SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended September 30, 1996
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- OR -
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ______________________ to ______________________
SEC File Number: 0-23620
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MID CONTINENT BANCSHARES, INC.
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(Exact name of Registrant as specified in its Charter)
Kansas 48-1146797
- --------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
of incorporation or organization) Identification Number)
124 W. Central, El Dorado, Kansas 67042
- ----------------------------------- ---------------
(Address of principal executive offices) (Zip Code)
Registrants telephone number, including area code: (316) 321-2700
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Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.10 per share
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(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 report(s), 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 ]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant, based upon the last sale price of such stock on December 5,
1996, was $39.1 million.
As of December 5, 1996, the Registrant had 2,016,750 shares of Common
Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
1. Parts II and IV -- Portions of the Registrant's 1996 Annual Report to
Stockholders.
2. Part III -- Portions of the Registrant's Proxy Statement for Annual Meeting
of Stockholders to be held in January 1997.
<PAGE>
PART I
Item 1. Business
(Dollars in Thousands)
General
Mid Continent Bancshares, Inc. ("Registrant" or "Company") is a unitary
savings and loan holding company that was incorporated in January 1994 under the
laws of the State of Kansas for the purpose of acquiring all of the issued and
outstanding common stock of Mid-Continent Federal Savings Bank ("Mid-Continent
Federal" or "Savings Bank"). This acquisition occurred in June 1994 at the time
Mid-Continent Federal changed its name from Mid-Continent Federal Savings and
Loan Association of El Dorado, simultaneously converted from a mutual to stock
institution, and sold all of its outstanding capital stock to the Company and
the Company made its initial public offering of common stock. As of September
30, 1996, the Company had total assets of $340,186, total deposits of $214,493,
and stockholders' equity of $36,807 or 10.8% of total assets under generally
accepted accounting principles ("GAAP"). The only subsidiary of the Company is
the Savings Bank. The Savings Bank has one subsidiary, Laredo Investment, Inc.
Mid-Continent Federal is a federally chartered capital stock savings bank
located in El Dorado, Kansas. The Savings Bank was founded in 1925 as a Kansas
chartered savings and loan association under the name Mid-Continent Savings and
Loan Association. In 1935, the Savings Bank adopted a federal charter and
changed its name to Mid-Continent Federal Savings and Loan Association of El
Dorado (the "Association"). In June 1994, the Association converted from a
federally chartered mutual savings and loan association to its current form, a
federally chartered capital stock savings bank subsidiary of a savings and loan
holding company. The Savings Bank's deposits are federally insured by the
Federal Deposit Insurance Corporation ("FDIC").
The Company directs and plans the activities of the Savings Bank, the
Company's primary asset. The Company's business activities to date have been
limited to its investment in the Savings Bank, loans made to the Savings Bank
for use in the normal course of the Savings Bank's business and to the
Mid-Continent Federal Savings Bank Employee Stock Ownership Plan (the "ESOP") to
enable the ESOP to purchase shares of the Company's common stock in the initial
public offering and the repurchase of a portion of the Company's stock, as
permitted by the Office of Thrift Supervision. References to the Company include
the Savings Bank, unless the context otherwise indicates.
The Company is primarily engaged in attracting deposits from the general
public and using those funds to originate and sell real estate loans on
one-to-four family residences and, to a lesser extent, to originate consumer and
construction loans for its portfolio. The Company also purchases one-to-four
family residential loans. The Company has offices in El Dorado, Newton,
Winfield, Augusta and Wichita, Kansas, which are located in its primary market
area of Butler, Cowley, Sedgwick and Harvey Counties in the State of Kansas. The
Company opened one full service branch in Wichita in 1996 and expects to open
another in 1997. A full service branch
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was opened in October, 1996 in Winfield, Kansas, to compliment the existing full
service branch in that city. The new branch is located in the local Dillon's
supermarket and will maintain extended hours to serve its customer base. In
addition, the Company invests in mortgage-related securities and investment
securities. The Company offers its customers fixed-rate, and adjustable-rate
mortgage loans ("ARM"), as well as FHA/VA loans and consumer loans, including
home equity and savings account loans. Adjustable-rate mortgage loans and
short-term fixed-rate mortgage loans generally are originated for retention in
the Company's portfolio while long-term fixed-rate mortgage loans are generally
sold into the secondary market. All consumer loans are retained in the Company's
portfolio.
The principal sources of funds for the Company's lending activities are
deposits and the amortization, repayment and maturity of loans, mortgage-related
securities, and investment securities and borrowings from the Federal Home Loan
Bank. Principal sources of income are interest and fees on loans,
mortgage-related securities, investment securities, and deposits held in other
financial institutions. The Company's principal expense is interest paid on
deposits.
The Company is actively engaged in the purchase and sale of mortgage loans
through a correspondent network. These purchased loans and loans originated by
the Company are then sold, generally without recourse, into the secondary market
with the Company generally retaining the servicing rights. The Company is
contingently liable on certain loans sold with recourse. The principal balance
of loans sold with recourse totalled approximately $127 and $ - 0 - at September
30, 1995 and September 30, 1996, respectively.
The Company has striven to increase its other income by increasing its
portfolio of loans serviced for others. The Company expects to continue to
increase the size of its portfolio of loans serviced for others. This portfolio
totalled approximately $1,229,153 as of September 30, 1996. Income from loan
servicing fees, net of amortization and before operating expenses, has provided
a substantial portion of net income in recent years and totalled $3,128, before
income tax, for the fiscal year ended September 30, 1996.
The counties of Butler, Cowley, Sedgwick and Harvey, Kansas are the
Company's primary market area for deposits and are located in south central
Kansas. This area was founded on agriculture and the oil and gas industry, which
continue to play a major role in the economy. This area has also attracted a
variety of industries including aircraft, recreational and camping equipment,
balloon plant, meat processing, refineries, state and private universities,
junior colleges, electronics manufacturing, and heating and air conditioning
equipment manufacturing. This area also includes the health care, financial
service, and other service related industries, including the wholesale/retail
trade industries. Also, within Butler County are located two state prisons. The
largest employment sectors in the Company's market area are aircraft, industrial
manufacturing, and retail.
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<PAGE>
Asset and Liability Management
Although the Company's dependence upon net interest income has been
greatly reduced during the past several years as a result of the increase in
sources of other income obtained through its mortgage banking operation and
purchases of mortgage servicing rights ("MSR"), the income from retail
operations and assets held in portfolio still depends primarily upon net
interest income. The ability to maximize net interest income is largely
dependent upon the achievement of a positive interest rate spread that can be
sustained during fluctuations in prevailing interest rates. Interest rate
sensitivity is a measure of the difference between amounts of interest-earning
assets and interest-bearing liabilities which either reprice or mature within a
given period of time. The difference, or the interest rate repricing "gap,"
provides an indication of the extent to which an institution's interest rate
spread will be affected by changes in interest rates over a period of time. A
gap is considered positive when the amount of interest-rate sensitive assets
maturing or repricing over a specified period of time exceeds the amount of
interest-rate sensitive liabilities maturing or repricing within that period and
is considered negative when the amount of interest-rate sensitive liabilities
maturing or repricing over a specified period of time exceeds the amount of
interest-rate sensitive assets maturing or repricing within that period.
Generally, during a period of rising interest rates, a negative gap within a
given period of time would adversely affect net interest income, while a
positive gap within a given period of time would result in an increase in net
interest income; during a period of falling interest rates, a negative gap
within a given period of time would result in an increase in net interest income
while a positive gap within a given period of time would have the opposite
effect. At September 30, 1996, the Company's one year and three year cumulative
interest sensitivity gap as a percentage of total assets was a negative 23.85%
and a negative 25.36%, respectively.
In an effort to reduce interest rate risk and protect it from the negative
effect of increases in interest rates, the Company has instituted certain asset
and liability management measures. This strategy includes the following primary
elements: (i originating and purchasing long-term fixed-rate loans only for sale
in the secondary mortgage market, (ii) maintaining a high percentage of total
assets in short-term securities and other liquid assets, (iii) increasing
sources of other income, such as gain on sale of loans and loan servicing fees,
(iv) increasing its ARM and short-term fixed rate loan portfolio and (v)
building a loan servicing portfolio whose market value floats inversely to the
movement of interest rates. A loan servicing portfolio becomes more valuable as
the "turnover" in the mortgage loans slows. Mortgage loans traditionally become
more seasoned and turnover less as interest rates rise. Therefore, after
interest rates rise, the value of a loan servicing portfolio generally increases
(assuming credit quality is maintained), causing the opposite effect to the
value of the Company's loans and investments.
Certain risks are inherent in the business of mortgage banking. There is a
risk that the Company will not be able to sell all the loans that it originates
or purchases or, conversely, that the Company will be unable to fulfill its
contractual commitment to deliver loans. In addition, in periods of rising
interest rates, loans originated or purchased by the Company may decline in
value. Exposure to interest rate risk is significant during the period between
the time the interest rate on a customer's mortgage loan application is
established and the time the mortgage loan
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<PAGE>
closes, and also during the period between the time the interest rate is
established and the time the Company commits to sell the loan. If interest rates
change in an unanticipated fashion, the actual percentage of loans that close
may differ from projected percentages. The resultant mismatching of commitments
to close loans and commitments to deliver sold loans may have an adverse effect
on the profitability of loan originations in any such period. A sudden increase
in interest rates can cause a higher percentage of loans to close than
projected. To the degree that this was not anticipated, the Company will not
have made commitments to sell these additional loans and may incur significant
mark to market losses, adversely affecting results of operations. In order to
minimize these risks, it is the policy of the Company to cover approximately
70%-75% of the loans that it has originated or purchased with sales contracts
with third parties. A mortgage banker that is unable to fulfill its commitments
to deliver mortgage loans to third parties will be subject to the payment of
fees and monetary penalties as well as the loss of business reputation.
Management attempts to adequately cover its delivery commitments by limiting
such commitments to 70%-75% of the aggregate amount of loans held for sale or
committed for origination or purchase plus a percentage of the aggregate loan
applications received. However, the risk associated with failing to meet
delivery commitments cannot be eliminated due to the variables created by
changes in market conditions and other factors. Commitments to sell loans are
considered when assessing the lower of cost or market valuation of the Company's
loans held for sale portfolio.
Gap Table
The following table sets forth the amount of interest-earning assets and
interest-bearing liabilities outstanding at September 30, 1996, which are
expected to reprice or mature in each of the future time period shown. The
amount of assets or liabilities shown which reprice or mature during a
particular period were determined by the contractual terms of the asset or
liability. The table assumes prepayments and scheduled principal amortization of
fixed-rate loans and mortgage-related securities, and assumes that adjustable
rate mortgage loans will reprice at contractual repricing intervals. No
consideration has been provided for the impact of future commitments and loans
in process.
5
<PAGE>
<TABLE>
<CAPTION>
Within Over 1-3 Over 3-5 Over
One Year Years Years 5 Years Total
Amount Amount Amount Amont Amount
-------- --------- --------- ------- ------
(Dollars in Thousands)
Interest-earning assets:
<S> <C> <C> <C> <C> <C>
Mortgage loans and MRS (1) $100,046 $61,843 $19,905 $31,256 $213,050
Other loans 3,086 1,944 701 478 6,209
Investment securities (2) 12,765 11,377 - 70,344 94,486
-------- -------- -------- ------- -------
Total interest-earning securities 115,897 75,164 20,606 102,078 313,745
-------- -------- -------- ------- -------
Interest-bearing liabilities:
Non-interest-bearing deposits 10,074 7,512 2,928 1,870 22,384
Demand and NOW accounts 10,524 1,760 1,163 954 14,401
Savings accounts 6,564 597 431 1,098 8,690
Money market deposit accounts 9,100 2,007 782 498 12,387
Certificates of deposit 97,575 49,930 3,335 5,791 156,631
FHLB advances 63,200 18,500 - - 81,700
-------- -------- -------- ------- -------
Total interest-bearing liabilities 197,037 80,306 8,639 10,211 296,193
-------- -------- -------- ------- -------
Interest sensitivity gap ($81,140) ($5,142) $11,967 $91,867 $17,552
======== ======== ======== ======= =======
Cumulative interest sensitivity gap ($81,140) ($86,282) ($74,315) $17,552 $17,552
======== ======== ======== ======= =======
Ratio of interest-earning assets to
interest-bearing liabilities 58.82% 93.60% 238.52% 999.69% 105.93%
======== ======== ======== ======= =======
Ratio of cumulative gap to total assets (23.85%) (25.36%) (21.85%) 5.16% 5.16%
======== ======== ======== ======= =======
</TABLE>
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(1) Includes loans held for sale. Mortgage-related securities are identified as
"MRS".
(2) Includes investment securities, FHLB stock, FHLB stock and interest-earning
deposits in banks.
Certain shortcomings are inherent in the method of analysis presented in
the table above. 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 adjustable-rate mortgage loans,
have features which 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 levels and decay rates on core deposits would likely deviate
significantly from those assumed in calculating the table.
The Company's analysis of its interest-rate sensitivity incorporates
certain assumptions concerning the amortization of loans and other
interest-earning assets and the repricing characteristics of deposits. The
Company has made the following assumptions in calculating the value on the
above-referenced table: adjustable-rate mortgage loans have prepayments rates
ranging from 10 to 31%; fixed-rate mortgage loans have a prepayment rate that is
constant through time but varies from 5% for lower contractual interest rate
loans to 37% for higher
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<PAGE>
contractual interest rate loans; consumer loans have prepayment rates ranging
from 4 to 17%; core savings deposits have a decreasing decay rate through time
ranging from 100% almost immediately to 15% after one year; NOW checking
deposits have a decreasing decay rate through time ranging from 100% almost
immediately to 19% after one year; and money market deposits have a decreasing
decay rate through time ranging from 100% almost immediately to 38% after one
year. The interest-rate sensitivity of the Company's assets and liabilities
illustrated in the table could vary substantially if different assumptions were
used or if actual experience differs from the assumptions used.
As discussed above and as shown in the preceding gap table and the average
balance sheet and rate/volume analysis contained in the annual report, the
Bank's net interest rate risk consists of risks from the numerous time periods
for maturity or repricing of particular assets or liabilities and from the
numerous interest rates that vary over time and because of the maturity or
repricing of the underlying assets or liabilities. These risks necessarily
impact net interest income. One impact on net interest income results from the
interest rate margin (net yield on interest bearing assets).
Lending Activities
General. The Company's loan portfolio consists of fixed-rate mortgage
loans and adjustable-rate mortgage loans ("ARMs") secured by one-to-four family
residences and, to a much lesser extent, commercial real estate, mobile home
loans, and real estate construction loans. As of September 30, 1996, the
Company's total portfolio of loans (the "loan portfolio") was $171,158 (net of
loans in process, deferred fees and costs and allowance for loan losses), of
which $176,882, or 103.4%, was secured by one-to-four family residential real
estate, $890, or 0.5%, was secured by commercial real estate, and $305, or 0.2%,
was secured by mobile homes. The following table sets forth information about
the company's loan portfolio at September 30 of each year presented.
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<PAGE>
<TABLE>
<CAPTION>
1992 1993 1994 1995 1996
------------------ ---------------- ----------------- ------------------ ------------------
$ % $ % $ % $ % $ %
------- ------ ------- ------ -------- ------ ------- ------- -------- -------
TYPE OF LOANS:
Real Estate Loans
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Residential $73,295 93.3% $53,727 94.89% $ 96,906 94.79% $ 11,216 93.93% $159,672 93.29 %
Construction 2,604 3.32% 569 1.00% 6,976 6.82% 10,351 8.29% 17,367 10.15 %
Commercial 2,215 2.82% 1,809 3.19% 922 0.90% 1,212 0.97% 964 0.56 %
Lane 126 0.16% 67 0.12% 86 0.08% 599 0.45% 49 0.03 %
Consumer Loans
Mobile home loans 1,210 1.55% 931 1.6 % 716 0.7% 499 0.40% 305 0.18 %
Savings account loans 482 0.61% 479 0.85% 699 0.68% 688 0.55% 769 0.45 %
Home improvement loans 1,478 1.88% 1,031 1.82% 873 0.85% 414 0.33% 1,012 0.59 %
Automobile loans 96 0.12% 31 0.05% 682 0.67% 1,050 0.84% 1,115 0.65 %
Other 237 0.30% 182 0.32% 225 0.22% 507 0.41% 890 0.52 %
------ ------ ------ ------ ------- ------ ------- ------ ------- ------
Total 81,743 104.09% 58,826 103.89% 108,085 105.71% 132,536 106.20% 182,143 106.42 %
Less:
Loans in process (1,890) (2.41%) (1,036) (1.83%) (4,581) (4.49%) (6,624) (5.30%) (10,407) (6.08%)
Deferred loan origination
fees and costs (1,039) (1.32%) (821) (1.53%) (987) (0.97%) (693) (0.56%) (157) (0.09%)
Allowance for loan losses (283) (0.36%) (346) (0.61%) (274) 0.27% (423) (0.34%) (421) (0.25%)
------ ------ ------ ------ ------- ------ ------- ------ ------- ------
Total loans, net $78,530 100.00% $56,623 100.00% $102,243 100.00% $124,796 100.00% $171,158 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
Total mortgage-related securities,
net $60,804 100.00% $42,856 100.00% $ 45,030 100.00% $40,004 100.00% $ 34,383 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
TYPE OF SECURITY:
Residential real estate
1 to 4 family 74,914 95.39% 53,900 95.19% 103,607 101.34% 127,567 102.22% 176,882 103.35%
Other dwelling units 985 1.26% 396 0.70% 275 0.27% 254 0.20% 231 0.13%
Commercial real estate 2,215 2.82% 1,809 3.19% 922 0.90% 958 0.77% 890 0.52%
Land 126 0.16% 67 0.12% 86 0.08% 599 0.48% 49 0.03%
Consumer loans
Mobile homes 1,210 1.55% 931 1.64% 716 0.70% 499 0.40% 305 0.18%
Savings accounts 482 0.61% 479 0.85% 699 0.68% 688 0.55% 769 0.45%
Home improvement 1,478 1.88% 1,031 1.82% 873 0.85% 414 0.33% 1,012 0.59%
Automobiles 96 0.12% 31 0.05% 682 0.67% 1,050 0.84% 1,115 0.65%
Other 237 0.30% 182 0.32% 225 0.22% 507 0.41% 890 0.52%
------ ------ ------ ------ ------- ------ ------- ------ ------- ------
Total 81,743 104.09% 58,826 103.89% 108,085 105.71% 132,536 106.20% 182,143 106.42%
Less:
Loans in process (1,890) (2.41%) (1,036) (1.83%) (4,581) (4.49%) (6,624) (5.30%) (10,407) (6.08%)
Deferred loan origination fees
and costs (1,039) (1.32%) (821) (1.53%) (987) (0.97%) (693) (0.56%) (157) (0.09%)
Allowance for loan losses (283) (0.36%) (346) (0.61%) (274) (0.27%) (423) (0.34%) (421) (0.25%)
------ ------ ------ ------ ------- ------ ------- ------ ------- ------
Total loans, net $78,531 100.00% $56,623 100.00 % $102,243 100.00% $124,796 100.00% $171,158 100.00%
====== ====== ====== ====== ======= ====== ======= ====== ======= ======
Total mortgage-related securities,
net $60,804 100.00% $42,856 100.00 % $ 45,030 100.00% $ 40,004 100.00% $ 34,383 100.00%
====== ====== ====== ====== ======= ====== ======= ====== ======= ======
</TABLE>
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<PAGE>
Loan Maturity. The following table sets forth the maturity of the Company's loan
portfolio at September 30, 1996. The table does not include prepayments or
scheduled principal repayments. Prepayments and scheduled principal repayments
on loans totalled $18,580, $30,688, and $44,858, for the three years ended
September 30, 1994, 1995 and 1996, respectively. Adjustable-rate mortgage loans
are shown as maturing based on contractual maturities.
<TABLE>
<CAPTION>
Multi-
1-4 Family Family and
Real Estate Commercial
Mortgage Real Estate Construction Consumer Total
----------- ----------- ------------ -------- -----
(In thousands)
Amounts Due:
<S> <C> <C> <C> <C> <C>
Within 1 year $221 $29 $17,210 $ 834 $ 18,294
-------- ------ ------- ------ --------
After 1 year
1 to 5 years 1,139 334 157 3,272 4,902
Over 5 years 156,136 650 2,161 158,947
-------- ------ ------- ------ --------
Total due after one year 157,275 984 157 5,433 163,849
-------- ------ ------- ------ --------
Total amount due $157,496 $1,013 $17,367 $6,267 $182,143
======== ====== ======= ======
Less
Allowance for loan loss (421)
Loans in process (10,407)
Deferred loan origination fees
and cost (157)
-------
Loans receivable, net 171,158
=======
</TABLE>
The following table sets forth the dollar amount of all loans due after
September 30, 1997, which have predetermined interest rates and which have
floating or adjustable interest rates.
Floating or
Fixed Adjustable
Rates Rates Total
----- ----------- -----
(In Thousands)
One-to-four family $49,213 $108,062 $157,275
Multi-family and Commercial
real estate 647 337 984
Construction 157 157
Consumer 4,606 827 5,433
------- -------- --------
Total $54,623 $109,226 $163,849
======= ======== ========
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The following table sets forth the contractual maturities of the Company's
mortgage-backed securities portfolio as of September 30, 1996.
Contractual Maturities Due In Year(s) Ended September 30,
2000 to 2002 to 2007 and
1997 1998 1999 2001 2006 Thereafter Total
---- ---- ---- ------- ------- ---------- -----
$2,430 $0 $1,510 $4,236 $176 $26,031 $34,383
Residential Loans. The Company's primary lending activity consists of the
origination of one-to-four family, owner-occupied, residential mortgage loans
secured by property located in the Company's primary market area. At September
30, 1996, the Company had $176,882, or 103.3%, of its net loan portfolio
invested in these loans. Management believes that this policy of focusing on
one-to-four family lending has been effective in contributing to net interest
income while reducing credit risk by keeping loan delinquencies and losses to a
minimum.
The Company offers ARMs that adjust every one to three years and have
terms from 10 to 30 years, as well as ARMs that adjust annually, but only after
the third year. One year ARMs have adjustments that are limited to 2% per year
and 6% over the life of the loan, and ARMs that are fixed for the first three
years and adjust annually thereafter have adjustments that are limited to 2% per
year and 5% over the life of the loan. The Company also offers conventional
fixed-rate mortgage loans with terms from 10 to 30 years. Generally, the
interest rates on ARMs are based on treasury bill indices. The Company considers
the market factors and competitive rates on loans as well as its own cost of
funds when determining the rates on the loans that it offers. The Company also
has a network of correspondents from whom the Company may be referred both
fixed- and adjustable-rate real estate mortgage loans. The Company expects to
expand its purchases and sales of mortgage loans, subject to market conditions.
Since 1989, the Company has sold most of its originated fixed-rate mortgage
loans into the secondary market. The Company does, however, service most of the
loans sold since 1991.
Generally, during periods of rising interest rates, the risk of default on
an ARM is considered to be greater than the risk of default on a fixed-rate loan
due to the upward adjustment of interest costs to the borrower. To help reduce
such risk, the Company qualifies the loan at the fully indexed interest rate, as
opposed to the original interest rate. ARM loans may be made at up to 95% loan
to value ratio. The Company does not originate ARMs with negative amortization.
Regulations limit the amount which a savings association may lend in
relationship to the appraised value of the real estate securing the loan, as
determined by an appraisal at the time of loan origination. Such regulations
permit a maximum loan-to-value ratio of 100% for residential
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<PAGE>
property and 90% for all other real estate loans. The Company's lending
policies, however, generally limit the maximum loan-to-value ratio to 80% of the
appraised value of the property, based on an independent or staff appraisal.
When the Company makes a loan in excess of 80% of the appraised value or
purchase price, private mortgage insurance is required for at least the amount
of the loan in excess of 80% of the appraised value. The Company generally does
not make conventional mortgage loans in excess of 95% of the appraised value.
The loan-to-value ratio, maturity, and other provisions of the residential
real estate loans made by the Company reflect the policy of making loans
generally below the maximum limits permitted under applicable regulations. The
Company requires an independent appraisal, title insurance, flood hazard
insurance (if applicable), and fire and casualty insurance on all properties
securing real estate loans made by the Company. The Company reserves the right
to approve the selection of which title insurance companies' policies are
acceptable to insure the real estate in the loan transactions.
While one-to-four family residential real estate loans are normally
originated with 10-30 year terms, such loans typically remain outstanding for
substantially shorter periods. This is because borrowers often prepay their
loans in full upon sale of the property pledged as security or upon refinancing
the original loan. In addition, substantially all of the fixed-interest rate
loans in the Company's loan portfolio contain due-on-sale clauses providing that
the Company may declare the unpaid amount due and payable upon the sale of the
property securing the loan. The Company enforces these due-on-sale clauses to
the extent permitted by law. Thus, average loan maturity is a function of, among
other factors, the level of purchase and sale activity in the real estate
market, the prevailing interest rates, and the interest rates payable on
outstanding loans.
Multi-Family Loans. The Company does not presently originate multi-family
loans. The existing portfolio, $231 at September 30, 1996, consisted of
permanent loans secured by apartments. Multi-family loans are generally
considered to have more credit risk than traditional single family mortgage
loans.
Construction Loans. As of September 30, 1996, the Company had $17,367 of
construction loans or 10.2% of the Company's total loan portfolio. The Company
originates construction loans within its market area for custom homes built for
specific borrowers. The Company also originates construction loans for homes
being built by professional builders for which a final retail purchaser has not
yet been identified. Construction financing is generally considered to involve a
higher degree of risk of loss than long-term financing on improved, occupied
real estate. Risk of loss on a construction loan is dependent largely upon the
accuracy of the initial estimate of the property's value at completion of
construction or development and the estimated cost (including interest) of
construction. During the construction phase, a number of factors could result in
delays and cost overruns. If the estimate of construction costs proves to be
inaccurate, the Company may be required to advance funds beyond the amount
originally committed to permit completion of the development. If the estimate of
value proves to be inaccurate, the Company may be confronted, at or prior to the
maturity of the loan, with a project having a sales value which is insufficient
to assure full repayment. Construction loans originated for homes built by
professional builders for which the ultimate purchaser has not been identified
11
<PAGE>
have the increased risk that the builder may be unable to locate a purchaser and
may be unable to continue funding the monthly interest and principal expense.
Consumer Loans. Mid-Continent views consumer lending as an important
component of its business operations because consumer loans generally have
shorter terms and higher yields, thus reducing exposure to changes in interest
rates. In addition, the Company believes that offering consumer loans helps to
expand and create stronger ties to its customer base. Consequently, the Company
intends to increase its consumer lending by marketing consumer loans to existing
and potential customers. All branches are now able to originate consumer loans.
Regulations permit federally chartered savings associations to make secured and
unsecured consumer loans up to 35% of the Company's assets. In addition, the
Company has lending authority above the 35% limit for certain consumer loans,
such as home improvements loans and loans secured by savings accounts.
Consumer loans consist of personal unsecured loans, home improvement
loans, automobile loans, mobile home loans, and savings account loans, at fixed
rates. Of these consumer loans, as of September 30, 1996, approximately $305, or
0.2% of the Company's total loan portfolio consisted of mobile home loans. These
mobile home loans were obtained in 1986. The Company does not originate mobile
home loans and expects that the size of the mobile home loan portfolio will
continue to decline as outstanding loans are repaid. As of September 30, 1996,
total consumer loans aggregated $4,091, or 2.39% of the Company's total loan
portfolio.
The underwriting standards employed by the Company for consumer loans
include a determination of the applicant's payment history on other debts and an
assessment of liability to meet existing obligations and payments on the
proposed loan. In addition, the stability of the applicant's monthly income from
primary employment is considered during the underwriting process.
Creditworthiness of the applicant is of primary consideration; however, the
underwriting process also includes a comparison of the value of the security in
relation to the proposed loan amount.
Consumer loans entail greater credit risk than do residential mortgage
loans, particularly in the case of consumer loans which are unsecured or secured
by assets that depreciate rapidly, such as automobiles, mobile homes, boats, and
recreational vehicles. In such cases, repossessed collateral for a defaulted
consumer loan may not provide an adequate source of repayment for the
outstanding loan and the remaining deficiency often does not warrant further
substantial collection efforts against the borrower. In particular, amounts
realizable on the sale of repossessed automobiles may be significantly reduced
based upon the condition of the automobiles and the lack of demand for used
automobiles. The Company adds a general provision to its consumer loan loss
allowance, based on general economic conditions, prior loss experience and
management's periodic evaluation.
Commercial Real Estate Loans. The Company does not presently originate
commercial real estate loans. The existing portfolio, $964, or 0.5% of the loan
portfolio as of September 30, 1996, consisted of permanent loans secured by
small office buildings, churches and other non-residential buildings. Commercial
real estate secured loans were, in the past, originated in
12
<PAGE>
amounts up to 80% of the appraised value of the property. Such appraised value
was determined by an independent appraiser previously approved by the Company.
Loans secured by commercial real estate generally involve a greater degree
of risk than residential mortgage loans and carry larger loan balances. This
increased credit risk is a result of several factors, including the
concentration of principal in a limited number of loans and borrowers, the
effects of general economic conditions on income producing properties and the
increased difficulty of evaluating and monitoring these types of loans.
Furthermore, the repayment of loans secured by commercial real estate is
typically dependent upon the successful operation of the related real estate
project. If the cash flow from the project is reduced, the borrower's ability to
repay the loan may be impaired. As of September 30, 1996, the largest commercial
real estate loan had a balance of $229 and was performing in accordance with its
terms.
Loan Solicitation and Processing for Portfolio Loans. The Company's source
of mortgage loan applications is referrals from existing or past customers, real
estate brokers, call-in and walk-in customers, and also as the result of
advertising. The Company has, in the past, added to its portfolio some of the
adjustable-rate loans and shorter term fixed-rate loans and, to a lesser extent,
some of the short term balloon loans obtained from the correspondent network
that the Company uses for its mortgage banking operations.
All loans are underwritten and approved, or denied, by the loan committee,
including loans obtained through the correspondent network. All single-family
loans approved by the loan committee are ratified by the Board of Directors.
The Company uses independent fee appraisers on all real estate related
transactions that are originated in the branches of the Company and for each
purchased loan. Each fee appraiser used must be licensed and approved by
Mid-Continent's Board of Directors. Each purchased loan is reviewed and
underwritten as if Mid-Continent were originating the loan. It is the Company's
policy to obtain title and fire and casualty insurance for all mortgage loans.
If appropriate, flood insurance is also required.
Loan Solicitation and Processing for Mortgage Banking Operations. The
Company solicits fixed- and adjustable-rate mortgage loans through a network of
approximately 110 correspondents located primarily in Kansas and to a lesser
extent in Oklahoma for sale in the secondary mortgage market.
The Company regularly advises its correspondents of the rates it will pay
to purchase mortgage loans. All loans are underwritten and approved, or denied,
by the loan committee. All single family loans are reviewed and approved by both
the loan committee and the Board of Directors. The Company issues a commitment
letter by which the Company will extend the offer of a particular rate and terms
for a period of up to 60 days. The Company's correspondents, typically other
financial institutions, close the loan in the name of the correspondent and sell
the loan to the Company based on the terms previously established for the loan.
13
<PAGE>
The Company generally retains the servicing rights to the loans it sells.
The Company also sells mortgage loans originated through referrals from existing
or past customers, real estate brokers, call-in and walk-in customers, and also
as the result of advertising.
Origination, Purchase and Sale of Loans
During the fiscal year ended September 30, 1996, the Registrant originated
$107,713 in loans, purchased $183,845 in loans (all secured by one-to-four
family residences), and sold $205,290 in loans (including $88,413 of loans
securitized primarily through GNMA).
Loan Sales. The Company currently sells most of its fixed-rate mortgage
loan originations to FNMA, GNMA, FHLMC and private secondary market purchasers.
The Company does not have separate underwriting policies for loans to be sold
and loans to be retained. Loans originated for sale are underwritten with the
same standards used to originate loans to be retained in the Company's loan
portfolio. The Company pools its FHA and VA loans into GNMA pools that are then
sold. Mortgage loans are typically sold with retention of servicing rights by
the Company but generally without recourse.
Loan Commitments. The Company issues written, formal commitments to
prospective borrowers on all real estate approved loans. The commitment requires
acceptance within 60 days of the date of issuance. As of September 30, 1996, the
Company had $63,743 of commitments to originate mortgage loans. The Company has
commitments to sell, with servicing rights retained, $28,345 of these loans and
the intent to add $16,513 of these loans to its investment in loans receivable
to be held to maturity.
Loan Processing and Servicing Fees. In addition to interest earned on
loans, the Company recognized fees and service charges which consist primarily
of fees on loans serviced for others. The Company recognized net loan servicing
fees of $1,790, $3,102, and $3,128, before operating expenses, for the years
ended September 30, 1994, 1995, and 1996, respectively. As of September 30,
1996, loans serviced for others totalled approximately $1,229,153. The Company
has a strategy in place to expand the amount of loans serviced for others. This
strategy requires the increase in both loans originated by the Company and sold
into the secondary market with servicing retained as well as the purchase of
loans originated out of Kansas for the purpose of resale with retention of the
servicing rights.
Loans to One Borrower. Regulations limit loans to one borrower in an
amount equal to (i) 15% of unimpaired capital and retained earnings on an
unsecured basis and an additional amount equal to 10% of unimpaired capital and
retained earnings if the loan is secured by readily marketable collateral
(generally, financial instruments, not real estate) or (ii) $500, whichever is
higher. The Company's maximum loan-to-one borrower limit was approximately
$4,774 as of September 30, 1996.
As of September 30, 1996, the Company's largest aggregation of loans to
one borrower was two loans secured by 62 one-to-four family residences,
originated prior to August 1989 in the amount of $3,039 having a balance of
$3,666 as of September 30, 1996. These loans are
14
<PAGE>
secured by non-owner occupied one-to-four family units located in Wichita,
Kansas and were performing in accordance with their terms as of September 30,
1996. They were restructured during October 1994. No provision for loss was
considered necessary, based on the restructured terms and the cash flows
expected to be generated by the underlying collateral.
Loan Delinquencies. The Company's collection procedures provide that when
a mortgage loan is 16 days past due, a computer printed delinquency notice is
sent and borrowers are contacted by telephone to discuss the delinquency. If the
loan continues in a delinquent status for 90 days or more, the Board of
Directors of the Company generally approves the initiation of foreclosure
proceedings unless other repayment arrangements are made. Collection procedures
for non-mortgage loans generally begin after a loan is ten days delinquent.
Loans are reviewed on a regular basis and are generally placed on a
non-accrual status when the loan becomes more than 90 days delinquent or, in the
opinion of management, the collection of additional interest is doubtful.
Interest accrued and unpaid at the time a loan is placed on non-accrual status
is charged against interest income. Subsequent payments, if any, are recorded as
interest income.
Real estate acquired by the Company as a result of foreclosure or by a
deed in lieu of foreclosure is classified as foreclosed real estate until such
time as it is sold. When foreclosed real estate is acquired, it is recorded at
fair value as of the date of foreclosure or transfer less estimated disposal
costs. It is subsequently carried at the lower of the new basis (fair value at
foreclosure or transfer) or fair value. As of September 30, 1996, the Company
had no loans that were considered troubled debt restructurings within the
meaning of SFAS No. 15.
15
<PAGE>
Non-Performing Assets
<TABLE>
<CAPTION>
At September 30,
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
(Dollars In Thousands)
Loans accounted for on a non-accrual basis:
Mortgage loans:
Permanent loans secured by one-to-four
<S> <C> <C> <C> <C> <C>
family dwelling units $945 $ 45 $ 125 $ 368 $ 445
All other mortgage loans 24 0 0 0 0
Non-mortgage loans:
Consumer 32 0 0 24 39
------ ---- ----- ----- -----
Total $1,001 $ 45 $ 125 $ 392 $ 484
====== ==== ===== ===== =====
Accruing loans which are contractually past
due 90 days or more $0 $ 0 $ 0 $ 0 $ 0
Total non-accrual and accrual loans 1,001 45 125 392 484
REO 1,237 837 46 187 28
------ ---- ----- ----- -----
Total non-performing assets $2,238 $882 $ 171 $ 579 $ 512
====== ==== ===== ===== =====
Total non-accrual loans to net loans 1.27% 0.08% 0.12% 0.31% 0.28%
Total non-accrual loans to total assets 0.53% 0.03% 0.06% 0.14% 0.14%
Total non-performing assets to total assets 1.18% 0.52% 0.08% 0.21% 0.15%
====== ==== ===== ===== =====
</TABLE>
Accrued interest on non-performing loans for the years ended September 30,
1995 and 1996 totalled approximately $31 and $45.
Classified Assets. OTS regulations provide for a classification system for
problem assets of insured institutions that covers all problem assets. Under
this classification system, problem assets of insured institutions are
classified as "substandard," "doubtful," or "loss." An asset is considered
"substandard" if it is inadequately protected by the current net worth and
paying capacity of the obligor or of the collateral pledged, if any.
"Substandard" assets include those characterized by the "distinct possibility"
that the insured institution will sustain "some loss" if the deficiencies are
not corrected. Assets classified as "doubtful" have all of the weaknesses
inherent in those classified "substandard," with the added characteristic that
the weaknesses present make "collection or liquidation in full," on the basis of
currently existing facts, conditions and values, "highly questionable and
improbable." Assets classified as "loss" are those considered "uncollectible"
and of such little value that their continuance as assets without the
establishment of a specific loss reserve is not warranted. Assets designated
"special mention" by management are assets included on the Company's internal
watchlist because of potential weakness but which do not currently warrant
classification in one of the aforementioned categories.
When an insured institution classified problem assets as either
substandard or doubtful, it may establish general allowances for loan losses in
an amount deemed prudent by management. General allowances represent loss
allowances which have been established to recognize the
16
<PAGE>
inherent risk associated with lending activities, but which, unlike specific
allowances, have not been allocated to particular problem assets. When an
insured institution classifies problem assets as "loss," it is required either
to establish a specific allowance for losses equal to 100% of that portion of
the asset so classified or to charge off such amount. An institution's
determination as to the classification of its assets and the amount of its
valuation allowances is subject to review by the OTS, which may order the
establishment of additional general or specific loss allowances. A portion of
general loss allowances established to cover possible losses related to assets
classified as 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. At September 30, 1996
that Company had a general loss allowance for loans and REO of $455.
At September 30,
1996
-----------------
(In Thousands)
Special Mention 0
Substandard 389
Doubtful assets 0
Loss assets 0
General loss allowance 455
Specific loss allowance 0
Charge-offs, net 112
REO. Real estate owned or acquired by the Company as a result of
foreclosure, judgment or by a deed in lieu of foreclosure is classified as real
estate owed until it is sold. When property is acquired it is recorded at fair
value as of the date of foreclosure or transfer less estimated disposal costs.
It is subsequently carried at the lower of the new basis (fair value at
foreclosure or transfer) or fair value.
The Company held REO with a net balance of $28 as of September 30, 1996
consisting of 2 one-to-four family dwellings with a carrying value totaling $62.
An allowance for loss of $34 is carried on real estate owned. See Note 9 to the
Notes to Consolidated Financial Statements.
Allowance for Loan and Real Estate Losses. It is management's policy to
provide for losses on unidentified loans in its loan portfolio and foreclosed
real estate. A provision for loan losses is charged to operations based on
management's evaluation of the potential losses that may be incurred in the
Company's loan portfolio. Such evaluation, which includes a review of all loans
of which full collectibility of interest and principal may not be reasonably
assured, considers, among other matters, the estimated net realizable value of
the underlying collateral. During the years ended September 30, 1994, 1995, and
1996, the Company charged $6, $224, and $75, respectively, to the provision for
loan losses and $59, $81, and $18, respectively, to the provision for losses on
REO or in judgment and other repossessed assets.
17
<PAGE>
Management will continue to review the entire loan portfolio to determine
the extent, if any, to which further additional loss provisions may be deemed
necessary. There can be no assurance that the allowance for losses will be
adequate to cover losses which may in fact be realized in the future and that
additional provisions for losses will not be required.
18
<PAGE>
The distribution of the Company's allowance for losses on loans is shown below
at the dates indicated:
<TABLE>
<CAPTION>
At September 30,
----------------------------------------------------------------------------------------------------------
1992 1993 1994 1995 1996
-------------------- ------------------- ------------------- -------------------- --------------------
Percent of Percent of Percent of Percent of Percent of
Loans in Loans in Loans in Loans in Loans in
Each Each Each Each Each
Category to Category to Category to Category to Category to
Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans
------ ----------- ------ ----------- ------ ----------- ------ ----------- ------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Residential real estate $231 92.72% $307 92.13% $226 95.98% $369 96.49% $351 97.06%
Commercial real estate 22 2.82% 18 3.19% 13 0.90% 10 0.98% 10 0.55%
Consumer 30 4.46% 21 4.68% 36 3.12% 44 2.53% 60 2.39%
---- ----- ---- ----- ---- ----- ---- ----- ---- -----
Total $283 100.00% $346 100.00% $275 100.00% $423 100.00% $421 100.00%
==== ====== ==== ====== ==== ====== ==== ====== ==== ======
</TABLE>
19
<PAGE>
Analysis of the Allowance for Loan Losses
The following table sets forth information with respect to the Company's
allowance for loan losses at the dates indicated:
<TABLE>
<CAPTION>
At September 30,
------------------------------------------------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Total loans outstanding, net $ 78,531 $ 56,623 $102,243 $124,796 $171,158
======== ======== ======== ======== ========
Average loans outstanding 95,453 65,959 63,751 119,247 134,013
======== ======== ======== ======== ========
Allowance balances (at beginning of period) 274 283 346 275 423
Provision for loan losses 83 154 6 224 75
Net charge-offs:
Residential (59) (62) (65) (56) (58)
Consumer (15) (29) (12) (20) (19)
-------- -------- -------- -------- --------
Allowance balance (at end of period) $ 283 $ 346 $ 275 $ 423 $ 421
======== ======== ======== ======== ========
Allowance for loan losses as a percent of total
outstanding loans 0.36% 0.61% 0.27% 0.34% 0.25%
Net loans charged off as a percent of average
loans outstanding 0.08% 0.14% 0.12% 0.06% 0.06%
</TABLE>
Analysis of the Allowance for REO
<TABLE>
<CAPTION>
At September 30,
---------------------------------------------------------------
1995 1993 1994 1995 1996
---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Total REO, net $ 1,237 $ 837 $ 46 $ 187 $ 28
========= ======= ======= ======= =========
Allowance balance (at beginning of period) 77 36 25 16 51
Provision for loss 62 29 59 81 18
Net charge-offs (103) (40) (68) (46) (35)
--------- ------- ------- ------- --------
Allowance balance (at end of period) $ 36 $ 25 $ 16 $ 51 $ 34
========= ======= ======= ======= =========
Allowance for loss on REO to net REO 2.91% 2.99% 34.78% 27.27% 121.43%
</TABLE>
20
<PAGE>
Loan Servicing
General. The Company's loan servicing portfolio represents a substantial
asset which, in the opinion of management, is expected to generate a significant
source of fee income. As of September 30, 1996, the Company was servicing
approximately $1,229,153 of loans for others. The portfolio of mortgage loans
serviced for others at September 30, 1996 consisted of approximately 22,000
loans with an average balance of approximately $55 and a weighted average
service fee of approximately 0.387% per annum. Since 1988, the loan servicing
portfolio has been increasing and the Company expects that it will continue to
increase. In management's view, the loan servicing portfolio also acts to some
degree as a hedge for the lending and mortgage banking components of the
Company's business.
The Company receives fees from a variety of institutional mortgage owners
in return for performing the traditional services of collecting individual
payments and managing the loan portfolio. Loan servicing includes processing
payments, accounting for loan funds and collecting and paying real estate taxes,
hazard insurance and other loan-related items such as private mortgage
insurance. When the Company receives the gross mortgage payment from individual
borrowers, it remits to the investor in the mortgage a predetermined net amount
based on the yield on that mortgage. The difference between the coupon on the
underlying mortgage and the predetermined net amount paid to the investor is the
gross loan servicing fee. In addition, the Company retains certain amounts in
escrow for the benefit of the lender for which the Company incurs no interest
expense but is able to lend. As of September 30, 1996, the Company held $16,917
in borrower escrow and principal and interest payments related to loans serviced
for others. These amounts are categorized as deposits for financial reporting
purposes.
Loan Servicing Portfolio. The loan servicing portfolio as of September 30,
1996 was composed primarily of GNMA mortgage loan (71.2%), FNMA mortgage loans
(9.4%), and FHLMC mortgage loans (18.8%). The balance of the loan servicing
portfolio as of September 30, 1996 consisted of loans serviced for a variety of
private investors. The loans serviced for others are predominantly secured by
property located in Kansas. As of September 30, 1996, the portfolio also
included loans secured by property located primarily in Oklahoma, Louisiana,
Michigan and Illinois.
As a result of the increase in the size of the portfolio of loans serviced
for others, gross loan servicing fees have increased from $1,261 for the year
ended September 30, 1991 to $4,779 for the year ended September 30, 1996.
As part of its responsibilities for various investors in VA-guaranteed or
FHA-insured mortgage loans, the Company is required to advance interest and
certain other costs on those loans when the mortgagor is delinquent. This
requirement continues until the Company pays the remaining principal amount of
the loan to the investor and forecloses upon the loan. The Company subsequently
files with either the VA or FHA a claim for the amount of loan principal,
advanced interest and other costs incurred.
21
<PAGE>
When a claim is filed with the VA, the VA either (i) pays the claim in
full and takes title to the foreclosed property (in which case the Company does
not suffer a loss) or (ii) exercises its option to pay to the Company only the
mortgage guarantee amount up to a maximum of 50% of the loan amount (in which
case the Company must rely upon the sale of the foreclosed property to recover
the balance of its claim). The VA typically exercises this latter option when
the value of the property plus the guarantee is less than the carrying amount of
the loan. To the extent that the guarantee, insurance, and the amounts generated
from foreclosure proceedings are insufficient to retire the indebtedness on such
loans, a loss will be incurred.
When a claim is filed with the FHA, the Company is reimbursed for its
advances of interest on the loan at the debenture interest rate in effect on the
date that the loan was originated; in addition, the interest starts to accrue on
the 61st day after the date of default at the debenture interest rate.
Furthermore, if an originated loan does not conform to the loan underwriting
standards of the acquiror, the acquiror has a right to require the Company to
repurchase such loans.
Included in other assets as of September 30, 1996, were $1,995 in claims
receivable from the FHA or VA for insured or guaranteed mortgage loans. These
receivables are carried at the lower of cost or net realizable value.
Mortgage Servicing Rights ("MSRs"). The cost of MSRs are capitalized and
amortized in proportion to, and over the period of, the estimated future net
servicing income. As of September 30, 1996, MSRs were carried at a value of
$12,496 by the Company. MSRs generally are adversely affected by current and
anticipated prepayments resulting from decreasing interest rates.
The purchase of loan servicing rights by the Company involves a detailed
analysis of the mortgage portfolio being offered for sale. When a request for
bids is received, the Company evaluates the pertinent information, including
types of loans, escrow balances, delinquency rate, weighted average coupon,
weighted average maturity, foreclosure rates, and average principal balance on
the servicing, to determine the appropriate purchase price. A bid, subject to
due diligence, is then submitted. After a bid is accepted, the Company reviews
all aspects of the loans to assure that the portfolio is as represented and
reserves the right to withdraw the bid if the portfolio is found to be different
from what was represented. The Company receives seller warranties and
representations regarding the adequacy of prior loan servicing and origination
procedures.
Originated Mortgage Servicing Rights. In May 1995, the Financial
Accounting Standards Board ("FASB") issued Statement of Financial Accounting
Standards ("SFAS") No. 122, Accounting for Mortgage Servicing Rights, effective
for fiscal years beginning after December 15, 1995 with early adoption
encouraged in fiscal years for which financial statements have not been issued.
This Statement requires the recognition of mortgage servicing rights related to
mortgage loans acquired through origination activities of the Savings Bank. The
originated mortgage servicing rights are recorded at cost based upon the
relative fair values of the loans and the servicing rights. Servicing release
fees paid on comparable loans and discounted
22
<PAGE>
cash flows are used to determine estimates of fair values. The Savings Bank
capitalized originated mortgage servicing rights of $322 in 1995 related to the
early adoption of SFAS No. 122 which effect is included in the gain on sale of
loans, net, to the extent such originated loans were sold prior to September 30,
1995. These rights are amortized in proportion to and over the period of
expected net servicing income.
Purchased Mortgage Servicing Rights. Purchased mortgage servicing rights
are acquired from independent third-party originators and are recorded at the
lower of cost or fair value. Prior to the adoption of SFAS No. 122, the excess
of the sale consideration received for purchased loans over the recorded basis
of those loans was offset against the cost of the mortgage servicing right
instead of being recorded as income. As the Savings Bank has elected early
adoption of SFAS No. 122, no gains on the sale of loans were offset against the
cost of the mortgage servicing rights in 1995. The offset was $714 in 1994. Such
rights are amortized in proportion to and over the period of expected net
servicing income.
Impairment Evaluation. The Savings Bank evaluates the carrying value of
capitalized mortgage servicing rights on a periodic basis based on their
estimated fair value. For purposes of evaluating and measuring impairment of
capitalized servicing rights, in accordance with SFAS No. 122, the Savings Bank
stratifies the rights based on their predominant risk characteristics. The
significant risk characteristics considered by the Savings Bank are loan type,
period or origination and stated interest rate. If the fair value estimated,
using a discounted cash flow methodology, is less than the carrying amount for
the portfolio, the portfolio is written down to the amount of the discounted
expected cash flows utilizing a valuation allowance. The Savings Bank utilizes
consensus market prepayment assumptions and discount rates to evaluate its
capitalized servicing rights as of September 30, 1996 which considers the risk
characteristics of the underlying servicing rights. For the years ended 1994,
1995 and 1996, there were no write downs or valuation allowances established for
capitalized servicing.
Sale of Mortgage Servicing Rights. The Savings Bank recognizes gains on
sales of mortgage servicing rights when a legal closing of the sale occurs with
title passing to the buyer. In addition, all significant risks and rewards of
ownership have transferred to the buyer, including risks related to default
prepayment (including no uncapped risks related to defaults or prepayments) and
there are no significant unresolved contingencies. The Savings Bank defers the
gain on sale of servicing until these conditions are met.
The following table sets forth the loan servicing fees of the Company as
well as such fees as a percentage of net interest income of the Company during
the periods indicated.
23
<PAGE>
<TABLE>
<CAPTION>
Year Ended September 30,
------------------------------------------------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
(Dollars in Thousands)
Loan servicing fees, net of MSR
<S> <C> <C> <C> <C> <C>
amortization $ 837 $ 1,125 $ 1,789 $ 3,102 $ 3,128
Net interest income $ 4,526 $ 5,509 $ 5,605 $ 7,221 $ 7,905
Loan servicing fees as a percentage
of net interest income 18.5% 20.4% 31.9% 43.0% 39.6%
</TABLE>
The following tables sets forth the composition of the portfolio of loans
serviced for others as of September 30, 1996.
Unpaid principal balance
------------------------
(In Thousands)
GNMA $875,381
FNMA 115,492
FHLMC 231,515
Other(1) 6,765
---------
$1,229,153
- --------------------
(1) Includes private investors, other financial institutions and
municipalities.
Interest Bearing Accounts Held at Other Financial Institutions
As of September 30, 1996, the Company held $3,924 in interest-bearing
deposits in other financial institutions, principally with the FHLB of Topeka.
The Company maintains these accounts in order to maintain liquidity and improve
the interest-rate sensitivity of its assets.
Investment Activities
Mid-Continent is required under federal regulations to maintain a minimum
amount of liquid assets which may be invested in specified short-term securities
and certain other investments. The Company has generally maintained a liquidity
portfolio well in excess of regulatory requirements. Liquidity levels may be
increased or decreased depending upon the yields on investment alternatives and
upon management's judgment as to the attractiveness of the yields then available
in relation to other opportunities and its expectation of future yield levels,
as well as management's projections as to the short-term demand for funds to be
used in the Company's loan origination and other activities. As of September 30,
1996, the Company had an investment portfolio of approximately $90,562,
consisting primarily of U.S. Government agency obligations, U.S. Treasury
securities, and FHLB stock as permitted by the OTS regulations. The Company has
found its level of investment securities has increased in recent years as a
result of increased interest rates. Mid-Continent has invested in
mortgage-related securities to offset any excess liquidity; principally in FNMA
ARMs and FHLMC ARMs. The Company anticipates having the ability to fund all of
its investing activities from funds held on
24
<PAGE>
deposit at FHLB of Topeka. Mid-Continent will continue to seek high quality
investments with short to intermediate maturities and duration from one to five
years.
Investment Portfolio
The following table sets forth the carrying value of the Company's
investment securities portfolio, short-term investments, FHLB stock, at the
dates indicated. As of September 30, 1996, the market value of the Company's
total investment securities portfolio was $88,154.
<TABLE>
<CAPTION>
At September 30,
----------------------------------------------
1993 1994 1995 1996
---- ---- ---- ----
(In Thousands)
Investment Securities:
<S> <C> <C> <C> <C>
U.S. Government Securities $ 1,126 $ 1,222 $ 1,326 $ 1,438
U.S. Agency Securities 11,812 20,946 52,917 84,797
FHLB Stock 2,206 2,206 2,206 4,327
------ ------ ------ ------
Total Investment Securities $ 15,144 $ 24,374 $ 56,449 $ 90,562
======== ======== ======== ========
</TABLE>
On June 1, 1989, the OTS issued a rule to clarify the application of GAAP
to securities held for investment, sale and/or trading by insured savings
associations. The rule requires an insured savings association's board of
directors to document and monitor its investment policy and strategies,
discusses the appropriate documentation of investment decisions of the insured
savings association's board of directors, summarizes GAAP applicable to
securities held for investment, sale and/or trading, and offers guidance on the
application of GAAP by insured savings associations in determining whether a
security should be accounted for as a security held as an investment, as a
security held for sale or as a security held for trading.
In May 1993, the FASB issued SFAS No. 115, Accounting for Certain
Investments in Debt and Equity Securities. This statement addresses the
accounting and reporting treatment for certain investments in debt and equity
securities by requiring such investments to be classified in held-to-maturity,
available-for-sale or trading categories. Securities classified as
held-to-maturity would be carried at amortized cost, available-for-sale
securities would be carried at market with unrealized gains (losses) included in
equity and trading securities would be carried at market with unrealized gains
(losses) included in operations. The Company adopted this standard effective
October 1, 1994. The adoption of this Standard did not have any impact on the
Company's financial position or results of operations as it is management's
intent to hold all investment securities to maturity.
25
<PAGE>
Investment Portfolio Maturities
The following table sets forth certain information regarding the carrying
values, weighted average yields and maturities of the Company's investment
securities portfolio as of September 30, 1996.
<TABLE>
<CAPTION>
As of September 30, 1996
---------------------------------------------------------------------------------------------------------
One Year or Less One to Five Years Five to Ten Years More than Ten Years Total Investment Securities
----------------- ----------------- ------------------ -------------------- --------------------------
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Average Market
Value Yield Value Yield Value Yield Value Yield Value Yield Value
-------- ------- -------- ------- -------- ------- -------- ------- -------- ------- ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Investment Securities:
U.S. Government
Obligations $ 1,341 8.56% $ 97 11.47% $ 1,438 8.76% 1,415
U.S. Agency
Obligations $2,000 6.18% 11,991 5.01% $17,500 7.05% 53,306 7.71% 84,797 7.16% 82,412
FHLB Stock 4,327 6.50% 4,327 6.50% 4,327
-----------------------------------------------------------------------------------------------------------
Total $2,000 6.18% %13,332 5.37% $17,500 7.05% 57,730 7.71% $90,562 7.18% $ 88,154
===========================================================================================================
</TABLE>
26
<PAGE>
Mortgage-Related Securities
The Company has a substantial investment in residential mortgage-related
securities. Although such securities are held for investment, they can serve as
collateral for borrowings and, through repayments, as a source of liquidity. As
of September 30, 1996, the carrying value of mortgage-related securities
totalled $34,383, or 10.1% of total assets. The market value of such securities
totalled approximately $34,366 as of September 30, 1996. As of September 30,
1996, $14,296 in mortgage-related securities were pledged as collateral for
public funds.
The mortgage-related securities portfolio as of September 30, 1996
consisted primarily of fixed and adjustable rate pass through certificates
issued by GNMA ($11,194), fixed and adjustable pass through certificates issued
by FHLMC ($18,072), and fixed and adjustable pass through certificates issued by
FNMA ($2,981). To a lesser extent, the mortgage-related securities portfolio
also contains pass through certificates issued by the Mortgage Guarantee
Insurance Corporation ("MGIC").
Mortgage-related securities represent a participation interest in a pool
of single-family or multi-family mortgages, the principal and interest payments
on which are passed from the mortgage originators, through intermediaries
(generally quasi-governmental agencies) that pool and repackage the
participation interests in the form of securities, to investors such as the
Company. Such quasi-governmental agencies, which guarantee the payment of
principal and interest to investors, primarily include FHLMC, FNMA and GNMA.
FHLMC is a corporation chartered by the United States Government that
issues participation certificates backed principally by conventional mortgage
loans. FHLMC guarantees the timely payment of interest and the ultimate return
of principal. FHLMC securities are indirect obligations of the United States
Government. FNMA is a private corporation chartered by Congress with a mandate
to establish a secondary market for conventional mortgage loans. FNMA guarantees
the timely payment of principal and interest, and FNMA securities are indirect
obligations of the United States Government. GNMA is a government agency with
HUD which is intended to help finance government assisted housing programs. GNMA
guarantees the timely payment of principal and interest, and GNMA securities are
backed by the full faith and credit of the United States Government. Since
FHLMC, FNMA and GNMA were established to provide support for low- and
middle-income housing, there are limits to the maximum size of loans that
qualify for these programs. To accommodate larger-sized loans, and loans that,
for other reasons, do not conform to the agency programs, a number of private
institutions have established their own home-loan origination and securitization
programs.
Mortgage-related securities typically are issued with stated principal
amounts, and the securities are backed by pools of mortgages that have loans
with interest rates that are within a range and have varying maturities. The
underlying pool of mortgages can be composed of either fixed-rate mortgages or
ARMs. Mortgage-related securities are generally referred to as mortgage
participation certificates or pass-through certificates. As a result, the
interest rate risk characteristics of the underlying pool of mortgages, i.e.,
fixed-rate or adjustable-rate, as well as prepayment risk, are passed on to the
certificate holder. The life of a mortgage-related pass-
27
<PAGE>
through security is equal to the life of the underlying mortgages.
Mortgage-related securities issued by FHLMC, FNMA, and GNMA make up the majority
of the pass-through market.
In a declining interest rate environment, the Company may experience
significant prepayments on both fixed- and adjustable-rate mortgage-related
securities. In such an environment or in an environment where interest rates are
perceived to be low, the Company may not be able to reinvest the cash flow from
these securities into comparable yielding investments.
The following table sets forth the carrying value of the Company's
mortgage-related securities portfolio at the dates indicated.
<TABLE>
<CAPTION>
At September 30,
----------------------------------------------
1993 1994 1995 1996
---- ---- ---- ----
Held for Investment:
<S> <C> <C> <C> <C>
FNMA-ARMs $ 5,424 $ 3,391 $ 2,990 $ 2,616
FHLMC-ARMs 8,268 8,293 6,786 6,219
GNMA-ARMs - 6,020 5,729 5,043
FHLMC-fixed rate 12,705 15,256 13,835 11,853
FNMA-fixed rate 1,279 585 459 365
GNMA-fixed rate 10,494 8,086 7,293 6,151
MGIC 4,686 3,399 2,912 2,136
-------- -------- -------- --------
Total mortgage-related securities $ 42,856 $ 45,030 $ 40,004 $ 34,383
======== ======== ======== ========
</TABLE>
Subsidiary Activities
Mid-Continent is permitted to invest up to 2% of its assets in the capital
stock of, or secured or unsecured loans to, subsidiary corporations, with an
additional investment of 1% of assets when such additional investment is
utilized primarily for community development purposes. As of September 30, 1996,
the net book value of the Company's total investment in its service corporation
was $129.
The Bank has one subsidiary, Laredo Investment, Inc. which was
incorporated in the State of Kansas and is engaged in the sale of tax deferred
annuities through Mid-Continent's branch offices. Insurance commissions from the
sale of tax deferred annuities amounted to $57 and $3 for the years ended
September 30, 1995 and 1996, respectively.
Sources of Funds
General. Deposits are the major source of the Company's funds for lending
and other investment purposes. Mid-Continent derives funds from amortization and
prepayment of loans and mortgage-related securities, maturities of investment
securities and operations. Scheduled loan principal repayments are a relatively
stable source of funds, while deposit inflows and
28
<PAGE>
outflows and loan prepayments are significantly influenced by general interest
rates and market conditions. Mid-Continent utilizes FHLB advances. The Company
does not use brokered deposits.
Deposits. Consumer deposits are attracted principally from within the
Company's primary market area through the offering of a broad selection of
deposit instruments including checking, statement savings, money market deposit
and term certificate accounts (including negotiated jumbo certificates in
denominations of $100,000 or more) and retirement account funds. Deposit account
terms vary according to the minimum balance required, the time period the funds
must remain on deposit, and the interest rate, among other factors.
The Company intends to continue to aggressively seek new checking accounts
and other related products and services by utilizing automated teller machines,
direct mail, gifts, and in-branch promotions in an effort to increase fee
income. In April 1993, the Company introduced a totally-free checking account
program which has been successful in attracting new checking accounts.
NOW accounts, money market accounts, regular savings accounts and
custodial accounts constituted $57,862, or 26.9% of the Company's deposit
portfolio as of September 30, 1996. Certificates of deposit constituted $99,480,
or 46.4% of the deposit portfolio, excluding Jumbo certificates of deposit, with
principal amounts of $100,000 or more, which constituted $57,151, or 26.6% of
the deposit portfolio, as of September 30, 1996.
Jumbo Certificates of Deposit
The following table indicates the amount of the Company's certificates
of deposit of $100,000 or more by time remaining until maturity as of
September 30, 1996.
Certificates of Deposits
------------------------
September 30,
1996
----
Maturity Period
Within three months $ 40,636
Over three through six months 3,601
Over six through twelve months 4,168
Over twelve months 8,746
------
Total $ 57,151
======
To supplement lending activities in periods of deposit growth and/or
declining loan demand, Mid-Continent has increased its investments in
residential mortgage-related securities during recent years. Although such
securities are held for investment, they can serve as collateral for borrowings
and, through repayments, as a source of liquidity. As of September 30, 1996,
$41,371 in investment mortgage-related securities were pledged as collateral for
public funds.
29
<PAGE>
Borrowings
Deposits are the primary source of funds of the Company's lending and
investment activities and for its general business purposes. The Company has
obtained advances from the FHLB of Topeka to supplement its supply of lendable
funds. Advances from the FHLB of Topeka have typically been secured by a pledge
of the Company's stock in the FHLB of Topeka and a portion of the Company's
first mortgage loans and certain other assets. The Company, if the need arises,
may also access the Federal Reserve Bank discount window to supplement its
supply of lendable funds and to meet deposit withdrawal requirements. As of
September 30, 1996, Mid-Continent had $81,700 in advances outstanding from the
FHLB of Topeka. The Savings Bank has entered into a line-of-credit agreement
with the FHLB of Topeka wherein the Savings Bank can borrow up to $54,400
subject to certain limitations. As of September 30, 1996, there was $15,700
outstanding relative to this agreement. The agreement expires December 27, 1996.
Personnel
As of September 30, 1996, the Company had 140 full-time and 20 part-time
employees. None of the Company's employees are represented by a collective
bargaining group.
Competition
The Company encounters strong competition both in the attraction of
deposits and origination of loans. Competition comes primarily from savings
institutions, commercial banks and credit unions that operate in counties where
Mid-Continent's offices are located. The Company competes for savings accounts
by offering depositors competitive interest rates and a high level of personal
service. The Company competes for loans primarily through the interest rates and
loan fees it charges and the efficiency and quality of services it provides
borrowers, real estate brokers, and contractors.
Regulation
Set forth below is a brief description of certain laws which relate to the
regulation of the Company. The description does not purport to be complete and
is qualified in its entirety by reference to applicable laws and regulations.
Unless otherwise indicated, this section discusses regulations that apply to the
Company indirectly through their direct application to the Savings Bank.
General. As a federally chartered, FDIC-insured savings association, the
Savings Bank is subject to extensive regulation by the OTS and the FDIC. Lending
activities and other investments must comply with various federal statutory and
regulatory requirements. The Savings Bank is also subject to certain reserve
requirements promulgated by the Board of Governors of the Federal Reserve System
(the "Federal Reserve Board").
30
<PAGE>
The OTS, in conjunction with the FDIC, regularly examines the Savings Bank
and prepares reports for the consideration of the Savings Bank's Board of
Directors on any deficiencies that they find in the Savings Bank's operations.
The Savings Bank's relationship with its depositors and borrowers is also
regulated to a great extent by federal law, especially in such matters as the
ownership of savings accounts and the form and content of the Savings Bank's
mortgage documents.
The Savings Bank must file reports with the OTS and the FDIC concerning
its activities and financial condition, in addition to obtaining regulatory
approvals prior to entering into certain transactions such as mergers with or
acquisitions of other savings institutions. This regulation and supervision
establishes a comprehensive framework of activities in which an institution can
engage and is intended primarily for the protection of the FDIC and depositors.
The regulatory structure also gives the regulatory authorities extensive
discretion in connection with their supervisory and enforcement activities and
examination policies, including policies with respect to the classification of
assets and the establishment of adequate loan loss reserves for regulatory
purposes. Any change in such regulations, whether by the OTS, the FDIC or the
Congress could have a material adverse impact on the Company and its operations.
The Company is also required to file certain reports with, and otherwise comply
with the rules and regulations of the OTS and the Securities and Exchange
Commission ("SEC").
31
<PAGE>
Regulatory Capital Requirements
OTS capital regulations require savings institutions to meet three capital
standards: (1) tangible capital equal to 1.5% of total adjusted assets, (2) a
leverage ratio (core capital) equal to 3% of total adjusted assets and (3)
risk-based capital equal to 8.0% of total risk-weighted assets.
The following table sets forth the Savings Bank's capital position at
September 30, 1996, as compared to the minimum regulatory capital
requirements imposed by the OTS at that date.
Percent
of Adjusted
Amount Assets
------ ------------
(Dollars in Thousands)
Tangible Capital:
Regulatory capital $ 31,827 9.32%
Regulatory requirement 5,122 1.50%
-------- -----
Excess $ 26,705 7.82%
======== =====
Core Capital:
Regulatory capital $ 31,827 9.32%
Regulatory requirement 10,244 3.00%
-------- -----
Excess $ 21,583 6.32%
======== =====
Risk-Based Capital:
Regulatory capital $ 32,281 24.48%
Regulatory requirement 10,551 8.00%
-------- -----
Excess $ 21,730 16.48%
======== =====
Prompt Corrective Action
Banking regulators are required to take certain supervisory actions
against undercapitalized institutions, the severity of which depends upon the
institution's degree of capitalization. Under the OTS rules, an institution
shall be deemed to be (i) "well capitalized" if it has total risk-based capital
of 10.0% or more, has a Tier I risk-based capital ratio (core or leverage
capital to risk-weighted assets) of 6.0% or more, has a leverage capital ratio
of 5.0% or more and is not subject to any order or final capital directive to
meet and maintain a specific capital level for any capital measure, (ii)
"adequately capitalized" if it has a total risk-based capital ratio of 8.0% or
more, a Tier I risked-based ratio of 4.0% or more and a leverage capital ratio
of 4.0% or more (3.0% under certain circumstances) and does not meet the
definition of "well capitalized", (iii) "undercapitalized" if it has a total
risk-based capital ratio that is less than 6.0%, a Tier I risk-based capital
ratio that is less than 4.0% or a leverage capital ratio that is less than 4.0%
(3.0% in certain circumstances), (iv) "significantly undercapitalized" if it has
a total risk-based capital ratio that is less than 6.0%, a Tier I risk-based
capital ratio that is less than 3.0% or a leverage capital ratio that is less
than 3.0% and (v) "critically undercapitalized" if it has a ratio of tangible
equity to total assets that is equal to or less than 2.0%. In addition, under
32
<PAGE>
certain circumstances, a federal banking agency may reclassify a well
capitalized institution as adequately capitalized and may require an adequately
capitalized institution or an undercapitalized institution to comply with
supervisory actions as if it were in the next lower category (except that the
FDIC may not reclassify a significantly undercapitalized institution as
critically undercapitalized).
Immediately upon becoming undercapitalized, an institution becomes subject
to restrictive provisions. The appropriate federal banking agency for an
undercapitalized institution also may take any number of discretionary
supervisory actions if the agency determines that any of these actions is
necessary to resolve the problems of the institution at the least possible long
term cost to the deposit insurance fund, subject in certain cases to specified
procedures.
The Company is currently a well capitalized institution.
Dividend and Other Capital Distribution Limitations
OTS regulations require the Savings Bank to give the OTS 30 days advance
notice of any proposed declaration of dividends and the OTS has the authority
under its supervisory powers to prohibit the payment of dividends. In addition,
the Savings Bank may not declare or pay a cash dividend on its capital stock if
the effect thereof would be to reduce the regulatory capital of the Savings Bank
below the amount required for the liquidation account established pursuant to
the Savings Bank's Plan of Conversion.
OTS regulations impose limitations upon all capital distributions by
savings institutions, such as cash dividends, payments to repurchase or
otherwise acquire its shares, payments to shareholders of another institution in
a cash-out merger and other distributions charged against capital. The rule
establishes three tiers of institutions, based primarily on an institution's
capital level. An institution that exceeds all fully phased-in capital
requirements before and after a proposed capital distribution ("Tier 1
institution") and has not been advised by the OTS that it is in need of more
than the normal supervision can, after prior notice but without the approval of
the OTS, make capital distributions during a calendar year equal to the greater
of (i) 100% of its net income to date during the calendar year plus the amount
that would reduce by one-half its "surplus capital ratio" (the excess capital
over its fully phased-in capital requirements) at the beginning of the calendar
year, or (ii) 75% of its net income over the most recent four quarter period.
Any additional capital distributions require prior regulatory approval. As of
September 30, 1996, the Savings Bank was a Tier 1 institution. In the event the
Company's capital fell below its fully phased-in requirement or the OTS notified
it that it was in need of more than normal supervision, the Savings Bank's
ability to make capital distributions could be restricted. In addition, the OTS
could prohibit a proposed capital distribution by any institution, which would
otherwise be permitted by the regulation, if the OTS determines that such
distribution would constitute an unsafe or unsound practice.
Finally, a savings association is prohibited from making a capital
distribution if, after making the distribution, the savings association would be
"undercapitalized" (not meet any one of its minimum regulatory capital
requirement).
33
<PAGE>
Qualified Thrift Lender Test
The Home Owners Loan Act ("HOLA"), as amended, requires savings
institutions to meet a qualified thrift lender ("QTL") test. If the Savings Bank
maintains at least 65% of its portfolio assets (defined as all assets minus
intangible assets, property used by the institution in conducting its business
and liquid assets equal to 20% of total assets) in Qualified Thrift Investments
(primarily residential mortgages and related investments, including certain
mortgage-backed securities" ("QTIs") and otherwise qualifies as a QTL, it will
continue to enjoy full borrowing privileges from the FHLB of Topeka. Certain
assets are subject to a percentage limitation of 20% of portfolio assets. In
addition, savings associations may include shares of stock of the Federal Home
Loan Banks, FNMA and FHLMC as qualifying QTIs. Compliance with the QTL test is
measured on a monthly basis in nine out of every 12 months. As of September 30,
1996, the Savings Bank was in compliance with its QTL requirement with 75.8% of
its total assets invested in Qualified Thrift Investments.
Federal Home Loan Bank System
The Savings Bank is a member of the FHLB of Topeka, which is one of 12
regional FHLBs that administers the home financing credit function of savings
associations. Each FHLB serves as a reserve or central bank for its members
within its assigned region. It is funded primarily from proceeds derived from
the sale of consolidated obligations of the FHLB System. It makes loans to
members (i.e., advances) in accordance with policies and procedures established
by the Board of Directors of the FHLB.
As a member, the Savings Bank is required to purchase and maintain stock
in the FHLB of Topeka in an amount equal to at least 1% of its aggregate unpaid
residential mortgage loans, home purchase contracts or similar obligations at
the beginning of each year. As of September 30, 1996, the Savings Bank had
$4,327 in FHLB stock, which was in compliance with this requirement.
Federal Reserve System
The Federal Reserve Board requires all depository institutions to maintain
non-interest bearing reserves at specified levels against their transaction
accounts (primarily checking, NOW and Super NOW checking accounts) and
non-personal time deposits. The balances maintained to meet the reserve
requirements imposed by the Federal Reserve Board may be used to satisfy the
liquidity requirements that are imposed by the OTS.
Savings associations have authority to borrow from the Federal Reserve
Bank "discount window," but Federal Reserve policy generally requires savings
associations to exhaust all OTS sources before borrowing from the Federal
Reserve System. The Savings Bank had no discount window borrowings as of
September 30, 1996.
34
<PAGE>
Holding Company Regulation
The Company is a unitary savings and loan holding company subject to
regulatory oversight by the OTS. As such, the Company is required to file
reports with the OTS and is subject to regulation and examination by the OTS. In
addition, the OTS has enforcement authority over the Company and its non-savings
association subsidiaries which also permits the OTS to restrict or prohibit
activities that are determined to be a serious risk to the subsidiary savings
association. This regulation and oversight is intended primarily for the
protection of the depositors of the Company and not for stockholders of the
Company.
As a unitary savings and loan holding company, the Company generally is
not subject to activity restrictions, provided the Company satisfied the QTL
test. If the Company acquires control of another savings association as a
separate subsidiary, it would become a multiple savings and loan holding
company, and the activities of the Company and any of its subsidiaries (other
than the Company or any other FDIC-insured savings association) would become
subject to such restrictions unless such other associations each qualify as a
QTL and were acquired in a supervisory acquisition.
Executive Officers of the Registrant
The following individuals were executive officers of the Registrant as of
September 30, 1996:
<TABLE>
<CAPTION>
Name Age(1) Positions Held With the Registrant
- ---- ------ ----------------------------------
<S> <C> <C>
Richard T. Pottorff 62 Chairman, President, and Chief
Executive Officer
Larry R. Goddard 50 Executive Vice President, Chief Operating Officer,
and Chief Financial Officer
Harold G. Siemens 47 Senior Vice President - Lending
David L. Walter 48 Vice President
</TABLE>
- ---------------------
(1) At September 30, 1996
The following is a description of the principal employment and occupation
during at least the past five years of the executive officers of the Registrant
as of September 30, 1996.
Richard T. Pottorff has served as a Director and Officer of the Savings
Bank since 1978 and of The Company since its incorporation in January 1994. Mr.
Pottorff has served as a Director of the FHLB of Topeka and has served as a
member of the El Dorado Chamber of Commerce, the Wichita Association of Real
Estate Brokers and the Wichita Homebuilders Association. In addition, Mr.
Pottorff is the Chairman of the Federal and State Legislative
35
<PAGE>
Committee of the Heartland Community Bankers. Mr. Pottorff is also a past
Chairman of the Heartland Community Bankers.
Larry R. Goddard has been with the Savings Bank since 1978 and has served
as a Director of the Savings Bank and the Company since 1994. Mr. Goddard is a
past President of the Mid-West Savings Conference and has served as Chairman of
the Real Estate Mortgage Committee of the Heartland Community Bankers. He is
also a member of the Lions Club, a member of the Partners in Education, a
director of El Dorado, Inc., and a member of the Community Action for Retail &
Revitalization Board.
Harold G. Siemens has been with Company since 1983. He is a founding
Director and past Presidnet of the Kansas Mortgage Banking Association and a
Director of the Mid-West Savings Conference. Mr. Siemens is also a member of the
Real Estate Mortgage Committee of the Heartland Community Bankers, the Wichita
Area Association of Realtors and the Wichita Area Builders Association.
David L. Walter has been with the Savings Bank since 1988 and has served
as a Vice President of the Company since January 1995. With respect to the
Savings Bank, Mr. Walter became the Treasurer and the Controller in 1988 and a
Vice President in 1989. Mr. Walter is a member of the Financial Managers Society
and the Treasurer of the El Dorado Kiwanis Club.
Item 2. Properties
The Company operates from its corporate office located at 124 W. Central,
El Dorado, Kansas. The Company owns this office facility which was opened in
1965.
Full service offices owned and leased by the Company are set forth below.
<TABLE>
<CAPTION>
Location
- --------
<C> <C> <C>
100 W. Twelfth 405 N. Main 2123 N. Maize Road
Newton, Kansas 67114 El Dorado, Kansas 67042 Wichita, Kansas 67212
1113 S. Main 255 N. Main 3055 N. Rock Road
Winfield, Kansas 67156 Wichita, Kansas 67201 Wichita, Kansas 67226
2310 S. Main 1420 N. Ohio 762 N. West Street
Winfield, Kansas 67156 Augusta, Kansas 67010 Wichita, Kansas 67203
</TABLE>
The Company owns all of its facilities except 405 N. Main in El Dorado,
which is leased. This lease expires June 30, 1998. The Company owns land at 79th
St. and Rock Road, Derby, Kansas, Kansas that the Company expects to develop
into an additional full-service office.
The Company also owns certain other properties that it leases to others.
The location of these properties is set forth below.
36
<PAGE>
<TABLE>
<CAPTION>
<C> <C> <C>
409 N. Main 100 W. Twelfth 402 N. Rose Hill Road
El Dorado, Kansas 67042 Newton, Kansas 67114 Rose Hill, Kansas 67213
</TABLE>
Item 3. Legal Proceedings
There are various claims and lawsuits in which the Company is periodically
involved, such as claims to enforce liens, condemnation proceedings on
properties in which the Company holds security interests, claims involving the
making and servicing of real property loans and other issues incident to the
Company's business. In the opinion of management, no material loss is expected
from any of such pending claims or lawsuits.
Supreme Court Ruling on Breach of Contract Regarding Supervisory Goodwill:
Mid-Continent Federal Savings Bank, the wholly-owned subsidiary of Mid Continent
Bancshares, Inc., is pursuing its claim against the federal government to
recover funds lost as a result of the enactment of the Financial Institutions
Reform, Recovery, and Enforcement Act of 1989 ("FIRREA"). In 1986, the Bank was
encouraged by the federal government to acquire an insolvent thrift institution
("Reserve Savings and Loan Association"). The federal government allowed the
Bank to count the insolvent thrift's losses as "goodwill" assets and to
double-count as "capital credit" federal government funds provided to help the
Bank take over the failing thrift. The Bank contends (among other things) in its
lawsuit that the federal government breached its contract with the Bank when
FIRREA was enacted because FIRREA prevented the Bank from counting such assets
toward minimum capital requirements. As a result of FIRREA, the Bank was forced
to write off approximately $7,500,000 in supervisory goodwill. This write off
reduced the Bank's regulatory capital.
On July 1, 1996, the United States Supreme Court Affirmed decisions by a
federal appellate court that the government had breached express contracts with
three thrifts (U.S. v. Winstar Corp, et al.) and therefore was liable for
damages. Those lawsuits stemmed from circumstances that are similar to those of
the Bank; in order to persuade those thrifts to acquire certain insolvent thrift
institutions, the federal government promised accounting treatment similar to
that promised to the Bank.
While the Supreme Court's ruling in U.S. v. Winstar Corp, et al., serves
to support the Bank's legal claims in its pending lawsuit against the federal
government, it is not possible at this time to predict what effect the Supreme
Court's ruling, and subsequent rulings of a lower court concerning damages, will
have on the outcome of the Bank's lawsuit. Notwithstanding the Supreme Court's
ruling, there can be no assurance that the Bank will be able to recover any
funds arising out of its claim and, if any recovery is made, the amount of such
recovery.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of security holders during the fourth
quarter of the fiscal year.
37
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The information contained under the section captioned "Market and Dividend
Information" in the Company's Annual Report to Stockholders for the fiscal year
ended September 30, 1996 (the "Annual Report"), is incorporated herein by
reference.
Item 6. Selected Financial Data
The information contained in the table captioned "Selected Consolidated
Financial Highlights" in the Annual Report is incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The information contained in the section captioned "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in the
Annual Report is incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data
The Registrant's financial statements listed under Item 14 are
incorporated herein by reference.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
There has been no change of independent auditor for the Company, or its
subsidiaries, during the two year period ended September 30, 1996.
PART III
Item 10. Directors and Executive Officers of the Registrant
The information contained under the section captioned "Proposal I --
Election of Directors" in the Registrant's definitive proxy statement for the
Registrant's 1996 Annual Meeting of Stockholders (the "Proxy Statement") is
incorporated herein by reference.
Additional information concerning executive officers is included under
"Part I -- Executive Officers of the Registrant."
38
<PAGE>
Item 11. Executive Compensation
The information contained under the sections captioned "Proposal I --
Election of Directors -- Executive Compensation," "Compensation Committee
Interlocks and Insider Participation," "--Report of the Compensation Committee
on Executive Compensation," and "--Stock Performance Graph" in the
Proxy Statement are incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
(a) Security Ownership of Certain Beneficial Owners
Information required by this item is incorporated herein by
reference to the section captioned "Voting Securities and Principal Holders
Thereof" in the Proxy Statement.
(b) Security Ownership of Management
Information required by this item is incorporated herein by
reference to the first chart in the section captioned "Proposal I -- Election of
Directors" in the Proxy Statement.
(c) Management of the Registrant knows of no arrangements, including any
pledge by any person of securities of the Registrant, the operation of which may
at a subsequent date result in a change in control of the Registrant.
Item 13. Certain Relationships and Related Transactions
The information required by this item is incorporated herein by reference
to the section captioned "Proposal I -- Election of Directors -- Certain
Relationships and Related Transactions" in the Proxy
Statement.
39
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) The following documents are filed as a part of this report:
1. The following financial statements and the report of independent
accountants of the Registrant included in the Registrant's 1996 Annual Report to
Stockholders are incorporated herein by reference and also in Item 8 hereof.
Consolidated Balance Sheets as of September 30, 1995 and 1996.
Consolidated Statements of Income for the Years Ended September 30, 1994,
1995 and 1996.
Consolidated Statements of Stockholders' Equity for the Years Ended
September 30, 1994, 1995 and 1996.
Consolidated Statements of Cash Flows for the Years Ended September 30,
1994, 1995 and 1996.
Notes to Consolidated Financial Statements.
2. Financial Statement Schedules, except for Exhibit 11, for which
provision is made in the applicable accounting regulations of the SEC are not
required under the related instructions or are inapplicable and therefore have
been omitted.
3. The following exhibits are included in this Report or
incorporated herein by reference:
(a) List of Exhibits:
3(i) Certificate of Incorporation of Mid Continent Bancshares,
Inc. *
3(ii) Bylaws of Mid Continent Bancshares, Inc. **
10.1 Outside Director Consultation and Retirement Plan*
10.2 Employment Agreement with Richard T. Pottorff **
10.3 Employment Agreement with Larry R. Goddard **
10.4 1994 Stock Option Plan **
10.5 Management Stock Bonus Plan and Trust Agreement **
40
<PAGE>
10.6 Amendment to Employment Agreement with Richard T. Pottorff
10.7 Amendment to Employment Agreement with Larry R. Goddard
11 Statement Regarding Computation of Earnings Per Share
13 Annual Report to Stockholders for the fiscal year ended
September 30, 1996
21 Subsidiaries of the Registrant **
23 Consent from Deloitte & Touche, LLP
99 Report on Financial Statement Schedule in Item 14
- --------------------
* Incorporated by reference to the registration statement on Form S-1 (File
No. 33-76010) declared effective by the Commission on May 3, 1994.
** Incorporated by reference to the Form 10-K (File No. 0-23620) for the
fiscal year ended September 30, 1995.
Copies of above exhibits not contained herein are available, at a fee of $0.15
per page, to any security holder upon written request to the Secretary, Mid
Continent Bancshares, Inc., 124 West Central, El Dorado, Kansas 67042.
41
<PAGE>
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, on December 26, 1996, by the undersigned, thereunto duly
authorized.
Mid Continent Bancshares, Inc.
By:/s/Richard T. Pottorff
---------------------------------
Richard T. Pottorff
President, Chairman and Chief
Executive Officer
(Duly Authorized Representative)
Pursuant to the requirement 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 as of December 26, 1996.
/s/ Larry R. Goddard /s/ Richard T. Pottorff
- ------------------------------- ---------------------------------
Larry R. Goddard Richard T. Pottorff
Executive Vice President, Chief President, Chairman, Chief
Operating Officer, Chief Financial Executive Officer, and Director
Officer and Director (Principal Executive Officer)
(Principal Financial and Accounting
Officer)
/s/ Donald Adlesperger /s/ Thomas C. Hand
- ------------------------------- ---------------------------------
Donald Adlesperger Thomas C. Hand
Director Director
/s/ Kenneth B. Dellett /s/ Ron J. McGraw
- ------------------------------- ---------------------------------
Kenneth B. Dellett Ron J. McGraw
Director Director
AMENDMENT TO EMPLOYMENT AGREEMENT
WHEREAS, Mid-Continent Federal Savings Bank (the "Bank") and Richard T.
Pottorff (the "Employee") previously entered into an Employment Agreement (the
"Agreement") dated March 21, 1995, and
WHEREAS, Section 14 of this Agreement provides that amendments to this
Agreement may be made in writing and signed by both parties,
NOW THEREFORE, BE IT RESOLVED that the Agreement be amended by adoption and
execution of this Amendment to the Agreement as follows.
1. Revision to Section 4 of the Agreement by inclusion of the following
phrase at the end of Section 5 as follows:
"Notwithstanding anything herein to the contrary, the expiration date
of the term of this Agreement shall be as of June 27, 1998, except as
may be extend beyond that date by future action of the Board within
its sole discretion in accordance with this Agreement."
As Secretary to the Bank, I hereby certify that the foregoing Amendment was
adopted and ratified by a majority vote of a meeting of the Board of Directors
of the Bank, held on June 27, 1996, a quorum being present.
/s/Cheryl Wilkerson
Cheryl Wilkerson, Secretary
SEAL
IN WITNESS WHEREOF, the parties to the Agreement dated March 21, 1995, do
hereby execute this Amendment to the Agreement on this 27 th day of June 1996.
Mid-Continent Federal Savings Bank
By: /s/Ken Dellett
-------------------------
Kenneth B. Dellett
/s/Richard T. Pottorff
-----------------------------
Richard T. Pottorff, Employee
ATTEST:
/s/Cheryl Wilkerson
Cheryl Wilkerson, Secretary
AMENDMENT TO EMPLOYMENT AGREEMENT
WHEREAS, Mid-Continent Federal Savings Bank (the "Bank") and Larry R.
Goddard (the "Employee") previously entered into an Employment Agreement (the
"Agreement") dated March 21, 1995, and
WHEREAS, Section 14 of this Agreement provides that amendments to this
Agreement may be made in writing and signed by both parties,
NOW THEREFORE, BE IT RESOLVED that the Agreement be amended by adoption
and execution of this Amendment to the Agreement as follows.
1. Revision to Section 4 of the Agreement by inclusion of
the following phrase at the end of Section 5 as follows:
"Notwithstanding anything herein to the contrary, the expiration
date of the term of this Agreement shall be as of June 27, 1998,
except as may be extend beyond that date by future action of the
Board within its sole discretion in accordance with this Agreement."
As Secretary to the Bank, I hereby certify that the foregoing Amendment
was adopted and ratified by a majority vote of a meeting of the Board of
Directors of the Bank, held on June 27, 1996, a quorum being present.
/s/Cheryl Wilkerson
Cheryl Wilkerson, Secretary
SEAL
IN WITNESS WHEREOF, the parties to the Agreement dated March 21, 1995, do
hereby execute this Amendment to the Agreement on this 27 th day of June 1996.
Mid-Continent Federal Savings
Bank
By: /s/Ken Dellett
/s/Larry R. Goddard
Larry R. Goddard, Employee
ATTEST:
/s/Cheryl Wilkerson
Cheryl Wilkerson, Secretary
SEAL
MID CONTINENT BANCSHARES, INC.
EXHIBIT 11
Statement Regarding Computation of Earnings Per Share
Three Months and Year Ended September 30, 1995 and 1996
<TABLE>
<CAPTION>
Three months Ended Year Ended
September 30, September 30,
--------------------------------------------------------
1995 1996 1995 1996
---------------------------- ---------------------------
Primary Earnings per share
Common shares outstanding,
<S> <C> <C> <C> <C>
beginning of period 2,248,250 1,937,803 2,248,250 2,045,235
Net effect of dilutive stock options 52,110 768 21,389 5,942
Allocated (unallocated) ESOP shares (120,700) 1,700 (125,788) 6,975
Amortized (unamortized) MSBP shares (57,995) 1,871 (29,909) 7,524
Treasury share purchases (80,000) (6,848) (26,274) (102,827)
--------- --------- --------- ---------
Weighted average common and common
equivalent shares outstanding 2,041,665 1,935,294 2,087,668 1,962,849
Net earnings $ 826 $ 460 $ 4,106 $ 3,126
Per share amount $ 0.40 $ 0.24 $ 1.97 $ 1.59
Fully Diluted Earnings per share
Common shares outstanding,
beginning of period 2,248,250 1,938,696 2,248,250 2,053,855
Net effect of dilutive stock options 60,730 2,766 26,499 (478)
Allocated (unallocated) ESOP shares (120,700) 1,700 (125,788) 6,975
Amortized (unamortized) MSBP shares (57,995) 1,871 (29,909) 7,524
Treasury share purchases (80,000) (6,848) (26,274) (102,827)
--------- --------- --------- ---------
Weighted average common and common
equivalent shares outstanding 2,050,285 1,938,185 2,092,778 1,965,049
Net earnings $ 826 $ 460 $ 4,106 $ 3,126
Per share amount $ 0.40 $ 0.24 $ 1.96 $ 1.59
</TABLE>
Primary earnings per share have been computed on the treasury stock method using
the average market price for the common stock equivalents (options). Fully
diluted earnings per share have been computed on the treasury stock method using
the closing market price for the common stock equivalents (options).
The Company accounts for the 136,000 shares acquired by the Employee Stock
Ownership Plan ("ESOP") in accordance with Statement of Position 93-6 and the
74,833 shares acquired for the Management Stock Bonus Plan (MSBP) in a manner
similar to the ESOP shares; shares controlled by the ESOP and MSBP are not
considered in the weighted average shares outstanding until the shares are
committed for allocation.
[LOGO]
1996 ANNUAL REPORT
<PAGE>
Mid Continent Bancshares, Inc.
================================================================================
CONTENTS
A Letter to Our Shareholders 1-2
Business of the Bancorp and Savings Bank 3-4
Selected Consolidated Financial Highlights 5-6
Market and Dividend Information 7-8
Management's Discussion and Analysis 9-24
Consolidated Financial Statements 25-63
Directors and Officers and Other Information 64-65
<PAGE>
Mid Continent Bancshares, Inc.
================================================================================
A Letter to Our Shareholders
- ----------------------------
Dear Stockholder:
Mid Continent Bancshares, Inc. and Mid-Continent Federal Savings Bank has had
another exceptional year in 1996.
We increased our asset base from $271 million at September 30, 1995 to $340
million at September 30, 1996, or 25.5%, and improved our capital and
shareholders' equity from $36.7 million to $36.8 million, with a net income for
the year of $3.1 million after the SAIF assessment. 1996 earnings per share was
$1.59 after the SAIF assessment. The SAIF assessment reduced our earnings by
$0.33 per share after income tax. On a pre-SAIF assessment basis the company's
earnings would have been $1.92 per share. When viewed on this basis, and
considering the 1995 earnings of $1.97 per share, 1996 was truly a very good
year for the Company.
During the year we have continued to increase our mortgage servicing portfolio
to in excess of $1.2 billion, or approximately 25,000 loans. Servicing income,
net of amortization, increased to $3.1 million. The expansion of our mortgage
banking operation continues as we now have more than 100 correspondent brokers.
We have two full time account representatives covering Oklahoma, Arkansas,
Missouri and Kansas.
Our checking account program continues to grow in popularity. At September 30,
1995, we had approximately 13,500 accounts and as of September 30, 1996 our
accounts had increased to over 16,000. We have increased our market share in our
total market since 1994 from 6% to 10%. In the Wichita area only, during the
same period of time, from 3% to 6%.
The Bank's service charges and other fees increased by 37.5%, from $1.8 million
to $2.5 million. The primary source of this income is the High Performance
Checking Account program and charges on loans serviced by the Bank, including
loans serviced for others.
The Bank, during the last quarter of the fiscal year, has expensed the special
assessment on the SAIF fund in the amount of $1,053,000, pre-tax. The Bank has
been looking forward to the resolution of the SAIF fund and the reduction in the
Bank's deposit insurance premiums to be realized during the coming fiscal year.
On July 24, 1995, the Savings Bank filed a claim in the United States Supreme
Court of Claims to recover funds lost as a result of the Financial Institutional
Reform and Recovery Enforcement Act of 1989 (FIRREA). The Savings Bank was
forced to write-off approximately $7.5 million in Supervisory Goodwill. While
the Savings Bank, along with many other financial institutions, has determined
to pursue a claim against the United States government, there is no assurance
that the Savings Bank will be able to recover any funds arising from the claim,
or if any recover is made, the
- 1 -
<PAGE>
Mid Continent Bancshares, Inc.
================================================================================
amount of such recovery.
The Bank has completed construction and opened its fourth office in Wichita. It
has also opened a branch in the Dillions store in Winfield, Kansas. The Bank now
has nine full service offices with the tenth office under construction in Derby,
Kansas.
The Bank has made much progress during the past year as we continued to increase
our market share in checking account services and our mortgage banking
operation. The Bank is in the process of implementing a new sales and marketing
program for our retail banking operation. The Bank intends to increase its
market penetration by expansion of the number of products and services offered
and sales per customer.
The Board of Directors, management and staff is committed to maintain the Bank's
position as a premier financial provider to our customers and communities.
Thanks to you, the stockholders and our customers, for having confidence in the
Bank over the past year.
Very truly yours,
/s/Richard T. Pottorff
Richard T. Pottorff
Chairman of the Board, CEO and President
- 2 -
<PAGE>
Mid Continent Bancshares, Inc.
================================================================================
BUSINESS OF THE BANCORP
- -----------------------
Mid Continent Bancshares, Inc. ("Bancorp") is a Kansas corporation organized in
January, 1994. On June 27, 1994, the Bancorp acquired all the capital stock of
Mid-Continent Federal Savings Bank ("Savings Bank") in the conversion of the
Savings Bank from a federal mutual savings and loan association to a federal
stock savings bank. Bancorp, as a unitary savings and loan holding company,
under existing laws, generally is not restricted in the types of business
activities in which it may engage provided that the Savings Bank retains a
specified amount of its assets in housing-related investments.
Management believes that the holding company structure, should it decide to do
so, would facilitate diversification into other non-banking activities and
possible future acquisitions of other financial institutions such as other
mutual or stock savings institutions and commercial banks, and thereby further
its expansion into existing and new market areas and also enable Bancorp to
repurchase its own stock. Except for the repurchase of a portion of Bancorp
stock, as permitted by Office of Thrift Supervision, there are no present plans,
arrangements, agreements, or understandings, written or oral, regarding any such
activities.
The Bancorp's business activities to date have been limited to its investment in
the Savings Bank, loans made to the Savings Bank for use in the normal course of
its business and to the Mid-Continent Federal Savings Bank Employee Stock
Ownership Plan ("ESOP") to enable the ESOP to purchase shares of the Bancorp's
common stock in the initial public offering and the repurchase of limited
amounts of Bancorp stock. The loans bear interest rates and have terms and
conditions which prevailed in the market place at the time they were originated.
As of September 30, 1996 the Bancorp has reacquired 231,500 shares of its common
stock in the open market.
BUSINESS OF THE SAVINGS BANK
- ----------------------------
Mid-Continent Federal Savings Bank is a federally chartered stock savings bank
located in El Dorado, Kansas in Butler County, Kansas. The Savings Bank was
founded in 1925 with a charter from Kansas under the name Mid-Continent Savings
and Loan Association. In 1935, the Savings Bank adopted a federal charter and
changed its name to Mid-Continent Federal Savings and Loan Association of El
Dorado. Its present name, Mid-Continent Federal Savings Bank, was obtained in
1994 at the time it obtained a charter as a savings bank. The Savings Bank
completed its conversion from mutual to stock form in June, 1994 at which time
all of its stock was acquired by Mid Continent Bancshares, Inc. The Savings Bank
has been a member of the Federal Home Loan Bank of Topeka since 1937 and its
deposits are insured up to the applicable limits by the Federal Deposit
Insurance Corporation ("FDIC").
Mid-Continent is primarily engaged in attracting deposits from the general
public and using those funds to originate and sell real estate loans on
one-to-four family residences and, to a lesser extent,
- 3 -
<PAGE>
Mid Continent Bancshares, Inc.
================================================================================
to originate consumer and construction loans for its portfolio. The Savings Bank
purchases one- to- four family residential loans through approximately 110
correspondents located primarily in Kansas and, to a lesser extent, in Oklahoma.
The Savings Bank also invests in mortgage-related securities, U.S. government
and agency obligations. These activities are funded with deposits from the
general public and borrowings from the Federal Home Loan Bank and Mid Continent
Bancshares, Inc. The Savings Bank has offices in El Dorado, Newton, Winfield,
Augusta and Wichita, Kansas, which are located in its primary market area of
Butler, Cowley, Sedgwick and Harvey Counties in the State of Kansas. The Savings
Bank opened one full service branch in Wichita, Kansas during 1996 and expects
to open another in 1997 in Derby, Kansas. A full service branch was opened in
October, 1996 in Winfield, Kansas, to compliment the existing full service
branch in that city. The new Winfield branch is located in the local Dillon's
supermarket and will maintain extended hours to serve its customer base. The
Savings Bank offers its customers fixed-rate and adjustable-rate mortgage loans,
as well as FHA/VA loans and consumer loans, including home equity and savings
account loans. Adjustable-rate mortgage loans generally are originated for
retention in the Savings Bank's portfolio while fixed-rate mortgage loans are
generally sold into the secondary market. All consumer loans are retained in the
Savings Bank's portfolio.
The Savings Bank is actively engaged in the purchase and sale of certain
mortgage loans through a correspondent network. These purchased loans and loans
originated by the Savings Bank are sold, generally without recourse, into the
secondary market with the Savings Bank generally retaining the servicing rights.
The sale of loans in the secondary market is the source of a significant amount
of income in the form of gain on the sale of loans and fees generated from
servicing the loans.
The principal sources of funds for the Savings Bank's lending activities are
deposits and the amortization, repayment and maturity of loans, mortgage-related
securities and investment securities. Principal sources of income are interest
and fees on loans, mortgage-related securities and investment securities. The
Savings Bank's principal expense is interest paid on deposits.
- 4 -
<PAGE>
Mid Continent Bancshares, Inc.
================================================================================
Selected Consolidated Financial Highlights
- ------------------------------------------
The following table sets forth certain information at the dates and for the
periods indicated. Average data presented herein, for the years 1992 through
1994, is primarily calculated on the basis of month-end balances. Average data
presented herein for the 1995 and 1996 is primarily calculated on the basis of
daily balances. Management does not believe that the use of month-end balances
instead of daily average balances has caused any material differences in the
information. All dollar amounts are in thousands except per share data and
selected ratios.
SUMMARY OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
At September 30,
---------------------------------------------------------------------------
1992 1993 1994 1995 1996
------------- -------------- -------------- -------------- --------------
Dollars in Thousands
Total Amount of:
<S> <C> <C> <C> <C> <C>
Assets $189,340 $170,012 $202,628 $270,923 $340,186
Loans receivable 78,531 56,623 102,243 124,796 171,158
Mortgage-backed securities 60,804 42,856 45,030 40,004 34,383
Loans held for sale 17,110 27,734 5,527 22,108 13,718
Investments 7,244 15,144 24,374 56,449 90,562
Mortgage servicing rights 2,796 3,243 6,312 11,625 12,496
Excess of cost over fair value of assets
acquired (Goodwill) 353 252 161 83 22
Cash and cash equivalents 15,031 17,701 10,823 5,677 5,618
Savings deposits 159,522 145,838 154,764 195,716 214,493
Other borrowings 14,955 7,500 9,000 33,000 81,700
Stockholders' equity 9,988 12,792 35,208 36,735 36,807
Number of:
Real estate loans outstanding 2,302 2,124 1,985 2,593 2,864
Deposit accounts 18,142 17,557 21,743 27,192 29,609
Full service offices 7 6 6 7 8
Employees 91 100 117 119 150
Principal balance of loans serviced for
others $377,639 $580,768 $908,112 $1,189,892 $1,229,153
</TABLE>
-5-
<PAGE>
Mid Continent Bancshares, Inc.
================================================================================
<TABLE>
<CAPTION>
SUMMARY OF OPERATIONS Year Ended September 30,
-------------------------------------------------------------------
Dollars in Thousands
1992 1993 1994 1995 1996
------------ ------------ ------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Interest Income $16,398 $12,885 $11,549 $16,225 $20,173
Interest Expense 11,872 7,376 5,944 9,004 12,268
------------ ------------ ------------- ----------- -------------
Net interest income 4,526 5,509 5,605 7,221 7,905
Provision for loan losses 83 154 6 224 75
------------ ------------ ------------- ----------- -------------
Net interest income after provision for loan losses 4,443 5,355 5,599 6,997 7,830
------------ ------------ ------------- ----------- -------------
Non-interest income:
Loan servicing fees 1,513 1,804 2,689 4,407 4,779
Amortization of mortgage servicing rights (676) (679) (899) (1,305) (1,651)
Gain on sale of mortgage servicing rights 1,961
Service fees and other charges to customers 607 618 1,032 1,846 2,539
Gain on sale of loans held for sale, net 1,168 2,596 896 706 1,367
Other income 310 358 83 139 138
------------ ------------ ------------- ----------- -------------
Total non-interest income 2,922 4,697 3,801 7,754 7,172
------------ ------------ ------------- ----------- -------------
Total non-interest expense (1) 5,195 5,632 6,340 8,202 9,983
------------ ------------ ------------- ----------- -------------
Income before income tax expense and cumulative effect of
change in accounting principle 2,170 4,420 3,060 6,549 5,019
Income tax expense 893 1,616 1,195 2,443 1,893
------------ ------------ ------------- ----------- -------------
Income before cumulative effect of change in accounting
principle 1,277 2,804 1,865 4,106 3,126
Cumulative effect of change in accounting principle (2) 136
------------ ------------ ------------- ----------- -------------
Net income $1,277 $2,804 $2,001 $4,106 $3,126
============ ============ ============= =========== =============
Earnings per share (3) $0.30 $1.97 $1.59
----- ===== =====
Cash dividends per share $0.40 $0.40
===== =====
Selected Financial Ratios Year Ended September 30,
1992 1993 1994 1995 1996
Return on average assets 0.64% 1.61% 1.14% 1.75% 1.07%
Return on average equity 13.66% 24.12% 10.54% 11.86% 8.54%
Dividend payout ratio -- -- -- 20.30% 25.16%
Average total equity to average assets 4.67% 6.67% 10.81% 14.74% 12.56%
Net interest rate spread 2.40% 3.23% 3.11% 2.87% 2.55%
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) For 1996, includes a $1,053 one time assessment to recapitalize the SAIF
insurance fund.
(2) The cumulative effect of accounting change reflects the adoption of SFAS
No. 109 for fiscal year 1994.
(3) Earnings per share is based on net income subsequent to the Conversion on
June 27, 1994.
- 6 -
<PAGE>
Mid Continent Bancshares, Inc.
================================================================================
MARKET AND DIVIDEND INFORMATION
- -------------------------------
Mid Continent Bancshares, Inc.'s common stock trades on the Nasdaq National
Market system under the symbol "MCBS":
The following table sets forth the quarterly high and low sale prices for the
common stock throughout the fiscal years ended September 30, 1995 and 1996:
<TABLE>
<CAPTION>
Quarter Ended High Low
<S> <C> <C>
September 30, 1994 $13 $11 1/4
December 31, 1994 11 1/2 9 5/8
March 31, 1995 13 3/8 10 1/8
June 30, 1995 16 1/4 13
September 30, 1995 19 1/8 15 1/2
December 31, 1995 18 1/2 17
March 31, 1996 18 1/2 17 3/8
June 30, 1996 19 1/4 17 7/8
September 30, 1996 19 3/8 17 1/2
</TABLE>
During the years ended September 30, 1995 and 1996, the Bancorp declared and
paid cash dividends to shareholders as follows:
<TABLE>
<CAPTION>
Declaration Date Shareholder Record Date Payment Date Amount Per Share
- ---------------- -------------------------- ------------ ----------------
<S> <C> <C> <C>
December 19, 1994 December 31, 1994 January 20, 1995 $0.10
March 23, 1995 April 5, 1995 April 19, 1995 0.10
June 29, 1995 July 13, 1995 July 27, 1995 0.10
September 27, 1995 October 11, 1995 October 25, 1995 0.10
December 21, 1995 January 4, 1996 January 18, 1996 0.10
March 28, 1996 April 11, 1996 April 25, 1996 0.10
June 27, 1996 July 11, 1996 July 25, 1996 0.10
September 26, 1996 October 10, 1996 October 24, 1996 0.10
</TABLE>
According to the records of the Bancorp's transfer agent, there were 386
registered stockholders of record at December 5, 1996. This number does not
include any persons or entities who hold their stock in nominee or "street" name
through various brokerage firms.
The Bancorp's ability to pay dividends to stockholders is substantially
dependent upon the dividends it receives from the Savings Bank. Under current
regulations, the Savings Bank is not permitted to pay dividends if its
regulatory capital would thereby be reduced below (1) the amount then required
for the liquidation account established in connection with the Savings Bank's
conversion from mutual to stock form, or (2) the regulatory capital requirements
imposed by the Office of Thrift
- 7 -
<PAGE>
Mid Continent Bancshares, Inc.
================================================================================
Supervision. Capital distributions are also subject to certain limitations based
on the Savings Bank's net income. See Note 1 of notes to consolidated financial
statements. The Savings Bank's total capital at September 30, 1996, exceeded the
amounts of its liquidation account and regulatory capital requirements.
- 8 -
<PAGE>
Mid Continent Bancshares, Inc.
================================================================================
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
- ---------------------------------------
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- ---------------------------------------------
(Dollars in thousands)
GENERAL
- -------
On June 27, 1994, Mid-Continent Federal Savings Bank completed its conversion
(the "Conversion") from a federally chartered mutual savings and loan
association to a federally chartered stock savings bank and was simultaneously
acquired by Mid Continent Bancshares, Inc., a Kansas corporation, which was
formed to act as the holding company of the Savings Bank. At the date of
conversion, the Bancorp completed the sale of 2,248,250 shares of common stock,
$.10 par value, through concurrent Subscription and Community Offerings at
$10.00 per share. Net proceeds from the Conversion, after recognizing Conversion
expenses and underwriting costs of $754, were $21,729. From the net proceeds,
the Bancorp used $11,200 to purchase all of the capital stock of the Savings
Bank and $1,360 to fund the purchase of 136,000 shares of the Bancorp stock by
the Employee Stock Ownership Plan.
Mid Continent Bancshares, Inc. was formed to purchase all of the common stock of
Mid-Continent Federal Savings Bank in connection with the Savings Bank's
conversion from the mutual to the stock form of ownership in 1994. In addition,
the Bancorp made loans to the Savings Bank and to the Savings Bank's employee
stock ownership plan, from which it receives interest income. The loans bear
interest rates and have terms and conditions which prevailed in the market place
at the time they were originated.
The Bancorp's consolidated results of operations are primarily dependent on the
Savings Bank's net interest income, or the difference between the interest
income earned on its loan, mortgage-backed securities and investment securities
portfolios, and the interest expense paid on its deposits and other borrowings.
Net interest income is affected not only by the difference between the yields
earned on interest-earning assets and the costs incurred on interest-bearing
liabilities, but also by the relative amounts of such interest-earning assets
and interest-bearing liabilities.
Other components of net income include: provisions for losses on loans;
non-interest income (primarily, loan origination and servicing fees; service
fees and other charges to customers; gains on the sale of loans and gain on sale
of servicing rights); non-interest expense (primarily, compensation and employee
benefits; federal insurance premiums; office occupancy expense; and gains,
losses and expenses associated with foreclosed real estate); and income taxes.
Earnings of the Savings Bank are significantly affected by economic and
competitive conditions, particularly changes in interest rates, government
policies and regulations of regulatory authorities.
MANAGEMENT STRATEGY
- -------------------
The Savings Bank's lending strategy has focused historically on the origination
of mortgage loans
- 9 -
<PAGE>
Mid Continent Bancshares, Inc.
================================================================================
on one-to-four family residences pursuant to underwriting standards. The Savings
Bank generally retains ownership of the adjustable-rate and short-term
fixed-rate loans it originates and sells long-term fixed-rate loans in the
secondary market; accordingly, its lending strategy is designed to reduce the
risk of losses on its loan portfolio. However, the high concentration of
residential mortgage loans in its portfolio subjects the Savings Bank to risks
associated with potential declines in real estate values in its lending area.
This risk has been mitigated to some extent, however, through diversification in
its investment and mortgage-backed securities portfolios.
In an effort to reduce interest rate risk and protect it from the negative
effect of increases in interest rates, the Savings Bank has instituted certain
asset and liability management measures. This strategy includes the following
primary elements: (i) originating and purchasing long-term fixed-rate loans
primarily for sale in the secondary mortgage market, (ii) maintaining a high
percentage of total assets in short-term securities and other liquid assets,
(iii) increasing sources of other income, such as gain on sale of loans and loan
servicing fees, (iv) increasing its ARM loan portfolio and (v) building a loan
servicing portfolio whose market value floats inversely to the movement of
interest rates. A loan servicing portfolio becomes more valuable as the
"turnover" in the mortgage loans slows. Loan portfolios traditionally become
more seasoned and experience less turnover after interest rates rise. Therefore,
after interest rates rise, the value of a loan servicing portfolio generally
increases (assuming credit quality is maintained), causing the opposite effect
to the value of the Savings Bank's loans and investments.
CHANGES IN FINANCIAL CONDITION FROM SEPTEMBER 30, 1995
- ------------------------------------------------------
TO SEPTEMBER 30, 1996
- ---------------------
Total assets increased $69,263, or 25.6%, from $270,923 at September 30, 1995 to
$340,186 at September 30, 1996. The increase is attributable to increases of
$34,113 in investment securities and Federal Home Loan Bank (FHLB) stock,
$46,362 in loans receivable, and $871 in mortgage servicing rights.
Mortgage-related securities decreased $5,621 and loans held for sale decreased
$8,390.
Investment securities and FHLB stock increased from $56,449 at September 30,
1995 to $90,562 at September 30, 1996. The increase is primarily due to
favorable interest rates offered on these securities during the fiscal year
ending September 30, 1996. Included in the securities held at September 30, 1996
are $1,000 of "step-up" securities with an interest rate of 8.04% and a maturity
of 1996. If the securities are not called at any of the respective call dates
the interest rate will increase. Also included at September 30, 1996 are
callable securities with a carrying value of approximately $76,801 bearing
interest at various rates ranging from 4.98% to 8.50% with stated maturity dates
ranging from 1996 to 2011. The Savings Bank intends to hold these securities to
maturity, but the securities are subject to call at the option of the issuer.
Loans receivable increased from $124,796 at September 30, 1995 to $171,158 at
September 30,
- 10 -
<PAGE>
Mid Continent Bancshares, Inc.
================================================================================
1996. This increase is due primarily to increases in adjustable-rate mortgages
and short-term fixed-rate mortgage loans being held for investment and to a
lesser extent to increases in the construction and consumer lending portfolio.
First mortgage loans increased $48,440 and consumer loans increased $1,167. The
Bank expects to increase its residential (one-to-four unit), first mortgage,
loans in fiscial 1997, but not to the extent that these loans were increased in
fiscal 1996.
Mortgage servicing rights increased $871 during fiscal 1996. During the fiscal
year the Savings Bank increased its servicing portfolio for others from
$1,189,892 to $1,229,153.
Deposit accounts increased $18,777 primarily from savings certificate accounts
which increased $13,635. Demand and NOW account deposit accounts decreased $712.
Demand and NOW accounts which totaled $36,785 at September 30, 1996 provide a
significant amount of low interest-rate funds and a source of service fee income
to the Savings Bank.
Advances from the Federal Home Loan Bank increased $48,700 from $33,000 at
September 30, 1995 to $81,700 at September 30, 1996. The Savings Bank utilizes
advances from the Federal Home Loan Bank to meet its cash needs as they arise.
The Savings Bank has a $54,400 line of credit with the Federal Home Loan Bank,
subject to certain limitations, for the purpose of providing short-term
financing. At September 30, 1996, $15,700 was outstanding relative to this line
of credit.
Stockholders' equity increased $72, or 0.2%, from $36,735 to $36,807. Net income
for the year was $3,126.
Other significant transactions during the year included the acquisition of
151,500 shares of the Bancorp's common stock for treasury at a cost of $2,730
and cash dividends paid or payable to common stockholders of $769. See the
accompanying Consolidated Statements of Stockholders' Equity for more detail.
- 11 -
<PAGE>
Mid Continent Bancshares, Inc.
================================================================================
COMPARISON OF OPERATING RESULTS FOR YEARS
- -----------------------------------------
ENDED SEPTEMBER 30, 1994 AND 1995
- ---------------------------------
GENERAL
- -------
Net income before cumulative effect of change in accounting principle increased
from $1,865 in 1994 to $4,106 in 1995. Net income increased by $2,105, or
105.2%, from $2,001 for the year ended September 30, 1994 to $4,106 for the year
ended September 30, 1995.
TOTAL INTEREST INCOME
- ---------------------
Total interest income increased $4,676, or 40.5%, to $16,225 during the year
ended September 30, 1995 from $11,549 for the year ended September 30, 1994.
Interest income on loans receivable and on investment securities increased
$3,448 and $1,513, respectively. The average yield on loans declined from 8.08%
in 1994 to 7.95% in 1995, but increases in the loan portfolio resulted in an
increase in loan interest in 1995 over 1994. The average yield of investment
securities increased from 5.66% in 1994 to 6.92% in 1995. The increase in rates
prompted more investment in securities and increased revenue resulted from both
volume and rate increases. Interest on mortgage-related securities decreased $9
as mortgage-related securities were allowed to repay in the amount of $4,985.
The average yield on mortgage-related securities increased from 6.84% in 1994 to
6.92% in 1995, but as rates increased, increased repayments took place in
amounts sufficient to result in an overall decrease in interest from
mortgage-related securities. Other interest income decreased $276 due to reduced
average cash balances. The average rate of interest earned on interest-bearing
cash accounts increased from 1994 to 1995, but the demand for cash to fund loans
and investment securities, which paid higher yields, reduced the overall
interest yield from cash accounts.
NET INTEREST INCOME
- -------------------
Net interest income increased $1,616, or 28.8%, from $5,605 during the year
ended September 30, 1994 to $7,221 for the year ended September 30, 1995. The
average interest-earnings assets increased $52,316 from 1994 to 1995. Components
of the interest-earning assets are discussed above. Overall the average yield
increased from 6.99% in 1994 to 7.46% in 1995. The major increase in interest
income was due to the increase in interest-earning assets with a lesser benefit
from rate increases.
Average interest-bearing liabilities increased $42,678 from 1994 to 1995. Both
deposit accounts and borrowed money increased in 1995. Average rates on deposits
increased from 3.65% in 1994 to 4.35% in 1995. The average interest rate on
borrowed money, however, declined from 9.47% in 1994 to 6.33% in 1995. Overall
rates on interest-bearing liabilities increased from 3.88% in 1994 to 4.59% in
1995.
The ratio of average interest-bearing assets to interest-bearing liabilities
increased from 107.7% at September 30, 1994 to 110.9% at September 30, 1995.
- 12 -
<PAGE>
Mid Continent Bancshares, Inc.
================================================================================
PROVISION FOR LOSSES ON LOANS
- -----------------------------
The Savings Bank currently maintains an allowance for loan losses based upon
management's periodic evaluation of known and inherent risks in the loan
portfolio, the Savings Bank's past loss experience, adverse situations that may
affect the borrowers' ability to repay loans, estimated value of the underlying
collateral and current and expected market conditions. The allowance for loan
losses was $275 and $423 at September 30, 1994 and 1995, respectively. The
provision for losses on loans increased $218 for the year ended September 30,
1995. The increase in the provision resulted from management's evaluation of the
adequacy of the allowance for loan losses. While the Savings Bank maintains its
allowance for losses at a level which it considers to be adequate to provide for
potential losses, there can be no assurance that further additions will not be
made to the loss allowances and that such losses will not exceed the estimated
amounts.
OTHER INCOME
- ------------
Other income increased $3,953, or 104%, during the year ended September 30,
1995, as compared to the year ended September 30, 1994. This increase was
primarily attributable to increased loan servicing fees (net of amortization),
service fees and other charges to customers and a gain on the sale of mortgage
servicing rights.
Loan servicing fees (net of amortization) increased by $1,312, or 73.3%, from
$1,790 to $3,102 during the years ended September 30, 1994 and 1995,
respectively. Servicing fees result primarily from service fees paid by
investors and correlate closely with the size of the loan servicing portfolio.
The increase in servicing fees during the year ended September 30, 1995, is
reflective of the increase in the amount of loans serviced by Mid-Continent for
others from $908,112 at September 30, 1994 to $1,189,892 at September 30, 1995.
Amortization of mortgage servicing rights increased by $406, or 45.2%, because
of the effects of the increased servicing portfolio, scheduled amortization,
prepayments and anticipated prepayments of loans.
Service fees and other charges to customers increased by $814, or 78.9%, from
$1,032 to $1,846 during the years ended September 30, 1994 and 1995,
respectively. This source of income is primarily a function of the amount of
deposits and the fees for deposit-related services charged by the Savings Bank.
A primary source of this income is the Bank's high performance checking account
programs. The Bank also receives late charges related to loans serviced for the
Bank, as well as loans serviced for others.
During the fiscal year ended September 30, 1995, gains on the sale of mortgage
servicing rights were realized in the amount of $1,961. The Savings Bank
periodically evaluates its servicing portfolio. In the latter half of fiscal
1994 interest rates rose and the value of the Savings Bank's loan servicing
rights increased. The rise in value afforded the Savings Bank the opportunity in
1995 to restructure a portion of its servicing portfolio by selling a portion of
its loan servicing for FNMA and FHLMC. Sales of rights to approximately $304,400
of loans resulted in a pre-tax gain of approximately $1,961. The funds provided
by the sales were reinvested in servicing product for GNMA. A service
- 13 -
<PAGE>
Mid Continent Bancshares, Inc.
================================================================================
fee enhancement resulted in that GNMA service fees yield 44 basis points,
whereas FNMA and FHLMC servicing yields 25 basis points. The Savings Bank
intends to continuously monitor the value of its mortgage loan servicing. The
gains recognized should not be viewed as indicative of future servicing revenue.
At September 30, 1995, the Savings Bank was servicing approximately $1,189,892
of mortgage loans for others. At September 30, 1994, the Savings Bank was
servicing approximately $908,112 of mortgage loans for others. The growth in
gross servicing fees was 63.9% and net servicing fees was 73.3%.
Net gains on sale of loans decreased by $190, or 21.2%, from $896 to $706 during
the years ended September 30, 1994 and 1995, respectively. The gains were
attributable to the Savings Bank's secondary market activities and result from a
combination of interest rates and management strategies.
Gains on the sale of loans were enhanced in 1995 upon implementation of
Financial Accounting Standards Board Statement of Accounting Standards No. 122
(SFAS No. 122), Accounting for Mortgage Servicing Rights, effective October 1,
1994. Implementation of this standard increased the gain on the sale of loans in
1995 in the amount of $426 ($267 after income tax). Prior to implementation of
SFAS No. 122, the excess of the sale consideration received for purchased loans
over the recorded basis of those loans was offset against the cost of any
mortgage servicing rights attributable to the loans being sold. This offset is
no longer required under SFAS No. 122. Further, SFAS No. 122 requires the
recognition of mortgage servicing rights related to Savings Bank's originated
loans which are sold with servicing rights retained. These two provision of SFAS
No. 122 enhanced gain on the sale of loans in the amounts of $185 and $241,
respectively. The effect of SFAS No. 122 on quarterly net income and earnings
per share is discussed in footnote 20 of the notes to the consolidated financial
statements.
Gains from the sale of loans are dependent on market and economic conditions
and, accordingly, there can be no assurance that the gains reported in current
periods can be achieved in the future or that there will not be significant
variations in the results from such activities.
OTHER EXPENSE
- -------------
Other expense increased by $1,862, or 29.4%, from $6,340 to $8,202 during the
years ended September 30, 1994 and 1995, respectively. This increase is
primarily attributable to increases in salaries and related expenses, occupancy,
professional fees, office supplies and related expense, advertising and
promotion and other expense.
Compensation and employee benefits increased $1,037, or 32.3%, in 1995 over
1994. The increase is due to normal annual salary adjustments and employment of
personnel necessary to carry out the business activities of the Savings Bank.
Additionally, the Savings Bank recognized $171 related to
- 14 -
<PAGE>
Mid Continent Bancshares, Inc.
================================================================================
the Employee Stock Ownership Plan, $141 for the Directors Retirement Plan and
$249 for the Management Stock Bonus Plan in the 1995 year.
Occupancy and office supplies expense increased $88 and $119, respectively in
1995 over 1994. During 1995 the Savings Bank opened one new full service branch
in Wichita, Kansas.
Professional fees increased $153 in 1995 over 1994. Additional legal fees were
incurred in 1995 in the amount of $103. Added legal expense was incurred as a
result of becoming a publicly held company, the legal fees incurred in the
design, approval from applicable parties and implementation of various director,
officer and employee benefit programs and the filing of a claim in the U.S.
Court of Claims related to supervisory goodwill (see Other Matters section).
Professional consultants were also retained to assist in the management of
corporate assets and liabilities and strategic planning.
Advertising increased $85 in the fiscal year 1995 over fiscal 1994. Advertising
was increased primarily to promote the Savings Bank's checking account programs
and promote the new full service branch in Wichita, Kansas.
Deposit account expense, related primarily to operation of the Savings Bank's
checking account programs, increased from $139 in 1994 to $227 in 1995. The
Savings Bank intends to expand its checking account and deposit account programs
in the future.
Miscellaneous loan servicing expense increased $73 in 1995 over 1994. These
expenses are directly related to the servicing of loans for others, as well as
for the Savings Bank, and can be expected to rise as the Savings Bank grows and
expands its servicing portfolio for others. See footnote 18 to the consolidated
financial statements, Segment Information, for more information relative to the
operation of the mortgage banking segment (which includes loan servicing for
others) of the Savings Bank.
Operating expenses have increased in recent years due to the Savings Bank's
increased mortgage banking operations. For the year ended September 30, 1995,
operating expenses totaled 3.5% of average assets, a decrease from the 3.6% of
average assets recorded for the year ended September 30, 1994. The operating
expense ratios are attributable to loan production and loan servicing activities
(which incur operating expenses), and general inflationary pressures on the
Savings Bank's operations. Although operating expenses could be expected to
decline somewhat if loan production levels decline, certain expenses should
increase as a result of being a public company.
INCOME TAX EXPENSE
- ------------------
Income tax expense increased $1,248 from $1,195 for the year ended September 30,
1994 to $2,443 for the year ended September 30, 1995. The primary reason for the
increase was a $3,489 increase in pre-tax income. The effective rate for the
year ended September 30, 1994 was 39.1% as compared to 37.3% for 1995.
- 15 -
<PAGE>
Mid Continent Bancshares, Inc.
================================================================================
COMPARISON OF OPERATING RESULTS FOR YEARS
- -----------------------------------------
ENDED SEPTEMBER 30, 1995 AND 1996
- ---------------------------------
GENERAL
- -------
Net income decreased by $980, or 23.9%, from $4,106 for the year ended September
30, 1995 to $3,126 for the year ended September 30, 1996.
TOTAL INTEREST INCOME
- ---------------------
Total interest income increased $3,948, or 24.3%, to $20,173 during the year
ended September 30, 1996 from $16,225 for the year ended September 30, 1995.
Interest income on loans receivable and on investment securities increased
$1,413 and $2,669, respectively. The average yield on loans declined from 7.95%
in 1995 to 7.76% in 1996, but increases in the loan portfolio resulted in an
increase in loan interest in 1996 over 1995. The average yield of investment
securities increased from 6.92% in 1995 to 7.15% in 1996. The increase in rates
prompted more investment in securities and increased revenue resulted from both
volume and rate increases. Interest on mortgage-related securities decreased $84
as mortgage-related securities were allowed to repay in the amount of $6,746.
The average yield on mortgage-related securities increased from 6.92% in 1995 to
7.36% in 1996, but as rates increased, increased repayments took place in
amounts sufficient to result in an overall decrease in interest from
mortgage-related securities. Other interest income decreased $50 due to reduced
average cash balances. The average rate of interest earned on interest-bearing
cash accounts decreased from 1995 to 1996, plus the demand for cash to fund
loans and investment securities, which paid higher yields, reduced the overall
interest yield from cash accounts.
NET INTEREST INCOME
- -------------------
Net interest income increased $684, or 9.5%, from $7,221 during the year ended
September 30, 1995 to $7,905 for the year ended September 30, 1996. Total
average interest-earning assets increased $53,094 from 1995 to 1996. Components
of the interest-earning assets are discussed above. Overall the average yield
remained unchanged, at 7.46%, for 1995 and 1996. The major increase in interest
income was due to the increase in interest-earning assets with a lesser benefit
from individual rate increases, primarily on mortgage-related securities and
investment securities.
Average interest-bearing liabilities increased $53,614 from 1995 to 1996. Both
deposit accounts and borrowed money increased in 1996. Average rates on deposits
increased from 4.35% in 1995 to 4.63% in 1996. The average interest rate on
borrowed money, however, declined from 6.33% in 1995 to 6.21% in 1996. Overall
rates on interest-bearing liabilities increased from 4.59% in 1995 to 4.91% in
1996.
The ratio of average interest-bearing assets to interest-bearing liabilities
decreased from 110.9% at September 30, 1995 to 108.4% at September 30, 1996.
- 16 -
<PAGE>
Mid Continent Bancshares, Inc.
================================================================================
PROVISION FOR LOSSES ON LOANS
- -----------------------------
The Savings Bank currently maintains an allowance for loan losses based upon
management's periodic evaluation of known and inherent risks in the loan
portfolio, the Savings Bank's past loss experience, adverse situations that may
affect the borrowers' ability to repay loans, estimated value of the underlying
collateral and current and expected market conditions. The allowance for loan
losses was $423 and $421 at September 30, 1995 and 1996, respectively. The
provision for losses on loans decreased $149 for the year ended September 30,
1996. The decrease in the provision resulted from management's evaluation of the
adequacy of the allowance for loan losses. While the Savings Bank maintains its
allowance for losses at a level which it considers to be adequate to provide for
potential losses, there can be no assurance that further additions will not be
made to the loss allowances and that such losses will not exceed the estimated
amounts.
OTHER INCOME
- ------------
Other income decreased $582, or 7.5%, during the year ended September 30, 1996,
as compared to the year ended September 30, 1995. During the year ended
September 30, 1995, the Bank realized gain on sale of servicing rights of
$1,961. There was no sales of servicing rights in the year ended September 30,
1996. All other significant sources of other income increased in 1996 compared
to 1995.
Loan servicing fees (net of amortization) increased by $26, or 0.8%, from $3,102
to $3,128 during the years ended September 30, 1995 and 1996, respectively.
Servicing fees result primarily from service fees paid by investors and
correlate closely with the size of the loan servicing portfolio. The increase in
servicing fees during the year ended September 30, 1996, is reflective of the
increase in the amount of loans serviced by Mid-Continent for others from
$1,189,892 at September 30, 1995 to $1,229,153 at September 30, 1996.
Amortization of mortgage servicing rights increased by $346, or 26.5%, because
of the effects of the increased servicing portfolio, scheduled amortization,
prepayments and anticipated prepayments of loans. The growth in gross servicing
fees was 8.4% and net servicing fees was 0.8%.
Service fees and other charges to customers increased by $693, or 37.5%, from
$1,846 to $2,539 during the years ended September 30, 1995 and 1996,
respectively. This source of income is primarily a function of the amount of
deposits and the fees for deposit-related services charged by the Savings Bank.
A primary source of this income is the Bank's high performance checking account
program. The Bank also receives late charges related to loans serviced for the
Bank, as well as serviced for others.
Net gains on sale of loans increased by $661, or 93.6%, from $706 to $1,367
during the years ended September 30, 1995 and 1996, respectively. The gains were
attributable to the Savings Bank's secondary market activities and result from a
combination of interest rates and management strategies. Gains from the sale of
loans are dependent on market and economic conditions and,
- 17 -
<PAGE>
Mid Continent Bancshares, Inc.
================================================================================
accordingly, there can be no assurance that the gains reported in current
periods can be achieved in the future or that there will not be significant
variations in the results from such activities.
OTHER EXPENSE
- -------------
Other expense increased by $1,781, or 21.7%, from $8,202 to $9,983 during the
years ended September 30, 1995 and 1996, respectively. This increase is
primarily attributable to increases in salaries and related expenses, office
supplies and related expense, advertising, federal insurance premiums and
promotion.
Compensation and employee benefits increased $291, or 6.9%, in 1996 over 1995.
The increase is due to normal annual salary adjustments and employment of
personnel necessary to carry out the business activities of the Savings Bank.
Occupancy decreased $22 and office supplies expense increased $114, in 1996 over
1995. During 1996 the Savings Bank opened one new full service branch in
Wichita, Kansas.
Data processing costs increased $135 in support of additional branch operations
and in response to mortgage banking (including servicing) demands.
Advertising increased $34 in the fiscal year 1996 over fiscal 1995. Advertising
was increased primarily to promote the Savings Bank's checking account programs.
Federal insurance premiums increased from $351 for the year ended September 30,
1995 to $1,504 for the year ended September 30, 1996. On September 30, 1996 the
Economic Growth and Regulatory Paperwork Reduction Act of 1996 was signed into
law. The Act imposed a special assessment on SAIF members to recapitalize the
SAIF. The Bank's assessment was $1,053 which was charged to expense immediately.
The rate of deposit insurance assessment is expected to materially decline in
future periods.
Deposit account expense, related primarily to operation of the Savings Bank's
checking account programs, increased from $227 in 1995 to $298 in 1996. The
Savings Bank intends to expand its checking account and deposit account programs
in the future.
Miscellaneous loan servicing expense increased $149 in 1996 over 1995. These
expenses are directly related to the servicing of loans for others, as well as
for the Savings Bank, and can be expected to rise as the Savings Bank grows and
expands its servicing portfolio for others. See footnote 18 to the consolidated
financial statements, Segment Information, for more information relative to the
operation of the mortgage banking segment (which includes loan servicing for
others) of the Savings Bank.
Operating expenses have increased in recent years due to the Savings Bank's
increased mortgage
- 18 -
<PAGE>
Mid Continent Bancshares, Inc.
================================================================================
banking operations. For the year ended September 30, 1996, operating expenses
totaled 3.4% of average assets, a decrease from the 3.5% of average assets
recorded for the year ended September 30, 1995. The operating expense ratios are
attributable to loan production and loan servicing activities (which incur
operating expenses), and general inflationary pressures on the Savings Bank's
operations. Although operating expenses could be expected to decline somewhat if
loan production levels decline, certain expenses should increase as a result of
being a public company.
INCOME TAX EXPENSE
- ------------------
Income tax expense decreased $550 from $2,443 for the year ended September 30,
1995 to $1,893 for the year ended September 30, 1996. The primary reason for the
decrease was a $1,530 decrease in pre-tax income. The effective rate for the
year ended September 30, 1995 was 37.3% as compared to 37.7% for 1996.
AVERAGE BALANCES, NET INTEREST INCOME, YIELDS EARNED AND RATES PAID
- -------------------------------------------------------------------
The following table presents for the periods indicated the total dollar amounts
of interest income from average interest earning assets and the resultant
yields, as well as the interest expense on the average interest bearing
liabilities, expressed both in dollars and rates. Average balances for the year
1994 are derived from month-end balances. Average balances for the years 1995
and 1996 are derived from daily balances. Management does not believe that the
use of month-end balances instead of daily average balances for 1994 has caused
any material differences in the information presented.
- 19 -
<PAGE>
Mid Continent Bancshares, Inc.
================================================================================
<TABLE>
<CAPTION>
Year Ended September 30,
-------------------------------------------------------------------------------------------------
1994 1995 1996
------------------------------- -------------------------------- -------------------------------
Average Average Average
Average Yield/ Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost Balance Interest Cost
------- -------- ---- ------- -------- ---- ------- -------- ----
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans receivable ............... $84,912 6862 8.08% $129,687 10310 7.95% $151,078 11723 7.76%
Mortgage-related securities .... 44101 3015 6.84% 43430 3006 6.92% 39711 2922 7.36%
Investment securities .......... 18866 1068 5.66% 37322 2581 6.92% 73431 5250 7.15%
Other interest-earning assets... 17277 604 3.50% 7033 328 4.66% 6346 278 4.38%
-------- ------- ---- -------- ------- ---- -------- ------- ----
Total interest-
earning assets ........ 165156 $11,549 6.99% 217472 $16,225 7.46% 270566 $20,173 7.46%
======= ==== ======= ==== ======= ====
Non-interest-earning assets 10414 17401 20892
-------- -------- --------
Total assets $175,570 $234,873 $291,458
======== ======== ========
Interest-bearing liabilities:
Passbook savings deposits ... $10,504 $ 243 2.31% $8,710 $ 239 2.74% $8,634 $ 238 2.76%
NOW accounts and money market
demand deposits ........... 38498 605 1.57% 40131 565 1.41% 47285 756 1.60%
Certificates of deposit ..... 98409 4533 4.61% 123444 6697 5.43% 148922 8491 5.70%
Other interest-bearing
liabilities ............... 5947 563 9.47% 23751 1503 6.33% 44809 2783 6.21%
-------- ------- ---- -------- ------- ---- -------- ------- ----
Total interest-
bearing liabilities .... 153358 $ 5,944 3.88% 196036 $ 9,004 4.59% 249650 $12,268 4.91%
======= ==== ======= ====
Non-interest-bearing
liabilities................... 3225 4216 5201
-------- -------- ------
Total liabilities 156583 200252 254851
Stockholder's equity 18987 34621 36607
-------- -------- --------
Total liabilities and
stockholders' equity $175,570 $234,873 $291,458
======== ======== ========
Net interest income $5,605 $7,221 $7,905
======= ======= =======
Interest rate spread 3.11% 2.87% 2.55%
==== ==== ====
Net yield on interest-
bearing assets 3.39% 3.32% 2.92%
==== ==== ====
Ratio of average interest-
earning assets to average
interest-bearing liabilities 107.69% 110.93% 108.38%
====== ====== ======
</TABLE>
-20-
<PAGE>
Mid Continent Bancshares, Inc.
================================================================================
RATE/VOLUME ANALYSIS
- --------------------
The following schedule presents the dollar amount of changes in interest income
and interest expense for the major components of interest-earning assets and
interest-bearing liabilities. For each category of interest-earning assets and
interest-bearing liabilities, information is provided on changes attributable to
(i) changes in volume (changes in average volume multiplied by old rate); (ii)
changes in rates (changes in rate multiplied by old average volume); (iii)
changes in rate-volume (changes in rate multiplied by the change in average
volume).
<TABLE>
<CAPTION>
1994 vs. 1995 1995 vs. 1996
-----------------------------------------------------------------------------------------
Increase (Decrease) Increase (Decrease)
Due to Due to
-----------------------------------------------------------------------------------------
Rate/ Rate/
Volume Rate Volume Net Volume Rate Volume Net
------ ---- ------ --- ------ ---- ------ ---
Interest income:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Loans receivable $ 3,616 ($ 110) ($ 58) $ 3,448 $ 1,701 ($ 247) ($ 41) $ 1,413
Mortgage-related securities (43) 35 (1) (9) (258) 190 (16) (84)
Investment securities 1,042 238 233 1,513 2,497 87 85 2,669
Other interest-earning assets (357) 200 (119) (276) (32) (20) 2 (50)
------- ------- ------- ------- ------- ------- ------- -------
Total interest-earning assets $ 4,258 $ 363 $ 55 $ 4,676 $ 3,908 $ 10 $ 30 $ 3,948
======= ======= ======= ======= ======= ======= ======= =======
Interest expense:
Passbook savings deposits ($ 41) $ 45 ($ 8) ($ 4) ($ 2) $ 1 $ 0 ($ 1)
NOW accounts and money market
demand deposits 25 (62) (3) (40) 100 77 14 191
Certificates of deposit 1154 805 206 2165 1383 341 70 1794
Other interest-bearing liabilities 1686 (187) (560) 939 1333 (28) (25) 1280
------- ------- ------- ------- ------- ------- ------- -------
Total interest-bearing liabilities $ 2,824 $ 601 ($ 365) $ 3,060 $ 2,814 $ 391 $ 59 $ 3,264
======= ======= ======= ======= ======= ======= ======= =======
Net change in net interest income $ 1,434 ($ 238) $ 420 $ 1,616 $ 1,094 ($ 381) ($ 29) $ 684
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
-21-
<PAGE>
Mid Continent Bancshares, Inc.
================================================================================
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Savings Bank is required to maintain minimum levels of "liquid assets", as
defined by the Office of Thrift Supervision ("OTS") regulations. This
requirement, which may be varied from time to time depending upon economic
conditions and deposit flows, is based upon a percentage of deposits and
short-term borrowings. The required minimum ratio is currently 5 percent. The
Savings Bank's average liquidity ratio was 7.9% percent during September, 1996.
The Savings Bank manages its liquidity ratio to meet its funding needs,
including: deposit outflows; disbursement of payments collected from borrowers
for taxes and insurance; repayment of Federal Home Loan Bank advances and other
borrowings; and loan principal disbursements. The Savings Bank also monitors its
liquidity position in accordance with its asset/liability management objectives.
In addition to funds provided from operations, the Savings Bank's primary
sources of funds are: savings deposits; principal repayments on loans and
mortgage-backed securities; and matured or called investment securities. The
Savings Bank also borrows funds from time to time from the Federal Home Loan
Bank of Topeka (the "FHLB").
Scheduled loan repayments and maturing investment securities are a relatively
predictable source of funds. However, savings deposit flows and prepayments on
loans and mortgage-backed securities are significantly influenced by changes in
market interest rates, economic conditions and competition. The Savings Bank
strives to manage the pricing of its deposits to maintain a balanced stream of
cash flows commensurate with its loan commitments and other predictable funding
needs.
The Savings Bank usually maintains a portion of its cash on hand in
interest-bearing demand deposits with the FHLB to meet immediate loan commitment
and savings withdrawal funding requirements. When applicable, cash in excess of
immediate funding needs is invested into longer-term investment and
mortgage-backed securities, some of which may also qualify as liquid investments
under current OTS regulations.
The Savings Bank has a $54,400 line of credit with the FHLB which may be used to
provide funds necessary to cover cash shortages on a daily basis, and the
ability to obtain various other FHLB advances up to a total borrowing limit of
approximately $200,000, the amount of the Banks residential housing finance
assets. At September 30, 1996, the Savings Bank had total FHLB borrowings of
$81,700.
Management believes the Savings Bank has sufficient resources available to meet
its foreseeable funding requirements. At September 30, 1996, the Savings Bank
had outstanding loan commitments of $63,743, and certificates of deposit
scheduled to mature within one year of $97,575.
As required by the Financial Institutions Reform, Recovery and Enforcement Act
of 1989 ("FIRREA"), the Savings Bank must meet or exceed three separate
standards of capital adequacy. OTS regulations require financial institutions to
have minimum tangible capital equal to 1.50 percent of total adjusted assets;
minimum core capital equal to 3.00 percent of total adjusted assets; and
risk-based capital equal
- 22 -
<PAGE>
Mid Continent Bancshares, Inc.
================================================================================
to 8.00 percent of total risk-weighted assets.
The Savings Bank's capital requirements and actual capital under the OTS
regulations were as follows at September 30, 1996:
Amount Percent of
(Thousands) Adjusted
Assets
----------- -----------
Tangible capital:
Actual amount $31,827 9.3%
Required amount 5,122 1.5%
------ ----
Excess 26,705 7.8%
====== ====
Core capital:
Actual amount 31,827 9.3%
Required amount 10,244 3.0%
------ ----
Excess 21,583 6.3%
====== ====
Risk-based capital:
Actual amount 32,281 24.5%
Required amount 10,551 8.0%
------ ----
Excess 21,730 16.5%
====== =====
OTHER MATTERS
- -------------
LEGAL PROCEEDINGS
- -----------------
Supreme Court Ruling on Breach of Contract Regarding Supervisory Goodwill:
Mid-Continent Federal Savings Bank, the wholly-owned subsidiary of Mid Continent
Bancshares, Inc., is pursuing its claim against the federal government to
recover funds lost as a result of the enactment of the Financial Institutions
Reform, Recovery, and Enforcement Act of 1989 ("FIRREA"). In 1986, the Bank was
encouraged by the federal government to acquire an insolvent thrift institution
("Reserve Savings and Loan Association"). The federal government allowed the
Bank to count the insolvent thrift's losses as "goodwill" assets and to
double-count as "capital credit" federal government funds provided to help the
Bank take over the failing thrift. The Bank contends (among other things) in its
lawsuit that the federal government breached its contract with the Bank when
FIRREA was enacted because FIRREA prevented the Bank from counting such assets
toward minimum capital requirements. As a result of FIRREA, the Bank was forced
to write off approximately $7,500,000 in supervisory goodwill. This write off
reduced the Bank's regulatory capital.
- 23 -
<PAGE>
Mid Continent Bancshares, Inc.
================================================================================
On July 1, 1996, the United States Supreme Court Affirmed decisions by a federal
appellate court that the government had breached express contracts with three
thrifts (U.S., v. Winstar Corp, et al.) and therefore was liable for damages.
Those lawsuits stemmed from circumstances that are similar to those of the Bank;
in order to persuade those thrifts to acquire certain insolvent thrift
institutions, the federal government promised accounting treatment similar to
that promised to the Bank.
While the Supreme Court's ruling in U.S. v. Winstar Corp, et al., serves to
support the Bank's legal claims in its pending lawsuit against the federal
government, it is not possible at this time to predict what effect the Supreme
Court's ruling, and subsequent rulings of a lower court concerning damages, will
have on the outcome of the Bank's lawsuit. Notwithstanding the Supreme Court's
ruling, there can be no assurance that the Bank will be able to recover any
funds arising out of its claim and, if any recovery is made, the amount of such
recovery.
- 24 -
<PAGE>
MID CONTINENT BANCSHARES, INC.
AND SUBSIDIARY
TABLE OF CONTENTS
- -----------------------------------------------------------------------------
Page
INDEPENDENT AUDITORS' REPORT ON FINANCIAL
STATEMENTS
CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheets as of September 30, 1995 and 1996 27
Consolidated Statements of Income for the Years Ended
September 30, 1994, 1995 and 1996 29
Consolidated Statements of Stockholders' Equity for the Years
Ended September 30, 1994, 1995 and 1996 30
Consolidated Statements of Cash Flows for the Years Ended
September 30, 1994, 1995 and 1996 31
Notes to Consolidated Financial Statements for the Years Ended
September 30, 1994, 1995 and 1996 33
-25-
<PAGE>
[CORPORATE LOGO] Suite 400 Telephone: (416) 474-6180
1010 Grand Avenue
Kansas City, Missouri 64106-2232
INDEPENDENT AUDITORS' REPORT
Board of Directors
Mid Continent Bancshares, Inc.
El Dorado, Kansas
We have audited the accompanying consolidated balance sheets of Mid Continent
Bancshares, Inc. and subsidiary (the "Company") as of September 30, 1995 and
1996, 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 financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of September 30,
1995 and 1996, 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.
As discussed in Note 2 to the consolidated financial statements, the Company
changed its method of accounting for mortgage servicing rights for the year
ended September 30, 1995 and changed its method of accounting for income taxes
for the year ended September 30, 1994.
/s/ Deloitte & Touche LLP
November 12, 1996
Deloitte Touche
Tohmatsu
International
-26-
<PAGE>
MID CONTINENT BANCSHARES, INC.
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1995 AND 1996
(Dollars in thousands, except share amounts)
- -------------------------------------------------------------------------------
ASSETS 1995 1996
CASH AND CASH EQUIVALENTS:
Cash and amounts due from depository institutions $ 1,187 1,694
Interest bearing deposits in other banks 4,490 3,924
-------- --------
Total cash and cash equivalents 5,677 5,618
INVESTMENT SECURITIES, At cost (Market value of $53,978
and $83,827) 54,243 86,235
CAPITAL STOCK OF FEDERAL HOME LOAN BANK, At cost 2,206 4,327
MORTGAGE-RELATED SECURITIES, At cost (Market value of
$40,342 and $34,366) 40,004 34,383
LOANS HELD FOR SALE (Market value of $22,335
and $13,816) 22,108 13,718
LOANS RECEIVABLE (Less allowance for loan losses
of $423 and $421) 124,796 171,158
PREMISES AND EQUIPMENT, Net 4,757 6,271
REAL ESTATE OWNED (Less allowance for losses of
$51 and $34) 187 28
ACCRUED INTEREST RECEIVABLE:
Loans receivable 1,111 1,285
Mortgage-related securities 291 262
Investment securities 817 1,197
-------- --------
Total accrued interest receivable 2,219 2,744
EXCESS OF COST OVER FAIR VALUE OF ASSETS ACQUIRED
(Less accumulated amortization of $994 and $1,055) 83 22
MORTGAGE SERVICING RIGHTS, Net 11,625 12,496
OTHER ASSETS 3,018 3,186
TOTAL ASSETS $270,923 $340,186
======== ========
(Continued)
-27-
<PAGE>
MID CONTINENT BANCSHARES, INC.
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1995 AND 1996
(Dollars in thousands, except share amounts)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY 1995 1996
<S> <C> <C>
DEPOSITS $ 195,716 $ 214,493
ADVANCE PAYMENTS BY BORROWERS FOR TAXES
AND INSURANCE 2,029 1,805
INCOME TAXES PAYABLE 607
DEFERRED INCOME TAXES 168 698
ACCRUED AND OTHER LIABILITIES 2,668 4,683
ADVANCES FROM FEDERAL HOME LOAN BANK 33,000 81,700
--------- ---------
Total liabilities 234,188 303,379
COMMITMENTS AND CONTINGENT LIABILITIES
STOCKHOLDERS' EQUITY:
Preferred stock, no par value; 10,000,000 shares authorized,
no shares issued or outstanding
Common stock, $.10 par value, 20,000,000 shares authorized,
2,248,250 shares issued 225 225
Additional paid-in capital 21,553 21,663
Unearned compensation - Employee Stock Ownership Plan (1,190) (1,054)
Unearned compensation - Management Stock Bonus Plan (746) (547)
Retained earnings, substantially restricted 18,067 20,424
--------- ---------
37,909 40,711
Treasury stock, 80,000 and 231,500 shares, at cost (1,174) (3,904)
--------- ---------
Total stockholders' equity 36,735 36,807
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDER' EQUITY $ 270,923 $ 340,186
========= =========
</TABLE>
See notes to consolidated financial statements
-28-
<PAGE>
MID CONTINENT BANCSHARES, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED SEPTEMBER 30, 1994, 1995 AND 1996
(Dollars in thousands, except share amounts)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1994 1995 1996
INTEREST INCOME:
<S> <C> <C> <C>
Loans receivable $ 6,862 $ 20,310 $ 11,723
Mortgage-related securities 3,015 3,006 2,922
Investment securities 1,068 2,581 5,250
Other interest - cash and cash equivalents 604 328 278
------ ------ ------
Total interest income 11,549 16,225 20,173
------ ------ ------
INTEREST EXPENSE:
Deposits 5,380 7,501 9,485
Advances from Federal Home Loan Bank 525 1,503 2,783
Other borrowed funds 39
------ ------ ------
Total interest expense 5,944 9,004 12,268
------ ------ ------
NET INTEREST INCOME 5,605 7,221 7,905
PROVISION FOR LOAN LOSSES 6 224 75
------ ------ ------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 5,599 6,997 7,830
OTHER INCOME:
Loan servicing fees 2,689 4,407 4,779
Amortization of mortgage servicing rights (899) (1,305) (1,651)
Gain on sale of mortgage servicing rights 1,961
Service fees and other charges to customers 1,032 1,846 2,539
Gain on sale of loans held for sale, net 896 706 1,367
Insurance commissions 107 100 54
Other (24) 39 84
------ ------ ------
Total other income 3,801 7,754 7,172
------ ------ ------
OTHER EXPENSES:
Salaries and employee benefits 3,208 4,245 4,536
Occupancy of premises 778 866 844
Office supplies and related expenses 410 529 643
Data processing 490 455 590
Advertising and promotions 329 414 448
Federal insurance premiums 330 351 1,504
Professional services 160 313 272
Provision for losses on real estate owned 59 81 18
Amortization of excess cost over fair value of assets acquired 91 78 60
Deposit accounts 139 227 298
Loan servicing 120 193 342
Other 226 450 428
------ ------ ------
Total other expenses 6,340 8,202 9,983
------ ------ ------
INCOME BEFORE INCOME TAX EXPENSE AND CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING FOR INCOME TAXES 3,060 6,549 5,019
INCOME TAX EXPENSE 1,195 2,443 1,893
------ ------ ------
INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING FOR INCOME TAXES 1,865 4,106 3,126
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING FOR INCOME TAXES 136
------ ------ ------
NET INCOME $ 2,001 $ 4,106 $ 3,126
====== ====== ======
EARNINGS PER SHARE (FROM JUNE 27, 1994):
Income before cumulative effect of change in accounting for income taxes $ 0.30 $ 1.97 $ 1.59
====== ====== ======
Net income $ 0.30 $ 1.97 $ 1.59
====== ====== ======
See notes to consolidated financial statements.
</TABLE>
-29-
<PAGE>
MID CONTINENT BANCSHARES, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 1994, 1995 AND 1996
(Dollars in thousands, except share amounts)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Unearned Unearned
Compensation- Compensation -
Employee Management Retained
Common Stock Additional Stock Stock Earnings, Treasury Stock Total
-------------- Paid-In Ownership Bonus Substantially ---------------- Stockholders'
Shares Amount Capital Plan Plan Restricted Shares Amount Equity
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, October 1, 1993 $ 12,791 $ 12,791
Issuance of common stock, net 2,112,250 $211 20,158 20,369
Common stock issued to Employee
Stock Ownership Plan 136,000 14 1,346 (1,360)
Common stock committed to be
released for allocation-
Employee Stock Ownership Plan 48 48
Net income 2,001 2,001
---------- ---- ------- ------- ----- -------- --------- ------- -------
BALANCE, September 30, 1994 2,248,250 225 21,504 (1,312) 14,792 35,209
Acquisition of common stock
for Management Stock Bonus Plan $ (995) (995)
Acquisition of Treasury Stock 80,000 (1,174) (1,174)
Common stock committed to be
released for allocation-
Employee Stock Ownership Plan 122 122
Increase in fair market value
of Employee Stock Ownership
Plan shares committed to
be released for allocation 49 49
Amortization of unearned
compensation - Management
Stock Bonus Plan 249 249
Dividends on common stock to
stockholders (831) (831)
Net income 4,106 4,106
---------- ---- ------- ------- ----- -------- --------- ------- -------
BALANCE, September 30, 1995 2,248,250 225 21,553 (1,190) (746) 18,067 80,000 (1,174) 36,735
Acquisition of Treasury Stock 151,500 (2,730) (2,730)
Common stock committed to
be released for allocation -
Employee Stock Ownership Plan 136 136
Increase in fair market value
of Employee Stock Ownership
Plan shares committed to
be released for allocation 110 110
Amortization of unearned
compensation - Management
Stock Bonus Plan 199 199
Dividends on common stock
to stockholders (769) (769)
Net income 3,126 3,126
---------- ---- ------- ------- ----- -------- --------- ------- -------
BALANCE, September 30, 1996 $2,248,250 $225 $21,663 $(1,054) $(547) $ 20,424 $ 231,500 $(3,904) $36,807
========== ==== ======= ======= ===== ======== ========= ======= =======
</TABLE>
See notes to consolidated financial statements.
-30-
<PAGE>
MID CONTINENT BANCSHARES, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 1994, 1995 AND 1996
(Dollars in thousands, except share amounts)
- -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
1994 1995 1996
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income $ 2,001 $ 4,106 $ 3,126
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Cumulative effect of change in accounting for income taxes (136)
Common stock committed to be released for allocation -
Employee Stock Ownership Plan 48 122 136
Increase in fair market value of Employee Stock Ownership
Plan shares committed to be released for allocation 49 110
Amortization of unearned compensation - Management
Stock Bonus Plan 249 199
Stock dividend on capital stock of Federal Home Loan Bank (172)
Amortization (accretion) of premiums and discounts on mortgage-
related securities and investment securities, net (120) (134) (155)
Provision for loan losses 6 224 75
Provision for losses on real estate owned 59 81 18
Net loan origination fees capitalized 368 380 1,602
Amortization of net deferred loan origination fees (116) (371) (168)
Amortization of mortgage servicing rights 899 1,305 1,651
Amortization of excess of cost over fair value of assets acquired 91 78 60
(Gain) loss on sale of real estate owned, net 34 (7) (34)
Depreciation and amortization on premises and equipment 358 393 344
Gain on sale of premises and equipment (12)
Gain on sale of loans held for sale, net (896) (706) (1,367)
Origination/purchase of loans held for sale (196,388) (107,341) (195,873)
Proceeds from sale of loans held for sale 219,491 91,466 205,630
Gain on sale of mortgage servicing rights (1,961)
Provision (benefit) for deferred income taxes 347 (225) 530
Changes in:
Accrued interest receivable (263) (935) (525)
Other assets (1,502) (27) (698)
Income taxes payable (212) 607 (77)
Accrued and other liabilities (487) 1,091 2,028
-------- -------- --------
Net cash provided by (used in) operating activities 23,582 (11,568) 16,440
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of investment securities 1,300 10,100 29,000
Purchases of investment securities (10,371) (42,000) (62,753)
Principal collected on mortgage-related securities 14,097 4,985 6,746
Purchases of mortgage-related securities (16,310) (1,158)
Loan originations net of principal collected on loans receivable (45,608) (23,171) (48,069)
Proceeds from sales of premises and equipment 43 117
Acquisitions of mortgage servicing rights, net (3,968) (8,423) (2,522)
Proceeds from sales of mortgage servicing rights 3,766
Purchases of premises and equipment (1,124) (1,416) (1,858)
Proceeds from sales of real estate owned 427 170 374
-------- -------- --------
Net cash used in investing activities (61,514) (55,872) (80,240)
-------- -------- --------
</TABLE>
(Continued)
-31-
<PAGE>
MID CONTINENT BANCSHARES, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 1994, 1995 AND 1996
(Dollars in thousands, except share amounts)
- -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
1994 1995 1996
CASH FLOWS FROM FINANCING ACTIVITIES:
<S> <C> <C> <C>
Receipts for deposits, net $ 8,926 $ 40,952 $ 18,779
Increase (decrease) in advance payments
by borrowers for taxes and insurance, net 260 126 (225)
Proceeds from advances from Federal Home Loan Bank 8,000 96,600 199,500
Repayments on advances from Federal Home Loan Bank (6,500) (72,600) (150,800)
Acquisition of common stock for Management Stock Bonus Plan (995)
Acquisition of treasury stock (1,174) (2,730)
Cash dividends on common stock to stockholders (615) (783)
Issuance of common stock 20,369
------ ------ ------
Net cash used in financing activities 31,055 62,294 63,741
------ ------ ------
DECREASE IN CASH AND CASH EQUIVALENTS (6,877) (5,146) (59)
CASH AND CASH EQUIVALENTS:
Beginning of year 17,700 10,823 5,677
------ ------ ------
End of year $ 10,823 $ 5,677 $ 5,618
======== ========== =========
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Income tax payments, net of refunds $ 1,414 $ 1,708 $ 2,424
======== ========== =========
Interest payments, including interest credited to deposits
of approximately $5,353, $7,218 and $9,434 $ 5,935 $ 8,758 $ 12,287
======== ========== =========
SUPPLEMENTAL DISCLOSURES OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Loans held for sale securitized into mortgage-related
securities $ 81,962 $ 40,544 $ 88,413
======== ========== =========
Common stock issued to Employee Stock Ownership Plan $ 1,360
======== ========== =========
Loans transferred to real estate owned $ 212 $ 386 $ 238
======== ========== =========
Loans made upon the sale of real estate owned $ 373 $ 40
======== ========== =========
Accrued dividends on common stock $ 204 $ 190
========== =========
</TABLE>
See notes to consolidated financial statements. (Concluded)
-32-
<PAGE>
MID CONTINENT BANCSHARES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1994, 1995 AND 1996
(Dollars in thousands, except share amounts)
- -----------------------------------------------------------------------------
1. STOCK CONVERSION
On November 23, 1993, the Board of Directors of Mid-Continent Federal
Savings and Loan Association of El Dorado unanimously adopted a Plan of
Conversion to convert from a federally chartered mutual savings and loan
association to a federally chartered stock savings bank to be known as
Mid-Continent Federal Savings Bank (the "Savings Bank") and to form Mid
Continent Bancshares, Inc., (the "Company"), a Kansas corporation, to act as
the holding company of the Savings Bank. At the date of conversion, June 27,
1994, the Company completed the sale of 2,248,250 shares of common stock,
$.10 par value, through concurrent Subscription and Community Offerings at
$10.00 per share. Included in the total shares sold are 136,000 shares which
were purchased by the Employees Stock Ownership Plan ("ESOP") at $10.00 per
share. Net proceeds from the conversion, after recognizing conversion
expenses and underwriting costs of $754 were $21,729. From the net proceeds,
the Company used $11,241 to purchase all of the capital stock of the Savings
Bank and $1,360 to fund the purchase of 136,000 shares of the Company stock
by the ESOP. The Company owns 100% of the Savings Bank's common stock.
At the time of conversion, the Savings Bank segregated and restricted
$13,434 of retained earnings, which was the amount of its regulatory capital
as of December 31, 1993, in a liquidation account for the benefit of
eligible account holders who continue to maintain their deposit accounts in
the Savings Bank after conversion. In the event of a complete liquidation of
the Savings Bank (and only in such an event), eligible depositors who
continue to maintain accounts shall be entitled to received a distribution
from the liquidation account in an amount proportionate to the current
adjusted balances of all qualifying deposits then held. The liquidation
account will be reduced annually to the extent that eligible account holders
have reduced their qualifying deposits.
Subsequent to the conversion, the Company or the Savings Bank may not
declare or pay a cash dividend on any of its shares of common stock if the
effect would reduce stockholders' equity below either the amount required
for the liquidation account discussed above or the applicable regulatory
capital requirements or if such declaration and payment would otherwise
violate regulatory requirements.
2. ACCOUNTING POLICIES AND PROCEDURES
Principles of Consolidation - The consolidated financial statements include
the accounts of the Company, and its wholly owned subsidiary, Mid-Continent
Federal Savings Bank. The Savings Bank grants mortgage and consumer loans
primarily to customers within the state of Kansas. The Savings Bank has a
wholly owned subsidiary, Laredo Investment, Inc., that is engaged in
promoting the sale of tax deferred annuities and receives related
commissions. Significant intercompany accounts and transactions have been
eliminated.
-33-
<PAGE>
Cash and Cash Equivalents - Cash and cash equivalents include cash on hand,
amounts due from depository institutions, treasury bills and interest
bearing deposits in other banks purchased with an original maturity of three
months or less.
The Savings Bank is required by regulation to maintain liquid assets in the
form of cash and securities approved by federal regulations, at a monthly
average of not less than 5% of customer deposits and short-term borrowings.
Investment Securities - Investment securities include securities of the
United States Government and its agencies and are recorded at amortized
cost. Related premiums and discounts are accreted or amortized into income
over the lives of the securities using the level-yield method. Securities
are not adjusted to the lower of amortized cost or market because management
has both the ability and intent to hold these securities to maturity.
Capital Stock of Federal Home Loan Bank - Capital stock of Federal Home Loan
Bank is carried at cost. Dividends received on such stock are reflected as
interest income on investment securities in the consolidated statements of
income.
Mortgage-Related Securities - Mortgage-related securities are recorded at
amortized cost. The related premiums and discounts are accreted or amortized
over the estimated lives of the underlying securities using the level-yield
method. These securities are not adjusted to the lower of amortized cost or
market because management has both the ability and intent to hold these
securities to maturity.
Loans Held for Sale - The Savings Bank's management designates certain loans
receivable at the date of origination or purchase as held for sale as
management does not intend to hold such loans to maturity. Accordingly, such
loans are carried at the lower of cost (outstanding principal adjusted for
net unearned fees and costs) or market value (determined on an aggregate
basis with consideration given to forward delivery commitments). Such loans
are originated or purchased and intended for sale in the secondary market
and are generally sold with servicing retained by the Savings Bank. Gains or
losses on such sales are recognized utilizing the specific identification
method for financial reporting and income tax purposes at the time of sale.
Loan fees, net discounts, premiums and other related costs are recognized at
the time the related loans are sold to third-party investors. Interest on
these loans is included in interest income on loans receivable.
Loans Receivable - Loans are stated at the amount of unpaid principal less a
provision for loan losses, undisbursed loan funds and unearned discounts and
loan fees, net of certain direct loan origination costs. Interest on loans
is credited to income as earned and accrued only if deemed collectible.
Loans are placed on nonaccrual status when, in the opinion of management,
the full timely collection of principal or interest is in doubt. As a
general rule, the accrual of interest is discontinued when principal or
interest payments become 90 days past due or earlier if conditions warrant.
When a loan is placed on nonaccrual status, previously accrued but unpaid
interest is reversed against current income. Subsequent collections of cash
may be applied as reductions to the principal balance, interest in arrears
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.
Net loan origination and commitment fees are amortized as a yield adjustment
to interest income using the level-yield method over the contractual lives
of the related loans.
-34-
<PAGE>
Provision for Loan Losses - The Savings Bank considers a loan to be impaired
when management believes it is probable that it will be unable to collect
all principal and interest due according to the contractual terms of the
loan. If a loan is impaired, the Savings Bank is required to record a loss
valuation allowance equal to the present value of the estimated future cash
flows discounted at the loan's effective rate or based on the loan's
observable market price or the fair value of the collateral if the loan is
collateral dependent. These estimates are susceptible to changes that could
result in a material adjustment to operations. Recovery of the carrying
value of such loans is dependent to a great extent upon economic, operating
and other conditions that may be beyond the Savings Bank's control.
Premises and Equipment - Premises and equipment are stated at cost less
accumulated depreciation and amortization. Depreciation and amortization are
computed primarily on the straight-line method over the estimated useful
lives of the related assets. The following represents a summary of estimated
useful lives:
Years
Building and improvements 40
Furniture, fixtures and equipment 5-10
Automobiles 3
Real Estate Owned - Real estate owned represents foreclosed assets held for
sale and is recorded at fair value as of the date of foreclosure or transfer
less estimated disposal costs (the new basis) and is subsequently carried at
the lower of the new basis or fair value on the current measurement date.
Subsequently, properties are evaluated and any additional declines which
reduce the fair value to less than carrying value are provided for as a
provision for losses on real estate owned. Costs and expenses related to
major additions and improvements are capitalized while maintenance and
repairs which do not improve or extend the lives of the assets are expensed
currently. Gains on the sale of real estate owned for which the Savings Bank
grants a loan are recognized upon disposition of the property to the extent
allowable considering certain down payments and other requirements.
Excess of Cost Over Fair Value of Assets Acquired - Excess of cost over fair
value of assets acquired is amortized using a level-yield method over the
estimated remaining life of the long-term interest-bearing assets acquired.
Level-yield amortization is determined based upon the carrying amount of the
long-term interest-bearing assets acquired. The estimated remaining life of
the excess of cost over fair value of assets acquired is two years as of
September 30, 1996.
Mortgage Servicing Rights - Mortgage servicing rights consist of the
following:
Originated Mortgage Servicing Rights - The Savings Bank adopted Statement
of Financial Accounting Standards ("SFAS") No. 122, Accounting for
Mortgage Servicing Rights, effective for the year ended September 30,
1995. This Statement requires the recognition of mortgage servicing
rights related to mortgage loans acquired through origination activities
of the Savings Bank. The originated mortgage servicing rights are
recorded at cost based upon the relative fair values of the loans and the
servicing rights. Servicing release fees paid on comparable loans and
discounted cash flows are used to determine estimates of fair values. The
Savings Bank capitalized originated mortgage servicing rights of $322 in
1995 related to the adoption of SFAS No. 122 which effect is included in
the gain on sale of loans, net, to the extent such originated loans were
sold prior to September 30, 1995. These rights are amortized in
proportion to and over the period of expected net servicing income.
-35-
<PAGE>
Purchased Mortgage Servicing Rights - Purchased mortgage servicing rights
are acquired from independent third-party originators and are recorded at
the lower of cost or fair value. Prior to the adoption of SFAS No. 122,
the excess of the sale consideration received for purchased loans over
the recorded basis of those loans was offset against the cost of the
mortgage servicing right instead of being recorded as income. As the
Savings Bank has adopted SFAS No. 122, no gains on the sale of loans were
offset against the cost of the mortgage servicing rights in 1995. The
offset was $714 in 1994. Such rights are amortized in proportion to and
over the period of expected net servicing income.
Impairment Evaluation - The Savings Bank evaluates the carrying value of
capitalized mortgage servicing rights on a periodic basis based on their
estimated fair value. For purposes of evaluating and measuring impairment
of capitalized servicing rights, in accordance with SFAS No 122, the
Savings Bank stratifies the rights based on their predominant risk
characteristics. The significant risk characteristics considered by the
Savings Bank are loan type, period of origination and stated interest
rate. If the fair value estimated, using a discounted cash flow
methodology, is less than the carrying amount of the portfolio, the
portfolio is written down to the amount of the discounted expected cash
flows utilizing a valuation allowance. The Savings Bank utilizes
consensus market prepayment assumptions and discount rates to evaluate
its capitalized servicing rights which considers the risk characteristics
of the underlying servicing rights. For the years ended 1994, 1995 and
1996, there were no write downs or valuation allowances established for
capitalized servicing.
Sale of Mortgage Servicing Rights - The Savings Bank recognizes gains on
sales of mortgage servicing rights when a legal closing of the sale
occurs with title passing to the buyer, all significant risks and rewards
of ownership have transferred to the buyer, including risks related to
default prepayment (including no uncapped risks related to defaults or
prepayments) and there are no significant unresolved contingencies. The
Savings Bank defers the gain on sale of servicing until these conditions
are met.
Income Taxes - The Company, the Savings Bank and its subsidiary file a
consolidated Federal income tax return. State income tax returns are
individually filed for each of the entities.
On October 1, 1993, the Company changed its method of accounting for income
taxes to conform to the requirements of SFAS No. 109, Accounting for Income
Taxes, which specifies the asset and liability method of accounting for
income taxes. Under the asset and liability method, deferred tax assets and
liabilities are established for the temporary differences between the
financial accounting basis and tax basis of the Company's assets and
liabilities at the current statutory tax rates. A valuation allowance is
established for deferred tax assets when their realization is in doubt based
on a "more likely than not" analysis. The cumulative effect of the change in
accounting for income taxes was to increase net income by $136 for the year
ended September 30, 1994. The Company reflected this cumulative effect in
operations during the year ended September 30, 1994.
The Savings Bank is permitted under the Internal Revenue Code to deduct an
annual addition to a reserve for bad debts in determining taxable income,
subject to certain limitations. This addition differs from the bad debt
experience used for financial accounting purposes. Bad debt deductions for
income tax purposes are included in taxable income of later years only if
the bad debt reserve is used subsequently for purposes other than to absorb
bad debt losses. Under SFAS No. 109, a deferred tax liability is provided
only to the extent the tax bad debt reserve exceeds the base year reserve.
The base year reserve is the tax bad debt reserve as of September 30, 1988.
Retained earnings as of
-36-
<PAGE>
September 30, 1996 includes approximately $2,071 representing such bad debt
reserve as of the base year for which no deferred income taxes have been
provided.
On August 20, 1996, the Small Business Job Protection Act of 1996 (the
"Act") was enacted into legislation. The Act repeals the special bad debt
reserve method for thrift institutions. The Act requires thrifts to
recapture any reserves accumulated after 1987 but forgives taxes owed on
reserves accumulated prior to 1988. Thrift institutions will be given six
years to account for the recaptured excess reserves, beginning with the
first taxable year after 1995, and will be permitted to delay the timing of
this recapture for one or two years subject to whether they meet certain
residential loan tests. The Act will not have a material impact on the
Company's financial statements as a deferred tax liability has been provided
on the excess reserves.
Revenue Recognition - Servicing fees, interest income, late fees, and other
ancillary income related to the Savings Bank's servicing activities are
accrued as earned.
Earnings Per Share - The Company completed its initial stock offering on
June 27, 1994, and, accordingly, earnings per share for 1994 was computed on
net income and the weighted average number of common and common equivalent
shares outstanding subsequent to June 27, 1994. Common equivalent shares
include shares usable upon exercise of dilutive options outstanding
determined under the treasury stock method. The Company accounts for the
shares acquired by its ESOP in accordance with the American Institute of
Certified Public Accountants' (AICPA) Statement of Position 93-6 and the
shares acquired for its Management Stock Bonus Plan (MSBP) in a manner
similar to the ESOP shares; shares acquired by the ESOP and MSBP are not
considered in the weighted average shares outstanding until the shares are
committed for allocation or vested to an employee's individual account. The
weighted average number of common and common equivalent shares outstanding
for the periods indicated below are:
June 27, 1994 through September 30, 1994 2,114,894 shares
October 1, 1994 through September 30, 1995 2,087,668 shares
October 1, 1995 through September 30, 1996 1,962,849 shares
Regulatory Compliance - Under the Financial Institutions Reform, Recovery
and Enforcement Act of 1989 ("FIRREA"), the Office of Thrift Supervision
("OTS") established capital regulations requiring savings associations to
maintain: (i) core capital equal to 3.0% of adjusted total assets, (ii)
tangible capital equal to 1.5% of adjusted total assets and (iii) risk-based
capital equal to 8.0% of risk-weighted assets.
The Savings Bank meets all of the minimum capital requirements as of
September 30, 1996. The Savings Bank's capital amounts and ratios as of
September 30, 1996 are as follows:
<TABLE>
<CAPTION>
Required Actual Excess
------------------ ------------------- -------------------
Amount Ratio Amount Ratio Amount Ratio
Core capital to adjusted
<S> <C> <C> <C> <C> <C> <C>
total assets $ 10,244 3.0 % $ 31,827 9.3 % $ 21,583 6.3 %
Tangible capital to
adjusted total assets 5,122 1.5 % 31,827 9.3 % 26,705 7.8 %
Total capital to risk-
weighted assets 10,551 8.0 % 32,281 24.5 % 21,730 16.5 %
</TABLE>
-37-
<PAGE>
A reconciliation of the Savings Bank's stockholders' equity under generally
accepted accounting principles to regulatory capital amounts as of September
30, 1996 is as follows:
<TABLE>
<CAPTION>
<S> <C>
Stockholders' equity, core and tangible capital - as reported by the Savings Bank $31,827
General loan loss reserves 454
-------
Risk-based capital $32,281
=======
</TABLE>
The ability to include supervisory goodwill for purposes of the core capital
requirement was phased out on January 1, 1995.
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA")
required each federal banking agency to implement prompt corrective actions
for institutions that it regulates. In response to this requirement, OTS
adopted final rules, based upon FDICIA's five capital tiers. The rules
provide that a savings bank is "well capitalized" if its total risk-based
capital ratio is 10% or greater, its Tier 1 risk-based capital ratio is 6%
or greater, its leverage is 5% or greater and the institution is not subject
to a capital directive. Under this regulation, the Savings Bank is deemed to
be "well capitalized" as of September 30, 1996.
Estimates - The preparation of these 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 as of
September 30, 1994, 1995 and 1996 and the reported amounts of revenues and
expenses during the years then ended. Significant estimates include the loan
loss reserve and fair value of financial instruments. Actual results could
differ from those estimates.
New Statements of Financial Accounting Standards - In March 1995, FASB
issued SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of, which will become effective for the
Company beginning October 1, 1996. This Statement establishes accounting
standards for the impairment of long-lived assets, certain identifiable
intangibles and goodwill related to those assets to be held and used and for
long-lived assets and certain identifiable intangibles to be disposed of.
The Statement requires that long-lived assets and certain identifiable
intangibles to be held and used by an entity be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. In performing the review for
recoverability, the entity should estimate the future cash flows expected to
result from the use of the asset and its eventual disposition. If the sum of
the undiscounted cash flows is less than the carrying amount of the asset,
an impairment loss is recognized to reduce the carrying amount to the fair
value of the asset. Generally, long-lived assets and certain identifiable
intangibles that are to be disposed of should be reported at the lower of
the carrying amount or fair value less costs to sell. The Company does not
anticipate that the implementation of this Statement will have a material
impact on the consolidated financial statements.
In October 1995, the FASB issued SFAS No. 123, Accounting for Stock-Based
Compensation, which will become effective for the Company beginning October
1, 1996. SFAS No. 123 will require increased disclosure of compensation
expense arising from both fixed and performance stock compensation plans.
Such expense will be measured as the fair value of the award at the date it
is granted using an option-pricing model that takes into account the
exercise price and expected volatility, expected dividends on the stock and
the expected risk-free rate of return during the term of the option. The
compensation cost would be recognized over the service period, usually the
period from the grant
-38-
<PAGE>
date to the vesting date. SFAS No. 123 encourages, rather than requires,
companies to adopt a new method that accounts for stock compensation awards
based on their estimated fair value at the date they are granted. Companies
would be permitted, however, to continue accounting under Accounting
Principles Board ("APB") Opinion No. 25. The Company will continue to apply
APB Opinion No. 25 in their financial statements and will be required to
disclose pro forma net income and earnings per share in a footnote,
determined as if the Company had applied the new method.
In June 1996, the FASB issued SFAS No. 125, Accounting for Transfers and
Servicing of Financial Assets and Extinquishments of Liabilities, which will
become effective for the Company for transfers and servicing of financial
assets and extinguishments of liabilities occurring after December 31, 1996.
This Statement supersedes SFAS No. 122, Accounting for Mortgage Servicing
Rights. For each servicing contract in existence before January 1, 1997,
previously recognized servicing rights and "excess servicing" receivables
shall be combined, net of any previously recognized servicing obligations
under that contract, as a servicing asset or liability. The Statement
provides that servicing assets and other retained interests in transferred
assets be measured by allocating the previous carrying amount between the
assets sold, if any, and retained interests, if any, based on their relative
fair values at the date of the transfer, and servicing assets and
liabilities be subsequently measured by (1) amortization in proportion to
and over the period of estimated net servicing income or loss, and (2)
assessment for asset impairment or increased obligation based on their fair
values. The Company does not anticipate that the implementation of this
Statement will have a material impact on the consolidated financial
statements.
Reclassifications - Certain reclassifications have been made to the 1994 and
1995 consolidated financial statements in order to conform with the 1996
presentation.
3. INVESTMENT SECURITIES
<TABLE>
<CAPTION>
September 30, 1995
------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
United States Treasury and other U.S.
Government agencies:
Securities maturing after one year
through five years $ 18,153 $ 82 $ 603 $ 17,632
Securities maturing after five years
through ten years 26,000 178 1 26,177
Securities maturing after ten years 10,090 79 10,169
-------- ----- ----- --------
$ 54,243 $ 339 $ 604 $ 53,978
======== ===== ===== ========
</TABLE>
-39-
<PAGE>
<TABLE>
<CAPTION>
September 30, 1996
-------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---- ----- ------ -----
United States Treasury and other U.S.
Government agencies:
<S> <C> <C> <C> <C>
Securities maturing within one year $ 2,000 $ 25 $ 1,975
Securities maturing after one year
through five years 13,332 606 12,726
Securities maturing after five years
through ten years 17,500 $ 16 441 17,075
Securities maturing after ten years 53,403 111 1,463 52,051
-------- ----- ------- --------
$ 86,235 $ 127 $ 2,535 $ 83,827
======== ===== ======= ========
</TABLE>
As of September 30, 1995 and 1996, the Savings Bank held "step up"
securities with aggregate carrying values of $2,000 and $1,000,
respectively. The securities bear interest at rates ranging from 5.05% to
8.04% with stated maturity dates ranging from 1996 to 2004. The securities
are callable on specified "step up" dates. At each call date, if the
securities are not called, the coupon rate increases.
As of September 30, 1996, the Savings Bank held callable securities with an
aggregate carrying value of $76,801. The securities bear interest at rates
ranging from 4.98% to 8.5% with stated maturity dates ranging from 1996 to
2011.
4. MORTGAGE-RELATED SECURITIES
<TABLE>
<CAPTION>
September 30, 1995
------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---- ----- ------ -----
Pass-through certificates - fixed rate:
<S> <C> <C> <C> <C>
Government National Mortgage Association $ 7,293 $ 339 $ 7,632
Federal National Mortgage Association 459 19 478
Federal Home Loan Mortgage Corporation 13,835 153 $ 48 13,940
Pass-through certificates - adjustable rate:
Government National Mortgage Association 5,729 35 5,694
Federal National Mortgage Association 2,990 41 2,949
Federal Home Loan Mortgage Corporation 6,786 49 6,737
Mortgage Guarantee Insurance Corporation 2,912 7 7 2,912
-------- ----- ----- --------
$ 40,004 $ 518 $ 180 $ 40,342
======== ===== ===== ========
</TABLE>
-40-
<PAGE>
<TABLE>
<CAPTION>
September 30, 1996
------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---- ----- ------ -----
Pass-through certificates - fixed rate:
<S> <C> <C> <C> <C>
Government National Mortgage Association $ 6,151 $ 224 $ 6,375
Federal National Mortgage Association 365 12 377
Federal Home Loan Mortgage Corporation 11,853 138 $ 176 11,815
Pass-through certificates - adjustable rate:
Government National Mortgage Association 5,043 24 5,019
Federal National Mortgage Association 2,616 70 2,546
Federal Home Loan Mortgage Corporation 6,219 119 6,100
Mortgage Guarantee Insurance Corporation 2,136 3 5 2,134
-------- ----- ----- --------
$ 34,383 $ 377 $ 394 $ 34,366
======== ===== ===== ========
</TABLE>
Certain mortgage-related securities have been pledged as collateral for
deposits (See Note 11).
5. LOANS RECEIVABLE
<TABLE>
<CAPTION>
1995 1996
---- ----
First mortgage loans:
<S> <C> <C>
Residential - one-to-four units ................ $115,803 $157,494
Secured by other properties .................... 1,280 1,013
Construction loans ............................. 10,351 17,367
-------- --------
Total first mortgage loans ............ 127,434 175,874
-------- --------
Other installment loans:
Property improvements, auto and other .......... 3,915 5,195
Mobile home .................................... 499 305
Deposits ....................................... 688 769
-------- --------
Total installment loans ............... 5,102 6,269
-------- --------
Total loans ........................... 132,536 182,143
Less:
Unearned discounts and loan fees ............... 693 157
Undisbursed loan funds ......................... 6,624 10,407
Allowance for loan losses ...................... 423 421
-------- --------
$124,796 $171,158
======== ========
</TABLE>
-41-
<PAGE>
There were no commercial real estate or business loans purchased or
originated during 1994, 1995 or 1996.
The Savings Bank originates and purchases both adjustable and fixed rate
loans. The approximate composition of these loans is as follows:
<TABLE>
<CAPTION>
September 30, 1995
- ----------------------------------------------------------------------------------------------------------------
Fixed Rate Adjustable Rate
- ------------------------------------ -----------------------------------
Term to Term to Rate
Maturity Book Value Adjustment Book Value
-------- ---------- ---------- ----------
<S> <C> <C> <C>
1 mo. - 1 yr. $ 11,138 1 mo. - 1 yr. $ 23,982
1 yr. - 3 yrs. 1,766 1 yr. - 3 yrs. 53,675
3 yrs. - 5 yrs. 1,815 3 yrs. - 5 yrs. 2,821
5 yrs. - 10 yrs. 5,020 5 yrs - 10 yrs. 1,376
10 yrs. - 20 yrs. 19,640
Over 20 years 11,303 -----------
-----------
$ 50,682 $ 81,854
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
September 30, 1996
- ----------------------------------------------------------------------------------------------------------------------
Fixed Rate Adjustable Rate
- ------------------------------------ -------------------------------------
Term to Term to Rate
Maturity Book Value Adjustment Book Value
-------- ---------- ---------- ----------
<S> <C> <C> <C>
1 mo. - 1 yr. $ 18,246 1 mo. - 1 yr. $ 50,379
1 yr. - 3 yrs. 2,009 1 yr. - 3 yrs. 48,341
3 yrs. - 5 yrs. 2,219 3 yrs. - 5 yrs. 9,419
5 yrs. - 10 yrs. 5,422 5 yrs - 10 yrs. 1,170
10 yrs. - 20 yrs. 28,615
Over 20 years 16,323
----------- ------------
$ 72,834 $ 109,309
=========== ============
</TABLE>
The adjustable rate loans have interest rate adjustment limitations and are
generally indexed to the weekly average yield on United States Treasury
securities adjusted to a constant maturity of 1 year.
The Savings Bank is subject to numerous lending-related regulations. Under
FIRREA, the Savings Bank may not make real estate loans to one borrower in
excess of the greater of 15% of its unimpaired capital and surplus or $500,
whichever is greater. As of September 30, 1996, the Savings Bank is in
compliance with this limitation.
-42-
<PAGE>
A summary of the activity in the allowance for loan losses is as follows:
<TABLE>
<CAPTION>
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Balance, beginning of year .................... $ 346 $ 275 $ 423
Provision charged to expense ................ 6 224 75
Losses charged against the allowance ........ (80) (80) (90)
Recoveries .................................. 3 4 13
----- ----- -----
Balance, end of year .......................... $ 275 $ 423 $ 421
===== ===== =====
</TABLE>
During 1995, the Savings Bank restructured loans with a carrying value of
approximately $3,039. No provision for loss was considered necessary based
on the restructured terms and the cash flows expected to be generated by the
underlying collateral. The Savings Bank did not engage in any troubled debt
restructurings during the years ended September 30, 1994, 1995 and 1996.
Aggregate loans to executive officers, directors and their associates,
including companies in which they have partial ownership interest did not
exceed 5% of stockholders' equity as of September 30, 1995 and 1996.
Management believes such loans were made under terms and conditions
substantially the same as loans made to parties not affiliated with the
Savings Bank.
As of September 30, 1995 and 1996, loans totaling approximately $392 and
$484, respectively, were on nonaccrual status. Gross interest income would
have been increased by $31 and $45 for the year ended September 30, 1995 and
1996, respectively, for nonaccrual status loans.
6. MORTGAGE LOANS SERVICED
The Savings Bank services primarily single family residential loans for
others which are not included in the accompanying consolidated balance
sheets. The approximate unpaid principal balances of these loans are
summarized as follows:
<TABLE>
<CAPTION>
1994 1995 1996
---- ---- ----
Government National
<S> <C> <C> <C>
Mortgage Association ............................ $ 501,781 $ 902,977 $ 875,381
Federal National
Mortgage Association ............................ 228,889 132,209 115,492
Federal Home
Loan Mortgage Corporation ....................... 133,227 146,624 231,515
Other investors ................................... 44,215 8,082 6,765
--------- ---------- ----------
$ 908,112 $1,189,892 $1,229,153
========= ========== ==========
</TABLE>
The Savings Bank services loans in 45 states. The five largest state
concentrations, based on unpaid principal balances, are as follows: Kansas
(48.8%), Oklahoma (22.2%), Louisiana (9.8%), Michigan (9.9%), and Illinois
(4.5%), aggregating approximately 95.2% of the portfolio. The risk inherent
in such concentrations is dependent not only upon regional and general
economic stability which affects property values, but also the financial
well-being and creditworthiness of the borrower.
-43-
<PAGE>
Mortgage loans and their related servicing rights are sold under agreements
that define certain criteria for the mortgage loan. If the criteria is not
met, the Savings Bank may be required to repurchase the mortgage loan.
Conforming conventional loans serviced by the Savings Bank are securitized
through FNMA or FHLMC programs on a non-recourse basis, whereby foreclosure
losses are generally the responsibility of FNMA or FHLMC and not the Savings
Bank. Similarly, the government loans serviced by the Savings Bank are
securitized through GNMA programs, whereby the Savings Bank is insured
against loss by the Federal Housing Administration ("FHA") or partially
guaranteed against loss by the Veterans Administration ("VA"). With respect
to sales of loans, under certain circumstances, the Savings Bank may become
liable for the unpaid principal and interest on defaulted loans or other
loans if there has been a breach of representations or warranties. In the
opinion of management, adequate reserves have been established for losses
that may be incurred as a result of repurchased mortgage loans.
The servicing of loans for others generally consists of collecting mortgage
payments, maintaining escrow accounts, disbursing payments to investors and
foreclosure processing. Loan servicing income includes servicing fees from
investors and certain charges collected from borrowers, such as late payment
fees. The Savings Bank held borrowers' escrow balances and principal and
interest payments related to loans serviced for others of $17,220, $19,169
and $16,917 as of September 30, 1994, 1995 and 1996, respectively. These
balances are segregated in special bank accounts which are included in
deposits in the accompanying consolidated balance sheets.
In connection with its fiduciary responsibilities, the Savings Bank advances
funds relative to the foreclosure of serviced loans, which are repaid from
sale proceeds by way of reimbursement from investors or through claims
submitted to private mortgage insurance companies, the FHA and/or the VA.
These advances totaled $1,880 and $1,995 as of September 30, 1995 and 1996,
respectively, and are included in other assets in the accompanying
consolidated balance sheets.
7. LOANS HELD FOR SALE
1995 1996
---- ----
Loans held for sale $ 22,219 $ 13,787
Deferred net discounts, premiums and
other related costs (111) (69)
-------- --------
Loans held for sale, net $ 22,108 $ 13,718
======== ========
A summary of gross realized gains (losses) on sales of loans held for sale
is as follows:
1994 1995 1996
---- ---- ----
Gross realized gains $ 1,599 $ 794 $ 1,651
Gross realized losses (703) (88) (284)
------- ------- -------
Gains on sale of loans, net $ 896 $ 706 $ 1,367
======= ======= =======
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<PAGE>
8. PREMISES AND EQUIPMENT
1995 1996
Land $ 1,718 $ 2,099
Building and improvements 3,642 4,555
Furniture, fixtures and equipment 2,547 2,980
Automobiles 42 38
------- -------
7,949 9,672
Less accumulated depreciation (3,192) (3,401)
------- -------
$ 4,757 $ 6,271
======= =======
9. REAL ESTATE OWNED
1995 1996
Real estate owned (acquired by foreclosure or
by deed in lieu of foreclosure) $ 238 $ 62
Less allowance for losses (51) (34)
----- -----
$ 187 $ 28
===== =====
A summary of the activity in the allowance for losses on real estate owned
is as follows:
1994 1995 1996
Balance, beginning of year $ 26 $ 16 $ 51
Provision charged to expense 59 81 18
Losses charged against the allowance (77) (47) (35)
Recoveries 8 1
---- ---- ----
Balance, end of year $ 16 $ 51 $ 34
==== ==== ====
-45-
<PAGE>
10. MORTGAGE SERVICING RIGHTS
The following is an analysis of the changes in mortgage servicing rights:
1994 1995 1996
Balance, beginning of year $ 3,243 $ 6,312 $11,625
Additions:
Purchased mortgage servicing rights 4,000 8,107 1,970
Originated mortgage servicing rights 322 589
------- ------- -------
4,000 8,429 2,559
Reductions:
Amortization 899 1,305 1,651
Bulk sales 1,805
Servicing released sales 32 6 37
------- ------- -------
931 3,116 1,688
------- ------- -------
Balance, end of year $ 6,312 $11,625 $12,496
======= ======= =======
During 1995, the Savings Bank sold (in bulk) the mortgage servicing rights
to loans with a principal balance of approximately $304,000 resulting in a
gain of $1,961.
-46-
<PAGE>
11. DEPOSITS
<TABLE>
<CAPTION>
1995 1996
--------------------- --------------------
Amount Percent Amount Percent
<S> <C> <C> <C> <C>
Passbook and checking accounts:
Demand and NOW accounts, including
noninterest bearing deposits of
approximately $24,495 and
$22,384 as of September 30,
1995 and 1996 (rates, excluding
noninterest bearing deposits, of 2.5% to
2.6% as of September 30, 1995 and 1996) $ 37,497 19.2 % $ 36,785 17.1 %
Money market accounts (rates of 3.00%
and 2.65% as of September 30, 1995
and 1996) 6,245 3.2 12,387 5.8
Passbook savings accounts (rate of 2.75%
as of September 30, 1995 and 1996) 8,978 4.6 8,690 4.1
-------- ----- -------- -----
Total passbook and checking accounts 52,720 27.0 57,862 7.0
-------- ----- -------- -----
Certificate accounts:
2.00% to 3.00% 22 12
3.01% to 4.00% 3
4.01% to 5.00% 14,629 7.4 6,13 42.9
5.01% to 6.00% 76,776 39.2 106,577 49.7
6.01% to 7.00% 50,010 25.6 43,526 20.3
7.01% to 8.00% 656 0.3 275 0.1
8.01% to 9.00% 900 0.5 107
-------- ----- -------- -----
Total certificate accounts 142,996 73.0 156,631 73.0
-------- ----- -------- -----
$195,716 100.0 % $214,493 100.0%
======== ===== ======== =====
Weighted average interest rate on deposits
during year 4.35 % 4.63 %
==== ====
</TABLE>
The aggregate amount of jumbo certificates of deposit with a minimum
denomination of $100 as of September 30, 1995 and 1996 was $30,318 and
$57,151, respectively.
Certain savings deposits of public institutions were collateralized by
investment and mortgage-related securities with aggregate amortized cost of
$35,965 and aggregate market value of $36,113 as of September 30, 1995, and
aggregate amortized cost of $41,371 and aggregate market value of $40,281 as
of September 30, 1996.
-47-
<PAGE>
Certificate accounts mature as follows:
1997 $97,575
1998 42,703
1999 7,227
2000 1,462
2001 1,873
Thereafter 5,791
--------
$156,631
========
A summary of interest expense by deposit type is as follows:
<TABLE>
<CAPTION>
1994 1995 1996
<S> <C> <C> <C>
Passbook savings deposits $ 243 $ 239 $ 238
NOW accounts and money market
demand deposits 604 565 756
Certificate accounts 4,533 6,697 8,491
------- ------- -------
$ 5,380 $ 7,501 $ 9,485
======= ======= =======
</TABLE>
12. INCOME TAXES
1994 1995 1996
Current $ 848 $ 2,668 $ 1,363
Deferred 347 (225) 530
------- ------- -------
$ 1,195 $ 2,443 $ 1,893
======= ======= =======
Income tax expense has been provided at effective rates of 39.1%, 37.3% and
37.7% for the years ended September 30, 1994, 1995 and 1996, respectively.
The differences between such effective rates and the statutory Federal
income tax rate computed on income before income tax expense and cumulative
effect of change in accounting for income taxes result from the following:
<TABLE>
<CAPTION>
1994 1995 1996
Amount % Amount % Amount %
<S> <C> <C> <C> <C> <C> <C>
Federal income tax expense
computed at statutory rate $ 1,040 34.0 $ 2,227 34.0 $ 1,706 34.0
Increases (decreases) in
taxes resulting from:
State income taxes 112 3.7 304 4.6 181 3.6
Amortization of cost over
fair value of assets acquired 31 1.0 26 0.4 21 0.4
Other 12 0.4 (114) (1.7) (15) (0.3)
------- ---- ------- ---- ------- ----
$ 1,195 39.1 $ 2,443 37.3 $ 1,893 37.7
======= ==== ======= ==== ======= ====
</TABLE>
-48-
<PAGE>
Deferred tax expense results from timing differences in the recognition of
revenue and expense for tax and financial statement purposes. The sources of
these differences and the tax effect of each were as follows:
1994 1995 1996
Market adjustment on loans held for sale $ 172 $(134) $(125)
Bad debt reserves 202 2 164
Depreciation 18 (7) 49
Deferred loan fees and costs (111) 12 402
Excess amortization of mortgage
servicing rights (72) (28)
Outside Directors' Retirement Plan accrual (52) (1)
Management Stock Bonus Plan accrual (19)
Federal Home Loan Bank stock dividends 66
Other 66 45 3
----- ----- -----
$ 347 $(225) $ 530
===== ===== =====
The components of net deferred tax assets and liabilities as of September
30, 1995 and 1996 are as follows:
1995 1996
Deferred tax assets:
Deferred loan fees $ 164
Excess amortization of mortgage servicing rights 72 $ 100
Outside Directors' Retirement Plan accrual 52 53
Management Stock Bonus Plan accrual 19 19
Market adjustment on loans held for sale 94
Other 39 44
------ ------
346 310
Deferred tax liabilities:
Federal Home Loan Bank stock dividends 330 396
Market adjustment on loans held for sale 31
Bad debt reserves 37 201
Prepaid expenses 75 90
Fixed assets 21 70
Deferred loan fees 238
Other 20 13
------ ------
514 1,008
------ ------
Net deferred tax liabilities $ 168 $ 698
====== ======
-49-
<PAGE>
13. ADVANCES FROM FEDERAL HOME LOAN BANK
<TABLE>
<CAPTION>
1995 1996
- ------------------------------------------- -----------------------------------------
Weighted Weighted
Fiscal Average Fiscal Average
Year Interest Year Interest
Maturity Amount Rate Maturity Amount Rate
<S> <C> <C> <C> <C> <C>
1996 $ 18,000 6.24 %
1997 7,000 6.80 1997 $ 63,200 5.98 %
1998 5,000 7.19 1998 18,500 6.43
2000 3,000 7.67
------------- -----------
$ 33,000 6.63 % $ 81,700 6.08 %
============= ===========
</TABLE>
The advances are collateralized as of September 30, 1996 by a blanket pledge
agreement, including all Capital Stock of Federal Home Loan Bank, qualifying
first mortgage loans, certain mortgage-related securities and other
investment securities.
The Savings Bank has entered into a line-of-credit agreement with the
Federal Home Loan Bank wherein the Savings Bank can borrow up to
approximately $54,400, subject to certain limitations. As of September 30,
1996, there was $15,700 outstanding relative to this agreement. The
agreement expires December 27, 1996.
14. EMPLOYEE BENEFIT PLANS
Profit-Sharing Plan - The profit sharing plan covers substantially all
employees and is a savings plan under Section 401(k) of the Internal Revenue
Code in which an employee's contributions may be matched by the Savings Bank
up to a limit based upon the employee's compensation. Employees may
contribute up to a specified percentage of their annual compensation. Prior
to April 30, 1994, the Savings Bank would match the employee contributions
in an amount equal to 1.5% of annual compensation for the first 3% of annual
compensation contributed by the employees. The Savings Bank's matching
contribution was discontinued effective April 30, 1994. The Savings Bank's
matching contributions amounted to $17 for the year ended September 30,
1994.
Pension Plan - The Savings Bank has a noncontributory defined-benefit
pension plan covering substantially all employees completing one year of
employment and 1,000 hours of service. Plan benefits are based upon years of
service and compensation. The Savings Bank funding policy is, acting under
the advice of the actuary for the plan, that the Savings Bank intends to
make contributions to the trust in such amounts and at such times as they
are required to maintain the plan and trust for its employees in compliance
with ERISA and Section 412 of the Internal Revenue Code.
-50-
<PAGE>
The following table sets forth the funded status of the plan:
<TABLE>
<CAPTION>
1995 1996
<S> <C> <C>
Projected benefit obligation:
Vested benefits $ 909 $ 1,111
Nonvested benefits 53 49
------- -------
Accumulated benefit obligation 962 1,160
Effect of projected future compensation levels 504 453
------- -------
Projected benefit obligation 1,466 1,613
Fair value of plan assets 948 1,162
------- -------
Projected benefit obligation in excess of fair value of plan assets 518 451
Unrecognized net obligation existing at initial
application of SFAS No. 87 (152) (141)
Unrecognized net loss (156) (52)
------- -------
Accrued pension cost $ 210 $ 258
======= =======
</TABLE>
The assets of the plan consist primarily of certificates of deposit which
are included in the Savings Bank's deposits.
Net periodic pension cost includes the following:
1994 1995 1996
Service cost $ 144 $ 172 $ 181
Interest cost 63 83 101
Actual return on assets (55) (63) (87)
Net amortization and deferral 10 7 19
----- ----- -----
Net periodic pension cost $ 162 $ 199 $ 214
===== ===== =====
The weighted average discount rate used in determining the actuarial present
value of the projected obligation was 7.0%, the expected rate of increase in
future salary levels for plan beneficiaries was 4.0% and the expected
long-term rate of return on plan assets was 7.5% for each of the plan years
ending September 30, 1994, 1995 and 1996.
Employee Stock Ownership Plan - The Company has an ESOP for the benefit of
Savings Bank employees who meet the eligibility requirement which includes
having completed 1,000 hours of service within a 12 month period with the
Company. The ESOP Trust acquired 136,000 shares of common stock in the
Company's initial public offering with proceeds from a loan from the
Company. The Savings Bank makes cash contributions to the ESOP on a
quarterly basis sufficient to enable the ESOP to make the required loan
payments to the Company.
-51-
<PAGE>
The note payable referred to above bears interest at prime rate adjustable
quarterly with interest payable quarterly and future principal payable in
nine installments of $136 beginning December 31, 1995 and annually
thereafter and one installment of $68 payable on June 26, 2004. The loan is
secured by the shares of the stock purchased.
As the debt is repaid, shares are released from collateral and allocated to
qualified employees based on the proportion of debt service paid in the
year. The Company accounts for its ESOP in accordance with AICPA Statement
of Position 93-6. Accordingly, the shares pledged as collateral are reported
as a reduction of stockholders' equity in the consolidated balance sheet. As
shares are released from collateral, the Company reports compensation
expense equal to the current market price of the shares, and the shares
become outstanding for earnings per share computations. Dividends on
allocated ESOP shares are recorded as a reduction of retained earnings.
Compensation expense related to the ESOP was $48, $172 and $246 for the
years ended September 30, 1994, 1995 and 1996, respectively. Following is a
summary of shares held in the ESOP Trust as of September 30, 1996:
Allocated shares 19,938
Shares released for allocation or committed to be released 10,200
Unreleased shares 105,128
--------
Total ESOP shares 135,266
=======
Fair value of unreleased shares at September 30, 1996 $ 1,997
========
Management Stock Bonus Plan - The Savings Bank adopted a Management Stock
Bonus Plan ("MSBP"), the objective of which is to enable the Savings Bank to
retain personnel of experience and ability in key positions of
responsibility. Employees of the Savings Bank are eligible to receive
benefits under the MSBP at the sole discretion of a committee appointed by
the Board of Directors of the Savings Bank. The MSBP is managed by trustees
who are non-employee directors of the Savings Bank.
The MSBP purchased 74,833 shares of the Company's stock for $995 during
1995. These shares were granted in the form of restricted stock payable 20%
upon date of award (June 27, 1995) and the remaining equally over a four
year period beginning June 27, 1996. Compensation expense in the amount of
the fair market value of the common stock at the date of the grant to the
employee will be recognized over the period during which the shares are
payable. A recipient of such restricted stock will be entitled to all voting
and other stockholder rights (including the right to receive dividends on
vested and nonvested shares), except that the shares, while restricted, may
not be sold, pledged or otherwise disposed of and are required to be held in
escrow. If a holder of such restricted stock terminates employment for
reasons other than death, disability or retirement, the employee forfeits
all rights to the allocated shares under restriction. If the participant's
service terminates as a result of death, disability, retirement or a change
in control of the Savings Bank, all restrictions expire and all shares
allocated become unrestricted. The Board of Directors can terminate the MSBP
at any time, and if it does so, any shares not allocated will revert to the
Company.
-52-
<PAGE>
Stock Option Plan - In connection with the stock conversion, the Company's
Board of Directors adopted the 1994 Stock Option Plan (the "Option Plan").
Pursuant to the Option Plan, 224,825 shares of common stock are reserved for
issuance by the Company upon exercise of stock options granted to officers,
directors and employees of the Company from time to time under the Option
Plan. The purpose of the Option Plan is to provide additional incentive to
certain officers, directors and key employees by facilitating their purchase
of a stock interest in the Company. The Option Plan provides for a term of
ten years, after which no awards may be made, unless earlier terminated by
the Board of Directors pursuant to the Option Plan.
The Option Plan will be administered by a committee of at least three
non-employee directors designated by the Board of Directors (the "Option
Committee"). The Option Committee will select the employees to whom options
are to be granted and the number of shares to be granted. The option price
may not be less than 100% of the fair market value of the shares on the date
of the grant, and no option shall be exercisable after the expiration of ten
years from the grant date. In the case of any employee who owns more than
10% of the outstanding common stock at the time the option is granted, the
option price may not be less than 110% of the fair market value of the
shares on the date of the grant, and the option shall not be exercisable
after the expiration of five years from the grant date. The exercise price
may be paid in cash, shares of the common stock, or a combination of both.
The Option Committee granted options for 165,476 shares of common stock, at
an exercise price of $11.75 (market value at date of grant) per share during
the year ended September 30, 1995. All such options are exercisable
immediately (for nonemployee directors) or otherwise at the rate of
one-third following one year after the date of the grant and one-third
annually thereafter. Accordingly, options on 85,135 shares are exercisable
at September 30, 1996.
15. OUTSIDE DIRECTORS' RETIREMENT PLAN
The Savings Bank has a consultation and retirement plan for outside
directors which became effective January 1, 1995. The plan provides
retirement benefits for outside directors after they have completed ten
years of service to the Savings Bank and reached age 65. The benefits
include $300 per month payment for 120 months beginning at age 75. In the
event of death, disability or retirement of a director on or after age 65 or
in the event of a change in control of the Company or the Savings Bank, such
payments will commence to the director or their beneficiary as if age 75 was
attained. Expense related to the retirement plan is amortized ratably over
the service period which is also the period until full vesting occurs.
Adoption of the retirement plan resulted in a charge to operations (included
in salaries and employee benefits) during the year ended September 30, 1995.
Total expense related to this plan was $141 and $10 for the years ended
September 30, 1995 and 1996, respectively. The plan is unfunded.
16. COMMITMENTS AND CONTINGENT LIABILITIES
As of September 30, 1995, the Savings Bank had commitments to originate
loans approximating $36,933 of which approximately $23,711 were fixed-rate
(interest rates ranging from 5.63% to 8.62%) and $13,222 were floating rate
commitments. As of September 30, 1996, the Savings Bank had commitments to
originate loans approximating $63,743 of which approximately $39,491 were
fixed-rate (interest rates ranging from 6.00% to 9.00%) and $24,252 were
floating rate commitments. These commitments are agreements to lend to a
customer as long as there is no violation of any condition established in
the contract. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Certain of the
commitments are expected to expire without
-53-
<PAGE>
being fully drawn upon; the total commitments amount disclosed above does
not necessarily represent future cash requirements due to normal fallout
experience. The Savings Bank evaluates each customer's creditworthiness on
a case-by-case basis. The amount of collateral obtained if considered
necessary by the Savings Bank upon extension of credit is based on
management's credit evaluation of the counterparty.
As of September 30, 1995 and 1996, the Savings Bank has approximately
$35,950 and $28,345 of commitments to sell loans to third parties, which
includes $23,600 and $28,345 of forward commitments to sell mortgage-related
securities, respectively. It is management's intent to securitize loans held
for sale to fill these commitments. These instruments contain an element of
risk in the event the counterparties may be unable to meet the terms of such
agreements. In the event the parties to delivery commitments were unable to
fulfill their obligations, the Savings Bank would be required to sell its
product to other parties and would be exposed to market fluctuations. The
Savings Bank minimizes its risk exposure by limiting the counterparties to
those that meet established credit and capital guidelines. Management does
not expect any counterparty to default on their obligations and, therefore,
does not expect to incur any cost due to counterparty default. The Savings
Bank does not require nor place collateral for any delivery commitments. Any
unrealized gain or loss on these commitment obligations are considered in
conjunction with the Savings Bank's lower of cost or market valuation of its
loans held for sale.
The Savings Bank is contingently liable on loans sold with recourse. The
principal balance of these loans was $127 as of September 30, 1995. There
were no loans sold with recourse outstanding as of September 30, 1996.
17. FAIR VALUE OF FINANCIAL INSTRUMENTS
Estimated fair value amounts have been determined by the Company using
available market information and a selection from a variety of valuation
methodologies. However, considerable judgment is necessarily required to
interpret market data to develop the estimates of fair value. Accordingly,
the estimates presented are not necessarily indicative of the amount the
Company could realize in a current market exchange. The use of different
market assumptions and estimation methodologies may have a material effect
on the estimated fair value amounts.
-54-
<PAGE>
The estimated fair value of the Company's financial instruments as of
September 30, 1995 and 1996 are as follows:
1995 1996
--------------------- -----------------------
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
Assets:
Cash and cash equivalents $ 5,677 $ 5,677 $ 5,618 $ 5,618
Investment securities 54,243 53,978 86,235 83,827
Capital stock of Federal Home
Loan Bank 2,206 2,206 4,327 4,327
Mortgage-related securities 40,004 40,342 34,383 34,366
Loans held for sale 22,108 22,335 13,718 13,816
Loans receivable 124,796 127,254 171,158 173,295
Mortgage servicing rights 11,625 18,225 12,496 18,326
Liabilities:
Deposits 195,716 196,098 214,493 215,016
Advances from Federal Home
Loan Bank 33,000 33,063 81,700 81,857
Accrued and other liabilities 2,668 2,668 4,683 4,683
<TABLE>
<CAPTION>
1995 1996
---------------------------- ----------------------------
Contract Estimated Contract Estimated
or Unrealized or Unrealized
Notional Gain Notional Gain
Amount (Loss) Amount (Loss)
Off-balance sheet financial instruments:
<S> <C> <C> <C> <C>
Lending commitments - fixed rate, net $ 23,711 $ 30 $ 39,491 $ 117
Lending commitments - floating rate 13,222 24,252
Commitments to sell loans 35,950 70 28,345 (64)
</TABLE>
The following methods and assumptions were used to estimate the fair value
of the financial instruments.
Cash and Cash Equivalents and Accrued and Other Liabilities - The carrying
amounts of cash and cash equivalents and accrued and other liabilities are a
reasonable estimate of their fair value.
Investment Securities, Mortgage-Related Securities and Loans Held for Sale -
Estimated fair values of investment securities, mortgage-related securities
and loans held for sale are based on quoted market prices where available.
If quoted market prices are not available, fair values are estimated using
quoted market prices for similar instruments.
Capital Stock of Federal Home Loan Bank - The carrying value of capital
stock of Federal Home Loan Bank approximates its fair value.
-55-
<PAGE>
Mortgage Servicing Rights - Fair values are determined by discounting the
estimated future net cash flows using consensus market prepayment
assumptions and discount rates which consider the risk characteristics of
the underlying servicing rights. The significant risk characteristics
considered by the Company are loan type, period of origination and interest
rate.
Loans Receivable - Fair values are estimated for portfolios with similar
financial characteristics. Loans are segregated by type, such as single
family residential mortgages, multi-family residential mortgages,
nonresidential and installment loans. Each loan category is further
segmented into fixed and variable interest rate categories. Future cash
flows of these loans are discounted using the current rates at which similar
loans would be made to borrowers with similar credit ratings and for the
same remaining maturities.
Deposits - The estimated fair value of demand deposits and savings accounts
is the amount payable on demand at the reporting date. The estimated fair
value of fixed-maturity certificates of deposit is estimated by discounting
the future cash flows using the rates currently offered for deposits of
similar remaining maturities.
Advances from Federal Home Loan Bank - The estimated fair value of advances
from Federal Home Loan Bank is determined by discounting the future cash
flows of existing advances using rates currently available on advances from
Federal Home Loan Bank having similar characteristics.
Lending Commitments - Fixed Rate - The estimated fair value of commitments
to originate fixed-rate loans is determined based on the difference between
current levels of interest rates and the committed rates. The notional
amount of lending commitments - fixed rate represents the net amount which
the Savings Bank expects to fund. The Savings Bank's estimate, based on
experience, is that 25% of its lending commitments - fixed rate will not
close.
Lending Commitments - Floating Rate - There is no estimated unrealized gain
(loss) attributable to floating rate lending commitments due to their
floating interest rate nature.
Commitments to Sell Loans - The estimated unrealized gain (loss) associated
with commitments to sell loans is based on current market prices that the
buyer will pay for such commitments.
The fair value estimates presented herein are based on pertinent information
available to management as of September 30, 1995 and 1996. Although
management is not aware of any factors that would significantly affect the
estimated fair value amounts, such amounts have not been comprehensively
revalued for purposes of these financial statements since that date.
Therefore, current estimates of fair value may differ significantly from the
amounts presented herein.
18. SEGMENT INFORMATION
The Savings Bank's operations include two reportable segments: savings and
loan and mortgage banking. The savings and loan segment is composed of those
operations involved in originating mortgage loans held for investment,
primarily on single family residences; investing in mortgage-related
securities, United States Treasury and other U.S. Government agencies'
securities and receiving deposits from customers. The mortgage banking
segment is composed of those operations involved in originating and
purchasing residential mortgage loans for resale in the secondary mortgage
market and in servicing loans for others.
-56-
<PAGE>
Intersegment interest income and expense represent interest on loans and
advances from the savings and loan segment to the mortgage banking segment
computed at the prime rate of interest.
<TABLE>
<CAPTION>
1994
------------------------------------------------------
Savings Mortgage
Bank Banking Eliminations Consolidated
Interest income:
<S> <C> <C> <C> <C>
Unaffiliated customers $ 9,467 $ 2,082 $ 11,549
Intersegment 2,330 $ (2,330)
--------- --------- ---------
Total interest income 11,797 2,082 (2,330) 11,549
--------- --------- --------- ---------
Interest expense:
Unaffiliated customers 5,944 5,944
Intersegment 2,330 (2,330)
--------- --------- --------- ---------
Total interest expense 5,944 2,330 (2,330) 5,944
--------- --------- --------- ---------
Net interest income (expense) 5,853 (248) $ 5,605
========
Provision for loan losses (6) (6)
Other income 1,116 2,685 3,801
Other expense (3,919) (2,421) (6,340)
------ ------ ------
Income before income taxes $ 3,044 $ 16 $ 3,060
========= ========= =========
Identifiable assets $ 170,984 $ 31,644 $ 202,628
========= ========= =========
Depreciation and amortization expense $ 284 $ 74 $ 358
========= ========= =========
Capital expenditures $ 911 $ 214 $ 1,125
========= ========= =========
</TABLE>
-57-
<PAGE>
<TABLE>
<CAPTION>
1995
----------------------------------------------------
Savings Mortgage
Bank Banking Eliminations Consolidated
Interest income:
<S> <C> <C> <C> <C>
Unaffiliated customers $ 14,499 $ 1,726 $ 16,225
Intersegment 1,937 $ (1,937)
--------- --------- --------- ---------
Total interest income 16,436 1,726 (1,937) 16,225
--------- --------- --------- ---------
Interest expense:
Unaffiliated customers 9,004 9,004
Intersegment 1,937 (1,937)
--------- --------- --------- ---------
Total interest expense 9,004 1,937 (1,937) 9,004
--------- --------- --------- ---------
Net interest income (expense) 7,432 (211) $ 7,221
=========
Provision for loan losses (224) (224)
Other income 1,580 6,174 7,754
Other expense (5,431) (2,770) (8,201)
--------- --------- ---------
Income before income taxes $ 3,357 $ 3,193 $ 6,550
========= ========= =========
Identifiable assets $ 214,649 $ 56,274 $ 270,923
========= ========= =========
Depreciation and amortization expense $ 338 $ 53 $ 391
========= ========= =========
Capital expenditures $ 1,014 $ 403 $ 1,417
========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
1996
---------------------------------------------------
Savings Mortgage
Bank Banking Eliminations Consolidated
Interest income:
<S> <C> <C> <C> <C>
Unaffiliated customers $ 17,859 $ 2,314 $ 20,173
Intersegment 2,723 $ (2,723)
--------- --------- --------- ---------
Total interest income 20,582 2,314 (2,723) 20,173
--------- --------- --------- ---------
Interest expense:
Unaffiliated customers 12,268 12,268
Intersegment 2,723 (2,723)
--------- --------- --------- ---------
Total interest expense 12,268 2,723 (2,723) 12,268
--------- --------- --------- ---------
Net interest income (expense) 8,314 (409) $ 7,905
=========
Provision for loan losses (75) (75)
Other income 2,121 5,051 7,172
Other expense (6,962) (3,021) (9,983)
--------- --------- ---------
Income before income taxes $ 3,398 $ 1,621 $ 5,019
========= ========= =========
Identifiable assets $ 293,415 $ 46,771 $ 340,186
========= ========= =========
Depreciation expense $ 257 $ 87 $ 344
========= ========= =========
Capital expenditures $ 1,489 $ 369 $ 1,858
========= ========= =========
</TABLE>
-58-
<PAGE>
19. PARENT COMPANY FINANCIAL INFORMATION (PARENT COMPANY ONLY)
Mid Continent Bancshares, Inc. was organized to serve as the holding company
for Mid-Continent Federal Savings Bank and began operations on June 27, 1994
in conjunction with the Savings Bank's mutual-to-stock conversion and the
Company's initial public offering of common stock. The Company's (Parent
company only) balance sheets as of September 30, 1995 and 1996 and related
statements of income and cash flows for the periods then ended are as
follows:
BALANCE SHEETS
SEPTEMBER 30, 1995 AND 1996
(Dollars in thousands, except share amounts)
- --------------------------------------------------------------------------------
ASSETS 1995 1996
-------- --------
CASH AND CASH EQUIVALENTS $ 1,029 $ 287
NOTES RECEIVABLE FROM MID-CONTINENT
FEDERAL SAVINGS BANK 7,292 4,951
INVESTMENT IN AND ADVANCES TO
MID-CONTINENT FEDERAL SAVINGS BANK 28,672 31,827
OTHER ASSETS 108 76
-------- --------
TOTAL ASSETS $ 37,101 $ 37,141
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES -
Income taxes payable $ 126 $ 112
Accrued and other liabilities 240 222
-------- --------
Total liabilities 366 334
-------- --------
STOCKHOLDERS' EQUITY
Common stock $.10 par value, 20,000,000
authorized, 2,248,250 shares issued 225 225
Additional paid-in capital 21,553 21,663
Unearned compensation - Employee Stock Ownership Plan (1,190) (1,054)
Unearned compensation - Management Stock Bonus Plan (746) (547)
Retained earnings, substantially restricted 18,067 20,424
-------- --------
37,909 40,711
Treasury stock, 80,000 and 231,500 shares, at cost (1,174) (3,904)
-------- --------
Total stockholders' equity 36,735 36,807
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 37,101 $ 37,141
======== ========
-59-
<PAGE>
STATEMENTS OF INCOME
YEARS ENDED SEPTEMBER 30, 1995 AND 1996
(Dollars in thousands, except share amounts)
- ----------------------------------------------------------------
1995 1996
------ ------
INTEREST INCOME $ 575 $ 361
------ ------
OTHER EXPENSES:
Professional fees 82 44
Other 105 94
------ ------
Total other expense 187 138
------ ------
INCOME BEFORE INCOME TAX EXPENSE
AND EQUITY IN UNDISTRIBUTED NET
INCOME OF SUBSIDIARY 388 223
INCOME TAX EXPENSE 140 85
------ ------
INCOME BEFORE EQUITY IN UNDISTRIBUTED
NET INCOME OF SUBSIDIARY 248 138
EQUITY IN UNDISTRIBUTED NET
INCOME OF SUBSIDIARY 3,858 2,988
------ ------
NET INCOME $4,106 $3,126
====== ======
-60-
<PAGE>
STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 1995 AND 1996
(Dollars in thousands, except share amounts)
- --------------------------------------------------------------------------------
1995 1996
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 4,106 $ 3,126
Adjustment to reconcile net income to
net cash provided by operating activities:
Equity in undistributed earnings of subsidiary (3,858) (2,988)
Changes in:
Other assets (39) 6
Accrued and other liabilities 24 100
Income taxes payable 94 (14)
------- -------
Net cash flows provided by operating activities 327 230
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Principal collected on notes receivable from
Mid-Continent Federal Savings Bank 2,968 2,342
------- -------
Net cash flows provided by investing activities 2,968 2,342
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Acquisition of common stock for Management
Stock Bonus Plan (995)
Receipt of funds for Management Stock Bonus Plan stock 199 199
Acquisition of treasury stock (1,174) (2,730)
Cash dividends on common stock to stockholders (615) (783)
------- -------
Net cash flows used in financing activities (2,585) (3,314)
------- -------
NET INCREASE (DECREASE) CASH AND CASH EQUIVALENTS 710 (742)
CASH AND CASH EQUIVALENTS:
Beginning of year 319 1,029
------- -------
End of year $ 1,029 $ 287
======= =======
SUPPLEMENTAL DISCLOSURES OF NONCASH
INVESTING AND FINANCING ACTIVITIES -
Accrued dividends on common stock $ 205 $ 188
======= =======
These statements should be read in conjunction with the other notes related
to the consolidated financial statements.
-61-
<PAGE>
20. SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
Quarter Ended
(In thousands, except earnings per share)
--------------------------------------------------------------
December 31, March 31, June 30, September 30,
1994 1995 1995 1995
<S> <C> <C> <C> <C>
Interest income $ 3,607 $ 3,750 $ 4,371 $ 4,497
Interest expense 1,823 2,045 2,466 2,670
Net interest income 1,784 1,705 1,905 1,827
Net income 880 1,317 1,083 826
Earnings per share -
Net income 0.41 0.62 0.54 0.40
</TABLE>
<TABLE>
<CAPTION>
Quarter Ended
(In thousands, except earnings per share)
---------------------------------------------------------------
December 31, March 31, June 30, September 30,
1995 1996 1996 1996
<S> <C> <C> <C> <C>
Interest income $ 4,726 $ 4,707 $ 5,089 $ 5,651
Interest expense 2,806 2,913 3,051 3,498
Net interest income 1,920 1,794 2,038 2,153
Net income 951 820 896 459(l)
Earnings per share -
Net income 0.48 0.42 0.46 0.23
</TABLE>
(1) Reflects a fourth quarter charge for the one-time assessment of federal
insurance premiums (See Note 22).
The Company has restated its fiscal year 1995 quarterly financial
information for the effects of the adoption of SFAS No. 122 as of the
beginning of the fiscal year (See Note 2). The implementation of this
Statement increased net income approximately $174 in the three fiscal
quarters ended June 30, 1995. Net income previously reported on Form 10-Q
was $823, $1,279, $1,004 and earnings per share previously reported was
$.39, $.60 and $.49, respectively, for the fiscal 1995 quarters ended
December 31, March 31 and June 30.
21. INTEREST RATE RISK
The Company is engaged principally in providing first mortgage loans to
individuals. For the year ending September 30, 1996, the Company had average
interest earnings assets of approximately $270,566 having a weighted average
effective yield of 7.46% and average interest bearing liabilities of
approximately $249,650 having a weighted average effective interest rate of
4.91%. The average maturity or repricing of interest earning assets is
generally longer than that of the liabilities. The shorter duration of
interest sensitive liabilities indicates that the Company is exposed to
interest rate risk because, in a rising rate environment, liabilities will
be repricing upwards more rapidly than the Company's interest sensitive
assets, thereby reducing net interest income.
-62-
<PAGE>
22. FEDERAL LEGISLATION
In September 1996, legislation was enacted which included a comprehensive
reform of the banking and thrift industries. The legislation imposes a
one-time assessment on qualifying thrift deposits to recapitalize the
Savings Association Insurance Fund ("SAIF"), the fund which insures thrift
deposits, and ultimately merges the Bank Insurance Fund ("BIF") and the
SAIF, at which time banks and thrifts would pay the same deposit insurance
premiums. The amount of the one-time assessment is .657% on qualifying
thrift deposits as of March 31, 1995. This one-time assessment of $1,053 is
included in federal insurance premiums for the year ended September 30,
1996.
* * * * * *
-63-
<PAGE>
Mid Continent Bancshares, Inc.
================================================================================
<TABLE>
<CAPTION>
Directors of Directors of
Mid Continent Bancshares, Inc. Mid-Continent Federal Savings Bank
- ------------------------------ ----------------------------------
<S> <C>
Richard T. Pottorff - Chairman Richard T. Pottorff - Chairman
Officer - Mid-Continent Federal Savings Bank Dr. Ken Dellett
Dr. Ken Dellett - Vice Chairman Thomas C. Hand
Retired - Physician Ron McGraw
Thomas C. Hand Don Adlesperger
President - Hand Realty Co. Larry R. Goddard
Ron McGraw Robert Lasater *
President - Sunflower Roofing, Inc. Clem Silvers *
Don Adlesperger * Advisory Directors
President - Triple A Builders Supply
Larry R. Goddard
Officer - Mid-Continent Federal Savings Bank
Officers of Officers of
Mid Continent Bancshares, Inc. Mid-Continent Federal Savings Bank
- ------------------------------ ----------------------------------
Richard T. Pottorff Richard T. Pottorff
Chairman, President & CEO Chairman, President & CEO
Larry R. Goddard Larry R. Goddard
Executive Vice President & CFO Executive Vice President & CFO
Harold Siemens Harold Siemens
Senior Vice President Senior Vice President
Cheryl A. Wilkerson Cheryl A. Wilkerson
Secretary Vice President, Secretary
David L. Walter David L. Walter
Vice President Vice President/Treasurer
Richard O. Nelson Craig Yaryan
Vice President Vice President
Eric Hawkins
Vice President
William Cole
Vice President
Diane Griffin
Vice President
Larry E. Haury
Vice President
Jill Norman
Vice President
</TABLE>
-64-
<PAGE>
Mid Continent Bancshares, Inc.
================================================================================
LEGAL COUNSEL
General Counsel Special Counsel
Adams, Jones, Robinson Malizia, Spidi, Sloane & Fisch, P.C.
and Malone One Franklin Square
155 N. Market 1301 K Street, NW - Suite 700 East
Wichita, KS 67202 Washington, DC 20005
AUDITORS TRANSFER AGENT
Deloitte & Touche LLP American Securities Transfer & Trust, Inc.
Suite 400 938 Quail St. Suite 101
1010 Grand Avenue Lakewood, CO 80215
Kansas City, MO 64106 Phone: (303) 234-5300
OFFICE LOCATIONS
Executive and Administrative Office
124 W. Central
El Dorado, Kansas 67042
(316) 321-2700
El Dorado Wichita
405 N. Main 255 N. Main
El Dorado, KS 67042 Wichita, KS 67202
(316) 321-2700 (316) 264-4133
Augusta 762 N. West St.
1420 N. Ohio Wichita, KS 67203
Augusta, KS 67010 (316) 946-0202
(316) 775-2208
2123 N. Maize Road
Winfield Wichita, KS 67212
1113 S. Main (316) 729-7999
Winfield, KS 67156
(316) 221-3830 3055 N. Rock Road
Wichita, KS 67226
Winfield (316) 634-2800
2310 S. Main
Winfield, KS 67156 FUTURE LOCATIONS
(316) 221-0158 . Derby
79th and Rock Road
Newton Derby, KS 67037
100 W. 12th
Newton, KS 67114
(316) 283-7310
-65-
EXHIBIT 23
<PAGE>
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
33-92224 of Mid Continent Bancshares, Inc. on Form S-8 of our report dated
November 12, 1996 appearing in and incorporated by reference in this Annual
Report on Form 10-K of Mid Continent Bancshares, Inc. for the year ended
September 30, 1996.
/s/Deloitte & Touche LLP
Kansas City, Missouri
December 23, 1996
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-END> SEP-30-1996
<CASH> 1,694
<INT-BEARING-DEPOSITS> 3,924
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 124,945
<INVESTMENTS-MARKET> 122,520
<LOANS> 184,876
<ALLOWANCE> 421
<TOTAL-ASSETS> 340,186
<DEPOSITS> 214,493
<SHORT-TERM> 63,200
<LIABILITIES-OTHER> 7,186
<LONG-TERM> 18,500
0
0
<COMMON> 225
<OTHER-SE> 36,582
<TOTAL-LIABILITIES-AND-EQUITY> 340,186
<INTEREST-LOAN> 11,723
<INTEREST-INVEST> 8,172
<INTEREST-OTHER> 278
<INTEREST-TOTAL> 20,173
<INTEREST-DEPOSIT> 9,485
<INTEREST-EXPENSE> 2,783
<INTEREST-INCOME-NET> 7,905
<LOAN-LOSSES> 75
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 9,983
<INCOME-PRETAX> 5,019
<INCOME-PRE-EXTRAORDINARY> 3,126
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,126
<EPS-PRIMARY> 1.59
<EPS-DILUTED> 1.59
<YIELD-ACTUAL> 2.92
<LOANS-NON> 484
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 423
<CHARGE-OFFS> 90
<RECOVERIES> 13
<ALLOWANCE-CLOSE> 421
<ALLOWANCE-DOMESTIC> 421
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Mid Continent Bancshares, Inc.
El Dorado, Kansas
We have audited the consolidated financial statements of Mid Continent
Bancshares, Inc. and subsidiary as of September 30, 1995 and 1996 and for each
of the three years in the period ended September 30, 1996, and have issued our
report thereon dated November 12, 1996; such consolidated financial statements
and report are included in your 1996 Annual Report to Stockholders and are
incorporated herein by reference. Our audits also included the financial
statement schedule of Mid Continent Bancshares, Inc. and subsidiary, listed in
Item 14(a)2. This financial statement schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion based on our
audits. In our opinion, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/Deloitte & Touche LLP
Kansas City, Missouri
December 12, 1996
