not an
employee of the Company, any parent Corporation or any
Subsidiary and who is either (i) serving on the Board on the
date of shareholder approval of the amendment to this
Section 5(k) adopted by the Board on November 19, 1996, or
(ii) elected as a director by the Board or the shareholders
subsequent to the date of shareholder appoval of such
amendment, shall automatically be granted an Option to
purchase 1,000 shares of Stock as of such date at an option
price per share equal to 100% of the Fair Market Value of a
share of Stock on such date. All such options shall be
designated as Non-Qualified Stock Options and shall be
subject to the same terms and provisions as are then in
effect with respect to the grant of Non-Qualified Stock
Options to officers and key employees of the Company, except
that (i) the term of each such Option shall be ten (10)
years after the date of grant, which term shall not expire
upon termination of service as a director and (ii) the
Option shall become exercisable as to 50% of the shares
subject to the Option beginning on the date the option is
granted, and the remaining 50% of the shares subject to the
Option shall become exercisable one year after the date the
Option is granted. All provisions of this Plan not
inconsistent with the foregoing shall apply to Options
granted pursuant to this Section 5(k).
SECTION 6. Transfer, Leave of Absence, Etc.
For purposes of the Plan, the following events shall not be deemed a
termination of employment:
(a) a transfer of an employee from the Company to a Parent
Corporation or Subsidiary, or from a Parent Corporation or
Subsidiary to the Company, or from one Subsidiary to
another;
(b) a leave of absence, approved in writing by the Committee,
for military service or sickness, or for any other purpose
approved by the Company if the period of such leave does not
exceed ninety (90) days (or such longer period as the
Committee may approve, in its sole discretion); and
(c) a leave of absence in excess of ninety (90) days, approved
in writing by the Committee, but only if the employee's
right to reemployment is guaranteed either by a statute or
by contract, and provided that, in the case of any leave of
absence, the employee returns to work within 30 days after
the end of such leave.
SECTION 7. Amendments and Termination
The Board may amend, alter, or discontinue the Plan, but no amendment,
alteration, or discontinuation shall be made (i) which would impair the rights
of an optionee or participant under a Stock Option award theretofore granted,
without the participant's consent, or (ii) which, without the approval of the
stockholders of the Company, would cause the Plan to no longer comply with Rule
16b-3 under the Securities Exchange Act of 1934, Section 422 of the Code, or any
other regulatory requirements.
The Committee may amend the terms of any award or Stock Option
theretofore granted, prospectively or retroactively, to the extent such
amendment is consistent with the terms of the Plan, but no such amendment shall
impair the rights of any holder without his or her consent except to the extent
authorized under the Plan. The Committee may also substitute new Stock Options
for previously granted stock options, including previously granted stock options
having higher exercise prices.
SECTION 8. Unfunded Status of Plan
The Plan is intended to constitute an Aunfunded" plan for incentive and
deferred compensation. With respect to any payments not yet made to a
participant or an optionee by the Company, nothing contained herein shall give
any such participant or optionee any rights that are greater than those of a
general creditor of the Company. In its sole discretion, the Committee may
authorize the creation of trusts or other arrangements to meet the obligations
created under the Plan to deliver Stock, or payments in lieu of or with respect
to awards hereunder, provided, however, that the existence of such trusts or
other arrangements is consistent with the unfunded status of the Plan.
SECTION 9. General Provisions
(a) The Committee may require each person purchasing shares
pursuant to a Stock Option under the Plan to represent to
and agree with the Company in writing that the optionee is
acquiring the shares without a view to distribution thereof.
The certificates for such shares may include any legend
which the Committee deems appropriate to reflect any
restrictions on transfer.
All certificates for shares of Stock delivered under the
Plan shall be subject to such stock-transfer orders and
other restrictions as the Committee may deem advisable under
the rules, regulations, and other requirements of the
Securities and Exchange Commission, any stock exchange upon
which the Stock is then listed, and any applicable federal
or state securities laws, and the Committee may cause a
legend or legends to be put on any such certificates to make
appropriate reference to such restrictions.
(b) Nothing contained in this Plan shall prevent the Board of
Directors from adopting other or additional compensation
arrangements, subject to stockholder approval if such
approval is required; and such arrangements may be either
generally applicable or applicable only in specific cases.
The adoption of the Plan shall not confer upon any employee
of the Company or any Subsidiary any right to continued
employment with the Company or a Subsidiary, as the case may
be, nor shall it interfere in any way with the right of the
Company or a Subsidiary to terminate the employment of any
of its employees at any time.
(c) Each participant shall, no later than the date as of which
any part of the value of an award first becomes includable
as compensation in the gross income of the participant for
federal income tax purposes, pay to the Company, or make
arrangements satisfactory to the Committee regarding payment
of, any federal, state, or local taxes of any kind required
by law to be withheld with respect to the award. The
obligations of the Company under the Plan shall be
conditional on such payment or arrangements and the Company
and Subsidiaries shall, to the extent permitted by law, have
the right to deduct any such taxes from any payment of any
kind otherwise due to the participant. With respect to any
award granted under the Plan, if the terms of such award or
Option so permit, a participant may elect by written notice
to the Company to satisfy part or all of the withholding tax
requirements associated with the award by (i) authorizing
the Company to retain from the number of shares of Stock
that would otherwise be deliverable to the participant, or
(ii) delivering to the Company from shares of Stock already
owned by the participant, that number of shares having an
aggregate Fair Market Value equal to part or all of the tax
payable by the participant under this Section. Any such
election shall be in accordance with, and subject to,
applicable tax and securities laws, regulations and rulings.
(d) At the time of grant, the Committee may provide in
connection with any grant made under this Plan that the
shares of Stock received as a result of such grant shall be
subject to a repurchase right in favor of the Company,
pursuant to which the participant shall be required to offer
to the Company upon termination of employment for any reason
any shares that the participant acquired under the Plan,
with the price being the then Fair Market Value of the Stock
or, in the case of a termination for Cause, an amount equal
to the cash consideration paid for the Stock, subject to
such other terms and conditions as the Committee may specify
at the time of grant. The Committee may, at the time of the
grant of an award under the Plan, provide the Company with
the right to repurchase, or require the forfeiture of,
shares of Stock acquired pursuant to the Plan by any
participant who, at any time within two years after
termination of employment with the Company or any Subsidiary
or Parent Corporation, directly or indirectly competes with,
or is employed by a competitor of, the Company or any
Subsidiary or Parent Corporation.
SECTION 10. Effective Date of Plan
The Plan shall be effective on the date it is approved by a vote of the
holders of a majority of the Stock present and entitled to vote at a meeting of
the Company's shareholders.
Adopted by the Board of Directors on December 22, 1993.
Ratified by the Shareholders on January 6, 1995.
Amended by the Board of Directors on November 19, 1996.
Amendment ratified by the Shareholders on _____________, ___.
Exhibit 11 - Computation of Earnings per Share
MID-CENTRAL FINANCIAL CORPORATION AND SUBSIDIARY
COMPUTATION OF EARNINGS PER SHARE
Year Ended September 30,
------------------------------
1996 1995
-------------- --------------
Computation of Earnings per Share
for Statements of Income:
Income applicable to common stock $ 227,767.00 $ 325,577.00
============== ==============
Weighted average number of Common
and common equivalent shares
outstanding:
Weighted average common
shares outstanding 243,805.00 257,038.00
Dilutive effect of stock
options after application of
treasury stock method 5,466.00 3,069.00
-------------- --------------
Total 249,271.00 260,107.00
============== ==============
Net Income per common shares $ 0.91 $ 1.25
============== ==============
Computation of Fully Diluted
Earnings per Share
Income applicable to common stock $ 227,767.00 $ 325,577.00
============== ==============
Weighted average number of common
and common equivalent shares
outstanding:
Weighted average common
shares outstanding 243,805.00 257,038.00
Dilutive effect of stock
options after application of
treasury stock method 5,827.00 3,760.00
-------------- --------------
Total 249,631.00 260,798.00
============== ==============
Net Income per common share $ 0.91 $ 1.25
============== ==============
MID-CENTRAL FINANCIAL CORPORATION
(THE HOLDING COMPANY FOR MID-CENTRAL FEDERAL SAVINGS BANK
A FEDERAL SAVINGS BANK)
1996 ANNUAL REPORT
THE COMPANY AND THE BANK
MID-CENTRAL FINANCIAL CORPORATION
Mid-Central Financial Corporation ("Mid-Central" or the "Company") was
incorporated under the laws of the State of Minnesota on November 1, 1993. On
April 25, 1994, Mid-Central Federal Savings Bank (the "Bank" or the ASavings
Bank@) converted from mutual to stock form and reorganized into the holding
company form of ownership as a wholly owned subsidiary of the Company. As a
result of the conversion and reorganization, the Company issued 260,387 shares
of its common stock to the public and registered its common stock with the
Securities and Exchange Commission under the Securities Exchange Act of 1934.
The Company is classified as a unitary savings and loan holding company
subject to regulation by the Office of Thrift Supervision ("OTS") of the
Department of the Treasury. Prior to its acquisition of the Bank, the Company
had no assets and no liabilities and engaged in no business activity. Since the
acquisition, the Company has not engaged in any significant activity other than
that of holding the stock of the Bank and operating the business of a savings
association through the Bank. Accordingly, the information set forth in this
report, including financial statements and related data, relates primarily to
the Bank and its subsidiary.
The main office of the Company is the same as the Bank's which is
located at 520 South Jefferson Street, Wadena, Minnesota 56482 and its telephone
number is (218) 631-1414. At September 30, 1996 the Company had total assets of
$52.9 million and stockholders' equity of $5.1 million.
MID-CENTRAL FEDERAL SAVINGS BANK
The Bank was organized in 1957 as a federally-chartered mutual savings
and loan association under the name "Wadena Federal Savings and Loan
Association." In 1973, the Bank changed its name to "Mid-Central Federal Savings
and Loan Association." The Bank converted to a federal savings bank charter and
changed to its current name in 1989. On April 25, 1994 the Bank converted to a
federally chartered stock savings bank and sold all of its newly issued capital
stock (100,000 shares) to the Company.
The Bank is regulated by the OTS and its deposits are insured up to
applicable legal limits under the Savings Association Insurance Fund ("SAIF") of
the Federal Deposit Insurance Corporation ("FDIC"). The Bank is a member of the
Federal Home Loan Bank ("FHLB") System. The Bank conducts its business through
three full service offices.
The Savings Bank's principal business is attracting deposits from the
general public through a variety of deposit programs and originating and
purchasing loans secured primarily by owner-occupied residential properties and,
to a lesser extent, originating consumer loans. The Savings Bank's residential
real estate and consumer loans amounted to $33.9 million and $8.5 million, or
76.4% and 19.3% respectively, of the total loan portfolio at September 30, 1996.
To a significantly lesser extent, the Savings Bank originates commercial real
estate and commercial business loans.
The Savings Bank is headquartered in the city of Wadena, the county
seat of Wadena County, which is situated on the border of Wadena and Otter Tail
Counties in north central Minnesota. Wadena is approximately 160 miles northwest
of Minneapolis/St. Paul and 160 miles west of Duluth. The City and County of
Wadena have a population of approximately 4,200 and 13,000, respectively, based
on the 1990 U.S. Census. The Savings Bank has recently purchased whole loans and
loan participation interests secured by residential properties located in and
around Fargo, North Dakota, Des Moines, Iowa, and the state of Minnesota.
Management considers these geographic areas secondary market areas for loans
when sufficient loan demand is not present in its primary market area.
Management considers Wadena and Todd Counties and eastern Otter Tail
County as its primary market area. The area economy is diverse agricultural,
with a mixture of crop, irrigation and dairy farming. The largest employer is
Homecrest Industries, a furniture manufacturer, employing approximately 330
persons according to recent statistics published by the Minnesota Department of
Trade and Economic Development.
The Bank faces strong competition in the attraction of savings deposits
(its primary source of lendable funds) and in the origination of loans.
Historically, its most direct competition for savings deposits has been other
thrift institutions, credit unions and commercial banks located in its primary
market area. The Bank considers Todd and Wadena Counties and eastern Otter Tail
County to be its primary market area for savings deposits and loans.
Particularly in times of high interest rates, the Company has faced additional
significant competition for investors' funds from short-term money market
securities and other corporate and government securities. The Company's
competition for loans comes principally from other thrift institutions,
commercial banks, mortgage banking companies and mortgage brokers.
As of September 30, 1996, the Company had 21 full-time and 7 part-time
employees. The employees are not represented by a collective bargaining unit.
SELECTED CONSOLIDATED FINANCIAL CONDITION, OPERATING AND OTHER DATA
The following table sets forth certain information concerning the financial
position of the Company (including consolidated data from operations of the
subsidiary) at the dates indicated.
<TABLE>
<CAPTION>
At September 30,
-----------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C> <C>
FINANCIAL CONDITION DATA:
Total assets............................ $52,871 $52,581 $51,848 $49,205 $50,495
Loans receivable, net................... 43,315 37,781 31,416 30,034 31,425
Mortgage-backed securities.............. 1,145 1,457 1,430 1,837 2,208
Cash, interest-bearing deposits
and investment securities(1)........... 6,820 11,619 17,169 15,693 15,201
Deposits................................ 46,873 46,804 46,290 46,211 47,853
Borrowings.............................. -- -- -- -- --
Retained earnings, substantially
restricted............................ 2,952 2,885 2,693 2,493 2,103
Total Stockholders' Equity.............. 5,095 5,130 5,040 -- --
- ---------------
(1) Includes interest-bearing deposits in other depository institutions.
</TABLE>
<TABLE>
<CAPTION>
Year Ended September 30,
-----------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Interest income......................... $3,896 $3,581 $3,229 $3,434 $4,024
Interest expense........................ 2,128 2,006 1,788 1,989 2,694
----- ----- ----- ----- -----
Net interest income .................... 1,768 1,575 1,441 1,445 1,330
Provision for loan losses............... 62 23 (17) -- 30
----- ----- ----- ----- -----
Net interest income after provision
for loan losses....................... 1,706 1,552 1,458 1,445 1,300
Gains (losses) from sale of loans,
securities and joint ventures......... -- -- -- 144 (176)
Non-interest income..................... 188 182 215 259 290
Non-interest expense.................... 1,494 1,189 1,299 1,191 1,165
----- ----- ----- ----- -----
Income (loss) before income tax
expense, and extraordinary item...... 400 545 374 657 249
Provision for income taxes (benefit).... 172 219 154 267 93
----- ---- ---- ---- ---
Net income (loss)....................... $ 228 $ 326 $ 220 $ 390 $ 156
==== ==== ==== ==== ====
</TABLE>
(Table continued on next page)
<TABLE>
<CAPTION>
KEY OPERATING RATIOS:
The table below sets forth certain performance ratios of the Company for the
periods indicated.
Year Ended September 30,
------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Return on assets (net income
(loss) divided by average assets) .. .43% .63% .43% .78% .30%
Return on average equity (net
income (loss) divided by average
equity) ........................... 4.36% 6.37% 5.97% 16.35% 7.60%
Average equity to average assets .... 9.96% 9.94% 7.27% 4.78% 3.98%
Interest rate spread
(difference between average
yield on interest-earning
assets and average cost of
interest-bearing liabilities) ...... 3.27% 2.93% 2.81% 2.94% 2.63%
Net interest margin (net
interest income as a
percentage of average
interest-earning assets) ........... 3.56% 3.22% 2.97% 3.02% 2.69%
Non-interest income to average assets .36% .35% .42% .54% .56%
Non-interest expense to
average assets ..................... 2.85% 2.31% 2.57% 2.39% 2.35%
Average interest-earning
assets to interest-bearing
liabilities ........................ 106.80% 106.95% 104.30% 101.91% 101.08%
Allowance for loan losses
to total loans at end of
period ............................ .48% .44% .53% .67% .66%
Net charge-offs to average
outstanding loans during the
period ............................ .05% .07% .07% --% --%
Ratio of non-performing assets
to total assets ................... .15% .37% .53% .86% 1.30%
Ratio of allowance for loan losses
to non-performing loans ........... 804.00% 131.00% 165.00% 175.00% 69.80%
OTHER DATA (END OF PERIOD):
Number of:
Real estate loans outstanding ...... 1,008 960 990 1,005 1,047
Deposit accounts ................... 8,525 8,539 8,774 10,289 11,122
Full-service offices ............... 3 3 3 3 3
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
Management's discussion and analysis of results of operations is
intended to assist in understanding the financial condition and results of
operations of the Company. The information contained in this section should be
read in conjunction with the Consolidated Financial Statements, the accompanying
Notes to Consolidated Financial Statements and the other sections of this
report.
FINANCIAL CONDITION
The Company's total assets increased approximately $290,000 from $52.6
million at September 30, 1995 to $52.9 million at September 30, 1996. The
increase in asset size primarily reflects an increase in the net loans
receivable of $5.5 million from $37.8 million at September 30, 1995 to $43.3
million at September 30, 1996 offset by decreases in interest bearing deposits
with banks and investment securities of $5.9 million.
The Savings Bank's levels of classified assets and net real estate
owned declined from September 30, 1995 to September 30, 1996. Net real estate
owned declined $14,521, or 24.2%, from $59,977 at September 30, 1995 to $45,456
at September 30, 1996. Assets classified as doubtful, substandard or special
mention declined $129,909 or 29.9%, from $434,980 at September 30, 1995 to
$305,071 at September 30, 1996. The decline in classified assets was primarily
the result of improved credit administration, as well as the general improvement
in the economy of the Savings Bank's primary market area.
Deposits increased between September 30, 1995 and September 30, 1996 by
0.2% with an increase of approximately $69,000. During fiscal year 1996,
approximately $1.6 million of interest was credited to accounts while
withdrawals exceeded deposits by $1.5 million.
OPERATING STRATEGY
The primary goal of management is to increase profitability and enhance
net worth, while minimizing risk. The Company's results of operations are
dependent primarily on net interest income, which is the difference between the
income earned on its interest-earning assets, such as loans and investments, and
the cost of its interest-bearing liabilities, consisting of deposits and
borrowings. The Company's net income is also affected by, among other things,
fee income, provisions for loan losses and operating expenses. The Company's
results of operations are also significantly affected by general and local
economic and competitive conditions, particularly changes in market interest
rates, government legislation and policies concerning monetary and fiscal
affairs, housing and financial institutions and the attendant actions of the
regulatory authorities.
The Company's management has implemented various strategies designed to
continue its profitability while maintaining the safety and soundness of the
Company. These strategies include: (i) emphasizing one- to four-family lending
within the primary market area; (ii) emphasizing consumer lending; (iii)
improving asset quality; and (iv) managing interest-rate risk. Subject to market
conditions, it is anticipated that these strategies will be continued in the
1997 fiscal year. In addition, subject to market conditions and in compliance
with appropriate internal policies and procedures, management may engage in
secondary market loan purchases, particularly with respect to adjustable-rate
loans, in order to enhance interest-rate risk management.
Emphasizing One- to Four-Family Lending. Historically, Mid-Central has
been a predominantly one- to four- family lender. Mid-Central has established
methods to expand its loan originations through contacts with past and present
customers. The Company also uses print and radio advertising and community
involvement to gain exposure within the communities it operates. Mid-Central
emphasizes the origination of ARM loans when available.
Emphasize Consumer Lending. At September 30, 1996, consumer loans
amounted to $8.5 million or 19.3% of the total loan portfolio, an increase of
$0.3 million or 3.6% from the previous fiscal year-end. Consumer loans are
helpful in asset liability management because they generally have shorter terms
and higher interest rates than residential mortgage loans. Consumer loans,
however, carry a higher risk of default.
During the past fiscal year the Company sold $864,000 in student loans,
effectively its whole portfolio. The Company decided that due to decreasing
yields and increasing servicing expenses, it will not hold student loans in its
portfolio in the future. However, the Company will continue to originate student
loans for immediate sale.
Improving Asset Quality. The ratio of non-performing assets to total
assets has steadily declined from 1.30% at September 30, 1992, to 0.15% at
September 30, 1996. Mid-Central has focused on maintaining asset quality through
sound underwriting and effective collection procedures.
Managing Interest-Rate Risk. In order to reduce the impact on the net
interest income due to changes in interest rates, management has implemented
several techniques. These include (i) emphasizing the origination or purchase of
ARM loans; (ii) maintaining a short-term investment portfolio; (iii) emphasizing
consumer lending; and (iv) attempting to lengthen deposit maturities.
RESULTS OF OPERATIONS
The operating results of the Company depend primarily on its net
interest income, which is the difference between interest income on
interest-earning assets, primarily loans and investment securities, and interest
expense on interest-bearing liabilities, primarily deposits. The Company's net
income also is affected by the establishment of provisions for loan losses and
the level of its other income, including deposit service charges, as well as its
other expenses and income tax provisions.
COMPARISON OF OPERATING RESULTS FOR THE FISCAL YEARS ENDED SEPTEMBER 30, 1996
AND 1995
General. Net income for the year ended September 30, 1996 totaled
$228,000 compared to net income of $326,000 for the year ended September 30,
1995. The primary reasons for the $98,000 decrease in net income were an
increase in other expenses of $305,000 offset by an increase in net interest
income after provision for loan losses of $153,000 and a decrease in income
taxes payable of $47,000. The reasons for these changes are discussed below.
Interest Income. Interest income for the year ended September 30, 1996
was $3.9 million, a 8.8% increase from $3.6 million for the year ended September
30, 1995. The yield on interest-earning assets in the year ended September 30,
1996 was higher, accounting for $95,000 of the $315,000 increase, as a result of
the general increase in market interest rates. The remainder of the increase was
primarily due to a larger interest-earning asset base resulting primarily from
the origination and purchase of mortgage loans, and to a lesser extent, the
origination of consumer loans and commercial business loans.
The largest component of interest income was interest on loans
receivable. Interest income on loans receivable was $3.4 million and $2.7
million for the years ended September 30, 1996 and 1995, respectively. The
$662,000 increase resulted primarily from an increase in the average balance on
mortgage loans which produced $420,000 of the increase in 1996 and an increase
in the average balance of consumer loans which produced $127,000 of the increase
in 1996.
Increasing volume in the mortgage loan portfolio resulted primarily
from new mortgage loan originations and purchases. Increasing volume in consumer
loans resulted primarily from new loan originations in the consumer loan
portfolio.
Interest on mortgage backed securities decreased by $15,000 in 1996
over the same period in 1995, due to a decrease in the average outstanding
volume of the mortgage-backed securities portfolio.
Interest income on investments and interest-bearing deposits decreased
43.8% to $426,000 in 1996. Interest income decreased $354,000 due to lower
average balances in 1996 as compared to 1995, offset by an increase of $37,000
to interest income as a result of higher yields on investments and
interest-bearing deposits in the current fiscal year.
The weighted average interest rate received on earning assets in the
year ended September 30, 1996 was 7.85% compared to 7.32% in the year ended
September 30, 1995.
Interest Expense. For the year ended September 30, 1996, interest
expense on deposits was $2.1 million, a $122,000 or 6.1% increase compared to
the year ended September 30, 1995. Higher interest rates paid accounted for
$88,000 of the increase and an increase in the average volume of deposits
increased interest expense by $33,000. The weighted-average rate paid on
deposits in 1996 was 4.58% compared to 4.39% in 1995. At September 30, 1996 and
1995, certificates of deposits totalled $32.8 million, or 70.0% of total
deposits, and $32.9 million, or 70.4% of total deposits, respectively. At the
same time, at those respective dates, regular savings and other transactional
accounts totalled $14.1 million, or 30.0% of total deposits, and $13.8 million,
or 29.6% of total deposits. The Company had no borrowings in either 1996 or
1995.
Provision for Loan Losses. During the year ended September 30, 1996 the
Company recorded a provision for loan losses of $63,000 compared to $23,000 for
the year ended September 30, 1995. The increase in the amount of the provision
for loan losses from 1996 compared to 1995 was due primarily to an increase in
the overall loan portfolio.
Other Income. Other income was $188,000 and $182,000 for the years
ended September 30, 1996 and 1995, respectively, an increase of $7,000 or 3.8%.
Other Expenses. Other expenses during the years ended September 30,
1996 and 1995 were $1.5 million and $1.2 million, respectively, an increase of
$300,000 or 25.6%. The increase was primarily due to an accrued payment of
approximately $305,000 to the Federal Deposit Insurance Corporation (the
AFDIC@). This payment is a special one-time assessment imposed by the Deposit
Insurance Funds Act of 1996 on most Office of Thrift Supervision regulated
financial institutions for the purpose of fully capitalizing the Savings
Association Insurance Fund. In 1996, the Company also paid approximately
$109,000 for annual federal insurance premiums, which were calculated at a rate
of 23 basis points of the Company=s assessable deposits. Due to the payment of
the special assessment of $305,000, the annual federal insurance premiums will
be calculated in 1997 at a rate of 6.4 basis points of the Company=s assessable
deposits.
Income Taxes. Income tax expense decreased to $172,000 in 1996 from
$219,000 in 1995 as a result of a decrease in income before income tax expense.
COMPARISON OF OPERATING RESULTS FOR THE FISCAL YEARS ENDED SEPTEMBER 30, 1995
AND 1994
General. Net income for the year ended September 30, 1995 totalled
$326,000 compared to net income of $220,000 for the year ended September 30,
1994. The primary reasons for the $106,000 increase in net income were a
$135,000 increase in net interest income and a $109,000 decrease in other
expense, offset by an increase in the provision for loan losses of $40,000, a
$64,000 increase in the provision for income taxes and a $33,000 decrease in
other income. The reasons for these changes are discussed below.
Interest Income. Interest income for the year ended September 30, 1995
was $3.6 million, a 10.9% increase from $3.2 million for the year ended
September 30, 1994. The yield on interest-earning assets in the year ended
September 30, 1995 was higher, accounting for $237,000 of the $352,000 increase,
as a result of the general increase in market interest rates. The remainder of
the increase was primarily due to a larger interest-earning asset base resulting
primarily from the origination of consumer loans, and to a lesser extent, the
origination and purchase of mortgage loans.
The largest component of interest income was interest on loans
receivable. Interest income on loans receivable was $2.7 million and $2.4
million for the years ended September 30, 1995 and 1994, respectively. The
$322,000 increase resulted primarily from increasing yields on mortgage loans
which produced $72,000 of the increase in 1995 and an increase in the average
balance of consumer loans which produced $151,000 of the increase in 1995.
Increasing mortgage yields resulted primarily from the upward yield
adjustment in the ARM loan portfolio. Increasing volume in consumer loans
resulted primarily from new loan originations in the consumer loan portfolio.
Interest on mortgage backed securities increased by $3,000 in 1995 over
the same period in 1994, due to an increase in the average yield earned on
mortgage-backed securities.
Interest income on investments and interest-bearing deposits increased
3.7% to $758,000 in 1995. Of the $27,000 increase, $148,000 was due to higher
yields offset by a $87,000 decrease resulting from lower average balances in
1995 as compared to 1994.
The weighted average interest rate received on earning assets in the
year ended September 30, 1995 was 7.32% compared to 6.66% in the year ended
September 30, 1994.
Interest Expense. The Company had no borrowings in either 1995 or 1994.
For the year ended September 30, 1995, interest expense on deposits was $2.0
million, a $218,000 or 12.2% increase compared to the year ended September 30,
1994. Higher interest rates paid accounted for $251,000 of the increase offset
by $29,000 due to an average decrease in the volume of deposits. The
weighted-average rate paid on deposits in 1995 was 4.39% compared to 3.85% in
1994. At September 30, 1995 and 1994, certificates of deposits totalled $32.9
million, or 70.4% of total deposits, and $31.7 million, or 68.5% of total
deposits, respectively. At the same time, at those respective dates, regular
savings and other transactional accounts totalled $13.8 million, or 29.6% of
total deposits, and $14.6 million, or 31.5% of total deposits.
Provision for Loan Losses. During the year ended September 30, 1995 the
Company recorded a provision for loan losses of $23,000 compared to a negative
$17,339 for the year ended September 30, 1994. The increase in the amount of the
provision for loan losses from 1995 compared to 1994 was due to an increase in
the allocation of the provisions for all losses to the loan loss category.
Other Income. Other income was $182,000 and $215,000 for the years
ended September 30, 1995 and 1994, respectively, a decrease of $33,000 or 15.5%.
The primary reason for the decrease in other income was a decrease in the income
attributable to loan origination fees in the amount of $42,000. The decrease in
loan origination fees was primarily attributable to a more conservative
amortization of origination fees to the income account and an increase in the
allocation of origination fee expenses charged to expense accounts.
Other Expenses. Other expenses during the years ended September 30,
1995 and 1994 were $1.2 million and $1.3 million, respectively, as a result of
decreases in nearly all categories of other expenses. The most significant
decrease was in the data processing services expense in the amount of $49,000,
primarily due to final lease payments paid on computer equipment during the
year.
Income Taxes. Income tax expense increased to $219,000 in 1995 from
$155,000 in 1994 as a result of increased income before income tax expense.
YIELDS EARNED AND RATES PAID
The earnings of the Company depend largely on the spread between the
yield on interest-earning assets (primarily loans and investments) and the cost
of interest-bearing liabilities (primarily deposit accounts), as well as the
relative size of the Company's interest-earning assets and interest-bearing
liability portfolios.
The following table sets forth, for the periods indicated, information
regarding average balances of assets and liabilities as well as the total dollar
amounts of interest income from average interest-earning assets and interest
expense on average interest-bearing liabilities, resultant yields, interest rate
spread, net interest margin, and ratio of average interest-earning assets to
average interest-bearing liabilities. Average balances for a period have been
calculated using the average of month-end balances during such period.
Management believes that such averages are representative of the Company's
operations.
<TABLE>
<CAPTION>
Year Ended September 30
----------------------------------------------------------------------------------------
1996 1995 1994
------------------------- ------------------------- ------------------------------
Interest Interest Interest
Average and Yield/ Average and Yield/ Average and Yield/
Balance Dividends Cost Balance Dividends Cost Balance Dividends Cost
------- --------- ---- ------- -------- ---- ------- --------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS(1):
Mortgage loans......................... $31,463 $2,519 8.01% $26,073 $2,048 7.85% $25,275 $1,914 7.57%
Consumer loans......................... 8,571 786 9.17 7,151 641 8.96 5,427 472 8.70
Commercial business loans.............. 755 74 9.80 296 28 9.46 100 9 9.00
-------- ------ ----- ------- ------ ----- ------- ------ -----
Total net loans...................... 40,789 3,379 8.28 33,520 2,717 8.11 30,802 2,395 7.78
Mortgage-backed securities............. 1,296 91 7.02 1,509 106 7.02 1,156 103 6.79
Investment securities.................. 5,418 311 5.74 13,271 727 5.48 14,503 686 4.73
Daily interest-bearing deposits........ 2,118 115 5.43 599 31 5.13 1,652 45 2.72
-------- ------ ----- ------- ------ ----- ------- ------ -----
Total interest-earning assets........ 49,621 3,896 7.85 48,899 3,581 7.32 48,473 3,229 6.66
NON-INTEREST EARNING ASSETS:
Office properties and equipment, net... 578 582 532
Real estate, net........................ 61 43 199
Other non-interest-earning assets...... 2,138 1,904 1,418
-------- ------- ------
Total assets......................... 52,398 51,428 50,622
-------- ------- ------
INTEREST-BEARING LIABILITIES:
Passbook accounts...................... 5,518 144 2.61 5,527 145 2.62 5,968 155 2.60
NOW and money market accounts.......... 8,259 200 2.42 8,365 211 2.52 9,391 250 2.66
Certificates of deposit................ 32,685 1,784 5.46 31,831 1,650 5.18 31,115 1,383 4.44
-------- ------ ----- --------- ------ ----- ------- ------ -----
Total interest-bearing liabilities... 46,462 2,128 4.58 45,723 2,006 4.39 46,474 1,788 3.85
NON-INTEREST-BEARING LIABILITIES:
Non-interest-bearing deposits.......... -- -- --
Other liabilities (2).................. 717 595 468
-------- ------- ------
Total liabilities.................... 47,179 46,318 46,942
-------- ------- ------
Retained earnings....................... 5,219 5,110 3,680
-------- ------- ------
Total liabilities and retained earnings $52,398 $51,428 $50,622
======== ======= =======
Net interest income..................... $1,768 $1,575 $1,441
====== ====== ======
Interest rate spread.................... 3.27% 2.93% 2.81%
===== ===== =====
Net interest margin..................... 3.56% 3.22% 2.97%
===== ===== =====
Ratio of average interest-earning
assets to average interest-bearing liabilities 106.80% 106.95% 104.30%
======= ======= =======
- ----------------------------------------------
(1) Excludes interest on loans 90 days or more past due.
(2) Includes average escrow balances of approximately $63,000, $56,000 and
$51,000 for the years ended September 30, 1996, 1995, 1994 respectively.
</TABLE>
YIELDS EARNED AND RATES PAID
The following table sets forth (on a consolidated basis) for the
periods and at the date indicated, the weighted average yields earned on the
Company's assets, the weighted average interest rates paid on the Company's
liabilities, together with the net yield on interest earning assets.
Year Ended
September 30, At
--------------------- September 30,
1996 1995 1994 1996
----- ----- ----- -----
Weighted average yield on loan
portfolio ............................ 8.28% 8.11% 7.78% 8.24%
Weighted average yield on mortgage
-backed securities ................... 7.02 7.02 6.79 7.07
Weighted average yield on investment
portfolio ............................ 5.74 5.48 4.73 5.30
Weighted average yield on
all interest-earning assets .......... 7.85 7.32 6.66 7.91
Weighted average rate paid on savings
deposits and on all interest-bearing
liabilities .......................... 4.58 4.39 3.85 4.45
Interest rate spread (spread between
weighted average rate on all interest-
earning assets and all interest-
bearing liabilities) ................. 3.27 2.93 2.81 3.46
Net interest margin (net interest income
(expense) as a percentage of average
interest-earning assets) ............. 3.56 3.22 2.97 N/A
<TABLE>
<CAPTION>
RATE/VOLUME ANALYSIS
The following table sets forth the effects of changing rates and
volumes on net interest income of the Company. Information is provided with
respect to (i) effects on interest income attributable to changes in volume
(changes in volume multiplied by prior rate); (ii) effects on interest income
attributable to changes in rate (changes in rate multiplied by prior volume);
and (iii) changes in rate/volume (change in rate multiplied by change in
volume).
1996 Compared to 1995 1995 Compared to 1994
Increase (Decrease) Increase (Decrease)
Due to Due to
----------------------------------- -----------------------------------
Rate/ Rate/
Rate Volume Volume Net Rate Volume Volume Net
---- ------ ------ --- ---- ------ ------ ---
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Mortgage loans(1)................... $ 42 $420 $9 $ 471 $ 72 $ 60 $ 2 $ 134
Consumer loans(1)................... 15 127 3 145 14 151 4 169
Commercial business loans(1)........ 1 43 2 46 0 18 1 19
----- ----- ----- ----- ------ ----- ----- ------
Total loans(1)..................... 58 590 14 662 86 229 7 322
Mortgage-backed securities.......... 0 (15) 0 (15) 3 0 0 3
Investment and trading securities... 35 (431) ( 20) (416) 108 (58) (9) 41
Daily interest-bearing deposits..... 2 77 5 84 40 (29) (25) (14)
----- ----- ----- ----- ------ ----- ----- ------
Total net change in income
on interest-earning assets.......... 95 221 (1) 315 237 142 (27) 352
Interest-bearing liabilities:
Interest-bearing deposits........... 88 33 1 122 251 ( 29) ( 4) 218
----- ----- ----- ----- ------ ----- ----- ------
Total net change in expense
on interest-bearing liabilities..... 88 33 1 122 251 (29) (4) 218
----- ----- ----- ----- ------ ----- ----- ------
Net change in net interest income.... $ 7 $188 $ (2) $193 $( 14) $171 $(23) $ 134
===== ===== ===== ===== ====== ===== ===== ======
[WIDE TABLE CONTINUED FROM ABOVE]
1994 Compared to 1993
Increase (Decrease)
Due to
-----------------------------------
Rate/
Rate Volume Volume Net
---- ------ ------ ---
Interest-earning assets:
Mortgage loans(1)................... $(233) $(54) $ 7 $(280)
Consumer loans(1)................... (52) 74 (9) 13
Commercial business loans(1)........ 0 (3) 0 (3)
----- ----- ----- -----
Total loans(1)..................... (285) 17 (2) (270)
Mortgage-backed securities.......... (11) (45) 3 (53)
Investment and trading securities... (38) 338 (30) 270
Daily interest-bearing deposits..... ( 6) (150) 4 (152)
----- ----- ----- -----
Total net change in income
on interest-earning assets.......... (340) 160 (25) (250)
Interest-bearing liabilities:
Interest-bearing deposits........... ( 174) (30) 3 (201)
----- ----- ----- -----
Total net change in expense
on interest-bearing liabilities..... (174) (30) 3 (201)
----- ----- ----- -----
Net change in net interest income.... $(166) $190 $( 28) $(4)
===== ===== ===== =====
- -------------------------------------
(1) Excludes interest on loans 90 days or more past due.
</TABLE>
ASSET AND LIABILITY MANAGEMENT
The primary function of asset and liability management is to provide
liquidity and maintain an appropriate balance between interest-earning assets
and interest-bearing liabilities. The elements of the Company's strategy to
manage its interest rate sensitivity include the origination of ARM loans and
consumer loans, the investment in short-term securities and the promotion of
long-term deposits. The matching of assets and liabilities may be analyzed by
examining the extent to which such assets and liabilities are "interest rate
sensitive" and by monitoring an institution's interest rate sensitivity "gap."
An asset or liability is said to be interest rate sensitive within a specific
time period if it will mature or reprice within that time period. The interest
rate sensitivity gap is defined as the difference between the amount of
interest-earning assets anticipated, based upon certain assumptions, to mature
or reprice within that time period. A gap is considered positive when the amount
of interest rate sensitive assets exceeds the amount of interest rate sensitive
liabilities. A gap is considered negative when the amount of interest rate
sensitive liabilities exceeds the amount of interest rate sensitive assets.
During a period of rising interest rates, a negative gap would tend to adversely
affect net interest income while a positive gap would tend to result in an
increase in net interest income. During a period of falling interest rates, a
negative gap would tend to result in an increase in net interest income while a
positive gap would tend to adversely affect net interest income.
At September 30, 1996, total interest-earning assets maturing or
repricing within one year exceeded total interest-bearing liabilities maturing
or repricing in the same time period by $2.8 million representing a cumulative
one-year gap to total assets ratio of 5.2%. At September 30, 1995, the
cumulative one-year gap to total assets ratio was 5.9%. The decrease in the
one-year gap ratio between September 30, 1996 and 1995 is primarily due to the
increase in fixed rate mortgage loans and the decrease in short term investment
securities. During periods of rising interest rates, the cost of
interest-bearing liabilities should rise less quickly than the yield on
interest-earning assets and have a positive effect on net interest income.
Conversely, during periods of falling interest rates, the cost of
interest-bearing liabilities should fall less quickly than the yield on
interest-earning assets and have a negative effect on net interest income.
Management is closely monitoring the Company's interest rate sensitivity
position and is actively structuring the asset and liability portfolios to
protect net interest margin.
Certain shortcomings are inherent in the method of analysis presented
in the following table. For example, although certain assets and liabilities may
have similar maturities or periods of 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. Additionally, certain assets, such as ARM loans, have features
that restrict changes in interest rates on a short-term basis over the life of
the asset. Further, in the event of a change in interest rates, prepayment and
early withdrawal levels would likely deviate significantly from those assumed in
calculating he table. Finally, the ability of many borrowers to service their
debt may decrease in the event of an interest rate increase.
The Company's analysis of its interest-rate sensitivity incorporates
certain assumptions concerning the amortization of loans and other
interest-earning assets and the withdrawal of deposits. The interest-rate
sensitivity analysis illustrated in the table could vary substantially if
different assumptions were used or if actual experience differs from the
assumptions used. Decay rates of core deposits are based on the latest available
OTS data, which the Company believes are a realistic representation of its own
portfolio. Loan prepayment assumptions are based on the Company's experience
over the past year.
<TABLE>
<CAPTION>
The following table presents the Company's interest sensitivity gap
between interest-earning assets and interest-bearing liabilities at September
30, 1996.
Within
Six 6 Months 1-3 3-5 5-10
Months to One Year Years Years Years
------- ------- ------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Interest-earning assets:
Fixed-rate mortgage loans ............. $ 985 $ 966 $ 3,311 $ 2,314 $ 3,996
Adjustable rate mortgage loans ........ 11,925 10,511 480 100 0
Mortgage-backed securities ............ 74 72 267 239 493
Other loans ........................... 3,042 2,230 4,218 197 0
Investment securities and
interest-bearing deposits ............ 3,991 168 630 0 0
------- ------- ------- ------- -------
Total rate sensitive assets ......... $20,017 $13,947 $ 8,906 $ 2,850 $ 4,489
======= ======= ======= ======= =======
Interest-bearing liabilities:
Regular savings and NOW accounts ..... $ 1,737 $ 1,437 $ 3,484 $ 1,490 $ 1,931
Money market deposit accounts ........ 1,320 605 268 128 98
Certificates of deposit .............. 16,696 9,399 4,989 1,732 0
------- ------- ------- ------- -------
Total rate sensitive liabilities .... $19,753 $11,441 $ 8,741 $ 3,350 $ 2,029
======= ======= ======= ======= =======
Excess (deficiency) of interest
sensitive assets over interest
sensitive liabilities ................. 264 2,506 165 (500) 2,460
Cumulative excess (deficiency) of
interest sensitive assets ............. 264 2,770 2,935 2,435 4,895
Cumulative ratio of interest-earning
assets to interest-bearing liabilities 101.34% 108.88% 107.35% 105.63% 110.80%
Interest sensitivity gap to total assets 0.50% 4.73% 0.31% -0.94% 4.64%
Ratio of cumulative gap to total assets 0.50% 5.23% 5.54% 4.59% 9.24%
</TABLE>
[WIDE TABLE CONTINUED FROM ABOVE]
Over
10
Years Total
------- -------
Interest-earning assets:
Fixed-rate mortgage loans ............. $ 0 $11,572
Adjustable rate mortgage loans ........ 0 23,016
Mortgage-backed securities ............ 0 1,145
Other loans ........................... 0 9,687
Investment securities and
interest-bearing deposits ............ 638 5,427
------- -------
Total rate sensitive assets ......... $ 638 $50,847
======= =======
Interest-bearing liabilities:
Regular savings and NOW accounts ..... $ 1,541 $11,620
Money market deposit accounts ........ 18 2,437
Certificates of deposit .............. 0 32,816
------- -------
Total rate sensitive liabilities .... $ 1,559 $46,873
======= =======
Excess (deficiency) of interest
sensitive assets over interest
sensitive liabilities ................. (921) 3,974
Cumulative excess (deficiency) of
interest sensitive assets ............. 3,974
Cumulative ratio of interest-earning
assets to interest-bearing liabilities 108.48% 108.48%
Interest sensitivity gap to total assets -1.74% 7.50%
Ratio of cumulative gap to total assets 7.50%
<TABLE>
<CAPTION>
The following table presents certain information regarding
interest-earning assets and interest-bearing liabilities which are estimated to
mature or are scheduled to reprice within one year.
At September 30,
1996 1995 1994
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Interest-earning assets maturing
or repricing within
one year ............................... $ 34,088 $ 33,132 $ 30,489
Interest-bearing liabilities maturing
or repricing within one year ........... $ 31,194 $ 30,019 $ 29,712
Excess (deficiency) of interest-earning
assets over interest-bearing liabilities
as a percent of total assets ........... 5.46% 5.92% 1.50%
Percent of assets to liabilities maturing
or repricing within one year ........... 109.28% 110.37% 102.62%
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of funds are deposits and proceeds from
principal and interest payments on loans, mortgage-backed securities and
investment securities. While maturities and scheduled amortization of loans and
mortgage-backed securities are a predictable source of funds, deposit flows and
mortgage prepayments are greatly influenced by general interest rates, economic
conditions and competition.
The primary investing activity of the Company is the origination of
residential mortgage loans. During the three years ended September 30, 1996,
1995 and 1994, the Company originated residential mortgage loans of $7.4
million, $5.4 million and $4.6 million, respectively. Other investing activities
include the purchase of investment securities, which totalled $0.5 million, $0.3
million and $11.2 million during the years ended September 30, 1996 and 1995 and
1994, respectively. These activities were funded primarily by principal
repayments on loans, mortgage-backed securities and other investment securities.
The Company must maintain an adequate level of liquidity to ensure the
availability of sufficient funds to support loan growth and deposit withdrawals,
to satisfy financial commitments and to take advantage of investment
opportunities. The Company's sources of funds include deposits and principal and
interest payments from loans and mortgage-backed securities and investments.
During fiscal years 1996, 1995 and 1994, the Company used its sources of funds
primarily to fund loan commitments and to pay maturing savings certificates and
deposit withdrawals. At September 30, 1996, the Company had approved loan
commitments totalling $235,000 and undisbursed loans in process totaling
$666,000. See Note 3 and Note 10 to Notes to Consolidated Financial Statements.
At September 30, 1996, savings certificates amounted to $32.8 million,
or 70.0% of the Company's total deposits, including $26.1 million ($1.3 million
of which were "jumbo" certificates of deposits) which were scheduled to mature
by September 30, 1997. Historically, the Company has been able to retain a
significant amount of its deposits as they mature. Accordingly, management of
the Company does not expect that the maturing of such deposits will have a
significant adverse effect on the Company's liquidity, which exceeded regulatory
requirements at September 30, 1996 as discussed below. Management of the Company
believes it has adequate resources to fund all loan commitments by savings
deposits and FHLB-Des Moines advances and sale of mortgage loans and that it can
adjust the offering rates of savings certificates to retain deposits in changing
interest rate environments.
The OTS requires a savings institution to maintain an average daily
balance of liquid assets (cash and eligible investments) equal to at least 5% of
the average daily balance of its net withdrawable deposits and short-term
borrowings. In addition, short-term liquid assets currently must constitute 1%
of the sum of net withdrawable deposit accounts plus short-term borrowings. The
Company's actual short- and long-term liquidity ratios at September 30, 1996
were 9.8% and 10.0%, respectively. The Company consistently maintains liquidity
levels in excess of regulatory requirements, and believes this is an appropriate
strategy for proper asset and liability management.
REGULATORY CAPITAL
The table below sets forth the Savings Bank's capital position relative
to its capital requirements at September 30, 1996.
At September 30, 1996
---------------------------------
Percent of Total
Amount Risk-Weighted Assets
------ --------------------
(Dollars in thousands)
Tangible capital $4,302 8.13%
Tangible capital requirement 794 1.50
------ -----
Excess $3,508 6.63%
====== =====
Core capital $4,302 8.13%
Core capital requirement(1) 1,587 3.00
------ -----
Excess(1) $2,715 5.13%
====== =====
Risk-based capital $4,511 14.87%
Risk-based capital requirement 2,427 8.00
------ -----
Excess $2,084 6.87%
====== =====
- ------------------------------
(1) Does not reflect proposed amendments to increase the core capital
requirement to up to 5% of total assets.
LENDING ACTIVITIES
GENERAL. The principal lending activity of the Company is the
origination of conventional mortgage loans (most of which are not insured or
guaranteed by federal agencies) for the purpose of purchasing, constructing or
refinancing owner-occupied, one- to four- family residential property in its
primary market area. The Company also originates direct consumer loans in
amounts generally less than $25,000.
During the past fiscal year the Company purchased $3.1 million in
adjustable-rate single-family residential mortgage loans on properties located
in Minnesota and Iowa.
During the past fiscal year the Company sold $864,000 in student loans,
almost its whole portfolio. The Company decided that due to decreasing yields
and increasing servicing expenses, it will not hold student loans in its
portfolio in the future. However, the Company will continue to originate student
loans for immediate sale.
Since 1982, the Company has placed a growing emphasis on the
origination of ARM loans in order to increase the interest rate sensitivity of
its loan portfolio. At September 30, 1996, ARM loans accounted for approximately
66.5% of the total mortgage loan portfolio.
Subject to market conditions, management intends for Mid-Central to
remain a retail financial institution originating long-term mortgage loans for
the purchase, construction or refinance of one- to four-family residential real
estate, small commercial and consumer loans.
LOAN PORTFOLIO ANALYSIS. The following table sets forth the composition of the
Company's loan portfolio by type of loan as of the dates indicated.
<TABLE>
<CAPTION>
At September 30,
-----------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
---------------- ---------------- --------------- ---------------- -------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------- -------- ------- -------- ------- ------- ------- ------- ------- -----
(Dollars in thousands)
Real Estate Loans:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Conventional one- to four-family ..... $31,371 70.8% $26,781 68.8% $22,616 71.2% $22,067 72.2% $22,466 70.4%
Conventional multi-family ............ 2,081 4.7 1,984 5.1 926 2.9 678 2.2 1,105 3.3
FHA and VA ........................... 203 .5 262 .7 376 1.2 496 1.6 668 2.1
Real estate sold on contract ......... 195 .4 351 .9 704 2.2 1,010 3.3 1,195 3.7
Commercial ........................... 738 1.7 903 2.3 904 2.9 1,231 4.0 1,429 4.5
------- -------- ------- -------- ------- ------- ------- ------- ------- -----
Total real estate loans ............. 34,588 78.1 30,281 77.8 25,526 80.4 25,482 83.3 26,863 84.2
Commercial loans ...................... 1,156 2.6 401 1.0 140 .4 85 .3 175 .5
Consumer Loans:
Home improvement ..................... 1,004 2.3 859 2.2 953 3.0 898 2.9 890 2.8
Automobile ........................... 3,493 7.9 3,245 8.3 2,415 7.6 2,165 7.1 2,141 6.7
Student loans ........................ 36 .1 920 2.4 903 2.9 787 2.6 747 2.3
Savings accounts ..................... 282 .6 203 .5 200 .6 293 1.0 360 1.2
Other ................................ 3,716 8.4 3,009 7.8 1,612 5.1 849 2.8 738 2.3
------- -------- ------- -------- ------- ------- ------- ------- ------- -----
Total consumer loans ................ 8,531 19.3 8,236 21.2 6,083 19.2 4,994 16.4 4,876 15.3
------- -------- ------- -------- ------- ------- ------- ------- ------- -----
Total loans ......................... 44,275 100.0% 38,918 100.0% 31,749 100.0% 30,561 100.0% 31,914 100.0%
===== ===== ===== ===== =====
Less:
Loans in process ..................... 669 924 158 302 236
Unamortized loan origination
fees, net or direct costs ........... 82 48 10 22 45
Allowance for possible loan
losses .............................. 209 165 165 203 208
------- ------- --------- ------- ---------
Total loans receivable, net ........ $43,315 $37,781 $ 31,416 $30,034 $ 31,425
======= ======= ========= ======= =========
(table continued on following page)
</TABLE>
<TABLE>
<CAPTION>
At September 30,
-----------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
---------------- ---------------- --------------- ---------------- -------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------- -------- ------- -------- ------- ------- ------- ------- ------- -----
(Dollars in thousands)
Type of Security:
Residential real estate
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
One- to four-family...................... $31,769 71.7% $27,394 70.4% $23,696 74.6% $23,573 77.1% $24,329 76.2%
Multi-family dwellings................... 2,081 4.7 1,984 5.1 926 2.9 678 2.2 1,105 3.5
Commercial real estate..................... 738 1.7 903 2.3 904 2.9 1,231 4.0 1,429 4.5
Other loans................................ 9,687 21.9 8,637 22.2 6,223 19.6 5,079 16.7 5,051 15.8
------- ----- ------ ----- -------- ------ -------- ------ -------- ------
Total loans............................. $44,275 100.0% $38,918 100.0% $31,749 100.0% $30,561 100.0% $31,914 100.0%
====== ====== ====== ====== ======
Less:
Loans in process.......................... (669) (924) (158) (302) (236)
Unearned discounts and deferred fees...... (82) (48) (10) (22) (45)
Allowance for possible loan losses ....... (209) (165) (165) (203) (208)
----- ------- ------- ------- -------
Total loans receivable, net............... $43,315 $37,781 $31,416 $30,034 $31,425
======= ======= ======= ======= =======
- ---------------
(1) Includes construction loans converted to permanent loans.
</TABLE>
LOAN MATURITY AND REPRICING
The following table sets forth certain information at September 30,
1996 regarding the dollar amount of loans maturing based on their scheduled
contractual payment to maturity, but does not include potential prepayments.
Demand loans, loans having no stated schedule of repayments and no stated
maturity, and overdrafts are reported as due in one year or less. Mortgage loans
which have adjustable rates are shown as maturing at their next repricing date.
Loan balances do not include undisbursed loan proceeds, unearned discounts,
unearned income and allowance for loan losses.
<TABLE>
<CAPTION>
After 1 Year After 3 Years After 5 Years
Within Through Through Through Beyond
One Year 3 Years 5 Years 10 Years 10 Years Total
-------- ------- ------- -------- -------- -----
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Real estate mortgage............. $21,516 $2,462 $2,098 $3,543 2,150 $31,769
Commercial real estate
and multi-family................ 1,890 219 243 467 0 2,819
Home improvement................. 129 247 224 340 64 1,004
Commercial....................... 272 576 165 134 9 1,156
Automobile....................... 1,359 1,742 390 2 0 3,493
Savings account.................. 282 0 0 0 0 282
Other............................ 880 1,345 881 637 9 3,752
---------- ------- ------- ------ ------- -------
Total loans................. $26,328 $6,591 $4,001 $5,123 $2,232 $44,275
======= ====== ====== ====== ====== =======
</TABLE>
The following table sets forth the dollar amount of all loans due after
September 30, 1997, which have fixed interest rates and have floating or
adjustable interest rates.
<TABLE>
<CAPTION>
Fixed Floating or
Rates Adjustable Rates
----- ----------------
(In thousands)
<S> <C> <C>
Real estate mortgage............................ $9,598 $655
Commercial real estate
and multi-family............................... 925 4
Home improvement................................ 875 --
Commercial...................................... 884 --
Automobile...................................... 2,134 --
Savings account................................. 0 --
Other........................................... 2,872 --
------- -----
Total...................................... $17,288 $659
======= ====
</TABLE>
The following table shows total loans originated, purchased, sold and
repaid during the periods indicated.
<TABLE>
<CAPTION>
Year Ended September 30,
------------------------------------------------
1996 1995 1994
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Total loans at beginning of period............ $ 38,918 $ 31,749 $ 30,561
---------- ---------- ----------
Loans originated:
Single-family residential.................... 7,399 5,359 4,579
Consumer..................................... 6,989 6,365 4,807
Other loans (commercial)..................... 1,333 718 157
---------- ---------- ----------
Total loans originated..................... 15,721 12,442 9,543
Loans purchased:
Single-family residential..................... 3,066 2,421 --
Multi-family residential and
commercial real estate...................... -- 1,078 400
---------- ---------- ----------
Total loans purchased...................... 3,066 3,499 400
---------- ---------- ----------
Consumer Loans Sold .......................... (864) -- --
---------- ---------- ----------
Loan principal repayments..................... (12,552) (8,772) (8,737)
---------- ---------- ----------
Other......................................... (14) -- (18)
---------- ---------- ----------
Net loan activity............................. 5,357 7,169 1,188
---------- ---------- ----------
Total gross mortgage loans
at end of period............................ $ 44,275 $ 38,918 $ 31,749
========== ========== ==========
</TABLE>
The following table sets forth information with respect to the
Company's non-performing assets for the periods indicated. During the periods
shown, the Company had no restructured loans within the meaning of SFAS 15 and
no accruing loans which were contractually past due 90 days or more.
<TABLE>
<CAPTION>
At September 30,
-------------------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Loans accounted for on
a nonaccrual basis:
Residential real estate.... $ 18 $125 $100 $ 93 $284
Commercial real estate..... -- -- -- -- --
Commercial business........ -- -- -- -- --
Consumer................... 9 1 -- 23 14
----- ----- ---- ---- -----
Total................... $27 $126 $100 $116 $ 298
=== ==== ==== ==== =====
Total nonaccrual
loans...................... $27 $126 $100 $116 $ 298
Real estate owned............. 53 71 174 307 356
----- ----- ------- ------- -------
Total non-performing assets .. $80 $197 $ 274 $ 423 $ 654
=== ==== ===== ===== ======
Total loans delinquent
90 days or more to
net loans................... .06% .33% .32% .39% .95%
Total loans delinquent
90 days or more to
total assets................ .05% .24% .19% .24% .59%
Total non-performing assets
to total assets............. .15% .37% .53% .86% 1.30%
</TABLE>
At September 30, 1996 and 1995 the aggregate amounts of classified
assets, and of general and specific loss allowances and charge-offs for the
period then ended, were as follows:
<TABLE>
<CAPTION>
At September 30,
-----------------------------
1996 1995
---- ----
(In thousands)
<S> <C> <C>
Doubtful............................................ $ -- $ --
Substandard assets.................................. 248 433
Special mention..................................... 52 2
General loss allowances............................. 217 176
Specific loss allowances............................ -- --
Charge-offs, net.................................... 19 56
</TABLE>
The following table sets forth an analysis of the Company's gross
allowance for possible loan losses for the periods indicated. Where specific
loan loss reserves have been established, any difference between the loss
reserve and the amount of loss realized has been charged or credited to current
income.
<TABLE>
<CAPTION>
At September 30,
--------------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Allowance at beginning of period..... $165 $ 165 $ 203 $ 208 $ 213
Provision for loan losses............ 63 23 (17) -- 30
Recoveries:
Residential Real Estate............ -- -- -- 2 1
Consumer........................... 6 3 8 -- --
---- ---- ---- ---- -----
Total recoveries.................... 6 3 8 2 1
Charge-offs:
Residential real estate............. -- 16 11 7 36
Consumer............................ 25 10 18 -- --
---- ---- --- ---- -----
Total charge-offs................. 25 26 29 7 36
---- ---- --- ---- -----
Net charge-offs................... 19 23 21 5 35
---- ---- --- ----- -----
Balance at end of period......... $209 $165 $165 $203 $208
==== ==== ==== ==== ====
Ratio of allowance to total
loans outstanding at the
end of the period................... .48% .44% .53% .67% .66%
Ratio of net charge-offs to
average loans outstanding
during the period................... .05% .07% .07% --% --%
</TABLE>
The following table sets forth the breakdown of the allowance for loan
losses by loan category for the periods indicated.
<TABLE>
<CAPTION>
At September 30,
----------------------------------------------------------------------------------------------------
1996 1995 1994
-------------------------------- ------------------------------ ------------------------------
As a % As a % As a %
Loan of Out- Loan of Out- Loan of Out-
Category standing Category standing Category standing
as a % of Loans in as a % of Loans in as a % of Loans in
Amount Total Loans Category Amount Total Loans Category Amount Total Loans Category
------ ----------- -------- ------ ----------- -------- ------ ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Category
Dollars in thousands)
Real estate mortgage:
Residential........ $154 76.4% .45% $117 76.2% .39% $156 77.5% .63%
Commercial......... 4 1.7 .54% 11 1.6 1.77 -- 2.9 --
Commercial
business........ 12 2.6 1.04 4 1.0 1.00 -- 0.4 --
Consumer........... 39 19.3 .46 33 21.2 .40 9 19.2 .15
---- ----- ----- ----- ----- -----
Total allowance
for loan losses.. $209 100.0% .47% $165 100.0% .44% $165 100.0% .53%
==== ===== ==== ===== ==== =====
</TABLE>
(WIDE TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
At September 30,
-------------------------------------------------------------
1993 1992
----------------------------- ------------------------------
As a % As a %
Loan of Out- Loan of Out-
Category standing Category standing
as a % of Loans in as a % of Loans in
Amount Total Loans Category Amount Total loans Category
------ ----------- -------- ------ --------------------
<S> <C> <C> <C> <C> <C> <C>
Category
(Dollars in thousands)
Real estate mortgage:
Residential........ $191 79.3% .79% $196 79.7% .77%
Commercial......... -- 4.0 -- -- 4.5 --
Commercial
business........ -- 0.3 -- -- 0.5
Consumer........... 12 16.4 .24 12 15.3 .25
---- ----- ----- -----
Total allowance
for loan losses.. $203 100.0% .67% $208 100.0% .66%
==== ===== ==== =====
</TABLE>
The following table sets forth the scheduled maturities, amortized
costs, market values and weighted average yields for the Company's
mortgage-backed securities at September 30, 1996. Expected maturities will
differ from contractual maturities due to scheduled repayments and because
borrowers may have the right to call or prepay obligations with or without
prepayment penalties. The following table does not take into consideration the
effects of scheduled repayments or the effects of possible prepayments.
<TABLE>
<CAPTION>
At September 30, 1996
------------------------------------------------------------------------------------------------
Greater than Five
One to Five Years Years Total Mortgage-Backed Securities
----------------- ----- --------------------------------
Weighted Weighted Approximate Weighted
Amortized Average Amortized Average Amortized Market Average
Cost Yield Cost Yield Cost Value Yield
---- ----- ---- ----- ---- ----- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
FNMA pass through
securities.................. $ 98 8.68% $298 7.23% $396 $401 7.58%
FHLMC pass through
securities.................. 559 6.51 190 7.64 749 745 6.80
------ ---- ------ ------
Total mortgage-backed
securities.................. $ 657 6.83 $488 7.38 $1,145 $1,146 7.07
===== ==== ====== ======
</TABLE>
The following table sets forth the Company's investment securities portfolio
at carrying value at the dates indicated. At September 30, 1996, the Company had
no investment securities, other than U.S. Government and agency securities, with
an aggregate book value in excess of 10% of retained earnings.
<TABLE>
<CAPTION>
At September 30,
----------------------------------------------------------------------------
1996 1995 1994
--------------------- --------------------- ---------------------
Carrying Percent of Carrying Percent of Carrying Percent of
Amount(1) Portfolio Amount(1) Portfolio Amount(1) Portfolio
-------- ---------- --------- ---------- --------- ----------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
U.S. government treasury
and obligations of U.S.
government agencies............. $1,069 100.0% $2,961 100.0% $5,387 98.2%
States of the U.S. and
political subdivisions.......... -- -- -- -- 100 1.8
------ ----- ------ ----- ------ -----
Total.................... $1,069 100.0% $2,961 100.0% $5,487 100.0%
===== ===== ====== ===== ====== =====
- ----------------
(1) The market value of the Company's investment securities portfolio was $1.1
million, $3.0 million, and $5.5 million at September 30, 1996, 1995 and
1994, respectively.
</TABLE>
The following table sets forth the maturities and weighted average
yields of the debt securities in the Company's investment securities portfolio
at September 30, 1996.
<TABLE>
<CAPTION>
Less Than One to Five to Over Ten
One Year Five Years Ten Years Years
---------------- ------------------ --------------- --------------
Amount Yield Amount Yield Amount Yield Amount Yield
------ ----- ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(Dollars in thousands)
U.S. government treasury
and obligations of U.S.
government agencies.......... $498 5.35% $ 349 6.63% $ 0 0.00% $222 5.85%
</TABLE>
<TABLE>
<CAPTION>
The following table sets forth information regarding the
Company's time deposits and other interest-bearing deposits at September 30,
1996.
Weighted-
Average Percentage
Interest Minimum of Total
Rate Term Category Amount Balance Deposits
- --------- ---- -------- ------- ------- ----------
(In thousands)
<S> <C> <C> <C> <C> <C>
2.20% None NOW accounts $ 100 $3,585 7.65%
2.85 None Money market 1,000 2,437 5.20
2.50 None Passbook savings 10 5,365 11.45
2.60 90 days 90-day notice accounts 10 259 0.55
2.35 None Super NOW accounts 1,000 2,273 4.85
N/A None Non-interest checking accounts 100 138 0.29
Certificates of Deposit
-----------------------
5.00 91 days Fixed-term, fixed-rate 500 1,961 4.18
5.13 182 days Fixed-term, fixed-rate 500 4,717 10.06
5.35 1 year Fixed-term, fixed-rate 500 9,391 20.05
5.68 2 years Fixed-term, fixed-rate 500 3,553 7.58
5.85 30 months Fixed-term, fixed-rate 500 136 0.29
5.37 3 years Fixed-term, fixed-rate 500 3,053 6.51
5.46 4 years Fixed-term, fixed-rate 500 2,836 6.05
6.00 5 years Fixed-term, fixed-rate 500 1,246 2.66
6.14 8 years Fixed-term, fixed-rate 500 30 .06
IRA Certificates of Deposit
---------------------------
5.00 91 days Fixed-term, fixed-rate 100 120 0.25
5.27 1 year Fixed-term, fixed-rate 100 5,256 11.23
5.73 2 years Fixed-term, fixed-rate 100 133 0.28
5.37 30 months Fixed-term, fixed-rate 100 20 0.04
5.54 3 years Fixed-term, fixed-rate 100 91 0.19
6.50 5 years Fixed-term, fixed-rate 100 273 0.58
------- ------
Total $46,873 100.00%
======= ======
</TABLE>
<TABLE>
<CAPTION>
DEPOSIT FLOW
The following table sets forth the balances of savings deposits in the
various types of savings accounts offered by the Company at the dates indicated.
At September 30,
----------------------------------------------------------------------------------
1996 1995 1994
---------------------------- -------------------------- ----------------
Percent Percent Percent
of Increase of Increase of
Amount Total (Decrease) Amount Total (Decrease) Amount Total
------ ------- ---------- ------ ------- ---------- ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Non-interest bearing............. $138 0.3% $ 11 $127 0.3% $ 39 $ 88 .2%
NOW checking..................... 5,858 12.5 595 5,263 11.3 (18) 5,281 11.4
Regular savings accounts......... 5,624 11.9 160 5,464 11.6 (211) 5,675 12.3
Money market deposit............. 2,437 5.2 (569) 3,006 6.4 (504) 3,510 7.6
Fixed-rate certificates
which mature in the
year ending(1):
Within 1 year.................. 26,095 55.7 970 25,125 53.7 1,311 23,814 51.4
After 1 year, but within
3 years...................... 4,989 10.6 (1,494) 6,483 13.8 (504) 6,987 15.1
After 3 years, but within
5 years...................... 1,732 3.8 396 1,336 2.9 401 935 2.0
------ ---- ---- ------ ---- ------ ------ ----
Total........................$46,873 100.0% $ 69 $46,804 100.0% $ 514 $46,290 100.0%
======= ====== ====== ======= ====== ======= ======= ======
- ---------------------------------
(1) At September 30, 1996, 1995 and 1994, jumbo certificates were $1.4
million, $1.9 million and $1.4 million, respectively. IRAs included in
certificate of deposit balances were $5.9 million, $5.6 million and
$5.8 million at September 30, 1996, 1995 and 1994, respectively.
</TABLE>
TIME DEPOSITS BY RATES
The following table sets forth the time deposits in the Company classified by
rates as of the dates indicated.
At September 30,
----------------------------------------
1996 1995 1994
------- ------- -------
(In thousands)
Below 3.00%....... $ -- $ -- $ --
3.01 - 4.00%....... 20 23 4,722
4.01 - 5.00%....... 5,984 4,911 21,968
5.01 - 6.00%....... 24,346 25,134 3,931
6.01 - 7.00%....... 2,386 2,468 414
Over 7.00%....... 80 408 701
------- ------- -------
Total........ $32,816 $32,944 $31,736
======= ======= =======
<TABLE>
<CAPTION>
The following table sets forth the amount and maturities of time
deposits at September 30, 1996.
Amount Percent
-------------------------------------------------------- of Total
1-6 7-12 13-36 37-60 Certificate
Months Months Months Months Total Accounts
------ ------ ------ ------ ----- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Below 3.00%.............. $ -- $ -- $ -- $ -- $ -- --%
3.01 - 4.00%.............. 4 16 -- -- 20 0.06
4.01 - 5.00%.............. 4,831 697 456 -- 5,984 18.24
5.01 - 6.00%.............. 11,577 8,290 3,591 888 24,346 74.19
6.01 - 7.00%.............. 284 396 942 764 2,386 7.27
Over 7.00%.............. -- -- -- 80 80 0.24
------- ------ ------ ------ ------- -------
Total.............. $16,696 $9,399 $4,989 $1,732 $32,816 100.00%
======= ====== ====== ====== ======= =======
</TABLE>
The following table indicates the amount of the Company's jumbo
certificates of deposit by time remaining until maturity as of September 30,
1996. Jumbo certificates of deposit require minimum deposits of $100,000 and
have negotiable interest rates.
Certificates
Maturity Period of Deposits
--------------- ------------
(In thousands)
Three months or less $ 400
Three through six months 152
Six through twelve months 731
Over twelve months 124
--------
Total $1,407
The following table sets forth the deposit activities of the Company
for the periods indicated.
Year Ended September 30,
--------------------------------------------
1996 1995 1994
-------- -------- --------
(In thousands)
Beginning balance $ 46,804 $ 46,290 $ 46,211
-------- -------- --------
Net increase (decrease)
before interest credited $ (1,563) $ (962) $ (1,233)
Interest credited 1,632 1,476 1,312
-------- -------- --------
Net increase (decrease)
in savings deposits $ 69 $ 514 $ 79
-------- -------- --------
Ending balance $ 46,873 $ 46,804 $ 46,290
======== ======== ========
<TABLE>
<CAPTION>
PROPERTIES
The following table sets forth the location of the Company's offices
and related information as of September 30, 1996. The net book value of the
Company's investment in office, properties and equipment totalled $565,000 at
September 30, 1996. See Note 5 of Notes to the Consolidated Financial
Statements.
Year Net Book Building Land Square
Location Constructed Value Owned/Leased Owned/Leased Footage
- -------- ----------- -------- ------------ ------------ -------
<S> <C> <C> <C> <C> <C>
Main Office
- -----------
520 South Jefferson Street
Wadena, Minnesota 56482 1972 $317,887 Owned Owned 4,380
Branch Offices
- --------------
416 Central Avenue
Long Prairie, Minnesota 56347 1977 49,919 Owned Owned 2,340
128 2nd Avenue, West
Staples, Minnesota 56482 1979 110,923 Owned Owned 2,340
</TABLE>
MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
The Company issued 260,387 of its shares on April 25, 1994 for a
purchase price of $10.00 per share in connection with the conversion of
Mid-Central Federal Company to a stock-chartered savings bank. The brokerage
firms of Friedman, Billings, Ramsey & Co, Inc. and Ryan, Beck, & Co. are
market-makers for the stock. The stock is traded over-the-counter through the
National Daily Quotation System's electronic bulletin board under the symbol
"MCFC.U".
On June 1, 1995 the Company initiated a stock repurchase program to
purchase shares of common stock from its shareholders on the open market. A
total of 13,019 shares of common stock (5% of the original number of issued
shares) were authorized under federal regulations to be repurchased within a one
year time period. The repurchase program concluded on July 21, 1995 with an
aggregate purchase of 13,000 shares of common stock at an average price per
share paid of $13.62.
On May 22, 1996 the Company initiated a stock repurchase program to
purchase shares of common stock from its shareholders on the open market. A
total of 12,369 shares of common stock (5% of the number of issued shares
outstanding as of May 22, 1996) were authorized under federal regulations to be
repurchased within a one year time period. The repurchase program concluded on
June 12, 1996 with an aggregate purchase of 12,369 shares of common stock at an
average price per share paid of $16.25.
On October 1, 1996 the Office of Thrift Supervision gave regulatory
approval to the Company to purchase an additional 23,501 shares of common stock
from its shareholders on the open market. On October 18, 1996 the Company
purchased 2,000 shares of common stock at a price of $16.75 per share.
<TABLE>
<CAPTION>
Below is a table showing the high and low bids for the Company's stock
during the previous eight quarters. The table also shows the amount of dividends
declared and paid per share per quarter for the same period.
For the Quarter Ended
--------------------------------------------------------------------------------
Dec Mar June Sept Dec Mar June Sept
1994 1995 1995 1995 1995 1996 1996 1996
------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
High Bid..................... $11.25 $11.50 $12.25 $13.25 $14.00 $14.50 $15.75 $16.00
Low Bid...................... 10.50 11.00 11.00 12.25 12.50 12.75 13.88 15.50
Dividends declared
and paid per share......... $0.075 $0.075 $0.075 $0.075 $0.075 $0.075 $0.075 $0.075
</TABLE>
The Board of Directors currently intends to continue its present
practice of paying quarterly cash dividends on the Company's common stock as
justified by the financial condition of the Company and its subsidiaries. The
declarations and amount of future dividends will depend on circumstances
existing at the time, including Company's earnings, financial condition, capital
requirements, and the cash available to pay such dividends. The Board will also
consider regulatory and contractual limitations and such other factors as the
Board of Directors may deem relevant. The Board does not currently intend to
cause the Company to pay out dividends in excess of fifty percent of current
earnings.
Under OTS regulations, institutions that have converted to the stock
form of ownership may not declare or pay a dividend on or repurchase any of its
capital stock if the effect thereof would cause the regulatory capital of the
institution to be reduced below the amount required for a liquidation account to
be established and maintained in accordance with OTS regulations and the Plan of
Conversion. In addition, a regulation of the OTS places certain limits on
'capital distributions', defined to include dividend payments of savings
institutions. The limitations are based on an institution's compliance with
applicable capital requirements.
Earnings of the Bank appropriated to bad debt reserves and deducted for
federal income tax purposes are not available for payment of cash dividends
without payment of taxes at the then current tax rate by the Company on the
amount removed from the reserves for such distributions. The Company does not
contemplate any distribution which would limit the Company's bad debt deduction
or create federal tax liabilities.
OFFICERS OF THE COMPANY
Gary W. Sellman President, Chief Executive Officer, Treasurer, Chief
Financial Officer and Chief Accounting Officer of the
Company; and President and Chief Executive Officer of
the Bank
Robert D. Iken, II Vice President and Assistant Secretary of the Company and
Executive Vice President and Treasurer of the Bank
Janice Aagard Secretary of the Company and the Bank
DIRECTORS OF THE COMPANY
Alfred H. Neitzke Chairman; retired owner of Neitzke Eyecare Associates
Robert D. Iken, Sr. Retired President and Chief Executive Officer of the
Company and the Bank
Duane J. Polman Retired President and principal shareholder of Polman
Transfer, Inc.
Michael J. Ebner Vice Chairman; Managing Partner of M.J. Ebner
Insurance Agency
Gary W. Sellman President, Chief Executive Officer, Treasurer, Chief
Financial Officer and Chief Accounting Officer of the
Company; and President and Chief Executive Officer of
the Bank
SEC FORM 10-K
SHAREHOLDERS MAY RECEIVE, WITHOUT CHARGE, A COPY OF THE COMPANY'S
ANNUAL REPORT ON FORM 10-K AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
BY WRITING TO GARY SELLMAN, PRESIDENT, MID-CENTRAL FINANCIAL CORPORATION, 520 S.
JEFFERSON STREET, P.O. BOX 152, WADENA, MINNESOTA 56482.
MID-CENTRAL FINANCIAL CORPORATION
AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
CONTENTS
PAGE
INDEPENDENT AUDITORS' REPORT.................................................F-1
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Statements of Financial Condition......................F-2
Consolidated Statements of Income...................................F-3
Consolidated Statements of Stockholders' Equity.....................F-4
Consolidated Statements of Cash Flows...............................F-5
Notes to Consolidated Financial Statements..........................F-6
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Mid-Central Financial Corporation and Subsidiaries
Wadena, Minnesota
We have audited the accompanying consolidated balance sheets of Mid-Central
Financial Corporation and Subsidiaries as of September 30, 1996 and 1995, and
the related consolidated statements of income, stockholders' equity, and cash
flows for each of the three years in the period ended September 30, 1996. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated 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 Mid-Central
Financial Corporation and Subsidiaries at September 30, 1996 and 1995, and the
results of their operations and their cash flows for each of the three years in
the period ended September 30, 1996 in conformity with generally accepted
accounting principles.
/s/ LARSON, ALLEN, WEISHAIR & CO., LLP
LARSON, ALLEN, WEISHAIR & CO., LLP
Minneapolis, Minnesota
October 25, 1996
F-1
<TABLE>
<CAPTION>
MID-CENTRAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1996 AND 1995
1996 1995
------------ ------------
ASSETS
<S> <C> <C>
Cash and Due from Banks $ 4,121,767 $ 2,988,544
Interest Bearing Deposits with Banks 1,628,832 5,669,978
Available-for-Sale Securities, at Market Value 299,250 294,000
Held-to-Maturity Securities (Market Value Approximates
$775,696 in 1996 and $2,660,870 in 1995) 769,987 2,666,730
Mortgage-Backed Securities (Market Value Approximates
$1,146,367 in 1996 and $1,465,156 in 1995) 1,145,028 1,456,738
Loans Receivable (Net) 43,314,885 37,781,277
Federal Home Loan Bank Stock (at Cost) 416,200 408,000
Office Property and Equipment (Net) 564,600 576,685
Real Estate Owned and in Judgment (Net) 45,456 59,977
Accrued Interest Receivable 405,509 561,034
Accrued Income Taxes Receivable 61,309 --
Other Assets 98,601 117,989
------------ ------------
Total Assets $ 52,871,424 $ 52,580,952
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits $ 46,872,604 $ 46,803,983
Advance Payments by Borrowers for Taxes
and Insurance 93,187 84,996
Accrued Interest Payable 198,277 213,316
Accrued Income Taxes Payable -- 52,549
Accrued Expenses and Other Liabilities 612,119 295,837
------------ ------------
Total Liabilities $ 47,776,187 $ 47,450,681
------------ ------------
STOCKHOLDERS' EQUITY
Common Stock, $.10 Par Value: 1,000,000 Shares
Authorized; 235,018 Shares in 1996 and 247,387 Shares
in 1995 were Issued and Outstanding $ 23,502 $ 24,739
Additional Paid-In Capital 2,149,021 2,262,074
Unamortized Deferred Compensation (29,214) (37,548)
Net Unrealized Loss on Available-for-Sale Securities (450) (3,600)
Retained Earnings, Substantially Restricted 2,952,378 2,884,606
------------ ------------
Total Stockholders' Equity $ 5,095,237 $ 5,130,271
------------ ------------
Total Liabilities and Stockholders' Equity $ 52,871,424 $ 52,580,952
============ ============
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-2
</TABLE>
<TABLE>
<CAPTION>
MID-CENTRAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
INTEREST INCOME
Loans Receivable $ 3,378,853 $ 2,717,101 $ 2,394,943
Mortgage-Backed Securities 90,877 106,236 103,174
Investment Securities and Cash Equivalents 396,222 727,827 697,007
Other 30,041 30,103 33,860
----------- ----------- -----------
Total Interest Income $ 3,895,993 $ 3,581,267 $ 3,228,984
INTEREST EXPENSE ON DEPOSITS 2,127,871 2,005,815 1,788,028
----------- ----------- -----------
NET INTEREST INCOME $ 1,768,122 $ 1,575,452 $ 1,440,956
PROVISION FOR LOAN LOSSES 62,563 22,873 (17,339)
----------- ----------- -----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES $ 1,705,559 $ 1,552,579 $ 1,458,295
----------- ----------- -----------
OTHER INCOME
Loan Origination Fees $ 10,674 $ 3,276 $ 45,130
Service Fees on Deposit Accounts 100,610 106,854 95,581
Net Gain on Sale of Investment Securities -- 8,822 --
Other Operating Income 77,203 62,693 74,339
----------- ----------- -----------
Total Other Income $ 188,487 $ 181,645 $ 215,050
----------- ----------- -----------
OTHER EXPENSE
Compensation, Payroll Taxes and Fringe Benefits $ 637,799 $ 622,989 $ 652,724
Occupancy 146,205 139,472 139,890
Data Processing Services 14,060 16,604 65,183
Federal Insurance Premiums 438,182 130,012 144,669
Advertising 34,128 26,383 21,066
Unrealized Loss on Securities Held for Sale -- -- 2,823
Other Operating Expenses 223,905 254,091 272,582
----------- ----------- -----------
Total Other Expense $ 1,494,279 $ 1,189,551 $ 1,298,937
----------- ----------- -----------
INCOME BEFORE INCOME TAX EXPENSE $ 399,767 $ 544,673 $ 374,408
INCOME TAX EXPENSE 172,000 219,096 154,690
----------- ----------- -----------
NET INCOME $ 227,767 $ 325,577 $ 219,718
=========== =========== ===========
EARNINGS PER SHARE:
Primary $ 0.91 $ 1.25 $ 0.84
=========== =========== ===========
Fully Diluted $ 0.91 $ 1.25 $ 0.83
=========== =========== ===========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-3
</TABLE>
<TABLE>
<CAPTION>
MID-CENTRAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
Net Unrealized
Additional Unamortized Gain (Loss) on
Number Common Paid-In Deferred Available-for-
of Shares Stock Capital Compensation Sale Securities
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE, SEPTEMBER 30, 1993 -- $ -- $ -- $ -- $ --
Net Income -- -- -- -- --
Issuance of Common Stock 260,387 26,039 2,380,894 -- --
Payment of Dividends ($.075 Per Share) -- -- -- -- --
Restricted Stock Granted -- -- -- (78,110) --
Amortization of Restricted Stock -- -- -- 17,867 --
----------- ----------- ----------- ----------- -----------
BALANCE, SEPTEMBER 30, 1994 260,387 $ 26,039 $ 2,380,894 $ (60,243) $ --
Net Income -- -- -- -- --
Payment of Dividends ($.30 Per Share) -- -- -- -- --
Amortization of Restricted Stock -- -- -- 22,695 --
Redemption of Common Stock (13,000) (1,300) (118,820) -- --
Net Unrealized Loss on
Available-for-Sale Securities -- -- -- -- (3,600)
----------- ----------- ----------- ----------- -----------
BALANCE, SEPTEMBER 30, 1995 247,387 $ 24,739 $ 2,262,074 $ (37,548) $ (3,600)
Net Income -- -- -- -- --
Payment of Dividends ($.30 Per Share) -- -- -- -- --
Amortization of Restricted Stock -- -- -- 8,334 --
Redemption of Common Stock (12,369) (1,237) (113,053) -- --
Net Unrealized Gain on
Available-for-Sale Securities -- -- -- -- 3,150
----------- ----------- ----------- ----------- -----------
BALANCE, SEPTEMBER 30, 1996 235,018 $ 23,502 $ 2,149,021 $ (29,214) $ (450)
=========== =========== =========== =========== ===========
[WIDE TABLE CONTINUED FROM ABOVE]
Retained
Earnings Total
----------- -----------
<S> <C> <C>
BALANCE, SEPTEMBER 30, 1993 $ 2,492,937 $ 2,492,937
Net Income 219,718 219,718
Issuance of Common Stock -- 2,406,933
Payment of Dividends ($.075 Per Share) (19,529) (19,529)
Restricted Stock Granted -- (78,110)
Amortization of Restricted Stock -- 17,867
----------- -----------
BALANCE, SEPTEMBER 30, 1994 $ 2,693,126 $ 5,039,816
Net Income 325,577 325,577
Payment of Dividends ($.30 Per Share) (77,142) (77,142)
Amortization of Restricted Stock -- 22,695
Redemption of Common Stock (56,955) (177,075)
Net Unrealized Loss on
Available-for-Sale Securities -- (3,600)
----------- -----------
BALANCE, SEPTEMBER 30, 1995 $ 2,884,606 $ 5,130,271
Net Income 227,767 227,767
Payment of Dividends ($.30 Per Share) (73,289) (73,289)
Amortization of Restricted Stock -- 8,334
Redemption of Common Stock (86,706) (200,996)
Net Unrealized Gain on
Available-for-Sale Securities -- 3,150
----------- -----------
BALANCE, SEPTEMBER 30, 1996 $ 2,952,378 $ 5,095,237
=========== ===========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-4
</TABLE>
<TABLE>
<CAPTION>
MID-CENTRAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 227,767 $ 325,577 $ 219,718
Adjustments to Reconcile Net Income to
Cash Provided by Operating Activities:
Federal Home Loan Bank Stock Dividend (8,200) -- --
Provision for Loan Losses 62,563 22,873 (17,339)
Provision for Real Estate Owned Losses (Recoveries) (2,563) 18,127 39,339
Depreciation 53,002 61,439 65,320
(Accretion) Amortization of Discounts and
Premiums on Loans and Securities (1,812) 1,432 6,231
Amortization of Restricted Stock Granted 8,334 22,695 17,867
Gain on Sale of Premises and Equipment -- (4,527) --
(Gain) Loss on Sale of Real Estate Owned
and in Judgment (5,175) (2,105) 7,312
(Gain) Loss on Sale of Securities -- (8,822) 784
Gain on Sale of Loans (13,611) -- --
Unrealized Loss on Securities -- -- 2,823
Increase (Decrease) in Deferred Income Taxes 47,100 (6,271) (18,808)
(Increase) Decrease in Accrued Interest Receivable 155,525 (65,912) (156,965)
Increase (Decrease) in Income Taxes Payable (105,098) 106,098 (131,927)
Increase (Decrease) in Accrued Interest Payable (15,039) 57,698 17,753
Net Changes in Other Assets and Other Liabilities 284,699 30,755 97,483
------------ ------------ ------------
Net Cash Provided by Operating Activities $ 687,492 $ 559,057 $ 149,591
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from Maturity and Calls of Securities
and Interest Bearing Deposits with Banks $ 6,439,026 $ 6,642,435 $ 6,688,525
Proceeds from Sales of Available-for-Sale Securities
and Securities Held-for-Sale -- 508,906 250,000
Purchase of Securities and Interest Bearing Deposits
with Banks (500,000) (294,118) (11,272,767)
Purchase of Mortgage-Backed Securities (71,610) (250,119) (381,000)
Principal Collected on Mortgage-Backed Securities 383,996 222,274 981,621
Net Increase in Loans (5,559,099) (6,455,341) (1,359,885)
Purchase of Premises and Equipment (40,917) (50,013) (130,828)
Improvements to Real Estate Owned -- -- (11,762)
Proceeds from Sale of Premises and Equipment -- 6,750 --
Proceeds from Sale of Real Estate -- 138,832 59,699
------------ ------------ ------------
Net Cash Provided (Used) by Investing Activities $ 651,396 $ 469,606 $ (5,176,397)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from Issuance of Common Stock, Net $ -- $ -- $ 2,406,933
Funding of Management Recognition Plan -- -- (78,110)
Dividends (73,289) (77,142) (19,529)
Retirement of Stock (200,996) (177,075) --
Net Increase in Deposit Accounts 68,620 513,728 78,991
------------ ------------ ------------
Net Cash Provided (Used) by Financing Activities $ (205,665) $ 259,511 $ 2,388,285
------------ ------------ ------------
INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS $ 1,133,223 $ 1,288,174 $ (2,638,521)
Cash and Cash Equivalents - Beginning of Year 2,988,544 1,700,370 4,338,891
------------ ------------ ------------
CASH AND CASH EQUIVALENTS - END OF YEAR $ 4,121,767 $ 2,988,544 $ 1,700,370
============ ============ ============
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-5
</TABLE>
MID-CENTRAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996 AND 1995
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
Mid-Central Financial Corporation (the Company) is a holding
company engaged primarily in retail community banking through its
wholly-owned subsidiaries, Mid-Central Federal Savings Bank (the
Bank) and Mid-Central Service Corp., in and around Wadena,
Minnesota.
Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in
consolidation. Certain reclassifications have been made to prior
years' financial statements to conform to current year
presentation. For consolidated statements of cash flow purposes,
cash and cash equivalents include cash and due from banks.
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could vary from the estimates that were
used.
Credit Concentrations
The Company's loan portfolio consists largely of mortgage loans
secured by properties located within Wadena County and the
surrounding counties of north central Minnesota. The Company has
also purchased several groups of loans from mortgage lenders in
other areas including Montgomery, Alabama; Fargo, North Dakota;
Minneapolis/St. Paul, Minnesota; Des Moines, Iowa; and Traverse
City, Michigan. None of these credit concentrations exceed 10% of
loan portfolio.
Investments Securities
The Company accounts for investment securities under the
provisions of Statement of Financial Accounting Standards (SFAS)
No. 115, ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY
SECURITIES. SFAS No. 115 requires that investments in debt and
equity securities with readily determinable fair values be
classified into the following three categories.
Held-to-Maturity Securities
Held to maturity securities consist of bonds, notes,
debentures, and equity securities for which management has the
positive intent and ability to hold to maturity. These
securities are reported at cost, adjusted for premiums and
discounts that are recognized in interest income using the
interest method over the period to maturity.
F-6
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Investments Securities (Continued)
Available-for-Sale Securities
Available-for-sale Securities consist of bonds, notes, and
debentures not classified as held-to-maturity securities.
Unrealized holding gains and losses, net of tax, on these
securities are reported as a net amount in a separate
component of stockholders' equity until realized. Gains and
losses on the sale of available for sale securities are
determined using the specific-identification method. Premiums
and discounts are recognized in interest income using the
interest method over the period to maturity.
Trading Account Securities
Debt and equity securities that are bought and held
principally for the purpose of selling them in the near term
are classified as trading account securities and are reported
at fair value. Gains or losses on sales of trading account
securities, adjustments to fair values, and other noninterest
income are included in trading account profits and
commissions. The Bank had no investments it classified as
trading at September 30, 1996 and 1995.
Derivative Financial Instruments
The Company has not invested in instruments which are typically
described as highly speculative derivative financial instruments,
and have no current plans to do so, for trading, investing,
hedging or other purposes. Instruments of this type include
future, forward, swap and option contracts, and interest rate
caps and floors.
Loans
Loans receivable are stated at unpaid principal balances, less
the allowance for loan losses, and net deferred loan-origination
fees and discounts.
The allowance for loan losses is increased by charges to income
and decreased by charge-offs (net of recoveries). Management's
periodic evaluation of the adequacy of the allowance is based on
the Company's past loan loss experience, known and inherent risks
in the portfolio, adverse situations that may affect the
borrower's ability to repay, the estimated value of any
underlying collateral, and current economic conditions.
Uncollectible interest on loans that are contractually past due
is charged off, or an allowance is established based on
management's periodic evaluation. The allowance is established by
a charge to interest income equal to all interest previously
accrued. Subsequent collections of cash may be applied as
reductions to the principal balance or recorded as income,
depending on management's assessment of the ultimate
collectibility of the loan. Nonaccrual loans may be restored to
accrual status when principal and interest become current and
full payment of principal and interest is expected.
F-7
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Loans (Continued)
It is the companies' policy to discontinue the accrual of
interest and set up appropriate reserves for uncollectible
amounts on impaired loans at the point management believes the
borrower may be unable to meet payments as they become due.
Loan Origination Fees
Net fees and costs associated with the origination of loans are
deferred and amortized over the lives of the loans.
Office Property and Equipment
Office property and equipment are stated at cost less accumulated
depreciation. Depreciation is accumulated on a straight-line
basis over the estimated useful lives of the related assets.
Real Estate
Real estate and other assets acquired in settlement of loans are
recorded at the lower of cost or fair value minus estimated cost
to sell the assets or cost. Adjustments are made to reflect
declines, if any, in net realizable values below the recorded
amounts. Costs of holding real estate acquired in settlement of
loans are reflected in income currently. Revenues from the sales
of real estate are recognized at the time title is conveyed to
the buyer at the close of escrow, minimum down payment
requirements are met, the terms of any notes received satisfy
continuing payment requirements and there are no requirements for
continuing involvement with the properties. Gains on sales of
such real estate are taken into income based on the buyer's
initial and continuing investment in the property.
Valuations are periodically performed by management, and an
allowance for losses is established by a charge to operations if
the carrying value of a property exceeds its estimated net
realizable value.
Federal Insurance Premiums
As part of the Deposit Insurance Funds Act of 1996 (enacted on
September 30, 1996), a special assessment was imposed on most
Office of Thrift Supervision regulated institutions in order to
capitalize the Savings Association Insurance Fund (SAIF). The
Company's assessment totaled $305,022 effective September 30,
1996 and due before November 29, 1996. This amount has been
included in federal insurance premiums on the income statements.
As part of this assessment, the Company expects annual
assessments, $133,160 for 1996, to drop approximately 60% in
coming years.
F-8
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Advertising
The Company expenses advertising costs the first time the
advertising takes place.
Income Taxes
Income taxes are accounted for using the asset and liability
method. Under this method, deferred tax assets and liabilities
are recognized for the future tax consequences attributed to
differences between the financial statement carrying amounts of
existing assets and liabilities and 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 on deferred tax assets and liabilities of a
change in tax rate is recognized in income in the period that
includes the enactment date.
Earnings Per Share
The weighted average number of shares outstanding for purposes of
computing primary and fully diluted earnings per share for the
years ended September 30, 1996, 1995, and 1994, was 249,271,
260,107 and 262,039, and 249,631, 260,798 and 263,280,
respectively. This includes shares of common stock outstanding
and common stock equivalents attributable to outstanding common
stock options.
Disclosures About Fair Value of Financial Instruments
Financial Accounting Standards Statement No. 107, DISCLOSURES
ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS, requires disclosure of
fair value information about financial instruments, whether or
not recognized in the balance sheet, for which it is practicable
to estimate that value. In cases where quoted market prices are
not available, fair values are based on estimates using present
value or other valuation techniques. Those techniques are
significantly affected by the assumptions used, including the
discount rate and estimates of future cash flows. In that regard,
the derived fair value estimates cannot be substantiated by
comparison to independent markets and, in many cases, could not
be realized in immediate settlement of the instrument. Statement
No. 107 excludes certain financial instruments and all
nonfinancial instruments from its disclosure requirements.
Accordingly, the aggregate fair value amounts presented do not
represent the underlying value of the Bank.
The following methods and assumptions were used by the Bank in
estimating the fair value of its financial instruments as
detailed in Note 16:
Cash and Due from Banks
The carrying amounts reported in the balance sheet for cash
and due from banks approximate their fair value.
F-9
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Disclosures About Fair Value of Financial Instruments (Continued)
Investment Securities (Including Mortgage-Backed Securities)
Fair values for investment securities are based on quoted
market prices, where available. If quoted market prices are
not available, fair values are based on quoted market prices
of comparable instruments.
Loans
Fair values are estimated for portfolios of loans with
similar financial characteristics. Loans are segregated by
type such as commercial, real estate, consumer and other.
For variable-rate loans that reprice frequently and with no
significant change in credit risk, fair values are based on
carrying values. The fair values for fixed-rate term loans
are determined using estimated future cash flows, discounted
at the interest rates currently being offered for loans with
similar terms to borrowers with similar credit quality. The
carrying amount of accrued interest receivable approximates
its fair value.
Off-Balance-Sheet Instruments
Fair values for the Bank's off-balance-sheet instruments
(lending commitments and stand by letters of credit) are
based on fees currently charged to enter into similar
agreements, taking into account the remaining terms of the
agreements and the counterparties' credit standing.
Deposit Liabilities
The fair values of demand, NOW, money market and savings
deposits equal their carrying amounts which represents the
amount payable on demand. The carrying amounts for
variable-rate, certificates of deposit approximate their
fair values at the reporting date. Fair values for
fixed-rate certificates of deposit are estimated using a
discounted cash flow calculation that applies interest rates
currently being offered on certificates to a schedule of
aggregate expected monthly maturities on time deposits.
Cash Flows
The Company paid the following approximate amounts for interest
and taxes:
1996 1995 1994
-------------- ------------- --------------
Interest $ 2,142,910 $ 1,948,117 $ 1,770,273
============== ============= ==============
Income Taxes $ 240,978 $ 117,998 $ 305,617
============== ============= ==============
These amounts are included in net cash used by operating
activities in the statement of cash flows.
F-10
<TABLE>
<CAPTION>
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Cash Flows (Continued)
Excluded from the statement of cash flows were the effects of the
following noncash investing activities:
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Transfer of Loans to Real Estate Owned $ 53,477 $137,252 $ 39,380
======== ======== ========
Loans and Real Estate Charged Off $ 25,126 $ 58,705 $104,578
======== ======== ========
Sale of Real Estate Owned on Contracts for Deed $ 71,915 $ 55,522 $ 47,500
======== ======== ========
Unrealized Loss on Available-for-Sale
Securities Related to Adoption of SFAS 115,
Net of Taxes of $300 in 1996 and $2,400 in
1995 $ 450 $ 3,600 $ 0
======== ======== ========
</TABLE>
Recently Issued Accounting Standard
In October 1995, the FASB issued Statement No. 123, ACCOUNTING
FOR STOCK BASED COMPENSATION. This statement is required to be
adopted by the Company during the year ending September 30, 1997.
The impact of the statement is not expected to have a material
impact on the Company's financial statements.
<TABLE>
<CAPTION>
NOTE 2 SECURITIES
The carrying amount and estimated market values of investments as
of September 30, 1996 and 1995 are as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
1996
Available-for-Sale Securities:
Obligations of U.S.
Government Agencies $ 300,000 $ 0 $ 750 $ 299,250
========== ========== ========== ==========
Held-to-Maturity Securities:
Obligations of U.S.
Government Agencies $ 769,987 $ 5,877 $ 168 $ 775,696
========== ========== ========== ==========
1995
Available-for-Sale Securities:
Obligations of U.S.
Government Agencies $ 300,000 $ 0 $ 6,000 $ 294,000
========== ========== ========== ==========
Held-to-Maturity Securities:
Obligations of U.S.
Government Agencies $2,666,730 $ 1,987 $ 7,847 $2,660,870
========== ========== ========== ==========
</TABLE>
F-11
<TABLE>
<CAPTION>
NOTE 2 SECURITIES (CONTINUED)
The carrying amount and estimated market value of securities at
September 30, 1996, by contractual maturity, are shown below:
Available-for-Sale Held-to-Maturity
------------------------------------- ---------------------------------------
Amortized Cost Estimated Amortized Cost Estimated Market
Market Value Value
----------------- ----------------- ------------------ -------------------
<S> <C> <C> <C> <C>
Due in One Year or Less $ 300,000 $ 299,250 $ 199,388 $ 199,750
Due After One Year
through Five Years 0 0 349,011 349,234
Due After Five Years
through Ten Years 0 0 0 0
Due After Ten Years 0 0 221,588 226,712
----------------- ----------------- ------------------ -------------------
$ 300,000 $ 299,250 $ 769,987 $ 775,696
================= ================= ================== ===================
</TABLE>
At September 30, 1995, the held-to-maturity portfolio consisted
primarily of step-up bonds/notes which contained coupon rates
that rise at predetermined points in time if the issue is not
called. These bonds/notes contain embedded call options "sold" to
the issuer by the Company allowing the issuer to call the
bonds/notes at various dates until maturity. All of the Company's
step-up bonds/notes were called during 1996.
At September 30, 1996, the held-to-maturity portfolio consisted
primarily of bonds of the U.S. Government agencies.
Accrued interest receivable on securities, interest-earning
deposits with banks, and cash equivalents aggregated $147,386 and
$329,121 at September 30, 1996 and 1995, respectively.
The annual weighted average contractual interest rate for
held-to-maturity securities was 6.32%, 6.09% and 5.80% at
September 30, 1996, 1995 and 1994, respectively.
The annual weighted average contractual interest rate for
available-for-sale securities and securities held-for-sale was
4.71%, 3.55% and 6.15% at September 30, 1996, 1995 and 1994,
respectively.
The annual weighted average contractual interest rate for
interest-earning deposits with banks was 4.92%, 4.79% and 4.56%
at September 30, 1996, 1995 and 1994, respectively.
Proceeds from the sale of available-for-sale securities and
securities held-for-sale totaled $-0-, $508,906 and $250,000
during 1996, 1995 and 1994, respectively. Gross gains of $-0-,
$9,013 and $-0-, and gross losses of $-0-, $-0- and $784 were
recognized during 1996, 1995 and 1994, respectively.
F-12
<TABLE>
<CAPTION>
NOTE 3 LOANS RECEIVABLE
Loans receivable at September 30 are summarized as follows:
1996 1995
------------- -------------
<S> <C> <C>
Mortgage Loans and Contracts:
Conventional $ 34,189,193 $ 29,667,212
Partially Guaranteed by VA or Insured
by FHA 203,523 262,461
Real Estate Sold on Contract 195,297 351,359
------------- -------------
$ 34,588,013 $ 30,281,032
Improvement 1,004,147 858,759
Consumer 7,211,235 6,256,801
Commercial 1,155,660 400,518
Other 315,454 1,120,614
------------- -------------
Total Loans Receivable $ 44,274,509 $ 38,917,724
Allowance for Losses (208,670) (165,353)
Deferred Loan Fees (82,088) (46,823)
Loans in Process (668,866) (924,271)
------------- -------------
$ 43,314,885 $ 37,781,277
============= =============
</TABLE>
Activity in the allowance for loan losses is summarized as
follow:
Balance, September 30, 1993 $ 203,212
Provision for Losses (17,339)
Charge-Offs (29,795)
Recoveries 8,440
-----------------
Balance, September 30, 1994 $ 164,518
Provision for Losses 22,873
Charge-Offs (25,125)
Recoveries 3,087
-----------------
Balance, September 30, 1995 $ 165,353
Provision for Losses 62,563
Charge-Offs (25,126)
Recoveries 5,880
-----------------
Balance, September 30, 1996 $ 208,670
=================
F-13
NOTE 3 LOANS RECEIVABLE (CONTINUED)
Accrued interest receivable on loans aggregated $250,166 and
$221,783 at September 30, 1996 and 1995, respectively. The
weighted average yields on the above loans were 7.91%, 8.10% and
7.74% as of September 30, 1996, 1995 and 1994, respectively.
At September 30, 1996 and 1995, the Company had loans receivable
from its Directors and officers of $254,301 and $271,666,
respectively. Such loans were made under terms and conditions
substantially the same as loans made to parties not affiliated
with the Company, except as described in the following paragraph.
Prior to the enactment of FIRREA in 1989, the Savings Bank had a
policy of offering preferred mortgage loans to officers,
Directors and employees for the financing and improvement of
their personal residences. These loans were made in the ordinary
course of business and were made on substantially the same terms,
except for interest rates or the waiver of fees, as those of
comparable transactions and do not involve more than the normal
risk of collectibility or contain other unfavorable features. As
a result of this policy, at September 30, 1996, the Company had
two remaining mortgage loans with an unpaid principal balance of
approximately $146,000. These loans were originated with an
interest rate which was 1 1/4% below the prevailing market rate.
Loans serviced for other financial institutions are not included
in the accompanying consolidated statements of financial
condition. The unpaid principal balances of these loans at
September 30, 1996 and 1995 are $652,000 and $1,246,000,
respectively.
Nonaccruing loans totaled $26,230, $125,874 and $99,900 at
September 30, 1996, 1995 and 1994, respectively. The effect of
these non-accruing loans on revenues were reductions of $547,
$2,500 and $10,000 for the years ended September 30, 1996, 1995
and 1994, respectively.
The Company has adopted the provisions of SFAS No. 114,
ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A LOAN. This statement
requires that a creditor measure impairment based on the present
value of expected future cash flows discounted at the loan's
effective interest rate, except that as a practical expedient, a
creditor may measure impairment based on a loan's observable
market price, or the fair value of the collateral if the loan is
collateral dependent. The Company also adopted SFAS No. 118 which
allows a creditor to use existing methods for recognizing
interest income on impaired loans. The adoption of these
statements does not have a material effect on the Company's
financial statements and results of operations for the year ended
September 30, 1996. The Company did not have any impaired loans
at September 30, 1996.
F-14
NOTE 4 MORTGAGE-BACKED SECURITIES
Mortgage-backed securities at September 30 are summarized as
follows:
Gross Gross
Amortized Unrealized Unrealized Estimated
1996 Cost Gains Losses Market Value
---------- ---------- ---------- ----------
FNMA $ 396,438 $ 4,599 $ 418 $ 400,619
FHLMC 748,590 5,076 7,918 745,748
---------- ---------- ---------- ----------
Total $1,145,028 $ 9,675 $ 8,336 $1,146,367
========== ========== ========== ==========
1995
FNMA $1,102,854 $ 10,758 $ 6,709 $1,106,903
FHLMC 353,884 4,876 507 358,253
---------- ---------- ---------- ----------
Total $1,456,738 $ 15,634 $ 7,216 $1,465,156
========== ========== ========== ==========
The annual weighted average contractual interest rate for all
mortgage-backed securities was 7.07%, 7.13% and 6.96% at
September 30, 1996, 1995 and 1994, respectively. Amortized cost
approximates outstanding principal balances as of September 30,
1996 and 1995. Accrued interest receivable on mortgage-backed
securities totaled $7,957 and $10,130 at September 30, 1996 and
1995, respectively. No gross gains or losses were recognized on
mortgage-backed securities during 1996, 1995 and 1994.
NOTE 5 OFFICE PROPERTY AND EQUIPMENT
Office property and equipment at September 30 is summarized as
follows:
Estimated
Lives 1996 1995
---------- ---------- ----------
Land $ 89,183 $ 89,183
Office Buildings 5-35 Years 754,983 754,983
Furniture and Equipment 3-10 Years 521,743 480,826
---------- ----------
$1,365,909 $1,324,992
Less: Accumulated Depreciation 801,309 748,307
---------- ----------
$ 564,600 $ 576,685
========== ==========
F-15
NOTE 6 REAL ESTATE
Real estate consists of the following:
1996 1995
-------- --------
Real Estate in Judgment $ 53,477 $ 70,561
Less: Valuation Allowances 8,021 10,584
-------- --------
Total $ 45,456 $ 59,977
======== ========
Activity in the allowance for losses is summarized as follows:
Balance, September 30, 1993 $ 61,481
Provision for Losses 39,339
Charge-Offs (74,783)
Recoveries 0
--------
Balance, September 30, 1994 $ 26,037
Provision for Losses 18,127
Charge-Offs (33,580)
Recoveries 0
--------
Balance, September 30, 1995 $ 10,584
Provision for Losses (2,563)
Charge-Offs 0
Recoveries 0
--------
Balance, September 30, 1996 $ 8,021
========
F-16
<TABLE>
<CAPTION>
NOTE 7 DEPOSITS
Deposits at September 30 are summarized as follows:
1996 1995
------------------------------------------ ---------------------------------------
Weighted Weighted
Average Average
Rate Amount Percent Rate Amount Percent
---------- --------------- ------------- ---------- --------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Checking:
Noninterest Bearing 0.00 % $ 137,713 0.29 % 0.00 % $ 126,856 0.27 %
Interest Bearing 2.26 5,858,163 12.50 2.30 5,263,070 11.24
Money Market 2.85 2,436,650 5.20 2.90 3,006,352 6.42
Passbook Savings 2.50 5,364,976 11.45 2.55 5,184,719 11.08
90-Day Notice Accounts 2.60 258,684 0.55 2.65 278,613 0.60
--------------- ---------- --------------- --------
$ 14,056,186 29.99 % $ 13,859,610 29.61 %
--------------- ---------- --------------- --------
IRA Savings Certificates 5.33 % $ 5,893,712 12.57 % 5.90 % $ 5,613,084 11.99 %
--------------- ---------- --------------- --------
Certificates of Deposit:
2.01% to 3.00% 0.00 % $ 0 0.00 % 0.00 % $ 0 0.00 %
3.01% to 4.00% 3.14 19,893 0.04 3.19 22,990 0.05
4.01% to 5.00% 4.87 5,296,924 11.30 4.54 4,433,765 9.47
5.01% to 6.00% 5.41 19,418,803 41.43 5.67 20,287,575 43.35
6.01% to 7.00% 6.26 2,107,086 4.50 6.27 2,186,568 4.67
7.01% and Above 7.25 80,000 0.17 7.83 400,391 0.86
--------------- ---------- --------------- --------
$ 26,922,706 57.44 % $ 27,331,289 58.40 %
--------------- ---------- --------------- --------
4.49 % $ 46,872,604 100.00 % 4.70 % $ 46,803,983 100.00 %
=============== ========== =============== ========
</TABLE>
Interest expense on deposits is summarized as follows:
Year Ended September 30,
------------------------------------------
1996 1995 1994
---------- ---------- ----------
Checking $ 124,773 $ 122,178 $ 125,812
MMDA 75,280 88,982 123,960
Passbook Savings 136,679 136,730 144,553
90-Day Notice Accounts 6,906 8,004 10,024
IRA Savings Certificates 323,586 302,685 289,432
Certificates of Deposit 1,460,647 1,347,236 1,094,247
---------- ---------- ----------
Total $2,127,871 $2,005,815 $1,788,028
========== ========== ==========
F-17
NOTE 7 DEPOSITS (CONTINUED)
Remaining maturities of IRA savings certificates and certificates
of deposit as of September 30, 1996 are summarized as follows:
Weighted
$100,000 Average
Minimum Other Total Rate
----------- ----------- ----------- ----
1-6 Months $ 551,913 $16,144,542 $16,696,455 5.23 %
7-12 Months 731,025 8,668,360 9,399,385 5.32
13-36 Months 123,826 4,865,048 4,988,874 5.62
37-60 Months 0 1,701,656 1,701,656 6.19
Over 60 Months 0 30,048 30,048 6.14
----------- ----------- ----------- ----
$ 1,406,764 $31,409,654 $32,816,418 5.37 %
=========== =========== =========== ====
At September 30, 1996 and 1995 investment securities with unpaid
principal balances of approximately $1,222,446 and $1,248,825,
respectively, were pledged as collateral for certain deposits.
NOTE 8 INCOME TAXES
Income tax expense for the years ended September 30 is comprised
of the following:
1996 1995 1994
--------- --------- ---------
Income Tax Expense Applicable
to Earnings:
Federal:
Current $ 96,370 $ 169,162 $ 130,056
Deferred 34,398 (5,282) (12,258)
--------- --------- ---------
Total Federal $ 130,768 $ 163,880 $ 117,798
--------- --------- ---------
State:
Current $ 28,530 $ 56,205 $ 43,442
Deferred 12,702 (989) (6,550)
--------- --------- ---------
Total State $ 41,232 $ 55,216 $ 36,892
--------- --------- ---------
Total Income Tax Expense $ 172,000 $ 219,096 $ 154,690
========= ========= =========
F-18
NOTE 8 INCOME TAXES (CONTINUED)
As of September 30, 1996 and 1995, the Company had a deferred tax
asset (liability) of $(29,829) and $17,271, respectively.
Deferred federal income taxes, resulting from temporary
differences in the recognition of income and expense for federal
and state income tax return and financial statement purposes, is
comprised of the following at September 30:
1996 1995 1994
--------- --------- ---------
Unrealized Gains and Losses
on Investments $ 2,121 $ (2,400) $ 1,129
Accrued Income and Expense 11,309 (13,759) (4,808)
FHLB Stock Dividends 3,313 0 0
Depreciation 7,048 6,727 2,514
Deferred Compensation Expense 6,255 1,138 (22,290)
Management Recognition Plan 0 (1,458) 0
Other 17,054 3,481 4,647
--------- --------- ---------
$ 47,100 $ (6,271) $ (18,808)
========= ========= =========
The actual income tax expense differs from the "expected" income
tax expense computed by applying the federal corporate tax rate
to earnings before income taxes as follows:
1996 1995 1994
--------- --------- ---------
Expected Federal Income Tax Expense $ 135,921 $ 185,189 $ 127,298
State Taxes, Net of Federal Tax Benefit 26,798 35,300 24,900
Bad Debts Deductible for Income Tax
Purposes in Excess (Less Than) the
Provision for Loan Losses 11,098 (2,000) (3,000)
Other (Net) (1,817) 607 5,492
--------- --------- ---------
Total $ 172,000 $ 219,096 $ 154,690
========= ========= =========
Under applicable provisions of the Internal Revenue Code (the
Code), a savings association that meets certain definitional
tests relating to the composition of its assets and the sources
of its income ("qualifying savings association") is permitted to
establish reserves for bad debts. A qualifying savings
association may make annual additions to such reserves under the
experience method. Alternatively, a qualifying savings
association may elect, on an annual basis, to use the percentage
of taxable income method to compute its allowable addition to its
bad debt reserve on qualifying real property loans (generally,
loans secured by an interest in improved real estate).
F-19
NOTE 8 INCOME TAXES (CONTINUED)
The availability of the bad debt reserve deduction computed under
the percentage of taxable income method has permitted qualifying
savings associations to be taxed at a lower effective federal
income tax rate than that applicable to corporations generally.
The percentage of taxable income that may be deducted under the
percentage of taxable income method is currently 8% and the
maximum corporate tax rate is 34%. This results in an effective
maximum federal income tax rate of 31.3% (exclusive of the
corporate alternative minimum tax) for the Company, provided it
remains a qualifying savings association. The percentage bad debt
deduction is subject to various limitations which, to date, have
not restricted the percentage bad debt deduction available to the
Company.
As part of the Small Business Job Protection Act, passed August
2, 1996, the percentage of bad debt deduction method will no
longer be available to qualifying savings associations. Beginning
October 1, 1996 the Company will be required to use the
experience method for calculating bad debt expense. Thus, the
Company's effective federal tax rate will be comparable to other
corporations.
NOTE 9 RETIREMENT PLAN
Substantially all full-time employees of the Company are included
in a defined contribution retirement plan. The Company's policy
is to provide a trustee insurance company with an amount,
representing a percentage of eligible employees' salaries, to
fund future retirement benefits. For the years ended September
30, 1996, 1995 and 1994, the amount charged to operations was
approximately $41,000, $42,000 and $47,000, respectively.
NOTE 10 LOAN COMMITMENTS
In the normal course of business, there are outstanding various
commitments which are not reflected in the consolidated financial
statements, consisting of commitments to originate fixed and
variable rate loans of $140,500 and $94,600 at September 30,
1996, and $267,200 and $478,200 at September 30, 1995,
respectively. The Company also had fixed rate, unused lines and
letters of credit of $82,800 and $51,000 at September 30, 1996
and 1995, respectively. At September 30, 1996, the Company had
commitments to originate loans at an average rate of 7.88% for
terms up to 30 years. The Company's exposure to credit loss is
limited to amounts funded or drawn, however, at September 30,
1996, no losses are anticipated as a result of these commitments.
Commitments to originate loans are typically contingent upon the
borrower meeting certain financial and other covenants, and such
commitments typically have fixed expiration dates. As many of
these commitments are expected to expire without being funded,
the total commitments do not necessarily represent future cash
requirements. The Company evaluates each potential borrower and
the necessary collateral on an individual basis. Collateral
varies, but consists principally of real and personal property.
F-20
NOTE 11 RETAINED EARNINGS
During 1994, the Bank converted from a federally chartered mutual
savings association to a federally chartered stock savings bank.
At that time, the Bank established a liquidation account in an
amount equal to its regulatory net worth as of February 9, 1994
(approximately $2,600,000). The liquidation account is maintained
for the benefit of eligible depositors who have continued to
maintain their deposits in the Bank since the conversion. In the
event of a liquidation, each eligible depositor will be entitled
to receive a liquidation distribution from the liquidation
account in the proportionate amount of the then current adjusted
balance for deposits held before any liquidation distribution may
be made with respect to the stockholders. The balance
attributable to the liquidation account is decreased by a
proportionate amount as each account holder closes an account or
reduces the balance in such account as of any subsequent
year-end. Except for the repurchase of stock and payment of
dividends, the existence of the liquidation account will not
restrict the use or application of such net worth.
The Bank may not declare or pay a cash dividend or repurchase any
of its capital stock if it would cause its regulatory capital to
be reduced below the amount required for the liquidation account.
The Bank is also not permitted to pay dividends to the Company in
excess of 100% of its annual net income plus the amount that
would reduce by one-half the Bank's surplus capital ratio at the
beginning of the calendar year without prior Office of Thrift
Supervision ("OTS") approval. Additional limitations on dividends
declared or paid on, or repurchases of, the Bank's capital stock
are tied to the Bank's level of compliance with its regulatory
capital requirements.
The Bank is required under OTS regulations to maintain a minimum
amount of regulatory capital. This requirement has been met.
Under the Internal Revenue Code, the Bank is permitted to deduct
an annual addition to a reserve for bad debts. This amount
differs significantly from the bad debt expense used for
financial accounting purposes. Bad debt deductions for income tax
purposes of $975,000 are included in taxable income of later
years only if the bad debt reserves are used for purposes other
than to absorb bad debt losses. Because the Bank does not intend
to use the reserve for purposes other than to absorb losses, no
deferred income taxes have been provided.
F-21
<TABLE>
<CAPTION>
NOTE 11 RETAINED EARNINGS (CONTINUED)
The following is a reconciliation of the Bank's GAAP (Generally
Accepted Accounting Principles) capital to regulatory capital at
September 30, 1996:
BANK REGULATORY CAPITAL
-----------------------------------------------------------------------
Total Tangible Total Core Total Risk-
GAAP Capital Capital Capital Based Capital
--------------- ---------------- --------------- -----------------
<S> <C> <C> <C> <C>
GAAP Capital Before
Adjustments $ 4,301,000
===============
GAAP Capital as Adjusted $ 4,302,000
===============
Regulatory Capital-Computed $ 4,302,000 $ 4,302,000 $ 4,511,000
Minimum-Capital Requirement 794,000 1,587,000 2,427,000
---------------- --------------- -----------------
Regulatory Capital Excess $ 3,508,000 $ 2,715,000 $ 2,084,000
================ =============== =================
</TABLE>
Total tangible and core capital to total assets is 8.1% and 7.9%,
with risk-based capital to risk-weighted assets of 14.9% and
15.4% at September 30, 1996 and 1995, respectively. These ratios
are in excess of the requirements as discussed in Note 12.
NOTE 12 FINANCIAL INSTITUTIONS REFORM, RECOVERY AND ENFORCEMENT ACT
OF 1989 (FIRREA) CONSIDERATIONS
On August 9, 1989, FIRREA was signed into law. FIRREA imposed
more stringent capital requirements upon savings institutions
("the institutions") than those previously in effect.
The legislation contains provision for new capital standards that
require institutions to have a minimum regulatory tangible
capital equal to 1.5% of total adjusted assets and leverage
capital ratio of core capital not less than 3% of adjusted total
assets. Additionally, institutions are required to meet a
risk-based capital requirement of 8% of risk rated assets.
As of September 30, 1996, the Company complies with the current
FIRREA capital requirements.
F-22
NOTE 13 BUSINESS COMBINATION
On April 25, 1994, the Bank was converted from a federally
chartered mutual savings bank to a federally chartered stock
savings bank with the concurrent formation of a holding company.
The Bank issued all of its common stock to the Company and
concurrently, the Company issued 260,387 shares of common stock.
The consolidated financial statements of the Company give effect
to the conversion which has been accounted for as a pooling of
interest combination. However, since the Company was a newly
formed shell corporation with no assets, liabilities or equity
prior to the conversion, the transaction had no impact on the
accounts and results of operations of the Bank as previously
reported.
NOTE 14 MANAGEMENT RECOGNITION PLAN AND STOCK OPTION PLAN
On April 25, 1994, in accordance with the stock conversion, the
Board of Directors approved the Management Recognition Plan (MRP)
and Stock Option Plan (Plan) for certain employees of the Company
and Bank and Directors of the Company.
The Bank has contributed $78,110 to a trust to purchase 7,811
shares of common stock in the conversion. Each participating
officer, Director and employee will earn shares over a five-year
vesting period.
In accordance with generally accepted accounting principles, the
MRP has been reflected as a reduction of stockholders' equity and
the balance will be charged against income over the five-year
vesting period.
Under the terms of the Plan, 26,039 shares of common stock were
issued to a trust in conversion and are reserved for issuance by
the Company upon exercise of stock options granted to employees
and Directors of the Company. Options to purchase 18,850 shares
of common stock for an average of $10.45 per share were issued to
certain employees and Directors. These options have a term of ten
years.
F-23
NOTE 15 PARENT COMPANY FINANCIAL INFORMATION
Mid-Central Financial Corporation (parent company only) condensed
balance sheets as of September 30 and the related statements of
income and cash flows for the years then ended are as follows:
CONDENSED BALANCE SHEETS
1996 1995
----------- -----------
ASSETS
Cash $ 824,203 $ 1,001,474
Investment in Subsidiary 4,272,664 4,115,805
Other Assets 0 12,992
----------- -----------
Total Assets $ 5,096,867 $ 5,130,271
=========== ===========
LIABILITIES AND STOCKHOLDER'S EQUITY
Accrued Expenses $ 1,630 $ 0
----------- -----------
STOCKHOLDER'S EQUITY
Capital Stock $ 23,501 $ 24,739
Additional Paid-In Capital 2,149,022 2,262,074
Retained Earnings, Substantially Restricted 2,922,714 2,843,458
----------- -----------
Total Stockholder's Equity $ 5,095,237 $ 5,130,271
----------- -----------
Total Liabilities and
Stockholder's Equity $ 5,096,867 $ 5,130,271
=========== ===========
CONDENSED STATEMENTS OF INCOME
Interest Income $ 22,918 $ 28,311
Dividends Received from Subsidiary Bank 80,000 80,000
----------- -----------
Total Income $ 102,918 $ 108,311
Operating Expenses 18,895 28,923
----------- -----------
INCOME BEFORE INCOME TAXES AND EQUITY IN
UNDISTRIBUTED EARNINGS OF SUBSIDIARIES $ 84,023 $ 79,388
INCOME TAX (BENEFIT) EXPENSE 1,630 (240)
----------- -----------
INCOME BEFORE EQUITY IN UNDISTRIBUTED
EARNINGS OF SUBSIDIARIES $ 82,393 $ 79,628
EQUITY IN UNDISTRIBUTED EARNINGS OF
SUBSIDIARIES 145,374 245,949
----------- -----------
NET INCOME $ 227,767 $ 325,577
=========== ===========
F-24
NOTE 15 PARENT COMPANY FINANCIAL INFORMATION (CONTINUED)
CONDENSED STATEMENTS OF CASH FLOWS
1996 1995
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 227,767 $ 325,577
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities:
Equity in Undistributed Earnings of
Subsidiaries (145,374) (245,949)
(Increase) Decrease in Other Assets 0 (788)
Increase (Decrease) in Taxes Payable 14,621 (14,394)
----------- -----------
Net Cash Provided by
Operating Activities $ 97,014 $ 64,446
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends Paid $ (73,289) $ (77,142)
Retirement of Stock (200,996) (177,075)
----------- -----------
Net Cash Provided (Used) by
Financing Activities $ (274,285) $ (254,217)
----------- -----------
NET INCREASE (DECREASE) IN CASH $ (177,271) $ (189,771)
Cash - Beginning 1,001,474 1,191,245
----------- -----------
CASH - ENDING $ 824,203 $ 1,001,474
=========== ===========
<TABLE>
<CAPTION>
NOTE 16 DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
1996 1995
-------------------------------------- ---------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------------ ----------------- ------------------ ------------------
<S> <C> <C> <C> <C>
Financial Assets:
Investment Securities $ 2,215,015 $ 2,221,313 $ 4,423,468 $ 4,420,026
================== ================= ================== ==================
Loans $ 43,523,555 $ 37,946,630
Less: Allowance for
Loan Losses 208,670 165,353
------------------ ------------------
Loans (Net) $ 43,314,885 $ 42,981,000 $ 37,781,277 $ 37,539,000
================== ================= ================== ==================
Financial Liabilities:
Total Deposits $ 46,872,604 $ 46,802,000 $ 46,803,983 $ 46,838,000
================== ================= ================== ==================
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> OCT-01-1995
<PERIOD-END> SEP-30-1996
<CASH> 4,121,767
<INT-BEARING-DEPOSITS> 1,628,832
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 299,250
<INVESTMENTS-CARRYING> 1,915,015
<INVESTMENTS-MARKET> 1,922,063
<LOANS> 43,523,555
<ALLOWANCE> 208,670
<TOTAL-ASSETS> 52,871,424
<DEPOSITS> 46,872,604
<SHORT-TERM> 0
<LIABILITIES-OTHER> 903,583
<LONG-TERM> 0
0
0
<COMMON> 2,172,523
<OTHER-SE> 2,922,714
<TOTAL-LIABILITIES-AND-EQUITY> 52,871,424
<INTEREST-LOAN> 3,469,730
<INTEREST-INVEST> 396,222
<INTEREST-OTHER> 30,041
<INTEREST-TOTAL> 3,895,993
<INTEREST-DEPOSIT> 2,127,871
<INTEREST-EXPENSE> 2,127,871
<INTEREST-INCOME-NET> 1,768,122
<LOAN-LOSSES> 62,563
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,494,279
<INCOME-PRETAX> 399,767
<INCOME-PRE-EXTRAORDINARY> 399,767
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 227,767
<EPS-PRIMARY> .91
<EPS-DILUTED> .91
<YIELD-ACTUAL> 7.85
<LOANS-NON> 27
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 248,000
<ALLOWANCE-OPEN> 165,000
<CHARGE-OFFS> 25,000
<RECOVERIES> 6,000
<ALLOWANCE-CLOSE> 209,000
<ALLOWANCE-DOMESTIC> 209,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
