SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20552
FORM 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 [FEE REQUIRED]
For the fiscal year ended June 30, 1998
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
Commission File Number 1-14343
MIDLAND CAPITAL HOLDINGS CORPORATION
(Name of Small Business Issuer in its Charter)
United States 36-4238089
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
8929 South Harlem Avenue
Bridgeview, Illinois 60455
(Address of Principal Executive Offices) Zip Code
Issuer's telephone number, including area code: (708) 598-9400
Securities Registered Under Section 12(b) of the Exchange Act:
None
Securities Registered Pursuant to Section 12(g) of the Exchange Act:
Common Stock, par value $ .01 per share
(Title of Class)
Check whether the Issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past twelve months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
YES [ X ] NO [ ]
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of Issuer's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ X ]
The Issuer had $595,000 in net income for the fiscal year ended June
30, 1998.
<PAGE>
As of June 30, 1998, there were issued and outstanding 363,975 shares
of the Issuer's Common Stock. The Issuer's voting stock is not regularly and
actively traded, and there are no regularly quoted bid and asked prices for the
Issuer's voting stock. Accordingly, the Issuer is unable to determine the
aggregate market value of the voting stock held by non-affiliates.
DOCUMENTS INCORPORATED BY REFERENCE
PARTS II and IV of Form 10-KSB - Annual Report to Stockholders for the
Fiscal Year Ended June 30, 1998.
PART III of Form 10-KSB - Proxy Statement for the 1998 Annual Meeting
of Stockholders.
<PAGE>
PART I
Item 1. Description of Business
Midland Capital Holding Corporation (the "Company") is a Delaware
corporation which was organized in 1998 by Midland Federal Savings and Loan
Association (the "Association" or "Midland Federal") for the purpose of becoming
a thrift institution holding company. The Company and the Association are
headquartered in Bridgeview, Illinois. The Association began operations in 1914
as a state-chartered mutual savings institution. In 1982, the Association became
a federal mutual savings and loan association.
On June 30, 1993, the Association completed a conversion to the stock
form of organization. In that conversion, the Association issued 345,000 shares
of Common Stock, raising net proceeds of approximately $3.1 million. On July 23,
1998, the Association became a wholly-owned subsidiary of the Company. The
principal asset of the company is the outstanding stock of the Association. The
Company presently has no separate operations and its business consists only of
the business of the Association. All references to the Company, unless otherwise
indicated, at or before July 23, 1998 refer to the Association. Midland Federal
has been principally engaged in the business of attracting deposits from the
general public and using such deposits to originate residential mortgage and, to
a lesser extent, consumer, multi-family and other loans in its primary market
area. The Association has also made substantial investments in mortgage-backed
securities, investment securities and liquid assets.
The Association's primary market area consists of Southwest Chicago,
and the southwest suburban communities of Bridgeview, Oak Lawn, Palos Hills,
Hickory Hills, Burbank and Justice which it serves through its main office in
Bridgeview and two branch offices in Southwest Chicago. Its deposits are insured
up to applicable limits by the Federal Deposit Insurance Corporation ("FDIC").
At June 30, 1998, Midland Federal had $117.4 million of assets, deposits of
$107.8 million and stockholders equity of $8.8 million.
The main office of the Company and the Association are located at 8929
South Harlem Avenue, Bridgeview, Illinois 60455 and the telephone number at that
address is (708) 598-9400.
Forward-Looking Statements
When used in this Form 10-KSB and in future filings by the Company with
the Securities and Exchange Commission (the "SEC"), in the Company's press
releases or other public or shareholder communications, and in oral statements
made with the approval of an authorized executive officer, the words or phrases
"will likely result", "are expected to", "will continue", "is anticipated",
"estimate", "project" or similar expressions are intended to identify
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Such statements are subject to risks and
uncertainties, including but not limited to changes in economic conditions in
the Company's market area, changes in policies by regulatory agencies,
fluctuations in interest rates, demand for loans in the Company's market area
and competition, all or some of which could cause actual results to differ
materially from historical earnings and those presently anticipated or
projected. The Company wishes to caution readers not to place undue reliance on
any such forward-looking statements, which speak only as of the date made and
are subject to the above-stated qualifications in any event. The Company wishes
to advise readers that the factors listed above could affect the Company's
<PAGE>
financial performance and could cause the Company's actual results for future
periods to differ materially from any opinions or statements expressed with
respect to future periods in any current statements.
The Company does not undertake--and specifically declines any
obligation--to publicly release the result of any revisions which may be made to
any forward-looking statements to reflect events or circumstances after the date
of such statements or to reflect the occurrence of anticipated or unanticipated
events.
Impact of the Year 2000
All of the Company's data processing functions are performed by the
Association or outside vendors. The Association has conducted a comprehensive
review of its computer systems to identify applications that could be affected
by the Year 2000 issue and has developed an implementation plan to address the
issue. The Association is in contact with vendors and providers of critical
systems to determine their progress in bringing such systems into Year 2000
compliance, which compliance is anticipated by December 31, 1998 and the
Association is currently scheduling testing dates for mission critical and
non-mission critical systems.
The Association is scheduled to convert its on-line customer account
data processing, as well as certain other critical data processing and computer
systems, to a new service provider beginning in October 1998 (the "Conversion").
The Association has been informed by the new service provider that all such
systems will be Year 2000 compliant by December 31, 1998. The Association
anticipates that it will incur Conversion costs in the approximate amount of
$125,000, which costs will be recorded as a charge to earnings in the period in
which the Conversion services are performed. The Conversion will also require
additional capital expenditures for computer and related equipment in the
approximate amount of $150,000 which costs will be amortized over the useful
life of the equipment purchased.
Lending Activities
General. The principal lending activity of the Association has been the
origination for its portfolio of conventional first mortgage real estate loans
secured by owner occupied one- to four-family residential property. The
Association also originates multi-family and non-residential real estate loans
and consumer loans.
Loan originations come primarily from walk-in customers, continued
business from customers and referrals from local real estate brokers through
contact with the Association's staff of loan originators. The Association's loan
originators earn a base salary plus commission based upon first mortgage loan
sales generated by the originator. All completed loan applications are reviewed
by the Association's salaried loan officers. As part of the application process,
information is obtained concerning the income, financial condition, employment
and credit history of the applicant. If multi-family or commercial real estate
is involved, information is also obtained concerning cash flow after debt
service. The quality of loan applications are analyzed based on the
Association's credit underwriting guidelines as well as the guidelines issued by
the Federal Home Loan Mortgage Corporation ("FHLMC"), depending on the type of
loan involved. The Association has established correspondent lending
<PAGE>
relationships with other lenders in order to take applications which either do
not conform to the Association's underwriting guidelines or are for mortgage
loan products not offered by the Association, such as FHA and VA insured
mortgage loans. In consideration of a loan broker fee paid by the lender to the
Association, the Association processes the loan application and forwards a
completed loan application package to the lender, who underwrites and originates
the loan.
All real estate loans are appraised by independent fee appraisers
approved by the Board of Directors. The Association obtains audited financial
statements, and current unaudited financial statements where appropriate, as
well as annual financial statements for borrowers with loans secured by
commercial real estate.
Real estate loans are generally approved by the Loan Committee or are
approved by the Chief Lending Officer or the President in amounts up to
$200,000, and then ratified by the Loan Committee. Loans for amounts between
$200,000 and $350,000 must be approved by the Loan Committee, and loans for
amounts over $350,000 by the Board of Directors. The Chief Lending Officer has
approval authority for all consumer loans.
The Association generally requires, in connection with the origination
of real estate loans, fire and casualty insurance coverage, as well as flood
insurance where appropriate, to protect the Association's interest. The cost of
this insurance coverage is paid by the borrower. The Association also requires
title insurance coverage on all real estate loans except for second mortgage
loans in amounts less than $25,000 for which loans the Association only requires
that good and marketable title be verified by an independent title search. The
cost of title insurance coverage is paid for by the borrower, except in the case
of second mortgage loans on which the Association may, from time to time, absorb
such costs for promotional purposes.
The aggregate amount of loans that the Association is permitted to make
under applicable federal regulations to any one borrower, including related
entities, and the aggregate amount that the Association could have invested in
any one real estate project is generally the greater of 15% of unimpaired
capital and surplus or $500,000. See "Regulation - Federal Regulation of Savings
Associations."
At June 30, 1998, the Association had one borrower with an outstanding
loan balance in excess of $500,000. The loan totaled $1.1 million, and was
secured by a 43 unit multi-family residential property in the Association's
market area. This loan, which had been delinquent at June 30, 1997, was brought
current by the borrower during the year ended June 30, 1998 as a result of
improved cash flows derived from the property. This loan was made prior to the
imposition of the regulatory limits described above, and is grandfathered. See
"Non-Performing Assets, Classified Assets, Loan Delinquencies and Defaults."
<PAGE>
Loan and Mortgage-backed Securities Portfolio Composition. The
following table sets forth information concerning the composition of the
Association's loan and mortgage-backed securities portfolios in dollar amounts
and in percentages as of the dates indicated.
<TABLE>
<CAPTION>
June 30,
-------------------------------------------------------------------------------
1998 1997 1996
----------------------- -------------------- --------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Real Estate Loans
One- to four-family....................... $35,030 87.82% $29,018 84.26% $28,398 84.09%
Multi-family.............................. 1,790 4.49 2,201 6.39 2,268 6.72
Non-residential........................... 244 .61 264 0.77 282 0.84
Construction.............................. 450 1.13 300 0.87 -- ---
------- ----- ------- ----- ------- -----
Total mortgage loans................... 37,514 94.05 31,783 92.29 30,948 91.65
------- ----- ------- ----- ------- -----
Other Loans
Consumer Loans:
Deposit accounts......................... 464 1.16 425 1.23 435 1.29
Student.................................. 1,316 3.30 1,542 4.48 1,789 5.30
Automobile............................... 372 .93 456 1.33 401 1.19
Mobile home.............................. 10 .03 21 .06 56 .16
Other.................................... 139 .35 138 .40 119 .35
------- ----- ------- ----- ------- -----
Total consumer loans.................. 2,301 5.77 2,582 7.50 2,800 8.29
------- ----- ------- ----- ------- -----
Commercial business loans................ 71 .18 74 .21 21 .06
------- ----- ------- ----- ------- -----
Total loans receivable................ 39,886 100.00% 34,439 100.00% 33,769 100.00%
------ ====== ------- ====== ------- ======
Less
Loans in process.......................... 41 137 11
Deferred fees and discounts............... 17 97 125
Allowance for uncollected interest........ 262 262 262
Allowance for loan losses................. 394 551 596
-------- ------- -------
Loans receivable, net................. $39,172 $33,392 $32,775
======= ======= =======
Mortgage-backed securities:
FHLMC.................................... $14,256 68.49% $14,234 65.03% $18,513 67.82%
FNMA..................................... 6,147 29.53 7,097 32.43 8,098 29.66
GNMA..................................... 389 1.87 520 2.38 650 2.38
Collateralized mortgage obligation....... 24 .11 36 .16 39 .14
------- ----- ------- ----- ------- -----
Total mortgage-backed securities....... 20,816 100.00% 21,887 100.00% 27,300 100.00%
====== ====== ======
Net premiums............................. 29 49 110
------- ------- -------
Net mortgage-backed securities........... $20,845 $21,936 $27,410
======= ======= =======
</TABLE>
<PAGE>
The following table shows the composition of the Association's loan
portfolio by fixed and adjustable-rate at the dates indicated.
<TABLE>
<CAPTION>
June 30,
--------------------------------------------------------------------------
1998 1997 1996
--------------------------------------------------------------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Fixed-Rate Loans
Real Estate:
One- to four-family $32,057 80.37% $24,517 71.19% $23,438 69.40%
Multi-family 179 .45 181 .53 182 .54
------- ----- ------- ----- ------- -----
Total real estate loans 32,236 80.82 24,698 71.72 28,620 69.94
------- ----- ------- ----- ------- -----
Consumer 10 .03 21 .06 56 .16
------- ----- ------- ----- ------- -----
Total fixed-rate loans 32,246 80.85 24,719 71.78 28,676 70.10
------- ----- ------- ----- ------- -----
Adjustable-Rate Loans
Real estate:
One- to four-family 2,973 7.45 4,501 13.07 4,960 14.69
Multi-family 1,611 4.04 2,020 5.86 2,086 6.18
Non-residential 244 .61 264 .77 282 .84
Construction 450 1.13 300 .87 -- --
------- ----- ------- ----- ------- -----
Total real estate loans 5,278 13.23 7,085 20.57 7,328 21.71
------- ----- ------- ----- ------- -----
Consumer 2,291 5.74 2,561 7.44 2,744 8.13
Commercial business 71 .18 74 .21 21 .06
------- ----- ------- ----- ------- -----
Total adjustable-rate loans 7,640 19.48 9,720 28.22 10,093 29.90
------- ----- ------- ----- ------- -----
Total loans 39,886 100.00% 34,439 100.00% 33,769 100.00%
====== ====== ======
Less:
Loans in process 41 137 11
Deferred fees and discounts 17 97 125
Allowance for uncollected interest 262 262 262
Allowance for loan losses 394 551 596
------- ------- -------
Total loans, net $39,172 $33,392 $32,775
</TABLE>
<PAGE>
The following schedule illustrates the interest rate sensitivity of the
Association's loan portfolio at June 30, 1998. Mortgages which have adjustable
or renegotiable interest rates are shown as maturing in the period during which
the contract is due. The schedule does not reflect the effects of possible
prepayments or enforcement of due-on-sale clauses or interest rate adjustments.
<TABLE>
<CAPTION>
Real Estate
-------------------------------------------------------------------------------------------
Multi-Family Construction or
One- to Four-Family and Commercial Development Consumer
-------------------- ------------------ ------------------ --------------------
Weighted Weighted Weighted Weighted
Average Average Average Amount Average
Amount Rate Amount Rate Amount Rate Rate Rate
------ ---- ------ ---- ------ ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Due During Years
Ending June 30,
1999(1).................. $ 567,764 9.43% $ 681,754 10.01% $450,000 10.50 $ 733,732 8.71%
2000..................... 123,116 10.34 23,462 11.50 --- --- 198,037 7.62
2001..................... 147,191 8.47 179,461 9.75 --- --- 392,358 8.03
2002 to 2003............. 1,103,755 8.40 --- --- --- --- 290,084 8.36
2004 to 2007............. 3,194,588 7.98 1,149,800 8.24 --- --- 532,445 8.24
2008 to 2022............. 13,014,904 7.67 --- --- --- 153,977 8.32
2023 and following....... 16,878,540 7.62 --- --- --- --- --- ---
$35,029,858 $2,034,477 $450,000 $2,300,633
<CAPTION>
Commercial
Business Total
-----------------------------------------
Weighted Weighted
Amount Average Amount Average
------ ------- ------ -------
<C> <C> <C> <C>
1999(1).................. $70,988 ---% $2,504,238 9.30%
2000..................... --- --- 344,615 8.86
2001..................... --- --- 719,010 8.55
2002 to 2003............. --- --- 1,393,839 8.39
2004 to 2007............. --- --- 4,876,833 8.07
2008 to 2022............. --- --- 13,168,881 7.68
2023 and following....... --- --- 16,878,540 7.62
$70,988 $39,885,956 7.85%
</TABLE>
(1) Includes demand loans, loans having no stated maturity and overdraft loans.
The total amount of loans due after June 30, 1999 which have
predetermined interest rates is approximately $34.0 million while the total
amount of loans due after such date which have floating or adjustable interest
rates is approximately $3.4 million.
<PAGE>
One- to Four-Family Residential Real Estate Lending
The Association's primary lending activity has been the origination and
purchase of permanent loans secured by mortgages on owner-occupied one- to
four-family residences. At June 30, 1998, $35.0 million or 87.8%, of the
Association's gross loan portfolio consisted of permanent loans on one- to
four-family residences. Most of these loans were secured by properties located
in the State of Illinois, with a substantial majority located in the
Association's primary market area. At June 30, 1998, approximately $465,000 was
secured by one-to four-family residential properties located in Florida.
Historically, Midland Federal originated for retention in its own
portfolio 30-year fixed-rate loans secured by one- to four-family residential
real estate. Beginning in 1981, in order to reduce its exposure to changes in
interest rates, Midland Federal began to originate adjustable rate mortgages
("ARMs"), subject to market conditions and consumer preference. However, as a
result of continued consumer demand, Midland Federal has continued to originate
for retention in its portfolio fixed-rate residential loans in amounts and at
rates which are monitored for compliance with the Association's asset/liability
management policy. From time to time, the Association will make owner-occupied
one- to four-family construction loans for a six-month interest only term, which
the Association will convert to a permanent mortgage for a fee generally of one
point. The Association requires the interest on such loans during the
construction term to be paid or placed in escrow when the loan is funded.
The Association's current one- to four-family residential ARMs are
fully amortizing loans with contractual maturities of up to 30 years. The
interest rates on substantially all the ARMs originated by Midland Federal are
subject to adjustment at one-year intervals. The Association's ARM products
generally carry interest rates which are reset to a stated margin over the
one-year U.S. Treasury Rate. Adjustments in the interest rate of the
Association's ARMs are generally limited to 2% at any adjustment date and 6%
over the life of the loan. At June 30, 1998, the total balance of one- to
four-family ARMs was $3.0 million, or 7.5% of the Association's gross loan
portfolio.
The Association also originates home equity lines of credit which were
funded in the amount of $799,000 at June 30, 1998, and home equity loans, which
were $2.3 million at June 30, 1998. Unfunded commitments on home equity lines of
credit totaled $597,000 at June 30, 1998. The Association's home equity lines of
credit are five year interest-only balloon loans secured by second liens on the
property, and are made in amounts up to 75% of the appraised value of the
property (including first lien amounts). The Association's home equity loans are
three to 15 year fixed-rate loans secured by second liens on the property, and
are made in amounts up to 80% of the appraised value of the property (including
first lien amounts).
The Association's residential loans are generally underwritten and
documented to permit their sale in the secondary market. The Association
evaluates both the borrower's ability to make principal and interest payments
and the value of the property that will secure the loan. Midland Federal
generally originates residential mortgage loans with loan-to-value ratios of up
to 80%, although the Board of Directors has authorized originations of mortgage
loans with loan-to-value ratios of up to 90%. On any mortgage loan exceeding an
80% loan-to-value ratio at the time of origination, Midland Federal generally
requires private mortgage insurance on the excess.
<PAGE>
The Association's residential mortgage loans customarily include
"due-on-sale" clauses, which are provisions that give Midland Federal the right
to declare a loan immediately due and payable in the event the borrower sells or
otherwise disposes of the real property subject to the mortgage and the loan is
not repaid.
Multi-Family Residential Lending
The Association's multi-family residential portfolio includes $1.8
million in loans secured by residential buildings (5 or more units) located
primarily in the Association's primary market area. The Association originates
primarily adjustable-rate multi-family real estate loans. Rates on the
Association's adjustable-rate multi-family real estate loans generally adjust in
a manner consistent with the Association's ARMs.
Multi-family real estate loans are generally underwritten in amounts of
up to 70% of the appraised value of the underlying property. Appraisals on
properties securing multi-family real estate loans originated by the Association
are performed by a qualified appraiser at the time the loan is made. In
addition, the Association's underwriting procedures generally require
verification of the borrower's credit history, income and financial statements,
banking relationships, references and income projections for the property.
Personal guarantees are generally obtained for the Association's multi-family
real estate loans.
The Association monitors the cash flow and operating performance of
borrowers through inspection of collateral, calls on borrowers, inspection of
business premises and evaluation of interim financial statements.
Midland Federal had 6 multi-family real estate loans totaling $1.8
million at June 30, 1998. The net amount of such loans which was non-performing
at June 30, 1998 was $38,000. See "- NonPerforming Assets, Classified Assets,
Loan Delinquencies and Defaults" for a discussion of the Association's
non-performing multi-family residential loans.
Multi-family residential real estate loans generally present a higher
level of risk than loans secured by one- to four-family residences. This greater
risk is due to 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 multi-family residential real estate is typically dependent
upon the successful operation of the related real estate project. If the cash
flow from the project is reduced (for example, if leases are not obtained or
renewed), the borrower's ability to repay the loan may be impaired.
Consumer Lending
Management believes that consumer loans help the Association expand its
customer base and create stronger ties to its existing customer base. In
addition, because consumer loans generally have shorter terms to maturity and
carry higher rates of interest than do residential loans, they can be valuable
asset/liability management tools.
<PAGE>
Midland Federal offers a variety of secured consumer loans, including
education loans (which carry a guaranty from a State agency), automobile loans
and loans secured by savings deposits. In addition, the Association offers
unsecured consumer loans through its Visa/MasterCard credit card program. The
Association currently originates substantially all of its consumer loans in its
principal market area.
Consumer loan terms vary according to the type of collateral, term of
the loan and creditworthiness of the borrower. The underwriting standards
employed by the Association for consumer loans include a determination of the
applicant's payment history on other debts and an assessment of the borrower's
ability to meet payments on the proposed loan along with his or her existing
obligations. In addition to the creditworthiness of the applicant, the
underwriting process also includes a comparison of the value of the security, if
any, in relation to the proposed loan amount.
Student loans are originated by Midland Federal in compliance with the
guidelines established by the Illinois Guaranteed Loan Program ("IGLP"). As a
result, any loans that become delinquent 30-90 days are sold to IGLP. The
Association's student loan volume may decline in the future as a result of new
legislative proposals that the U.S. government provide direct loans for
education. As of June 30, 1998, student loans amounted to $1.3 million or 3.3%
of the Association's gross loan portfolio.
The Association also originates consumer loans secured by automobiles
in its primary market area. Underwriting standards employed by the Association
in connection with these loans includes a review of the borrowers'
creditworthiness, verification of collateral value and perfection of a lien
against the collateral. The Association requires vehicle insurance on all loans
secured by automobiles. At June 30, 1998, the Association had $372,000, or .93%
of its gross loan portfolio in automobile loans.
Lines of credit extended through the Association's Visa/MasterCard
credit card program are generally limited to $10,000. The Association obtains an
application from the borrower, a credit report on the borrower and verifies
employment for credit card borrowers. At June 30, 1998, the Association had
$73,000 or .18% of its gross loan portfolio in credit card loans.
Consumer loans may entail greater risk than residential mortgage loans,
particularly in the case of consumer loans which are unsecured or secured by
rapidly depreciable assets such as automobiles. In such cases, any repossessed
collateral for defaulted consumer loans may not provide adequate sources of
repayment for the outstanding loan balances as a result of the greater
likelihood of damage, loss or depreciation. In addition, consumer loan
collections are dependent on the borrower's continuing financial stability, and
thus are more likely to be affected by adverse personal circumstances.
Furthermore, the application of various federal and state laws, including
federal and state bankruptcy and insolvency laws, may limit the amount which can
be recovered on such loans. Although the level of delinquencies in the
Association's consumer loan portfolio has generally been low (at June 30, 1998,
$5,000, or approximately .22% of the consumer loan portfolio was 90 days or more
delinquent), there can be no assurance that delinquencies will not increase in
the future.
<PAGE>
Commercial Real Estate Lending
Midland Federal maintains a portion of its portfolio in permanent loans
secured by commercial real estate. The Association's commercial real estate
portfolio consists of loans on a variety of non-residential property, including
an automobile repair center and churches. At June 30, 1998, $244,000, or .61% of
the Association's gross loan portfolio consisted of permanent loans secured by
commercial real estate. In the future, the Association intends to continue to
engage in a modest level of commercial real estate lending, subject to
regulatory restrictions. Management intends that any future commercial real
estate loans carry adjustable interest rates and a loan-to-value ratio of 70% or
less. Nevertheless, in view of the significant amount of risk generally
associated with commercial real estate lending, there can be no assurance that
the Association will not experience delinquencies on its commercial real estate
portfolio.
Mortgage-Backed Securities
Midland Federal has a substantial portfolio of mortgage-backed
securities totaling $20.8 million. Midland Federal utilizes its mortgage-backed
securities to supplement loan production and to meet its asset/liability
management objectives. Mortgage-backed securities can also serve as collateral
for borrowings and, through repayments, as a source of liquidity. For
information regarding the carrying and fair values of Midland Federal's
mortgage-backed securities portfolio, see Note 4 of the Notes to Financial
Statements in the Annual Report to Stockholders filed as Exhibit 13 hereto. See
"Regulation."
The following table sets forth the contractual maturities of the
Association's mortgage-backed securities at June 30, 1998. It should be noted
that, due to prepayments, the actual maturity of the Association's long term
mortgage-backed securities will likely be significantly shorter than the
contractual maturities.
<TABLE>
<CAPTION>
Due in Balance Outstanding
----------------------------------------------------------------
3 to 5 6 to 20 Over 20
Years Years Years Fixed Adjustable
-----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Federal Home Loan Mortgage Corporation.............. $4,012 $1,607 $8,662 $4,012 $10,269
Federal National Mortgage Association............... --- 580 5,571 1,859 4,292
Government National Mortgage Association............ --- 389 --- 389 ---
Collateralized Mortgage Obligations................. --- 24 --- 24 ---
------- -------- -------- -------- --------
Total.......................................... $ 4,012 $ 2,600 $ 14,233 $ 6,284 $ 14,561
======= ======== ======== ======== ========
</TABLE>
Loan Originations, Purchases and Sales
Real estate loans are originated by Midland Federal's staff of salaried
loan officers. In addition, in order to increase loan volumes, commencing in
September 1995, the Association hired commissioned loan originators. Loan
applications are taken at each office, processed in the Association's main
office and then submitted to the Chief Lending Officer, the President or the
Loan Committee for approval.
<PAGE>
While the Association originates both adjustable-rate and fixed-rate
loans, its ability to originate loans is dependent upon the relative customer
demand for loans in its market. Demand is also affected by the interest rate
environment. The Association has not purchased loans in recent years, however,
during the years ended June 30, 1998 and 1997, the Association did sell loans to
the Illinois Housing Development Authority and other leaders, under various
programs.
The following tables set forth the Association's loan origination and
mortgage-backed securities purchases, sales and principal repayments for the
periods indicated.
<TABLE>
<CAPTION>
Year Ended June 30,
--------------------------------
1998 1997 1996
--------------------------------
(In Thousands)
<S> <C> <C> <C>
Loans receivable
Originations by type:
Adjustable-Rate:
Real estate - One- to four-family $ 239 $ 986 $ 1,922
- construction 408 300 --
Non-real estate - consumer 1,770 1,113 1,112
-------- -------- --------
Total adjustable rate 2,417 2,399 3,034
-------- -------- --------
Fixed-Rate:
Real estate - One- to four-family 14,916 5,172 4,878
- non-residential -- -- 31
Non-real estate - consumer 173 254 225
-------- -------- --------
Total fixed-rate 15,089 5,426 5,134
-------- -------- --------
Total loans originated 17,506 7,825 8,168
-------- -------- --------
Real estate loans sold (2,197) (832) --
Transfer of loans to foreclosed real estate (58) (85) --
Principal repayments (9,804) (6,238) (6,574)
-------- -------- --------
Net increase (decrease) $ 5,447 $ 670 $ 1,594
======== ======== ========
Mortgage-backed securities:
Mortgage-backed securities purchased $ 4,592 $ -- $ 4,488
Mortgage-backed securities sold -- -- --
Amortization and repayments (5,663) (5,413) (5,800)
-------- -------- --------
Net increase (decrease) $ (1,071) $ (5,413) $ (1,312)
======== ======== ========
</TABLE>
<PAGE>
Non-Performing Assets, Classified Assets, Loan Delinquencies and Defaults
When a borrower fails to make a required payment on a loan, the
Association attempts to cause the deficiency to be cured by contacting the
borrower. A notice is mailed to the borrower and late charges are assessed after
a payment is 30 days past due. Five days after the late notice is mailed, the
Loan Service Counselor/Collector will contact the borrower by telephone. After a
payment is 60 days past due, the Loan Service Counselor/Collector conducts a
personal interview with the borrower after which if the loan continues to be
delinquent, it is referred to the Loan Service Manager. After the 90th day of
delinquency, the Association institutes action to foreclose on the property or
to acquire it by deed in lieu of foreclosure. If foreclosed on, real property is
sold at a public sale and may be purchased by the Association. A decision as to
whether and when to initiate foreclosure proceedings is based on such factors as
the amount of the outstanding loan in relation to the original indebtedness and
the current value of the property, the extent of delinquency and the borrower's
ability and willingness to cooperate in curing delinquencies. Generally, when a
loan becomes delinquent 90 days or more, the Association will place the loan on
a non-accrual status and, as a result, previously accrued interest income on the
loan is taken out of current income. Future interest income is recognized on a
cash basis. The loan will remain on a non-accrual status as long as the loan is
90 days delinquent, unless a repayment plan is being followed.
<PAGE>
The amounts presented represent the total remaining principal balances
of the related loans, rather than actual payment amounts which are overdue and
are reflected as a percentage of total loans. The following table sets forth
information concerning delinquent mortgage and other loans at June 30, 1998 and
June 30, 1997. The balances included in the table do not reflect specific
reserves.
<TABLE>
<CAPTION>
At June 30, 1998
Loans Delinquent For:
---------------------------------------------------------------------------------------------------
30 - 59 days 60 - 89 days 90 days and over
---------------------------------------------------------------------------------------------------
Number Amount Percent Number Amount Percent Number Amount Percent
---------------------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate:
One- to four-family............ 7 $237 .68% 6 $485 1.38% 3 $220 .63%
Multi-family................... --- --- --- --- --- --- 4 237 13.24
Consumer......................... 4 11 .48 --- --- --- 6 5 .22
Commercial business.............. --- --- --- --- --- 1 3 4.23
---- ---- ---- ---- ---- ---- --- ---- -----
Total....................... $11 248 .62% $ 6 $485 1.22% $14 465 1.16%
=== ==== ==== ==== ==== ==== === ==== =====
<CAPTION>
At June 30, 1998
Loans Delinquent For:
-----------------------------
Total
-----------------------------
Number Amount Percent
-----------------------------
Real estate:
One- to four-family............ <C> <C> <C>
Multi-family...................
Consumer......................... 16 $ 942 2.69%
Commercial business.............. 4 237 13.24
10 16 .70
Total....................... 1 3 4.23
----- ----- -----
$ 31 1,198 3.00%
===== ===== =====
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
At June 30, 1997
Loans Delinquent For:
--------------------------------------------------------------------------------------------------
30 - 59 days 60 - 89 days 90 days and over
--------------------------------------------------------------------------------------------------
Number Amount Percent Number Amount Percent Number Amount Percent
------ ------ ------- ------ ------ ------- ------ ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate:
One- to four-family............ 14 $ 860 2.96% 3 $ 411 1.42% 1 $ 58 .20%
Multi-family................... --- --- --- 1 1,177 53.48 4 253 11.49
Consumer......................... 2 9 .35 --- --- --- 7 6 .23
Total....................... $ 16 869 2.52% $ 4 1,588 4.61% $ 12 317 .92%
<CAPTION>
At June 30, 1997
Loans Delinquent For:
------------------------------
Total
------------------------------
Number Amount Percent
------ ------ -------
Real estate: <C> <C> <C>
One- to four-family............ 18 $1,329 4.58%
Multi-family................... 5 1,430 64.97
Consumer......................... 9 15 .58
Total....................... $32 2,774 8.05%
</TABLE>
<PAGE>
The table below sets forth the amounts and categories of non-performing
assets, shown net of specific reserves, in the Association's loan portfolio.
Loans are placed on non-accrual status when the collection of principal and/or
interest becomes doubtful, generally when the loan is delinquent 90 days or
more. Foreclosed assets include assets acquired in settlement of loans.
<TABLE>
<CAPTION>
At June 30,
--------------------------------
1998 1997 1996
------ ------ --------
(Dollars in Thousands)
<S> <C> <C> <C>
Non-Accruing Loans:
One- to four-family $ 220 $ 58 161
Multi-family 38 42 50
Consumer 2 3 19
Commercial business 3 -- --
------ ------ ------
Total 263 103 230
------ ------ ------
Accruing loans delinquent 90 days or more:
Multi-family -- -- 1,217
------ ------ ------
Total -- -- 1,217
------ ------ ------
Foreclosed Assets:
One- to four-family 747 855 770
------ ------ ------
Total 747 855 770
------ ------ ------
Total non-performing assets $1,010 $ 988 $2,217
====== ======
Total as a percentage of total assets .86% .86% 1.90%
====== ====== ======
</TABLE>
As of June 30, 1998, there were no concentrations of loans in any types
of industry which exceed 10% of the Association's total loans, that are not
included as a loan category in the preceding table.
For the fiscal year ended June 30, 1998, gross interest income which
would have been recorded had the non-accruing loans been current in accordance
with their original terms amounted to $12,000, which interest income was not
accrued into interest income for the fiscal year ended June 30, 1998.
Real Estate Owned. As of June 30, 1998, the Association had $746,500 of
real estate owned properties. The following is a description of the
Association's three largest real estate owned properties.
<PAGE>
Florida Condominium. This asset derived from a $640,000 loan made in
1986 for a penthouse condominium located in Ft. Lauderdale, Florida. The
Association obtained title to the property on December 11, 1989 and has listed
the property for sale and/or lease with a local real estate broker. In the
interim, the Association has leased the property at $50,000 per year through
December 31, 1998. The Association further wrote down its investment in this
property during the year ended June 30, 1998 in the amount of $160,000 as a
result of recent comparable sales activity.
Florida Condominium. This asset derived from a $426,000 loan made in
1985 for a penthouse condominium located in Ft. Lauderdale, Florida. The
Association obtained title to the property on November 19, 1991 and has listed
the property for sale and/or lease with a local real estate broker. The
Association further wrote down its investment in this property during the year
ended June 30, 1998 in the amount of $7,000 as a result of pending negotiations
to lease the property for one year with a one year purchase option.
Florida Condominium. This asset derived from a $130,000 loan made in
1990 for a two bedroom condominium located in Ft. Lauderdale, Florida. The
Association obtained title to the property on October 28, 1996 and has listed
the property for sale and/or lease with a local real estate broker.
Non-Accruing Loans. As of June 30, 1998, non-accruing multi-family
loans consisted of one loan in the amount of $38,000 secured by a five unit
property located in Chicago, Illinois. Nonaccruing one- to-four family loans
totaled $220,000 and consisted of three loans secured by properties located in
the Association's primary market area.
As of June 30, 1998, there were no other loans not included on the
table or discussed above where known information about the possible credit
problems of borrowers caused management to have serious doubts as to the ability
of the borrower to comply with present loan repayment terms and which may result
in disclosure of such loans in the future.
Classified Assets. Federal regulations require that each savings
institution classify its own assets on a regular basis. In addition, in
connection with examinations of savings institutions, OTS and Federal Deposit
Insurance Corporation (the "FDIC") examiners have authority to identify problem
assets and, if appropriate, require them to be classified. There are three
classifications for problem assets: "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 savings association will sustain "some loss" if the
deficiencies are not corrected. Assets classified as "doubtful" have all of the
weaknesses inherent in those classified "substandard," with the added
characteristic that the weaknesses present make "collection or liquidation in
full," on the basis of currently existing facts, conditions, and values, "highly
questionable and improbable." Assets classified as "loss" are those considered
"uncollectible" and of such little value that their continuance as assets
without the establishment of a specific loss reserve is not warranted. Assets
which do not currently expose the savings association to sufficient risk to
warrant classification in one of the aforementioned categories, but possess
weaknesses, are required to be designated "Special Mention" by management.
<PAGE>
When a savings association classifies problem assets as either
substandard or doubtful, it may establish general allowances for loan losses in
an amount deemed prudent by management. General allowances represent loss
allowances which have been established to recognize the inherent risk associated
with lending activities, but which, unlike specific allowances, have not been
allocated to particular problem assets. When a savings association 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 association's determination as to the
classification of its assets and the amount of its valuation allowances is
subject to review by the association's District Director at the regional OTS
office, who may order the establishment of additional general or specific loss
allowances.
In connection with the filing of its periodic reports with the OTS and
in accordance with its classification of assets policy, the Association
regularly reviews the assets in its portfolio to determine whether any assets
require classification in accordance with applicable regulations. On the basis
of management's review of its assets, at June 30, 1998, the Association had
classified a total of $1.1 million of its assets as substandard (net of specific
reserves of $491,000), none as doubtful, $244,000 as loss (which have been fully
reserved), and $279,000 as special mention.
Allowance for Losses on Loans and Real Estate
The allowance for loan losses is established through a provision for
loan losses based on management's evaluation of the risk inherent in its loan
portfolio and changes in the nature and volume of its loan activity. Such
evaluation, which includes a review of all loans of which full collectibility
may not be reasonably assured, considers among other matters, the estimated fair
value of the underlying collateral, economic conditions, historical loan loss
experience and other factors that warrant recognition in providing for an
adequate loan loss allowance.
Real estate properties acquired through foreclosure are recorded at the
lower of the related loan balance, net of any specific loan loss provision
(which is charged-off at the time of transfer), or fair value minus estimated
costs to sell at the date of foreclosure. Valuations are periodically updated by
management and a specific provision for losses on such property is established
by a charge to operations if the carrying value of the property exceeds its fair
value minus estimated costs to sell. In the year ended June 30, 1998, the
Association increased its provision for loss on real estate owned properties in
the amount of $167,000 in order to further reduce the Association's investment
in two out of state condominium properties as a result of recent comparable
sales activity and pending sale negotiations regarding such properties. See
"Real Estate Owned" for a discussion of these properties.
In the year ended June 30, 1998, a $1.2 million multi-family
residential mortgage loan, which had been delinquent during the prior year, was
brought current by the borrower as a result of improved cash flows derived from
the underlying collateral. The Association incurred no loan charge-offs in the
year ended June 30, 1998. The Association reduced it's general allowance for
loan losses from $282,000 at June 30, 1997 to $150,000 at June 30, 1998, which
level was determined by the Association to be consistent with its revised policy
for the establishment and maintenance of adequate levels of general loan loss
allowances based upon an assessment of the level of risk inherent in the
Association's loan portfolio including its classified loans. The $132,000
decrease in the Association's general allowance for loan losses during fiscal
1998 was the result of a $160,000 recovery of previously established general
loan loss provision which was offset by $26,000 in recoveries from loans
<PAGE>
previously classified "loss" and $2,000 in recoveries from loans previously
charged off. Although management believes that it uses the best information
available to determine the allowances, unforeseen market conditions could result
in adjustments and net earnings could be significantly affected if circumstances
differ substantially from the assumptions used in making the final
determination. Future additions to the Association's allowances will be the
result of periodic loan, property and collateral reviews and thus cannot be
predicted in advance. At June 30, 1998 the Association had a total allowance for
losses on loans of $394,000 or 1.00% of total loans. See Note 5 of the Notes to
Financial Statements in the Annual Report to Stockholders filed as Exhibit 13
hereto.
The following table sets forth an analysis of the Association's
allowance for loan losses.
<TABLE>
<CAPTION>
Year Ended June 30,
------------------------------
1998 1997 1996
------------------------------
(Dollars in Thousands)
<S> <C> <C> <C>
Balance at beginning of period $ 551 $ 596 $ 666
Charge-offs:
One- to four-family -- 43 73
Multi-family -- -- 95
Consumer -- 3 4
Commercial business -- -- 2
----- ----- -----
-- 46 174
----- ----- -----
Recoveries:
One- to four-family -- -- 101
Consumer 3 1 3
----- ----- -----
Total recoveries 3 1 104
----- ----- ------
Net charge-offs 3 (45) (70)
Additions credited to operations (160) -- --
----- ----- ------
Balance at end of period $ 394 $ 511 $ 596
===== ===== =====
Ratio of net charge-offs during the period to
average loans outstanding during the period -- % .13% .21%
Ratio of net charge-offs during the period to
average non-performing assets -- % 2.56% 2.82%
Allowance for loan losses to
non-performing loans(1) 57.16% 274.39% 22.00%
Allowance for loan losses to total loans 1.00% 1.62% 1.78%
</TABLE>
- -----------
(1) General valuation allowances to non-performing loans (net of specific
allowances).
<PAGE>
The following table presents the portions of the allowance for loan
losses applicable to each loan category.
<TABLE>
<CAPTION>
June 30,
-----------------------------------------------------------------------------
1998 1997 1996
----------------------- ---------------------- -----------------------
Percent Percent Percent
of Loans of Loans of Loans
in Each in Each in Each
Category Category Category
to Total to Total to Total
Amount Loans Amount Loans Amount Loans
--------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
One- to four-family.............. $ 78 87.82% $129 84.26% $ 98 84.09%
Multi-family..................... 208 4.49 219 6.39 260 6.72
Non-residential.................. --- .61 1 .77 --- 0.84
Construction..................... --- 1.13 --- .87 --- ---
Consumer......................... 48 5.77 59 7.50 67 8.29
Commercial business.............. --- .18 --- .21 --- 0.06
Unallocated...................... --- 143 --- 171 ---
--------- ------ ---- ------- ----- ------
Total....................... $ 394 100.00% $551 100.00% $ 596 100.00%
========== ======= ==== ======= ===== ======
</TABLE>
Investment Activities
As a part of its asset/liability management strategy and as a response
to a relatively high level of competition and low level of loan demand, the
Association invests in various types of liquid assets, short and medium term
government securities as well as smaller amounts of other assets. The
Association is required by federal regulations to maintain a minimum amount of
liquid assets that may be invested in specified securities and is also permitted
to make certain other security investments. The Association maintains liquidity
in excess of regulatory requirements. Cash flow projections are regularly
reviewed and updated to assure that adequate liquidity is provided. As of June
30, 1998, the Association's liquidity ratio (liquid assets as a percentage of
net withdrawable savings and current borrowings) was 56.8%.
At June 30, 1998, the Association's interest-bearing deposits in other
financial institutions totaled $29.3 million, or 25.0% of its total assets, and
investment securities totaled $21.2 million, or 18.1% of its total assets. As of
such date, the Association also had a $554,000 investment in the common stock of
the FHLB of Chicago in order to satisfy the requirement for membership in this
institution. At June 30, 1998, the average term to maturity or repricing of the
investment securities portfolio was approximately two years.
<PAGE>
The following table sets forth the composition of the Association's
investment portfolio at the dates indicated.
<TABLE>
<CAPTION>
At June 30,
-------------------------------------------------------------------
1998 1997 1996
------------------- -------------------- --------------------
Carrying Fair Carrying Fair Carrying Fair
Value Value Value Value Value Value
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Investment Securities:
U.S. Government securities $21,185 $21,226 $21,058 $21,057 $21,033 $21,031
FHLB - Chicago stock 554 554 554 554 554 554
Other equity investments -- -- -- -- -- --
------- ------- ------- ------- ------- -------
Total investment securities $21,739 $21,780 $21,612 $21,611 $21,587 $21,585
======= ======= ======= ======= ======= =======
Interest-bearing deposits:
FHLB daily investment $18,522 $18,522 $17,825 $17,825 $17,733 $17,733
Other daily investments 10,816 10,816 10,241 10,241 9,715 9,715
------- ------- ------- ------- ------- -------
Total interest-bearing deposits $29,338 $29,338 $28,066 $28,066 $27,448 $27,448
======= ======= ======= ======= ======= =======
</TABLE>
The composition and maturities of the investment securities portfolio,
excluding FHLB of Chicago stock, are indicated in the following table.
<TABLE>
<CAPTION>
June 30, 1998
---------------------------------------------------------------------
1 Year 1 to 2 Over Total Investment
or Less Years 10 Years Securities
------- ------- -------- ------------------
Weighted
Book Book Book Book Fair Average
Value Value Value Value Value Yield
----- ----- ----- ----- ----- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
U.S. government and agency securities..... $9,998 $9,991 $1,196 $21,185 $21,226 5.9%
====== ====== ====== ======= =======
</TABLE>
Sources of Funds
General. Deposit accounts have traditionally been the principal source
of the Association's funds for use in lending and for other general business
purposes. In addition to deposits, the Association derives funds from loan
repayments and cash flows generated from operations. Scheduled loan payments are
a relatively stable source of funds, while deposit inflows and outflows and the
related cost of such funds have varied. Borrowings may be used on a short-term
basis to compensate for seasonal reductions in deposits or deposit inflows at
less than projected levels and may be used on a longer term basis to support
expanded lending activities.
<PAGE>
Deposits. The Association attracts principally short-term and
intermediate-term deposits from the Association's primary market area. The
Association offers regular passbook accounts, NOW accounts, money market deposit
accounts, fixed interest rate certificates of deposit with varying maturities,
and negotiated rate $100,000 jumbo certificates of deposit ("Jumbo CDS").
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. Midland Federal has not actively sought deposits outside of its
primary market area.
The flow of deposits is influenced significantly by general economic
conditions, changes in money market and prevailing interest rates, competition
and the Association's pricing policies and capital requirements. Midland Federal
regularly evaluates the internal cost of funds, surveys rates offered by
competing institutions, reviews its cash flow requirements for liquidity and
executes rate changes when deemed appropriate.
Midland Federal has utilized high quality service and promotion to
attract passbook and transaction accounts. The Association believes that these
accounts are less interest rate sensitive and, in most interest rate
environments, carry lower interest charges than certificate accounts. While
there are costs associated with offering transaction accounts, the Association
believes that the fee income and enhanced spread outweigh any additional
administrative expense. Midland Federal does not have any brokered deposits and
has no present intention to accept or solicit such deposits.
The following table sets forth the savings flows at the Association
during the periods indicated.
<TABLE>
<CAPTION>
Year Ended June 30,
------------------------------------------
1998 1997 1996
---------- --------- ---------
(Dollars in Thousands)
<S> <C> <C> <C>
Opening balance $ 102,973 $ 107,914 $ 105,090
Deposits 360,039 332,833 328,188
Withdrawals (358,909) (341,491) (329,191)
--------- --------- ---------
Balance before interest credited 104,103 99,256 104,087
Interest credited 3,659 3,717 3,827
--------- --------- ---------
Ending balance $ 107,762 $ 102,973 $ 107,914
========= ========= =========
Net increase (decrease) $ 4,789 $ (4,941) $ 2,824
========= ========= =========
Percent increase (decrease) 4.65% (4.58)% 2.69%
========= ========= =========
</TABLE>
<PAGE>
The following table sets forth the dollar amount of savings deposits in
the various types of deposit programs offered by the Association at the dates
indicated.
<TABLE>
<CAPTION>
June 30,
----------------------------------------------------------------------------
1998 1997 1996
---------------------------------------------------------------------------
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
------ -------- ------ -------- ------ --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest Rate Range:
Passbook accounts $ 40,716 37.78% $ 40,984 39.80% $ 43,420 40.24%
NOW accounts 8,266 7.67 8,468 8.22 7,986 7.40
Money market accounts 3,706 3.44 3,769 3.66 4,768 4.42
Non-interest bearing deposits 7,823 7.26 7,327 7.12 7,266 6.73
-------- ------ -------- ------ -------- ------
Total non-certificates 60,511 56.15 60,548 58.80 63,440 58.79
-------- ------ -------- ------ -------- ------
Certificates:
Interest rate range:
0.00 - 3.99% -- -- -- -- -- --
4.00 - 4.99% -- -- -- -- 2,692 2.50
5.00 - 5.99% 47,151 43.75 40,438 39.27 38,714 35.88
6.00 - 6.99% 100 .10 1,987 1.93 3,068 2.84
-------- ------ -------- ------ -------- ------
Total certificates 47,251 43.85 42,425 41.20 44,474 41.21
-------- ------ -------- ------ -------- ------
Total deposits $107,762 100.00% $102,973 100.00% $107,914 100.00%
======== ====== ======== ====== ======== ======
</TABLE>
<PAGE>
The following table shows rate and maturity information for the
Association's time deposits as of June 30, 1998.
<TABLE>
<CAPTION>
5.00- 6.00- Percent
5.99 6.99 Total of Total
-------- ------ -------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Certificate Accounts Maturing
in Quarter Ending:
September 30, 1998 $ 16,701 $ $ 16,701 33.35%
December 31, 1998 14,677 -- 14,677 31.06
March 31, 1999 4,262 -- 4,262 9.02
June 30, 1999 5,072 -- 5,072 10.73
September 30, 1999 1,100 -- 1,100 2.23
December 31, 1999 964 100 1,064 2.25
833March 31, 2000 833 -- 833 1.76
June 30, 2000 944 -- 944 2.00
September 30, 2000 1,346 -- 1,346 2.85
December 31, 2000 1,252 -- 1,252 2.65
Total $ 47,151 $ 100 $ 47,251 100.00%
========= ===== ======== ======
Percent of total 99.79% .21% 100.00%
======== ===== ========
</TABLE>
The following table indicates the amount of the Association's
certificates of deposit and other deposits by time remaining until maturity as
of June 30, 1998.
<TABLE>
<CAPTION>
Maturity
--------------------------------------------------------
Over Over Over
3 Months 3 to 6 6 to 12 12
or Less Months Months Months Total
------- ------ ------ ------ -----
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Certificates of deposit less than $100,000 $15,105 $12,433 $ 8,189 $ 6,306 $42,033
Certificate of deposit of $100,000 or more 1,596 2,244 1,146 232 5,218
------- ------- ------- ------- -------
Total certificates of deposit $16,701 $14,677 $ 9,335 $ 6,538 $47,251
======= ======= ======= ======= =======
</TABLE>
<PAGE>
Borrowings
Midland Federal's other available sources of funds include advances
from the Federal Home Loan Bank ("FHLB") of Chicago and collateralized
borrowings. As a member of the FHLB of Chicago, the Association is required to
own capital stock in the FHLB of Chicago and is authorized to apply for advances
from the FHLB of Chicago. Each FHLB credit program has its own interest rate,
which may be fixed or variable, and range of maturities. The FHLB of Chicago may
prescribe the acceptable uses for these advances, as well as limitations on the
size of the advances and repayment provisions. The Association has not had
significant borrowings in recent years.
Competition
Midland Federal faces strong competition in originating loans and in
attracting deposits. Competition in originating loans comes primarily from other
thrift institutions, commercial banks and mortgage bankers which also make loans
secured by real estate located in the Association's primary market area. The
Association competes for loans principally on the basis of the interest rates
and loan fees it charges, the types of loans it originates and the quality of
service it provides to borrowers.
The Association faces substantial competition in attracting deposits
from other thrift institutions, commercial banks, money market and mutual funds,
credit unions and other investment vehicles. The ability of the Association to
attract and retain deposits depends on its ability to provide an investment
opportunity that satisfies the requirements of investors as to rate of return,
liquidity, risk and other factors. The Association competes for these deposits
by offering a variety of deposit accounts at competitive rates and convenient
business hours. The Association estimates its share of deposits in its primary
market area to be less than 3%.
The authority to offer money market deposits, and expanded lending and
other powers authorized for thrift institutions by federal legislation, has
resulted in increased competition for both deposits and loans between thrift
institutions and other financial institutions such as commercial banks.
Service Corporation
Federal associations generally may invest up to 2% of their assets in
service corporations, plus an additional 1% of assets if for community purposes.
In addition, federal associations may invest up to 50% of their regulatory
capital in conforming loans to their service corporations. In addition to
investments in service corporations, federal associations are permitted to
invest an unlimited amount in operating subsidiaries engaged solely in
activities which a federal association may engage in directly.
Midland Federal has one service corporation, Midland Service
Corporation, located in Bridgeview, Illinois, which was organized by the
Association in 1976 to act as a holding company for the Association's other
subsidiaries. At June 30, 1998, Midland Federal's equity investment in Midland
Service Corporation was approximately $180,000. During fiscal 1998, Midland
Service Corporation recorded a profit of $3,000.
<PAGE>
Midland Service Corporation owns MS Insurance Agency, an insurance
agency which provides insurance products to customers of Midland Federal and to
members of the general public in Midland Federal's market area. Insurance
products offered by this agency, include credit life, health, homeowners' and
disability. MS Insurance Agency had a loss of $1,400 for the 1998 fiscal year,
all of which is included in the Midland Service Corporation income amounts
reported above.
REGULATION
General. Midland Federal is a federally chartered savings and loan
association, the deposits of which are federally insured and backed by the full
faith and credit of the United States Government. Accordingly, Midland Federal
is subject to broad federal regulation and oversight extending to all its
operations. The Association is a member of the FHLB of Chicago and is subject to
certain limited regulation by the Board of Governors of the Federal Reserve
System ("Federal Reserve Board"). Midland Federal is a member of the Savings
Association Insurance Fund ("SAIF"), which together with the Bank Insurance Fund
(the "BIF") are the two deposit insurance funds administered by the FDIC, and
the deposits of Midland Federal are insured by the FDIC. As a result, the FDIC
has certain regulatory and examination authority over the Association.
Certain of these regulatory requirements and restrictions are discussed
below or elsewhere in this document.
Federal Regulation of Savings Associations. The OTS has extensive
authority over the operations of savings associations. As part of this
authority, Midland Federal is required to file periodic reports with the OTS and
is subject to periodic examinations by the OTS and the FDIC. The last OTS
examination commenced on April 27, 1998 using financial data as of December 31,
1997, and the last regular OTS and FDIC joint examination was on June 30, 1993.
When these examinations are conducted by the OTS and the FDIC, the examiners may
require the Association to provide for higher general or specific loan loss
reserves.
All savings associations are subject to semi-annual assessments, based
upon the savings associations total assets. The Association's paid assessment
during the fiscal year ended June 30, 1998 was $35,000.
The OTS also has extensive enforcement authority over all savings
institutions, including Midland Federal. This enforcement authority includes,
among other things, the ability to assess civil money penalties, to issue
cease-and-desist or removal orders and to initiate injunctive actions. In
general, these enforcement actions may be initiated for violations of laws and
regulations and unsafe or unsound practices. Other actions or inactions may
provide the basis for enforcement action, including misleading or untimely
reports filed with the OTS. Except under certain circumstances, public
disclosure of final enforcement actions by the OTS is required.
In addition, the investment and lending authority of the Association is
prescribed by federal laws and regulations, and it is prohibited from engaging
in any activities not permitted by such laws and regulations. For instance, no
savings association may invest in corporate debt securities not rated in one of
the four highest rating categories by a nationally recognized rating
organization. In addition, the permissible level of investment by federal
associations in loans secured by non-residential real property may not exceed
400% of regulatory capital, except with approval of the OTS. Midland Federal is
in compliance with each of these restrictions.
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The Association's permissible lending limit for loans-to-one-borrower
is equal to the greater of $500,000 or 15% of unimpaired capital and surplus
(except for loans fully secured by certain readily marketable collateral, in
which case this limit is increased to 25% of unimpaired capital and surplus). At
June 30, 1998, the Association's lending limit under this restriction was $1.3
million. The Association is in compliance with the loans-to-one-borrower
limitation.
The OTS, as well as the other federal banking agencies, has adopted
guidelines establishing safety and soundness standards on such matters as loan
underwriting and documentation, asset quality, earnings standards, internal
controls and audit systems, interest rate risk exposure and compensation and
other employee benefits. Any institution which fails to comply with these
standards must submit a capital compliance plan. A failure to submit a plan or
to comply with an approved plan will subject the institution to further
enforcement action.
Insurance of Accounts and Regulation by the FDIC. Midland Federal is a
member of the SAIF, which is administered by the FDIC. Savings deposits are
insured up to applicable limits by the FDIC and such insurance is backed by the
full faith and credit of the United States Government. As insurer, the FDIC
imposes deposit insurance premiums and is authorized to conduct examinations of
and to require reporting by FDIC-insured institutions. It also may prohibit any
FDIC-insured institution from engaging in any activity the FDIC determines by
regulation or order to pose a serious risk to the SAIF or the BIF. The FDIC also
has the authority to initiate enforcement actions against savings associations,
after giving the OTS an opportunity to take such action, and may terminate the
deposit insurance if it determines that the institution has engaged or is
engaging in unsafe or unsound practices, or is in an unsafe or unsound
condition.
The FDIC's deposit insurance premiums are assessed through a risk-based
system under which all insured depository institutions are placed into one of
nine categories and assessed insurance premiums based upon their level of
capital and supervisory evaluation. Under the system, institutions classified as
well capitalized (i.e., a core capital ratio of at least 5%, a ratio of core
capital to risk-weighted assets of at least 6% and a risk-based capital ratio of
at least 10%) and considered healthy would pay the lowest premium while
institutions that are less than adequately capitalized (i.e., a core capital or
core capital to risk-based capital ratios of less than 4% or a risk-based
capital ratio of less than 8%) and considered of substantial supervisory concern
would pay the highest premium. Risk classification of all insured institutions
will be made by the FDIC for each semi-annual assessment period.
The FDIC is authorized to increase assessment rates, on a semiannual
basis, if it determines that the reserve ratio of the SAIF will be less than the
designated reserve ratio of 1.25% of SAIF insured deposits. In setting these
increased assessments, the FDIC must seek to restore the reserve ratio to that
designated reserve level, or such higher reserve ratio as established by the
FDIC. The FDIC may also impose special assessments on SAIF members to repay
amounts borrowed from the United States Treasury or for any other reason deemed
necessary by the FDIC.
In order to equalize the deposit insurance premium schedules for BIF
and SAIF insured institutions, the FDIC imposed a one-time special assessment on
all SAIF-assessable deposits pursuant to federal legislation passed on September
30, 1996. The Association's special assessment, which was $674,061,144, was paid
in November 1996. Effective January 1, 1997, the premium schedule for BIF and
SAIF insured institutions
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ranged from 0 to 27 basis points. However, SAIF-insured institutions are
required to pay a Financing Corporation (FICO) assessment, in order to fund the
interest on bonds issued to resolve thrift failures in the 1980s, equal to 6.48
basis points for each $100 in domestic deposits, while BIF-insured institutions
pay an assessment equal to 1.52 basis points for each $100 in domestic deposits.
The assessment is expected to reduced to 2.43 no later than January 1, 2000,
when BIF insured institutions fully participate in the assessment. These
assessments, which may be revised based upon the level of BIF and SAIF deposits
will continue until the bonds mature in the year 2017.
Regulatory Capital Requirements. Federally insured savings
associations, such as the Association, are required to maintain a minimum level
of regulatory capital. The OTS has established capital standards, including a
tangible capital requirement, a leverage ratio (or core capital) requirement and
a risk-based capital requirement applicable to such savings associations. These
capital requirements must be generally as stringent as the comparable capital
requirements for national banks. The OTS is also authorized to impose capital
requirements in excess of these standards on individual associations on a
case-by-case basis.
The capital regulations require tangible capital of at least 1.5% of
adjusted total assets (as defined by regulation). Tangible capital generally
includes common stockholders' equity and retained income, and certain
noncumulative perpetual preferred stock and related income. In addition, all
intangible assets, other than a limited amount of purchased mortgage servicing
rights, must be deducted from tangible capital for calculating compliance with
the requirement. Further, any unrealized holding gains or losses, net of income
taxes, on securities classified as available for sale in accordance with SFAS
No. 115 are excluded from regulatory capital calculations. At June 30, 1998, the
Association had no intangible assets and an unrealized gain, net of tax, under
SFAS No. 115 in the amount of $145,000.
The OTS regulations establish special capitalization requirements for
savings associations that own subsidiaries. In determining compliance with the
capital requirements, all subsidiaries engaged solely in activities permissible
for national banks or engaged in certain other activities solely as agent for
its customers are "includable" subsidiaries that are consolidated for capital
purposes in proportion to the association's level of ownership. For excludable
subsidiaries the debt and equity investments in such subsidiaries are deducted
from assets and capital.
At June 30, 1998, the Association had tangible capital of $8.6 million,
or 7.33% of adjusted total assets, which is approximately $6.9 million above the
minimum requirement of 1.5% of adjusted total assets in effect on that date.
The capital standards also require core capital equal to at least 3% of
adjusted total assets (as defined by regulation). Core capital generally
consists of tangible capital plus certain intangible assets, including
supervisory goodwill (which is phased-out over a five-year period) and a limited
amount of purchased credit card relationships and purchased mortgage servicing
rights. As a result of the prompt corrective action provisions of FDICIA
discussed below, however, a savings association must maintain a core capital
ratio of at least 4% to be considered adequately capitalized unless its
supervisory condition is such to allow it to maintain a 3% ratio. At June 30,
1998, the Association had no intangibles which were subject to these tests.
At June 30, 1998, the Association had core capital equal to $8.6
million, or 7.33% of adjusted total assets, which is $5.1 million above the
minimum leverage ratio requirement of 3% in effect on that date.
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The OTS risk-based requirement requires savings associations to have
total capital of at least 8% of risk-weighted assets. Total capital consists of
core capital, as defined above, and supplementary capital. Supplementary capital
consists of certain permanent and maturing capital instruments that do not
qualify as core capital and general valuation loan and lease loss allowances up
to a maximum of 1.25% of risk-weighted assets. Supplementary capital may be used
to satisfy the risk-based requirement only to the extent of core capital. At
June 30, 1998, Midland Federal had no capital instruments that qualify as
supplementary capital and $150,000 of general loss reserves, which was less than
1.25% of risk-weighted assets.
Certain exclusions from capital and assets are required to be made for
the purpose of calculating total capital. Such exclusions consist of equity
investments (as defined by regulation) and that portion of land loans and
nonresidential construction loans in excess of an 80% loan-to-value ratio and
reciprocal holdings of qualifying capital instruments. There were no such equity
investments at June 30, 1998.
In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet items, will be multiplied by a risk weight,
ranging from 0% to 100%, based on the risk inherent in the type of asset. For
example, the OTS has assigned a risk weight of 50% for prudently underwritten
permanent one- to four-family first lien mortgage loans not more than 90 days
delinquent and having a loan to value ratio of not more than 80% at origination
unless the loan amount in excess of such ratio is insured by an insurer approved
by the FNMA or FHLMC.
OTS regulations also require that every savings association with more
than normal interest rate risk exposure to deduct from its total capital, for
purposes of determining compliance with such requirement, an amount equal to 50%
of its interest-rate risk exposure multiplied by the present value of its
assets. This exposure is a measure of the potential decline in the net portfolio
value of a savings association, greater than 2% of the present value of its
assets, based upon a hypothetical 200 basis point increase or decrease in
interest rates (whichever results in a greater decline). Net portfolio value is
the present value of expected cash flows from assets, liabilities and
off-balance sheet contracts. The rule will not become effective until the OTS
evaluates the process by which savings associations may appeal an interest rate
risk deduction determination. It is uncertain as to when this evaluation may be
completed. Any savings association with less than $300 million in assets and a
total capital ratio in excess of 12% is exempt from this requirement unless the
OTS determines otherwise.
On June 30, 1998, the Association had total capital of $8.8 million
(including $8.6 million in core capital and $150,000 of qualifying general loss
reserves) and risk-weighted assets of $37.5 million or total capital of 23.36%
of risk-weighted assets. This amount was $5.8 million above the 8% requirement
in effect on that date.
The OTS and the FDIC are authorized and, under certain circumstances
required, to take certain actions against associations that fail to meet their
capital requirements. Effective December 19, 1992, the federal banking agencies,
including the OTS, were given additional enforcement authority over
undercapitalized depository institutions. The OTS is generally required to take
action to restrict the activities of an "undercapitalized association"
(generally defined to be one with less than either a 4% core ratio, a Tier 1
risked-based capital ratio or an 8% risk-based capital ratio). Any such
association must submit a capital restoration plan and until such plan is
approved by the OTS may not increase its assets, acquire another institution,
establish a branch or engage in any new activities, and generally may not make
capital distributions. The OTS is authorized to impose the additional
restrictions that are applicable to significantly undercapitalized associations.
<PAGE>
Any savings association that fails to comply with its capital plan or
is "significantly undercapitalized" (i.e., Tier 1 risk-based or core capital
ratios of less than 3% or a risk-based capital ratio of less than 6%) must be
subject to one or more of additional specified actions and operating
restrictions, which may cover all aspects of its operations and include a forced
merger or acquisition of the association.
An association that becomes "critically undercapitalized" (i.e., a
tangible capital ratio of 2% or less) is subject to further mandatory
restrictions on its activities in addition to those applicable to significantly
undercapitalized associations. In addition, the OTS must appoint a receiver (or
conservator with the concurrence of the FDIC) for a savings association, with
certain limited exceptions, within 90 days after it becomes critically
undercapitalized.
Any undercapitalized association is also subject to the general
enforcement activity of the OTS and the FDIC, including the appointment of a
receiver or conservator.
The imposition by the OTS or the FDIC of any of these measures on the
Association may have a substantial adverse effect on the Association's
operations and profitability and the value of its stock. If the OTS or the FDIC
require an association such as Midland Federal, to raise additional capital
through the issuance of stock or other capital instruments such issuance may
result in the dilution in the percentage of ownership of Midland Federal.
Limitations on Dividends and Other Capital Distributions. OTS
regulations impose various restrictions on savings associations with respect to
their ability to make distributions of capital, which include dividends, stock
redemptions or repurchases, cash-out mergers and other transactions charged to
the capital account. OTS regulations also prohibit a savings association from
declaring or paying any dividends or from repurchasing any of its stock if, as a
result, the regulatory capital of the association would be reduced below the
amount required to be maintained for the liquidation account established in
connection with its mutual to stock conversion.
Generally, savings associations, such as the Association, that before
and after the proposed distribution meet their capital requirements, may make
capital distributions during any calendar year equal to the greater of 100% of
net income for the year-to-date plus 50% of the amount by which the lesser of
the association's tangible, core or risk-based capital exceeds its capital
requirement for such capital component, as measured at the beginning of the
calendar year, or 75% of their net income for the most recent four quarter
period. However, an association deemed to be in need of more than normal
supervision by the OTS may have its dividend authority restricted by the OTS.
Midland Federal may pay dividends in accordance with this general authority.
Savings associations proposing to make any capital distribution need
only submit written notice to the OTS 30 days prior to such distribution.
Savings associations that do not, or would not meet their current minimum
capital requirements following a proposed capital distribution, however, must
obtain OTS approval prior to making such distribution. The OTS may object to the
distribution during that 30-day notice period based on safety and soundness
concerns. See "Regulatory Capital Requirements."
The OTS has proposed regulations that would revise the current capital
distribution restrictions. Under the proposal a savings association may make a
capital distribution without notice to the OTS provided that it has a CAMEL 1 or
2 rating, is not of supervisory concern, and would remain adequately capitalized
(as defined in the OTS prompt corrective action regulations) following the
proposed distribution. Savings associations that would remain adequately
capitalized following the proposed distribution but do not meet the other noted
<PAGE>
requirements must notify the OTS 30 days prior to declaring a capital
distribution. The OTS stated it will generally regard as permissible that amount
of capital distributions that do not exceed 50% of the institution's excess
regulatory capital plus net income to date during the calendar year. A savings
association may not make a capital distribution without prior approval of the
OTS and the FDIC if it is undercapitalized before, or as a result of, such a
distribution. As under the current rule, the OTS may object to a capital
distribution if it would constitute an unsafe or unsound practice. No assurance
may be given as to whether or in what form the regulations may be adopted.
Liquidity. All savings associations, including Midland Federal, are
required to maintain an average daily balance of liquid assets equal to a
certain percentage of the sum of its average daily balance of net withdrawable
deposit accounts and borrowings payable in one year or less. For a discussion of
what the Association includes in liquid assets, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations-Liquidity and Capital
Resources" in the Annual Report to Stockholders filed as Exhibit 13 hereto. This
liquid asset ratio requirement may vary from time to time (between 4% and 10%)
depending upon economic conditions and savings flows of all savings
associations. At the present time, the minimum liquid asset ratio is 4%.
Penalties may be imposed upon associations for violations of the liquid asset
ratio requirement. At June 30, 1998, the Association was in compliance with the
requirement, with an overall liquid asset ratio of 56.8% .
Accounting. An OTS policy statement applicable to all savings
associations clarifies and re-emphasizes that the investment activities of a
savings association must be in compliance with approved and documented
investment policies and strategies, and must be accounted for in accordance with
GAAP. Under the policy statement, management must support its classification of
and accounting for loans and securities (i.e., whether held for investment, sale
or trading) with appropriate documentation.
OTS accounting regulations, which may be made more stringent than GAAP
by the OTS, to require that transactions be reported in a manner that best
reflects their underlying economic substance and inherent risk and that
financial reports must incorporate any other accounting regulations or orders
prescribed by the OTS. The Association is in compliance with these amended
rules.
Qualified Thrift Lender Test. All savings associations, including the
Association, are required to meet a qualified thrift lender ("QTL") test to
avoid certain restrictions on their operations. This test requires a savings
association to have at least 65% of its portfolio assets (as defined by
regulation) in qualified thrift investments for nine out of every 12 months on a
rolling basis. As an alternative, the savings association may maintain 60% of
its assets in those assets specified in Section 7701(a)(19) of the Internal
Revenue Code. Under either test, such assets primarily consist of residential
housing related loans and investments. At June 30, 1998 the Association met the
test and has always met the test since its effectiveness.
Any savings association that fails to meet the QTL test must convert to
a national bank charter, unless it requalifies as a QTL and thereafter remains a
QTL. If an association does not requalify and converts to a national bank
charter, it must remain SAIF-insured until the FDIC permits it to transfer to
the Bank Insurance Fund. If an association that fails the test has not yet
requalified and has not converted to a national bank, its new investments and
activities are limited to those permissible for both a savings association and a
national bank, and it is limited to national bank branching rights in its home
state. In addition, the association is immediately ineligible to receive any new
<PAGE>
FHLB borrowings and is subject to national bank limits for payment of dividends.
If such association has not requalified or converted to a national bank within
three years after the failure, it must divest of all investments and cease all
activities not permissible for a national bank. In addition, it must repay
promptly any outstanding FHLB borrowings, which may result in prepayment
penalties.
Community Reinvestment Act. Under the Community Reinvestment Act
("CRA"), every FDIC insured institution has a continuing and affirmative
obligation consistent with safe and sound banking practices to help meet the
credit needs of its entire community, including low and moderate income
neighborhoods. The CRA does not establish specific lending requirements or
programs for financial institutions nor does it limit an institution's
discretion to develop the types of products and services that it believes are
best suited to its particular community, consistent with the CRA. The CRA
requires the OTS, in connection with the examination of the Association, to
assess the institution's record of meeting the credit needs of its community and
to take such record into account in its evaluation of certain applications, such
as a merger or the establishment of a branch, by the Association. An
unsatisfactory rating may be used as the basis for the denial of an application
by the OTS.
The federal banking agencies, including the OTS, have recently revised
the CRA regulations and the methodology for determining an institution's
compliance with the CRA. Due to the heightened attention being given to the CRA
in the past few years, the Association may be required to devote additional
funds for investment and lending in its local community. The Association was
examined for CRA compliance in 1996 and received a rating of "satisfactory."
Transactions with Affiliates. Generally, transactions between a savings
association or its subsidiaries and its affiliates are required to be on terms
as favorable to the association as transactions with non-affiliates. In
addition, certain of these transactions are restricted to a percentage of the
association's capital. Affiliates of Midland Federal include any company which
is under common control with the Association. In addition, a savings association
may not lend to any affiliate engaged in activities not permissible for a bank
holding company or acquire the securities of most affiliates. The Association's
subsidiaries are not deemed affiliates, however; the OTS has the discretion to
treat subsidiaries as affiliates on a case-by-case basis.
Certain transactions with directors, officers or controlling persons
are also subject to conflict of interest regulations enforced by the OTS. These
conflict of interest regulations and other statutes also impose restrictions on
loans to such persons and their related interests. Among other things, such
loans must be made on terms substantially the same as for loans to unaffiliated
persons.
Federal Reserve System. The Federal Reserve Board requires all
depository institutions to maintain non-interest bearing reserves at specified
levels against their transaction accounts (primarily checking, NOW and Super NOW
checking accounts) and non-personal time deposits. At June 30, 1998 the
Association was in compliance with these reserve requirements. The balances
maintained to meet the reserve requirements imposed by the Federal Reserve Board
may be used to satisfy liquidity requirements that may be imposed by the OTS.
See "--Liquidity."
<PAGE>
Savings associations are authorized to borrow from the Federal Reserve
Bank "discount window," but Federal Reserve Board regulations require
associations to exhaust other reasonable alternative sources of funds, including
FHLB borrowings, before borrowing from the Federal Reserve Bank.
Federal Home Loan Bank System. The Association is a member of the FHLB
of Chicago, which is one of 12 regional FHLBs that administers the home
financing credit function of savings associations. Each FHLB serves as a reserve
or central bank for its members within its assigned region. It is funded
primarily from proceeds derived from the sale of consolidated obligations of the
FHLB System. It makes loans to members (i.e., advances) in accordance with
policies and procedures established by the board of directors of the FHLB. These
policies and procedures are subject to the regulation and oversight of the
Federal Housing Finance Board. All advances from the FHLB are required to be
fully secured by sufficient collateral as determined by the FHLB. In addition,
all long-term advances are required to provide funds for residential home
financing. While a member of the FHLB of Chicago at June 30, 1998, the
Association had not entered into a credit arrangement with the FHLB of Chicago
and, as such, could not obtain funds from the FHLB of Chicago.
As a member, Midland Federal is required to purchase and maintain stock
in the FHLB of Chicago. At June 30, 1998 Midland Federal had $554,000 in FHLB
stock, which was in compliance with this requirement. In past years, the
Association has received substantial dividends on its FHLB stock. Over the past
five calendar years such dividends have averaged 6.41% and were 6.81% for
calendar year 1997.
Under federal law, the FHLBs are required to provide funds for the
resolution of troubled savings associations and to contribute to low- and
moderately priced housing programs through direct loans or interest subsidies on
advances targeted for community investment and low- and moderate-income housing
projects. These contributions have affected adversely the level of FHLB
dividends paid and could continue to do so in the future. These contributions
could also have an adverse effect on the value of FHLB stock in the future. A
reduction in value of the Association's FHLB stock may result in a corresponding
reduction in Midland Federal's capital.
For the year ended June 30, 1998, dividends paid by the FHLB of Chicago
to Midland Federal totaled $37,000, which was a $1,000 decrease over the amount
of dividends received in fiscal year 1997. The $9,200 dividend received for the
quarter ended June 30, 1998 reflects an annualized rate of 6.62%, or .18% below
the rate for calender 1997.
Federal Taxation. For fiscal years beginning prior to December 31,
1995, savings associations such as the Association that met certain definitional
tests relating to the composition of assets and other conditions prescribed by
the Internal Revenue Code of 1986, as amended (the "Code"), were permitted to
establish reserves for bad debts and to make annual additions thereto which
could, within specified formula limits, be taken as a deduction in computing
taxable income for federal income tax purposes. The amount of the bad debt
reserve deduction for "non-qualifying loans" was computed under the experience
method. The amount of the bad debt reserve deduction for "qualifying real
property loans" (generally one- to four-family residential loans secured by
improved real estate) could be computed under either the experience method or
the percentage of taxable income method (based on an annual election).
Under the experience method, the bad debt reserve deduction was an
amount determined under a formula based generally upon the bad debts actually
sustained by the savings association over a period of years.
<PAGE>
The percentage of specially computed taxable income that was used to
compute a savings association's bad debt reserve deduction under the percentage
of taxable income method (the "percentage bad debt deduction") was 8%. The
percentage bad debt deduction thus computed was reduced by the amount permitted
as a deduction for non-qualifying loans under the experience method. The
availability of the percentage of taxable income method permitted qualifying
savings associations to be taxed at a lower effective federal income tax rate
than that applicable to corporations generally (approximately 31.28% assuming
the maximum percentage bad debt deduction).
If an association's specified assets (generally, loans secured by
residential real estate or deposits, educational loans, cash and certain
government obligations) constitute less than 60% of its total assets, the
association could not deduct any addition to a bad debt reserve and generally
must include existing reserves in income over a four year period.
In August 1996, legislation was enacted that repeals the reserve
method of accounting (including the percentage of taxable income method) used by
many thrifts, including the Association, to calculate their bad debt reserve for
federal income tax purposes. As a result, large thrifts such as the Association
must recapture that portion of the reserve that exceeds the amount that could
have been taken under the specific charge-off method for post-1987 tax years.
The legislation also requires thrifts to account for bad debts for federal
income tax purposes on the same basis as commercial banks for tax years
beginning after December 31, 1995. The recapture will occur over a six-year
period, the commencement of which will be delayed until the first taxable year
beginning after December 31, 1997, provided the institution meets certain
residential lending requirements. The management of the Association does not
believe that the legislation will have a material impact on the Association.
In addition to the regular income tax, corporations, including savings
associations such as the Association, generally are subject to a minimum tax. An
alternative minimum tax is imposed at a minimum tax rate of 20% on alternative
minimum taxable income, which is the sum of a corporation's regular taxable
income (with certain adjustments) and tax preference items, less any available
exemption. The alternative minimum tax is imposed to the extent it exceeds the
corporation's regular income tax and net operating losses can offset no more
than 90% of alternative minimum taxable income. For taxable years beginning
after 1986 and before 1996, corporations, including savings associations such as
the Association, are also subject to an environmental tax equal to 0.12% of the
excess of alternative minimum taxable income for the taxable year (determined
without regard to net operating losses and the deduction for the environmental
tax) over $2 million.
To the extent earnings appropriated to a savings association's bad debt
reserves for "qualifying real property loans" and deducted for federal income
tax purposes exceed the allowable amount of such reserves computed under the
experience method and to the extent of the association's supplemental reserves
for losses on loans ("Excess"), such Excess may not, without adverse tax
consequences, be utilized for the payment of cash dividends or other
distributions to a shareholder (including distributions on redemption,
dissolution or liquidation) or for any other purpose (except to absorb bad debt
losses). As of June 30, 1998, the Association's Excess for tax purposes totaled
approximately $1.4 million.
<PAGE>
The Association and its subsidiaries file a consolidated federal income
tax return on a fiscal year basis using the accrual method of accounting. In the
past, savings associations, such as Midland Federal, that file federal income
tax returns as part of a consolidated group were required by applicable Treasury
regulations to reduce their taxable income for purposes of computing the
percentage bad debt deduction for losses attributable to activities of the
non-savings association members of the consolidated group that are functionally
related to the activities of the savings association member.
The Association and its consolidated subsidiaries have never been
audited by the IRS with respect to federal income tax returns. The statute of
limitations has passed for tax years ending on or prior to June 30, 1995, for
the Association and its consolidated subsidiaries.
Illinois Taxation. Midland Federal and its subsidiaries file separate
Illinois income tax returns. For Illinois income tax purposes, the Association
and its subsidiaries are taxed at an effective rate equal to 7.18% of Illinois
taxable income. For these purposes, "Illinois Taxable Income" generally means
federal taxable income, subject to certain adjustments (including the addition
of interest income on state and municipal obligations and the exclusion of
interest income on United States Treasury obligations). The exclusion of income
on United States Treasury obligations has the effect of reducing significantly
the Illinois taxable income of savings associations.
Impact of New Accounting Standards
Reporting Comprehensive Income. In June 1997, the FASB issued Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
("SFAS No. 130"). This statement establishes standards for reporting and the
display of comprehensive income and its components (revenues, expenses, gains,
losses) in a full set of general-purpose financial statements. SFAS No. 130 is
effective for fiscal years beginning after December 15, 1997. Management does
not believe that adoption of SFAS No. 130 will have a material impact of the
Association's financial condition or results of operations.
Disclosures about Segments of an Enterprise and Relates Information. In
June 1997, the FASB issued Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information" ("SFAS No.
131") which becomes effective for fiscal years beginning after December 15,
1997. SFAS No. 131 establishes standards for the way that public business
enterprises report information about operating segments and requires enterprises
to report selected information about operating segments in interim financial
reports. Management does not believe that adoption of SFAS No. 131 will have a
material impact on the Association's consolidated financial condition or results
of operations.
Employers' Disclosure about Pension and Other Employee Benefits. In
February 1998, the FASB issued Statement of Financial Accounting Standards No.
132, "Employers' Disclosures about Pensions and Other Post-retirement Benefits"
("SFAS No. 132"). SFAS No. 132 alters current disclosure requirements regarding
pensions and other post-retirement benefits in the financial statements of
employers who sponsor such benefits plans. The revised disclosure requirements
are designed to provide additional information to assist readers in evaluating
future costs related to such plans. Additionally, the revised disclosures are
<PAGE>
designed to provide changes in the components of pension and benefit costs in
addition to the year end components of those factors in the resulting asset or
liability related to such plans. The statement is effective for fiscal years
beginning after December 15, 1997 with earlier application available. Management
does not believe that adoption of SAFS No. 132 will have a material impact on
the Association's consolidated financial condition of results of operations.
Accounting for Derivative Instruments and for Hedging Activities. In
June 1998, the FASB issued Statement of Financial Accounting Standards No. 133
"Accounting for Derivative Instruments and for Hedging Activities" ("SAFS No.
133"). SFAS No. 133 provides a comprehensive and consistent standard for the
recognition and measurement of derivatives and hedging activities. The statement
requires all derivatives to be recorded on the balance sheet at fair value and
establishes special accounting for the following three different types of
hedges: hedges of changes in the fair value of assets, liabilities or firm
commitments (referred to as fair value hedges); hedges of the variable cash
flows of forecasted transactions (cash flow hedges); and hedges of foreign
currency exposures of net investments in foreign operations. Though the
accounting treatment and criteria for each of the three types of hedges is
unique, they all result in recognizing offsetting changes in value or cash flows
of both the hedge and the hedged item in earnings in the same period. Changes in
the fair value of derivatives that do not meet the criteria of one of these
three categories of hedges are included in earnings in the period of the change.
SFAS No. 133 is effective for years beginning after June 15, 1999, but companies
can early adopt as of the beginning of any fiscal quarter that begins after June
1998. Management does not expect the adoption of this statement to have a
material impact on the Association's consolidated financial condition or results
of operations.
The foregoing does not constitute a comprehensive summary of all
material changes or developments affecting the manner in which the Association
keeps its books and records and performs its financial accounting
responsibilities. It is intended as a summary of the recent pronouncements made
by the FASB which are of particular interest to financial institutions.
MANAGEMENT
Executive Officers of the Association
The following information as to the business experience during the past
five years is supplied with respect to each executive officer of the
Association. There are no arrangements or understandings between the persons
named and any other person pursuant to which such officers were selected.
Paul Zogas. Mr. Zogas has been Chairman of the Board, President and
Chief Executive Officer since 1983, and a Director since 1982 . Mr. Zogas holds
a BA degree in Economics from the University of Michigan in Ann Arbor, and a
Juris Doctor degree from De Paul University College of Law in Chicago. Mr. Zogas
provides legal services from time to time to private clients, and serves as
Director of Midland Business Systems, Inc., a computer sales, service and
consulting company located in Chicago, Illinois.
<PAGE>
Charles Zogas. Mr. Zogas has been the Executive Vice President and the
Chief Operations Officer of the Association since 1982. He was elected a
Director in 1983, and also serves as Secretary and Treasurer. Mr. Zogas holds a
BS degree from the University of Notre Dame in Notre Dame, Indiana, and a Juris
Doctor degree from IIT/Chicago - Kent College of Law. Mr. Zogas also provides
legal services from time to time to private clients and serves as Director of
Midland Business Systems, Inc., a computer sales, service and consulting company
located in Chicago, Illinois.
Richard Taylor. Mr. Taylor joined the Association in 1972. Since
joining the Association in 1972, he has held various lending positions and has
held the position of Vice President in Charge of Lending since 1982. Mr. Taylor
holds a BS degree from Illinois State University, and is also a licensed real
estate and insurance broker.
Employees
At June 30, 1998, the Association had a total of 37 full-time employees
and 40 part-time employees. None of the Association's employees are represented
by any collective bargaining group. Management considers its employee relations
to be good.
Item 2. Description of Property
Offices
Midland Federal owns the building and land for its main office at 8929
South Harlem Avenue, Bridgeview, Illinois. This office has 18,000 square feet
and a net book value of $980,000 at June 30, 1998. The Association also has a 99
year easement on land adjacent to its main office which expires in the year
2078. The Association owns the building and land for its two branch offices in
Chicago at 4040 South Archer Avenue in Brighton Park and 2657 West 69th Street
in Marquette Park which have 5,000 and 2,500 square feet and $58,000 and $33,000
net book values at June 30, 1998, respectively.
The Association has a lease ($17,256 per year to June 30, 1999) on an
approximately 4,800 square foot lot located in Homer Township, Illinois, where
the Association may open a branch in the future. As of June 30, 1998, the
Association had not resubmitted an application for OTS approval of the branch
nor have any cost projections been obtained.
Computer Equipment
The Association's recordkeeping activities are maintained on an on-line
basis with an independent service bureau. The Association's accounting
activities are maintained on an in-house computer. The net book value of the
Association's computer equipment at June 30, 1998 was $156,000.
Item 3. Legal Proceedings
The Association is, from time to time, a defendant to certain lawsuits
arising in the ordinary course of its business. The Association believes that
there is no litigation pending which, if adversely determined, would have a
material adverse effect on its financial condition.
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the three months ended June 30,
1998.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
Pages 22 through 23 of the 1998 Annual Report to Stockholders is herein
incorporated by reference.
Item 6. Management's Discussion and Analysis or Plan of Operation
Pages 7 through 19 of the 1998 Annual Report to Stockholders is herein
incorporated by reference.
Item 7. Financial Statements
Pages 25 through 49 of the 1998 Annual Report to Stockholders are
herein incorporated by reference.
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
There have been no changes in or disagreements with the Association's
accountants on accounting and financial disclosure matters.
PART III
Item 9. Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of the Exchange Act
Information concerning Directors of the Issuer is incorporated herein
by reference from the Association's definitive Proxy Statement for the Annual
Meeting of Stockholders, a copy of which will be filed not later than 120 days
after the close of the fiscal year.
Item 10. Executive Compensation
Information concerning executive compensation is incorporated herein by
reference from the Association's definitive Proxy Statement for the Annual
Meeting of Stockholders, a copy of which will be filed not later than 120 days
after the close of the fiscal year.
Item 11. Security Ownership of Certain Beneficial Owners and Management
Information concerning security ownership of certain beneficial owners
and management is incorporated herein by reference from the Association's
definitive Proxy Statement for the Annual Meeting of Stockholders, a copy of
which will be filed not later than 120 days after the close of the fiscal year.
<PAGE>
Item 12. Certain Relationships and Related Transactions
Information concerning relationships and transactions is incorporated
herein by reference from the Association's definitive Proxy Statement for the
Annual Meeting of Stockholders, a copy of which will be filed not later than 120
days after the close of the fiscal year.
<PAGE>
PART IV
Item 13. Exhibits and Reports on Form 8-K
(a) Exhibits:
<TABLE>
<CAPTION>
Reference to
Prior Filing
Regulation or Exhibit
S-K Exhibit Number Attached
Number Document Hereto
------ -------- ------
<S> <C> <C>
2 Plan of acquisition, reorganization, arrangement, liquid, or succession None
3 Articles of Incorporation and Bylaws.................................... ***
4 Instruments defining the rights of security holders,
including indentures:
Common Stock Certificate............................................... ***
9 Voting trust agreement.................................................. None
10 Material contracts:
Employee Stock Ownership Plan.......................................... ***
1993 Stock Option and Incentive Plan................................... **
Employment Agreements.................................................. ***
Recognition and Retention Plan......................................... ***
401(k) Retirement/Savings Plan......................................... ***
11 Statement re computation of per share earnings.......................... ****
13 Annual Report to Security Holders....................................... 13
16 Letter on change in certifying accountant............................... None
18 Letter on change in accounting principles............................... None
21 Subsidiaries of Registrant.............................................. 21
22 Published report regarding matters submitted to vote of security holders None
23 Consent of Experts and Counsel.......................................... None
24 Power of Attorney....................................................... Not required
27 Financial Data Schedule................................................. 27
99 Additional Exhibits None
</TABLE>
- --------------------
* Filed on January 15, 1993 an exhibit to the Association's initial Form
AC.
* Filed on March 19, 1993 as an exhibit to the Association's
Pre-Effective Amendment No. One to the Form AC.
*** Filed on June 22, 1998 as exhibits to the Company's Registration
Statement No. 333-57399 on Form S-4. All of such previously filed
documents are hereby incorporated herein by reference in accordance
with Item 601 of Regulation S-B.
**** See Note 1 of the Notes to Consolidated Financial Statements included
in the Annual Report under Exhibit 13.
(b) Reports on Form 8-K:
No reports on Form 8-K have been filed during the three-month period
ended June 30, 1998.
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
MIDLAND CAPITAL HOLDINGS CORPORATION
Date: September 22, 1998 By: /s/ Paul M. Zogas
------------------- -----------------
Paul M. Zogas
Chairman, President and
Chief Executive Officer
(Duly Authorized Representative)
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the Registrant and in the capacities and
on the dates indicated.
/s/ Paul M. Zogas /s/ Charles A. Zogas
- ------------------ --------------------
Paul M. Zogas, Chairman, President and Charles A. Zogas, Director,
Chief Executive Officer Executive Vice President
(Principal Financial and Accounting and Secretary
Officer)
Date: September 22, 1998 Date: September 22, 1998
------------------- -------------------
/s/ Jonas Vaznelis /s/ Richard Taylor
- ------------------ ------------------
Jonas Vaznelis, Director Richard Taylor, Director and
Date: September 22, 1998 Vice President
Date: September 22, 1998
/s/ Michael J. Kukanza /s/ Algerd Brazis
- ---------------------- -----------------
Michael J. Kukanza, Director Algerd Brazis, Director
Date: September 22, 1998 Date: September 22, 1998
Corporate Profile
Midland Federal Savings and Loan Association, a wholly owned subsidiary of
Midland Capital Holdings Corporation, is headquartered in Bridgeview, Illinois.
Midland Federal Savings and Loan Association was founded in 1914 with the goal
of providing savings and home loan financial services to communities on the
Southwest side of the city of Chicago. It continues to fulfill that role today
with three full service offices including offices located in the Brighton Park
and Marquette Park neighborhoods of Chicago. Midland Federal Savings also
operates a wholly owned subsidiary, Midland Service Corporation. Common stock in
Midland Capital Holdings Corporation is traded on the "pink sheets" published by
the National Quotation Bureau, Inc..
Table of Contents
Letter to Shareholders....................... 2
Financial Highlights......................... 3
Selected Consolidated Financial
Information................................ 4
Management's Discussion and Analysis......... 6
Independent Auditor's Report................. 23
Consolidated Statements of
Financial Condition........................ 24
Consolidated Statements of Income............ 25
Consolidated Statements of Changes in
Stockholders' Equity....................... 26
Consolidated Statements of Cash Flows........ 27
Notes to Consolidated Financial
Statements................................. 28
<PAGE>
To Our Shareholders,
I am pleased to report that Midland Federal Savings and Loan
Association completed fiscal 1998 with earnings of $595,000, or $1.66 per
diluted share, and book value of $24.09 per share. Fiscal 1998 earnings
represented a return on average stockholders' equity of 7.11% and a return on
average assets of .54%.
Midland Federal Savings built upon its core businesses in fiscal 1998
with total deposits increasing $4.8 million, or 4.7%, to $107.8 million at
fiscal year end. The continued success of our enhanced lending operations was
again evident this year resulting in a third consecutive annual increase in
total loans. During fiscal 1998 net loans receivable increased $5.8 million, or
17.3%, to $39.2 million at fiscal year end. Loan disbursements increased 128%
from the prior fiscal year to $17.6 million, resulting in a 63% increase in loan
related fees and service charges during the current fiscal year.
Midland Federal Savings continued to build its capital base during
fiscal 1998 and at fiscal year end its ratio of stockholders' equity to total
assets had risen to 7.47%. Midland Federal also continued to meet all of the
regulatory criteria for a 'well capitalized' designation throughout fiscal 1998
and at fiscal year end each of Midland Federal's regulatory capital ratios
significantly exceeded its fully phased in capital requirements.
Once again in fiscal 1998, as part of our commitment to promote affordable home
ownership among first time home buyers within our communities, Midland Federal
participated in the Illinois Housing Development Authority's ("IHDA") first time
home buyers program. During fiscal 1998 Midland Federal originated $2.6 million
in single family mortgage loans under the IHDA first time home buyers program
and at fiscal year end was servicing forty loans totaling $3.7 million which had
been originated under this program. In the coming year we plan to continue to
participate with the IHDA in promoting affordable housing for first time home
buyers and we will continue to market our loan products to the local real estate
community in order to build upon our success in this important area.
Finally, fiscal 1998 marked the fifth anniversary of Midland Federal
Savings' conversion from a mutual savings and loan association to a federal
stock savings and loan association. In fiscal 1998 the Board of Directors
approved a plan to adopt a holding company structure which plan was approved by
the shareholders on July 15, 1998 and became effective on July 23, 1998. I would
like to thank all of our shareholders for your support throughout the past five
years and for your continued support in the years to come as shareholders of
Midland Capital Holdings Corporation, the corporate parent of Midland Federal
Savings and Loan Association.
Sincerely,
/s/Paul Zogas
-------------
Paul Zogas
Chairman and President
<PAGE>
2
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
Year Ended June 30,
1998 1997 1996 1995 1994
--------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Total assets.................... $117,373 111,678 116,460 113,364 117,128
Loans receivable, net........... 39,173 33,392 32,776 31,036 33,424
Mortgage-backed securities...... 20,845 21,936 27,410 28,736 33,842
Cash and cash equivalents....... 31,994 30,903 30,918 28,022 21,805
Investment securities .......... 21,185 21,058 21,033 21,078 23,477
Deposits........................ 107,762 102,973 107,914 105,090 109,416
Stockholders' equity............ 8,768 7,971 7,740 7,412 6,747
For the Period:
Net interest income........... $ 3,147 3,124 3,186 3,272 3,179
Net income ................... 595 296 575 692 615
Per Common Share:
Book value per share
outstanding................. $ 24.09 22.99 22.32 21.48 19.56
Earnings per share outstanding
basic....................... $ 1.68 .85 1.66 2.01 1.78
diluted..................... $ 1.66 .83 1.64 2.00 1.78
Financial Ratios:
Stockholders' equity to
total assets................ 7.47% 7.14 6.65 6.54 5.76
Non-performing assets to
total assets................ .86% .86 1.90 2.24 3.06
Net charge-offs to total loans -- .13 .21 .32 --
Net interest margin........... 3.01% 2.96 2.96 3.07 2.90
Operating expenses to
average assets (1).......... 2.90% 2.72 2.69 2.56 2.53
Return on average assets (2).. .54% .66 .50 .61 .52
Return on average
stockholders' equity (2).... 7.11% 9.21 7.62 9.89 9.46
</TABLE>
(1) Exclusive of real estate owned expenses and losses and FDIC special
assessment.
(2) Exclusive of FDIC special assessment in the 1997 period.
3
<PAGE>
<TABLE>
<CAPTION>
SELECTED CONSOLIDATED FINANCIAL INFORMATION
SELECTED FINANCIAL CONDITION DATA:
At June 30,
1998 1997 1996 1995 1993
--------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Total assets.................... $117,373 111,678 116,460 113,364 117,128
Loans receivable, net........... 39,173 33,392 32,776 31,036 33,424
Mortgage-backed securities...... 20,845 21,936 27,410 28,736 33,842
Cash and cash equivalents....... 31,994 30,903 30,918 28,022 21,805
Investment securities .......... 21,185 21,058 21,033 21,078 23,477
Deposits........................ 107,672 102,973 107,914 105,090 109,416
Stockholders' equity............ $ 8,768 7,971 7,740 7,412 6,747
<CAPTION>
SELECTED OPERATIONS DATA:
Year Ended June 30,
1998 1997 1996 1995 1994
--------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Total interest income........... $ 7,016 7,034 7,228 6,700 6,380
Total interest expense.......... 3,869 3,910 4,042 3,428 3,201
-------- ----- ----- ----- -----
Net interest income............. 3,147 3,124 3,186 3,272 3,179
Provision for loan losses
(recoveries).................. (160) -- -- (80) (65)
-------- ----- ----- ----- -----
Net interest income after
provision for loan losses... 3,307 3,124 3,186 3,352 3,244
Non-interest income:
Loan related fees and charges... 238 146 102 32 46
Gain (loss) on sale of assets... 34 16 (7) 1 (111)
Deposit related fees .......... 596 613 597 624 708
Other income.................... 248 350 204 181 221
-------- ----- ----- ----- -----
Total non-interest income..... 1,116 1,125 896 838 864
-------- ----- ----- ----- -----
Non-interest expense:
Staffing costs.................. 1,789 1,670 1,546 1,393 1,350
Federal deposit insurance
premiums...................... 63 142 239 263 314
FDIC special assessment......... -- 674 -- -- --
Real estate owned expenses...... 261 98 129 222 125
Other expense................... 1,377 1,268 1,282 1,270 1,339
-------- ----- ----- ----- -----
Total non-interest expense.... 3,490 3,852 3,196 3,148 3,128
-------- ----- ----- ----- -----
Income before income taxes...... 933 397 886 1,042 980
Provision for income taxes...... 338 101 311 350 365
-------- ----- ----- ----- -----
Net income ..................... $ 595 296 575 692 615
======== === === === ===
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
SELECTED CONSOLIDATED FINANCIAL INFORMATION
SELECTED FINANCIAL RATIOS:
At or For the Year Ended June 30,
1998 1997 1996 1995 1994
--------------------------------------------
<S> <C> <C> <C> <C> <C>
Performance Ratios:
Return on average assets (1).... .54% .66 .50 .61 .52
Return on average stockholders'
equity (1).................... 7.11% 9.21 7.62 9.89 9.46
Interest rate spread during
period (2).................... 2.92% 2.91 2.90 3.05 2.93
Net interest margin (3)......... 3.01% 2.96 2.96 3.07 2.90
Ratio of operating expenses to
average total assets (4)...... 2.90% 2.72 2.69 2.56 2.53
Ratio of average interest-
earning assets to average
interest-bearing liabilities.. 110.25% 108.76 108.34 107.33 105.99
Asset Quality Ratios:
Non-performing assets to
total assets.................. .86% .86 1.90 2.24 3.06
Allowance for loan losses to
non-performing loans (5)...... 57.16% 274.39 22.00 18.84 19.45
Allowance for loan losses to
total loans................... 1.00% 1.62 1.78 2.10 2.43
Capital Ratios:
Stockholders' equity to
total assets.................. 7.47% 7.14 6.65 6.54 5.76
Average stockholders' equity to
average assets................ 7.52% 6.81 6.61 6.13 5.47
</TABLE>
(1) Exclusive of FDIC special assessment.
(2) Interest rate spread for the period shown includes the impact of
non-interest bearing demand deposits.
(3) Net interest income divided by average interest-earning assets.
(4) Exclusive of real estate owned expenses and losses and FDIC special
assessment.
(5) General valuation allowances to non-performing loans (net of specific
allowances).
5
<PAGE>
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
Midland Federal Savings and Loan Association (the "Association") converted from
a federal mutual savings and loan association to a federal stock savings and
loan association on June 30, 1993 (the "Conversion"). In the Conversion, 345,000
shares of common stock, par value of $.01 per share, of the Association were
sold in an initial public offering for an aggregate consideration of $3.45
million. At June 30, 1998 there were 363,975 shares of the Association's common
stock outstanding. On March 19, 1998 the Board of Directors of the Association
adopted a proposal to reorganize the Association into a holding company form of
organization in accordance with a Merger Agreement and Plan of Reorganization
(the "Reorganization"). The Reorganization was approved by the Association's
shareholders on July 15, 1998 and became effective on July 23, 1998. As a result
of the Reorganization, the Association became a wholly owned subsidiary of
Midland Capital Holdings Corporation, a newly formed Delaware Corporation, and
each outstanding share of common stock of the Association became, by operation
of law, one share of common stock of Midland Capital Holdings Corporation.
The Association's results of operations are dependent primarily on net interest
income, which is the difference between the interest income earned on its loan,
mortgage-backed securities, and investment portfolios and its cost of funds,
consisting of the interest paid on its deposits and borrowings. In addition, to
a lesser extent, the Association's operating results are affected by
non-interest income and non-interest expense. Non-interest expense includes
operating expenses consisting primarily of employee salaries and benefits,
office occupancy expenses, equipment costs, federal deposit insurance premiums,
and other general and administrative expenses. Operational results are also
affected by general economic conditions (particularly changes in interest
rates), competition, government policies and actions of regulatory agencies.
Midland Federal's operating philosophy is to provide, in a safe and profitable
manner, financial services to families and local businesses in the communities
served by its offices. The Association's immediate market area consists of
Southwest Chicago and the Southwest suburban communities of Bridgeview, Oak
Lawn, Palos Hills, Hickory Hills, Burbank, Chicago Ridge and Justice. Consistent
with its operating philosophy, the Association focuses upon attracting deposits
from the general public and using such deposits to originate residential
mortgage, and to a lesser extent, consumer, multi-family and other loans in its
primary market area. The Association also makes substantial investments in
mortgage backed securities, investment securities consisting primarily of U.S.
Government obligations and liquid assets in an effort to control interest rate
risk.
6
<PAGE>
MANAGEMENT OF INTEREST RATE RISK
An evaluation of the interest rate risk position of a financial institution
typically entails an examination of the sensitivity of the institution's balance
sheet to changes in interest rates and the capacity of the institution to absorb
losses resulting from movements in interest rates. The sensitivity of an
institution's balance sheet depends upon the composition of the institution's
assets and liabilities. The Association manages interest rate risk by analyzing
the extent to which its assets and liabilities are interest rate sensitive and
then developing strategies to reduce the vulnerability of its operations to
changes in interest rates.
Management uses analytical tools provided by the Office of Thrift Supervision
("OTS") to measure and predict the Association's level of interest rate risk
under a variety of market scenarios. In evaluating an institution's interest
rate risk profile, the OTS focuses on Net Portfolio Value ("NPV"), which is a
proxy for the economic value, or net present value, of an institution's worth.
NPV is defined as the present value of assets, less the present value of
liabilities, plus the net present value of off balance sheet contracts. OTS
measures an institution's vulnerability to interest rate risk by examining the
"Pre-Shock NPV Capital Ratio", the "Post-Shock NPV Capital Ratio" and the
"Sensitivity Measure". The Pre-Shock NPV Capital Ratio is the leverage ratio of
equity-to-assets expressed in present value terms and is calculated by dividing
an institution's base-case NPV by the present value of its assets. The
Post-Shock NPV Capital Ratio, also referred to as the "Exposure Measure", is an
estimate of what an institution's NPV capital ratio would be after a
hypothetical adverse 200 basis point shock in interest rates. The Sensitivity
Measure gauges the magnitude of loss that an institution would suffer from a 200
basis point movement in interest rates. The Sensitivity Measure is calculated as
the difference between the Post Shock NPV Capital Ratio and the Pre-Shock NPV
Capital Ratio, expressed in basis points. The OTS Interest Rate Risk Exposure
Model measures an institution's interest rate risk by approximating its NPV
under various market interest rate scenarios which range from a 400 basis point
increase to a 400 basis point decrease in market interest rates. The OTS has
incorporated an interest rate risk component into its regulatory capital rule.
Under that rule, an institution's "normal" level of interest rate risk is a
decrease in the institution's NPV (calculated under a hypothetical 200 basis
point change in interest rates) which does not exceed an amount equal to 2% of
the present value of its assets. An institution whose measured interest rate
risk exceeds its normal level of interest rate risk must deduct an interest rate
risk component in calculating its total capital for purpose of meeting its
risk-based capital requirement. The amount of that deduction is equal to
one-half of the difference between the institution's measured decline in net
portfolio value (assuming a 200 basis point change in interest rates) and an
amount equal to 2% of the present value of its assets. A savings institution
with assets of less than $300 million and with a risk-based capital ratio in
excess of 12% is not subject to the interest rate risk component, unless the OTS
determines otherwise. The OTS has postponed the date that the interest rate risk
component will first be deducted from an institution's total capital to provide
it with an opportunity to review the interest rate risk proposals recently
issued by the other federal banking agencies. The Association's measured
interest rate risk is below the
7
<PAGE>
threshold at which it could be required to hold additional risk-based capital
under OTS regulations.
Certain shortcomings are inherent in the methodology described in the above
interest rate risk measurements. Measuring changes in NPV requires certain
assumptions that may tend to oversimplify the manner in which actual yields and
costs respond to changes in market interest rates. For example, the model
assumes that the actual composition of the Association's interest sensitive
assets and liabilities remain constant over the period being measured. Also, the
model assumes that a particular change in interest rates is reflected uniformly
across the yield curve regardless of the duration to maturity or repricing of
specific assets and liabilities. Finally, the model does not take into account
the impact of the Association's business or strategic plans on the structure of
interest-earning assets and interest-bearing liabilities. Accordingly, although
the NPV measurement provides an indication of the Association's interest rate
risk exposure at a particular point in time, such measurement is not intended
to, and does not provide, a precise forecast of the effect of the changes in
market interest rates on the Association's net interest income and will differ
from actual results. The results of the OTS's NPV model are monitored by
management and presented to the Board of Directors quarterly.
The interest rate risk policy of the Association provides that the maximum
permissible impact to the Association, assuming a 400 basis point increase or
decrease in market interest rates, is an 80% decrease in net portfolio value.
The Association uses a variety of tools to limit interest rate risk. First, the
Association has focused a portion of its residential lending on adjustable-rate
mortgages ("ARMs"), which generally reprice within one year, although the
Association continues to make long term fixed-rate mortgages in recognition of
market demand and the potential for fee income. Second, the Association
maintains a high level of liquidity and has focused its recent investment
activities in adjustable rate mortgage-backed securities and other short term
investments. Third, the Association has maintained a large percentage of its
deposit liabilities in passbook and transaction accounts, which are considered
to be relatively resistant to changes in interest rates. The following table
shows the NPV and projected change in the NPV of the Association at June 30,
1998 assuming an instantaneous and sustained change in market interest rates of
100, 200, 300 and 400 basis points.
<TABLE>
<CAPTION>
INTEREST RATE SENSITIVITY OF NET PORTFOLIO VALUE (NPV)
Net Portfolio Value NPV as % of Assets
------------------------------- ------------------
Change in Rates $ Amount $ Change % Change NPV Ratio Change
- --------------- -------- --------- -------- ---------- -------
(Basis Points) (Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
+400 bp $11,930 $ (334) ( 3)% 9.92% -19 bp
+300 bp 12,315 51 0 10.19 + 8 bp
+200 bp 12,579 316 3 10.37 +27 bp
+100 bp 12,631 367 3 10.39 +29 bp
0 bp 12,264 -- - 10.10 --
-100 bp 12,285 22 0 10.10 0 bp
-200 bp 12,435 171 1 10.19 + 9 bp
-300 bp 12,878 614 5 10.49 +39 bp
-400 bp 13,496 1,232 10 10.92 +81 bp
</TABLE>
8
<PAGE>
FINANCIAL CONDITION AT JUNE 30, 1998
During the year ended June 30, 1998, total assets of the Association increased
by $5.7 million to $117.4 million from $111.7 million at June 30, 1997. This
increase was primarily the result of an increase in deposits in the amount of
$4.8 million to $107.8 million at June 30, 1998. Net loans receivable and loans
available for sale increased $5.8 million to $39.2 million at June 30, 1998.
Loan disbursements totaled $17.6 million compared to $7.7 million during the
year ended June 30, 1997. Principal payments to loans during the year ended June
30, 1998 totaled $9.8 million compared to $6.2 million during the year ended
June 30, 1997. The balance of mortgage-backed securities decreased by $1.1
million to $20.8 million due to repayments of mortgage-backed securities in the
amount of $5.7 million which exceeded purchases of mortgage-backed securities in
the amount of $4.6 million during the fiscal year. The $5.8 million increase in
net loans receivable was primarily funded by the $4.8 million increase in
deposits and the $1.1 million decrease in mortgage backed securities during the
fiscal year.
In fiscal 1998 the Association originated $2.6 million in single family mortgage
loans in conjunction with the Illinois Housing Development Authority's ("IHDA")
first time home buyers program. As required by the program, the Association
completed the sale of $2.2 million of these loans to the IHDA in fiscal 1998 and
will continue to service these loans for the IHDA and these customers. In fiscal
1999 the Association plans to continue to participate in the IHDA first time
home buyers program and to market its loan products to local real estate brokers
through Association loan origination personnel.
Cash and cash equivalents increased to $32.0 million at June 30, 1998 from $30.9
million at June 30, 1997 as short term interest rates remained stable throughout
the year. The balance of investment securities increased slightly to $21.2
million at June 30, 1998. The weighted average remaining maturity of the
Association's investment securities portfolio at June 30, 1998 was 1.8 years.
As discussed above, deposits for the year ended June 30, 1998 increased $4.8
million as deposit activity of $360.0 million and interest credited to deposit
accounts in the amount of $3.7 million exceeded withdrawal activity of $358.9
million. The increase in deposits is the result of a $4.8 million increase in
certificate of deposit accounts and a $231,000 increase in transaction deposits
including money market accounts offset by a $268,000 decrease in passbook
deposit accounts. The net increase in savings deposits is attributed to more
aggressive pricing and promotion of certificate of deposit rates.
Stockholders' equity increased $797,000 to $8.8 million at June 30, 1998 from
$8.0 million at June 30, 1997. The increase in stockholders' equity is the
result of earnings in the amount of $595,000, proceeds from the exercise of
stock options in the amount of $190,000, a $32,000 reduction in the unamortized
cost of the Bank Incentive Plan established in fiscal 1996 and a positive market
adjustment in the amount of $84,000, net of income taxes, from securities
classified 'available for sale'. These increases in
9
<PAGE>
stockholders' equity were offset by dividends paid on common stock in the amount
of $107,000.
Non-performing assets increased slightly to $1.0 million at June 30, 1998 from
$958,000 at June 30, 1997. Non-performing assets at June 30, 1998 consist of
$263,000 in non-accruing loans and $747,000 in real estate owned properties,
both stated net of specific reserves. At June 30, 1998 non-accruing loans
consist of $220,000 in three single family residential mortgage loans, $38,000
in one multi-family residential mortgage loan and $5,000 in non-mortgage loans.
General allowances for loan losses total $150,000 or 57.16% of net
non-performing loans at June 30, 1998. At June 30, 1998 real estate owned
consist of three out of state single family residential properties with net book
values of $325,000, $278,000 and 86,000, respectively and one local single
family residential property with a net book value of 58,000.
RESULTS OF OPERATIONS
The Association's operating results depend primarily on the level of its net
interest income and non-interest income as well as the level of its operating
expenses. Net interest income depends upon the volume of interest-earning assets
and interest-costing liabilities and the interest rate earned or paid on them.
The Association receives non-interest income in the form of fees charged for
services related to transaction and other deposit accounts. Fee income is also
generated by the Association's loan origination and loan brokerage operations
well as its loan servicing operations in the form of late payment and loan
servicing fees. Personnel costs, office occupancy and equipment expenses and
deposit insurance premiums comprise the largest components of the Association's
non-interest expense.
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 average interest-bearing
liabilities, expressed both in dollars and rates. No tax equivalent adjustments
were made. All average balances are monthly average balances and include
non-accruing loans.
10
<PAGE>
<TABLE>
<CAPTION>
Year Ended June 30,
------------------------------------------------------------------------
1998 1997 1996
---------------------- ---------------------- ----------------------
Average Interest Yield Average Interest Yield Average Interest Yield
Balance Earned/ and Balance Earned/ and Balance Earned/ and
Paid Rates Paid Rates Paid Rates
-------- ------- ----- -------- ------- ----- -------- ------- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-Earning
Assets:
Loans Receivable (1) $ 34,701 $2,792 8.04% 32,868 $2,699 8.21% $ 31,578 $2,631 8.33%
Mortgage-backed
securities........ 23,065 1,552 6.73 24,518 1,604 6.54 27,307 1,781 6.52
Investment and other
securities........ 21,142 1,248 5.90 21,049 1,277 6.07 21,081 1,281 6.08
Interest-bearing
deposits.......... 25,234 1,387 5.50 26,549 1,416 5.33 26,889 1,490 5.54
FHLB stock.......... 554 37 6.75 554 38 6.81 656 45 6.86
-------- ------ ---- ------ ------ ---- -------- ------ ----
Total interest-
earning assets $104,696 $7,016 6.70% $105,538 $7,034 6.67% $107,511 $7,228 6.72%
-------- ------ ---- ------ ------ ---- -------- ------ ----
Interest-Bearing
Liabilities:
Certificates of
deposit........... $ 43,122 $2,330 5.40% $ 43,264 $2,311 5.34% $ 43,479 $2,375 5.46%
Passbook accounts... 40,097 1,185 2.96 41,564 1,228 2.95 42,861 1,272 2.97%
Money market and
NOW accounts...... 11,744 354 3.02 12,214 371 3.04 12,898 395 3.06%
-------- ------ ---- ------ ------ ---- -------- ------ ----
Total interest-
bearing lia-
bilities...... $ 94,963 $3,869 4.07% $ 97,042 $3,910 4.03% $ 99,238 $4,042 4.07%
======== ====== ==== ======== ====== ==== ======== ====== ====
Net earning assets.. $ 9,733 $ 8,496 $ 8,273
======== ======== ========
Net-interest income. $3,147 $3,124 $3,186
====== ====== ======
Net interest rate
spread (2)........ 2.63% 2.64% 2.65%
==== ==== ====
Net interest margin. 3.01% 2.96% 2.96%
==== ==== ====
Average interest-
earning assets to
average interest-
bearing liabilities 110.25% 108.76% 108.34%
====== ====== ======
</TABLE>
(1) Calculated net of deferred loan fees, loan discounts, loans in process and
loss reserves.
(2) Net interest rate spread would be increased to 2.92%, 2.91% and 2.90% for
the periods shown if the positive impact of average non-interest bearing demand
deposits ($7,386, $6,990 and $6,618 for the periods shown) is considered.
11
<PAGE>
The following table presents, for the period indicated, the dollar amount of
changes in interest income and interest expense for major components of
interest-earning assets and interest-bearing liabilities. It distinguishes
between the increase related to higher outstanding balances and that due to the
unprecedented levels and volatility of interest rates. 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 rate (changes in rate multiplied
by old average volume) and (iii) changes in rate-volume (changes in rate
multiplied by the change in average volume).
<TABLE>
<CAPTION>
Year Ended June 30,
------------------------------------------------------------------
1998 vs. 1997 1997 vs. 1996
------------------------------ ------------------------------
Increase (decrease) due to Increase (decrease) due to
------------------------------ ------------------------------
Rate/ Rate/
Volume Rate Volume Net Volume Rate Volume Net
------ ------ ------ ------ ------ ------ ------ ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-Earning
Assets:
Loans Receivable.... $ 150 $ (54) $ (3) $ 93 $ 107 $ (38) $ (1) $ 68
Mortgage-backed
securities........ (95) 46 (3) (52) (182) 5 -- (177)
Investment and other
securities........ 6 (35) -- (29) (2) (2) -- (4)
Interest-bearing
deposits.......... (70) 43 (2) (29) (19) (56) 1 (74)
FHLB stock.......... -- (1) -- (1) (7) -- -- (7)
----- -- -- ----- ----- ----- -- -- ----- -----
Total interest-
earning assets $ (9) $ (1) $ (8) $ (18) $(103) $ (91) $ -- $(194)
----- ----- ----- ----- ----- ----- ---- -----
Interest-Bearing
Liabilities:
Certificates of
deposit........... $ (8) 27 -- 19 $ (12) $ (52) $ -- $ (64)
Passbook accounts... (43) -- -- (43) (38) (6) -- (44)
Money market and
NOW accounts...... (14) (3) -- (17) (21) (3) -- (24)
----- ----- ----- ----- ----- ----- ----- -----
Total interest-
bearing liab-
ilities....... $ (65) $ 24 $ -- $ (41) $ (71) $ (61) $ -- $(132)
----- ----- ----- ----- ----- ----- ----- -----
Net change in net
interest income... $ 23 $ (62)
===== =====
</TABLE>
12
<PAGE>
COMPARISON OF OPERATING RESULTS
FOR THE FISCAL YEARS ENDED
JUNE 30, 1998 AND JUNE 30, 1997
GENERAL
Midland Federal had net income of $595,000 in fiscal 1998 compared to net income
of $296,000 for fiscal 1997. Net income for the fiscal year ended June 30, 1997
included an after tax charge in the amount of $445,000 for a special assessment
levied by the Federal Deposit Insurance Corporation ("FDIC") to recapitalize the
Savings Association Insurance Fund ("SAIF").
Net income increased in fiscal 1998 from the prior fiscal year as a result of a
$23,000 increase in net interest income. The increase in net interest income is
primarily the result of an increase in net interest margin to 3.01% in fiscal
1998 compared to 2.96% in the prior fiscal year. Interest rate spread also
increased by a single basis point to 2.92% for the fiscal year ended June 30,
1998. The increases in net interest margin and interest rate spread offset an
$842,000 decrease in the average balance of interest earning assets to $104.7
million for the year ended June 30, 1998 from $105.5 million in the prior fiscal
year as interest earning assets were reduced in order to fund a $1.7 million
decline in average deposit balances which occurred during the year.
Net income was decreased in fiscal 1998 as a result of a $9,000 decrease in
non-interest income. The decrease in non-interest income in the current fiscal
year is primarily attributed to the elimination of a non-recurring recovery of a
prior period loss on the sale of real estate owned properties in the amount of
$143,000 which occurred in the prior fiscal year. Non-interest income was
increased in fiscal 1998 as a result of a $92,000 increase in loan related fees
and service charges as well as a $26,000 increase in commission income and an
$18,000 increase in profit on the sale of loans.
Net income was increased in fiscal 1998 as a result of a $363,000 decrease in
non-interest expense. The decrease in non-interest expense was attributable to
the elimination of a non-recurring $674,000 special assessment levied by the
FDIC to recapitalize the SAIF as well as a $79,000 decrease in regular deposit
insurance premiums. These decreases in non-interest expense were offset by a
$167,000 provision for loss on real estate owned properties, a $119,000 increase
in staffing costs, and smaller increases in computer software and support
expense, occupancy and equipment expense, legal expense and data processing
costs.
INTEREST INCOME
Interest income decreased $18,000 in fiscal 1998. This decrease in interest
income resulted from an $842,000 decrease in the average balance of interest
earning assets to $104.7 million in fiscal 1998 from $105.5 million in fiscal
1997. The decrease in the average outstanding balance of interest earnings
assets was partially offset by an increase in the average yield earned on
interest earning assets to 6.70% in fiscal 1998 from 6.67% in fiscal 1997.
Interest on loans receivable increased $93,000, or 3.4%, in fiscal 1998 compared
with fiscal 1997. The increase in interest income was attributed to
13
<PAGE>
an increase in the average outstanding balance of net loans receivable to $34.7
million in fiscal 1998 from $32.9 million in fiscal 1997. The increase in the
average balance of net loans receivable was partially offset by a decrease in
the average yield earned on loans receivable to 8.04% in fiscal 1998 from 8.21%
in fiscal 1997.
Interest on mortgage backed securities decreased $52,000, or 3.2%, in fiscal
1998. The decrease in interest income was attributed to a $1.4 million reduction
in the average outstanding balance of mortgage backed securities to $23.1
million in fiscal 1998 from $24.5 million in fiscal 1997. The lower average
outstanding balance of mortgage backed securities was partially offset by an
increase in the average yield earned on mortgage backed securities to 6.73% in
fiscal 1998 from 6.54% in fiscal 1997.
Interest earned on investment securities decreased $29,000, or 2.3%, in fiscal
1998. The decrease in interest income resulted from a decrease in the average
yield on investment securities to 5.90% in fiscal 1998 compared to 6.07% in
fiscal 1997 which offset a $93,000 increase in the average outstanding balance
of investment securities to $21.1 million in fiscal 1998 from $21.0 million in
fiscal 1997.
Interest earned on interest bearing deposits decreased $29,000, or 2.0%, in
fiscal 1998. The decrease in interest income is attributed to a $1.3 million
decrease in the average outstanding balance of interest bearing deposits to
$25.2 million in fiscal 1998 from $26.6 million in fiscal 1997 which offset an
increase in the average yield earned on interest bearing deposits to 5.50% in
fiscal 1998 from 5.33% in fiscal 1997. The Association maintained its
investments in interest bearing deposits in response to the Federal Reserve
Board's reported bias toward a tighter monetary policy during fiscal 1998.
INTEREST EXPENSE
Interest expense decreased $41,000, or 1.0%, in fiscal 1998. The decrease in
interest expense in fiscal 1998 was primarily the result of a $2.0 million
decrease in the average outstanding balance of interest costing deposits to
$95.0 million in fiscal 1998 from $97.0 million in fiscal 1997 which was
partially offset by an increase in the average yield paid on interest costing
deposits to 4.07% in fiscal 1998 compared to 4.03% in fiscal 1997.
PROVISIONS FOR LOSSES ON LOANS
The Association maintains an allowance for loan losses based upon management's
periodic evaluation of known and inherent risks in the loan portfolio, the
Association's past loan loss experience, adverse situations that may affect
borrowers' ability to repay loans, estimated value of the underlying collateral
and current and expected market conditions. During fiscal 1998 a $1.2 million
multi-family residential mortgage loan, which had been delinquent during fiscal
1997, was brought current by the borrower as a result of improved cash flows
derived from the underlying collateral. The Association incurred no loan
charge-offs during fiscal 1998. During fiscal 1998 the Association reduced it's
general allowance for loan losses from $282,000 at June 30, 1997 to $150,000 at
June 30, 1998, which level was determined by the Association to be consistent
with its revised policy for the establishment and maintenance of adequate levels
of general loan loss allowances based upon an assessment of the level of risk
inherent in the
14
<PAGE>
Association's loan portfolio including its classified loans. The $132,000
decrease in the Association's general allowance for loan losses during fiscal
1998 was the result of a $160,000 recovery of previously established general
loan loss provisions which was offset by $26,000 in recoveries from loans
previously classified 'loss' and $2,000 in recoveries from loans previously
charged off.
At June 30, 1998 the general allowance for loan losses totaled 57.16% of net
non-performing loans. At June 30, 1998, the Association was aware of no
regulatory directives or suggestions that the Association make additional
provisions for losses on loans. Although the Association believes its allowance
for loan losses is at a level which it considers to be adequate to provide for
potential losses, there can be no assurance that such losses will not exceed the
estimated amounts.
NON-INTEREST INCOME
Non-interest income decreased $9,000 in fiscal 1998. The decrease was primarily
due to the elimination of a non-recurring recovery of a prior period loss on the
sale of real estate owned properties in the amount of $143,000 in the prior
fiscal year. Non-interest income was increased in fiscal 1998 as a result of a
$92,000 increase in loan related fees and service charges to $238,000 from
$146,000 in the prior fiscal year, a $26,000 increase in commission income and
an $18,000 increase in profit on the sale of loans to the IHDA. The increase in
loan related fees and service charges was the result of increased loan brokerage
revenues in fiscal 1998 compared to fiscal 1997. The increase in commission
income was the result of an increase in the sale of annuity products in fiscal
1998 compared to the prior fiscal year. During fiscal 1998 deposit related fees
decreased $17,000 to $596,000 from $613,000 in fiscal 1997.
NON-INTEREST EXPENSE
Non-interest expense decreased $363,000 during fiscal 1998 to $3.5 million from
$3.9 million in the prior fiscal year. The decrease in non-interest expense was
primarily the result of the elimination of a non-recurring $674,000 special
assessment levied by the FDIC to recapitalize SAIF, along with a $79,000
decrease in regular deposit insurance premiums to $63,000 from $142,000 in the
prior fiscal year. The reduction in quarterly deposit insurance premiums was due
to a reduction in the Association's FDIC insurance premium rate effective
January 1, 1997. As of such date, deposit insurance premium rates for highly
rated institutions, such as the Association, were reduced to zero due to the
recapitalization of the SAIF, discussed above. However, all savings
associations, including the Association, continue to be charged a debt service
assessment by the FDIC to fund repayment of certain debt obligations of the
Financing Corporation which were undertaken pursuant to the Financial
Institutions Reform, Recovery and Enforcement Act of 1989 to fund the FSLIC
Resolution Fund. Non-interest expense was increased in fiscal 1998 as a result
of a $167,000 provision for loss on real estate owned properties, as well as a
$119,000 increase in staffing costs. The $167,000 provision for loss on real
estate owned properties was made to further reduce the Association's investment
in two out of state condominium properties as a result of recent comparable
sales activity and pending sale negotiations regarding such properties.
Non-interest expense was also increased in fiscal 1998 as a result of a $25,000
increase in computer software and support
15
<PAGE>
expense, a $23,000 increase in occupancy and equipment expense, a $20,000
increase in legal expense and a $16,000 increase in data processing expense. The
$20,000 increase in legal expense is the result of expenses associated with the
Association's proposal to adopt a holding company structure, discussed above.
INCOME TAXES
Provisions for income taxes increased by $237,000 to $338,000 in fiscal 1998
from $101,000 in fiscal 1997. The increased income tax provision for fiscal 1998
was due primarily to the increase in operating income as compared to fiscal
1997.
COMPARISON OF OPERATING RESULTS
FOR THE FISCAL YEARS ENDED
JUNE 30, 1997 AND JUNE 30, 1996
GENERAL
Midland Federal had net income of $296,000 in fiscal 1997 compared to net income
of $575,000 for fiscal 1996. Net income for the fiscal year ended June 30, 1997
included an after tax charge in the amount of $445,000 for a special assessment
levied by the FDIC to recapitalize the SAIF.
Net income decreased from the prior fiscal year as a result of decreases in the
Association's net interest income to $3.1 million in fiscal 1997 from $3.2
million in fiscal 1996. Net interest income declined $62,000 in fiscal 1997
compared to the prior fiscal year as the result of a $2.0 million reduction in
the average balance of interest earning assets as interest earning assets were
reduced in order to fund a $1.8 million decline in average deposit balances
which occurred during the year. The reduction in the average balance of interest
earning assets offset the positive impact of a slight increase in interest rate
spread in fiscal 1997. Interest rate spread increased a single basis point to
2.91% for the fiscal year ended June 30, 1997 from 2.90% in the prior fiscal
year. Net interest margin remained stable at 2.96% during fiscal 1997.
Net income was increased in fiscal 1997 as a result of a $229,000 increase in
non-interest income. The increase in non-interest income in the current fiscal
year is primarily attributed to a one time recovery of a prior period loss on
the sale of real estate owned properties in the amount of $143,000 as well as a
$44,000 increase in loan related fees and service charges.
Net income was decreased in fiscal 1997 as a result of a $656,000 increase in
non-interest expense, which increase is largely attributable to a non-recurring
$674,000 special assessment levied by the FDIC to recapitalize the SAIF.
Staffing costs also increased $124,000. The increase in staffing costs is
partially attributed to the costs associated with operating the Association's
enhanced loan brokerage and loan origination operations for the entire fiscal
year as well as the addition of one full time commissioned loan originator.
16
<PAGE>
INTEREST INCOME
Interest income decreased $194,000, or 2.7%, to $7.0 million in fiscal 1997 from
$7.2 million in fiscal 1996. This decrease in interest income resulted from a
$2.0 million decrease in the average balance of interest earning assets to
$105.5 million in fiscal 1997 from $107.5 million in fiscal 1996 as well as a
decrease in the average yield earned on interest earning assets to 6.67% in
fiscal 1997 from 6.72% in fiscal 1996.
Interest on loans receivable increased $68,000, or 2.6%, in fiscal 1997 compared
with fiscal 1996. The increase in interest income was attributed to an increase
in the average outstanding balance of net loans receivable to $32.9 million in
fiscal 1997 from $31.6 million in fiscal 1996 which offset a decrease in the
average yield earned on loans receivable to 8.21% in fiscal 1997 from 8.33% in
fiscal 1996.
Interest on mortgage backed securities decreased $177,000, or 9.9%, to $1.6
million in fiscal 1997 from $1.8 million in fiscal 1996. The decrease in
interest income is attributed to a $2.8 million reduction in the average
outstanding balance of mortgage backed securities to $24.5 million in fiscal
1997 from $27.3 million in fiscal 1996. The lower average outstanding balance of
mortgage backed securities was partially offset by a slight increase in the
average yield earned on mortgage backed securities to 6.54% in fiscal 1997 from
6.52% in fiscal 1996.
Interest earned on investment securities remained relatively stable in fiscal
1997 at $1.3 million, decreasing only $4,000, or 0.3% from fiscal 1996. The
average yield on investment securities was 6.07% in fiscal 1997 compared to
6.08% in fiscal 1996 while the average outstanding balance of investment
securities declined $32,000 to $21.0 million in fiscal 1997 from $21.1 million
in fiscal 1996.
Interest earned on interest bearing deposits decreased $73,000, or 4.9%, to $1.4
million in fiscal 1997 from $1.5 million in fiscal 1996. The decrease in
interest income is attributed to a decrease in the average yield earned on
interest bearing deposits to 5.33% in fiscal 1997 from 5.54% in fiscal 1996 as
well as a $340,000 decrease in the average outstanding balance of interest
bearing deposits to $26.6 million in fiscal 1997 from $26.9 million in fiscal
1996.
INTEREST EXPENSE
Interest expense decreased $132,000, or 3.3%, to $3.9 million in fiscal 1997
from $4.0 million in fiscal 1996. The decrease in interest expense in fiscal
1997 was primarily the result of a $2.2 million decrease in the average
outstanding balance of interest costing deposits to $97.0 million in fiscal 1997
from $99.2 million in fiscal 1996 as well as to a decrease in the average yield
paid on interest costing deposits to 4.03% in fiscal 1997 compared to 4.07% in
fiscal 1996.
PROVISIONS FOR LOSSES ON LOANS
The Association maintains an allowance for loan losses based upon management's
periodic evaluation of known and inherent risks in the loan portfolio, the
Association's past loss experience, adverse situations that may affect
borrowers' ability to repay loans, estimated value of the
17
<PAGE>
underlying collateral and current and expected market conditions. The
Association made no provision for loan losses in fiscal 1997 due to the
continued improvement in the level of net non-performing loans. In fiscal 1997
net non-performing loans declined by $1.3 million, or 92.9%, to $103,000 at June
30, 1997. At June 30, 1997 general loan loss reserves amounted to $282,000 or
274.39% of net non-performing loans. Net charge-offs during fiscal 1997 were
$44,000, or .13% of average net loans outstanding during the year. At June 30,
1997, the Association was aware of no regulatory directives or suggestions that
the Association make additional provisions for losses on loans. Although the
Association believes its allowance for loan losses is at a level which it
considers to be adequate to provide for potential losses, there can be no
assurance that such losses will not exceed the estimated amounts.
NON-INTEREST INCOME
Non-interest income increased $229,000 to $1.1 million in fiscal 1997 from
$896,000 in fiscal 1996. The increase was primarily due to a non-recurring
recovery of a prior period loss on the sale of real estate owned properties in
the amount of $143,000, a $44,000 increase in loan related fees and service
charges, a $16,000 gain on the sale of assets compared to a $7,000 loss on the
sale of assets in the prior fiscal year and a $16,000 increase in deposit
related fees. The increase in loan related fees and service charges was
partially the result of increased loan brokerage revenues in fiscal 1997
compared to fiscal 1996.
NON-INTEREST EXPENSE
Non-interest expense increased $656,000 during fiscal 1997 to $3.9 million from
$3.2 million in the prior fiscal year. The increase in non-interest expense was
primarily the result of a $674,000 special assessment levied by the FDIC to
recapitalize SAIF, a $124,000 increase in staffing costs, as discussed above,
and a $23,000 increase in advertising. These increases in non-interest expense
were partially offset by a $97,000 reduction in quarterly deposit insurance
premiums, a $43,000 decrease in legal, audit and examination services and the
elimination of a $25,000 provision for loss on real estate owned properties
which had been recorded in the prior fiscal year. The $97,000 reduction in
quarterly deposit insurance premiums is due to a reduction in the Association's
FDIC insurance premium rate effective January 1, 1997, as discussed above.
INCOME TAXES
Provisions for income taxes decreased by $210,000 to $101,000 in fiscal 1997
from $311,000 in fiscal 1996. The decreased income tax provision for fiscal 1997
was due primarily to the decrease in operating as compared to fiscal 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Association's principal sources of funds are deposits, loan and mortgage
backed securities repayments, proceeds from the maturities of investment
securities and other funds provided by operations. In addition, the Association
may borrow funds from the Federal Home Loan Bank of Chicago.
18
<PAGE>
The Association maintains investments in liquid assets based upon management's
assessment of (i) the Association's need for funds, (ii) expected deposit flows,
(iii) the yields available on short-term liquid assets and (iv) the objectives
of the Association's asset/liability management program. The OTS requires
members of the FHLB system to maintain minimum levels of liquid assets. OTS
regulations currently require the Association to maintain an average daily
balance of liquid assets equal to at least 4% of the sum of its average daily
balance of net withdrawable deposit accounts and borrowings payable in one year
or less. At June 30, 1998, the Association's regulatory liquidity ratio was
56.8%. At such date, the Association had commitments to originate $2.1 million
in single family mortgage loans, commitments to sell $659,000 in single family
mortgage loans and no commitments to purchase loans.
The Association considers its liquidity and capital reserves sufficient to meet
its outstanding short and long-term needs. The Association expects to be able to
fund or refinance, on a timely basis, its material commitments and long-term
liabilities. The Association's liquidity, represented by cash and cash
equivalents, is a combination of its operating, investing and financing
activities. These activities are summarized in the following table for the years
ended June 30, 1998 and 1997.
<TABLE>
<CAPTION>
For the Year
Ended June 30,
----------------------
1998 1997
-------- --------
(Dollars in Thousands)
<S> <C> <C>
Net income............................. $ 595 $ 296
Adjustments to reconcile net income
to net cash provided by
operating activities................. (235) (69)
------- -------
Net cash provided by
operating activities................. 360 227
Net cash provided by (for)
investing activities................. (4,233) 4,787
Net cash provided by (for)
financing activities................. 4,964 (5,029)
------- -------
Net change in cash and
cash equivalents..................... 1,091 (15)
Cash and cash equivalents at
beginning of period.................. 30,903 30,918
------- -------
Cash and cash equivalents at
end of period........................ $31,994 $30,903
======= =======
</TABLE>
At June 30, 1998 Midland Federal had tangible and core capital of $8.6 million,
or 7.33% of adjusted total assets, which was approximately $6.9 million and $5.1
million above the minimum requirements for capital adequacy purposes in effect
on that date of 1.5% and 3.0%, respectively, of adjusted total assets.
19
<PAGE>
At June 30, 1998 Midland Federal had total capital of $8.8 million and
risk-weighted assets of $37.5 million, or total capital of 23.36% of
risk-weighted assets. This amount was approximately $5.8 million above the 8.0%
requirement in effect on that date.
IMPACT OF NEW ACCOUNTING STANDARDS
The following does not constitute a comprehensive summary of all material
changes or developments affecting the manner in which the Association keeps its
books and records and performs its financial accounting responsibilities. It is
intended only as a summary of some of the recent pronouncements made by the
Financial Accounting Standards Board ("FASB") which are of particular interest
to financial institutions.
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
130 ("SFAS 130"), entitled "Reporting Comprehensive Income." This statement
establishes standards for the reporting and display of comprehensive income and
its components (revenues, expenses, gains, losses) in a full set of
general-purpose financial statements. SFAS 130 is effective for fiscal years
beginning after December 15, 1997. Management does not believe that adoption of
SFAS 130 will have a material impact on the Association's consolidated financial
condition or results of operations.
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
131 ("SFAS 131"), entitled "Disclosures about Segments of an Enterprise and
Related Information". SFAS 131 becomes effective for fiscal years beginning
after December 15, 1997 and establishes standards for the way that public
business enterprises report information about operating segments and requires
enterprises to report selected information about operating segments in interim
financial reports. Management does not believe that adoption of SFAS 131 will
have a material impact on the Association's consolidated financial condition or
results of operations.
In February 1998, the FASB issued Statement of Financial Accounting Standards
No. 132 ("SFAS 132"), entitled "Employers' Disclosure about Pensions and Other
Post-retirement Benefits". SFAS 132 alters current disclosure requirements
regarding pensions and other post-retirement benefits in the financial
statements of employers who sponsor such benefit plans. The revised disclosure
requirements are designed to provide additional information to assist readers in
evaluating future costs related to such plans. Additionally, the revised
disclosures are designed to provide changes in the components of pension and
benefit costs in addition to the year end components of those factors in the
resulting asset or liability related to such plans. The statement is effective
for fiscal years beginning after December 15, 1997 with earlier application
available. Management does not believe that adoption of SFAS 132 will have a
material impact on the Association's consolidated financial condition or results
of operations.
In June 1998, the FASB issued Statement of Financial Accounting Standards No.
133 ("SFAS 133"), entitled "Accounting for Derivative Instruments and for
Hedging Activities". SFAS 133 provides a comprehensive and consistent standard
for the recognition and measurement of derivatives and hedging
20
<PAGE>
activities. The statement requires all derivatives to be recorded on the balance
sheet at fair value and establishes special accounting for the following three
different types of hedges: hedges of changes in the fair value of assets,
liabilities or firm commitments (referred to as fair value hedges); hedges of
the variable cash flows of forecasted transactions (cash flow hedges); and
hedges of foreign currency exposures of net investments in foreign operations.
Though the accounting treatment and criteria for each of the three types of
hedges is unique, they all result in recognizing offsetting changes in value or
cash flows of both the hedge and the hedged item in earnings in the same period.
Changes in the fair value of derivatives that do not meet the criteria of one of
these three categories of hedges are included in earnings in the period of the
change. SFAS 133 is effective for years beginning after June 15, 1999, but
companies can early adopt as of the beginning of any fiscal quarter that begins
after June 1998. Management does not expect the adoption of this statement to
have a material impact on the Association's consolidated financial condition or
results of operations.
IMPACT OF INFLATION AND CHANGING PRICES
The Consolidated Financial Statements and Notes thereto presented herein have
been prepared in accordance with Generally Accepted Accounting Principles, which
require the measurement of financial position and operating results in terms of
historical dollars without considering the changes in the relative purchasing
power of money over time due to inflation. The impact of inflation is reflected
in the increased cost of the Association's operations. Unlike most industrial
companies, nearly all of the assets and liabilities of the Association are
monetary in nature. As a result, interest rates have a greater impact on the
Association's performance than do the effects of general levels of inflation.
Interest rates do not necessarily move in the same direction or to the same
extent as the price of goods and services.
COMMON STOCK
As of June 30, 1998, there were approximately 60 holders of record of the
Association's Common Stock and 363,975 shares of issued and outstanding common
stock. The Association's stock is quoted on the 'pink sheets' published by the
National Quotation Bureau, Inc. Beginning July 23, 1998, the Company's common
stock will be quoted on the 'pink sheets' under the symbol 'MCPH'.
The following table sets forth, for the periods shown, the high and low prices
of the common stock and cash dividends per share decalred. The common stock
began trading on June 30, 1993, the date the Association converted from a mutual
to a stock company.
The prices reflect inter-dealer quotations without retail mark-up, mark-down or
commissions and do not necessarily represent actual transactions.
21
<PAGE>
<TABLE>
<CAPTION>
Cash dividends
Quarter ended High Low declared
------------- ---- --- --------
<S> <C> <C> <C>
March 31, 1996 $15.00 $13.75 $0.075
June 30, 1996 17.00 15.50 0.075
September 30, 1996 16.44 14.50 0.075
December 31, 1996 17.06 14.50 0.075
March 31, 1997 17.50 16.00 0.075
June 30, 1997 18.50 17.13 0.075
September 30, 1997 19.50 18.13 0.075
December 31, 1997 21.25 20.13 0.075
March 31, 1998 23.50 20.75 0.075
June 30, 1998 30.50 27.00 0.075
</TABLE>
Dividend payment decisions are made with consideration of a variety of factors
including earnings, financial condition, market considerations and regulatory
restrictions.
22
<PAGE>
[LETTERHEAD OF COBITZ, VANDENBERG & FENNESSY]
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Midland Federal Savings and Loan Association
Bridgeview, Illinois
We have audited the consolidated statements of financial condition of
Midland Federal Savings and Loan Association and subsidiaries as of June 30,
1998 and 1997, and the related consolidated statements of income, changes in
stockholders' equity and cash flows for each of the three years in the period
ending June 30, 1998. These consolidated financial statements are the
responsibility of the Association's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatements. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Midland
Federal Savings and Loan Association and subsidiaries at June 30, 1998 and 1997,
and the results of their operations and their cash flows for each of the three
years in the period ending June 30, 1998, in conformity with generally accepted
accounting principles.
/s/Cobitz, Vandenberg & Fennessy
- --------------------------------
Cobitz, Vandenberg & Fennessy
August 6, 1998
Palos Hills, Illinois
23
<PAGE>
<TABLE>
<CAPTION>
MIDLAND FEDERAL SAVINGS AND LOAN ASSOCIATION
AND SUBSIDIARIES
Consolidated Statements of Financial Condition
June 30,
---------------------------
1998 1997
------------- -----------
<S> <C> <C>
Assets
Cash and amounts due from depository institutions $ 2,656,448 2,836,806
Interest-bearing deposits 29,337,747 28,065,769
------------- -----------
Total cash and cash equivalents 31,994,195 30,902,575
Investment securities, held to maturity (fair value:
1998 - $20,030,469; 1997 - $19,989,063) (note 2) 19,989,055 19,989,524
Investment securities available for sale,
at fair value (note 3) 1,195,938 1,068,125
Mortgage-backed securities, held to maturity (fair value:
1998 - $21,128,839; 1997 - $22,148,459) (note 4) 20,844,623 21,935,716
Loans receivable (net of allowance
for loan losses: 1998 - $393,884;
1997 - $551,509) (note 5) 38,513,121 33,161,513
Loans receivable held for sale (note 6) 659,450 230,400
Real estate owned, net 746,522 855,500
Stock in Federal Home Loan Bank of Chicago 554,000 554,000
Accrued interest receivable (note 7) 619,464 638,296
Office properties and equipment - net (note 8) 1,567,285 1,588,024
Prepaid expenses and other assets (note 9) 689,727 753,907
------------- -----------
Total assets 117,373,380 111,677,580
============= ===========
Liabilities and Stockholders' Equity
Liabilities:
Deposits (note 10) 107,761,846 102,972,924
Advance payments by borrowers for taxes
and insurance 447,668 355,765
Other liabilities (note 11) 396,229 378,225
------------- -----------
Total liabilities 108,605,743 103,706,914
------------- -----------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Stockholders' Equity:
Preferred stock, $.01 par value: authorized
1,000,000 shares; none outstanding - -
Common stock, $.01 par value: authorized
5,000,000 shares; issued and outstanding
363,975 shares at June 30, 1998 and
346,725 shares at June 30, 1997 3,640 3,467
Additional paid-in capital 3,266,315 3,073,664
Retained earnings - substantially restricted 5,430,065 4,942,077
Unrealized gain on securities available for sale,
net of income taxes 145,099 61,375
Common stock awarded by Bank Incentive Plan (77,482) (109,917)
------------- -----------
Total stockholders' equity (notes 15 and 16) 8,767,637 7,970,666
------------- -----------
Commitments and contingencies (notes 17 and 18)
Total liabilities and stockholders' equity $ 117,373,380 111,677,580
============= ===========
</TABLE>
See accompanying notes to consolidated financial statements.
24
<PAGE>
<TABLE>
<CAPTION>
MIDLAND FEDERAL SAVINGS AND LOAN ASSOCIATION
AND SUBSIDIARIES
Consolidated Statements of Income
Years Ended June 30,
--------------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Interest income:
Interest on loans $ 2,791,590 2,699,211 2,631,159
Interest on mortgage-backed securities 1,551,940 1,603,709 1,780,840
Interest on investment securities 1,247,576 1,277,457 1,281,383
Interest on interest-bearing deposits 1,387,391 1,416,267 1,489,182
Dividends on FHLB stock 37,401 37,717 44,994
----------- ----------- -----------
Total interest income 7,015,898 7,034,361 7,227,558
----------- ----------- -----------
Interest expense:
Interest on deposits (note 10) 3,868,946 3,910,529 4,041,748
----------- ----------- -----------
Total interest expense 3,868,946 3,910,529 4,041,748
----------- ----------- -----------
Net interest income before provision
for loan losses 3,146,952 3,123,832 3,185,810
Provision for loan losses (recoveries) (note 5) (160,000) -- --
----------- ----------- -----------
Net interest income after provision
for loan losses 3,306,952 3,123,832 3,185,810
----------- ----------- -----------
Non-interest income:
Loan fees and service charges 237,768 145,586 101,600
Commission income 94,572 68,525 81,003
Profit on sale of loans (note 6) 29,076 10,802 --
Loss on sale of real estate owned -- -- (6,585)
Recovery from litigation settlement (note 19) -- 143,000 --
Deposit related fees 596,194 612,567 596,919
Other income 158,233 144,820 123,637
----------- ----------- -----------
Total non-interest income 1,115,843 1,125,300 896,574
----------- ----------- -----------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Non-interest expense:
Staffing costs (notes 12 and 13) 1,788,697 1,670,423 1,546,124
Advertising 89,394 86,063 63,087
Occupancy and equipment expenses (note 8) 474,947 451,507 448,893
Data processing 152,830 136,634 136,714
Federal deposit insurance premiums (note 20) 63,090 142,377 239,259
FDIC special assessment (note 20) -- 674,061 --
Legal, audit and examination services 161,005 143,974 186,890
Real estate owned expense 93,917 97,602 104,014
Provision for loss on
real estate owned (note 1) 167,000 -- 25,000
Other 498,968 449,862 446,341
----------- ----------- -----------
Total non-interest expense 3,489,848 3,852,503 3,196,322
----------- ----------- -----------
Income before income taxes 932,947 396,629 886,062
Provision for income taxes (note 14) 338,354 100,811 310,886
----------- ----------- -----------
Net income $ 594,593 295,818 575,176
=========== =========== ===========
Earnings per share - basic $ 1.68 .85 1.66
=========== =========== ===========
Earnings per share - diluted $ 1.66 .83 1.64
=========== =========== ===========
Dividends declared per common share $ .30 .30 .30
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
25
<PAGE>
<TABLE>
<CAPTION>
MIDLAND FEDERAL SAVINGS AND LOAN ASSOCIATION
AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
Unrealized
Gain on Common
Additional Securities stock
Common Paid-In Retained Available awarded
Stock Capital Earnings For Sale by BIP Total
------- --------- --------- ------ ---------
<S> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1995 $ 3,450 3,053,385 4,278,730 76,665 - 7,412,230
Net income 575,176 575,176
Adjustment of securities
available for sale to fair
value, net of tax effect (27,239) (27,239)
Common stock issued in
connection with stock
options exercised 17 17,233 17,250
Tax benefit related to
stock options exercised 2,200 2,200
Contribution to BIP trustee
for purchase of BIP shares (155,250) (155,250)
Amortization of award of BIP stock 18,975 18,975
Dividends declared on
common stock ($.30 per share) (103,630) (103,630)
------ --------- --------- ------- ------- ---------
Balance at June 30, 1996 3,467 3,072,818 4,750,276 49,426 (136,275) 7,739,712
Net income 295,818 295,818
Adjustment of securities
available for sale to fair
value, net of tax effect 11,949 11,949
Tax benefit related to
employee stock plan 846 846
Contribution to BIP trustee
for purchase of BIP shares (6,922) (6,922)
Amortization of award of BIP stock 33,280 33,280
Dividends declared on
common stock ($.30 per share) (104,017) (104,017)
------ --------- --------- ------- ------- ---------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1997 3,467 3,073,664 4,942,077 61,375 (109,917) 7,970,666
Net income 594,593 594,593
Adjustment of securities
available for sale to fair
value, net of tax effect 83,724 83,724
Common stock issued in
connection with stock
options exercised 173 189,577 189,750
Tax benefit related to
employee stock plan 3,074 3,074
Amortization of award of BIP stock 32,435 32,435
Dividends declared on
common stock ($.30 per share) (106,605) (106,605)
------ --------- --------- ------- ------- ---------
Balance at June 30, 1998 $ 3,640 3,266,315 5,430,065 145,099 (77,482) 8,767,637
====== ========= ========= ======= ======= =========
</TABLE>
See accompanying notes to consolidated financial statements.
26
<PAGE>
<TABLE>
<CAPTION>
MIDLAND FEDERAL SAVINGS AND LOAN ASSOCIATION
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years Ended June 30,
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 594,593 295,818 575,176
Adjustments to reconcile net income to net cash
from operating activities:
Depreciation 148,118 117,169 134,225
Amortization of premiums and discounts on securities 25,682 46,143 88,767
Amortization of cost of stock benefit plan 32,435 33,280 18,975
Loss on sale of real estate owned - - 6,585
Provision for loss on real estate owned 167,000 - 25,000
Provision for loan losses (recoveries) (160,000) - -
Proceeds from sale of loans held for sale 2,196,672 831,600 -
Origination of loans held for sale (2,625,722) (1,062,000) -
Profit on sale of loans (29,076) (10,802) -
(Increase) decrease in accrued interest receivable 18,832 49,023 (24,075)
Increase (decrease) in accrued interest payable 4,672 (2,157) 3,197
Decrease in deferred income on loans (79,462) (28,405) (76,649)
(Increase) decrease in other assets 53,199 49,753 (55,781)
Increase (decrease) in other liabilities 13,332 (93,014) 113,258
----------- ----------- -----------
Net cash provided by operating activities 360,275 226,408 808,678
----------- ----------- -----------
Cash flows from investing activities:
Purchase of mortgage-backed securities, held to maturity (4,610,445) - (4,575,313)
Proceeds from repayments of mortgage-backed securities,
held to maturity 5,663,017 5,413,446 5,799,821
Purchase of investment securities, held to maturity (9,987,650) (9,992,125) (9,983,375)
Proceeds from maturities of investment securities,
held to maturity 10,000,000 10,000,000 10,000,000
Proceeds from redemption of Federal Home Loan Bank stock - - 153,200
Loan disbursements (14,927,543) (6,636,897) (8,166,185)
Loan repayments 9,757,375 6,194,014 6,503,514
Proceeds from sale of real estate owned - - 147,250
Property and equipment expenditures (127,379) (191,221) (202,157)
----------- ----------- -----------
Net cash provided by (for) investing activities (4,232,625) 4,787,217 (323,245)
----------- ----------- -----------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Cash flows from financing activities:
Proceeds from exercise of stock options 189,750 - 17,250
Deposit receipts 360,038,437 332,832,845 328,187,728
Deposit withdrawals (358,908,515) (341,490,636) (329,190,908)
Interest credited to deposit accounts 3,659,000 3,717,000 3,827,000
Payment of dividends (106,605) (104,017) (103,630)
Purchase of BIP stock - (6,922) (155,250)
Increase (decrease) in advance payments
by borrowers for taxes and insurance 91,903 22,962 (171,962)
----------- ----------- -----------
Net cash provided by (for) financing activities 4,963,970 (5,028,768) 2,410,228
----------- ----------- -----------
Net change in cash and cash equivalents 1,091,620 (15,143) 2,895,661
Cash and cash equivalents at beginning of year 30,902,575 30,917,718 28,022,057
----------- ----------- -----------
Cash and cash equivalents at end of year $ 31,994,195 30,902,575 30,917,718
=========== =========== ===========
Cash paid during the year for:
Interest $ 3,864,274 3,912,686 4,038,551
Income taxes 239,000 77,226 291,190
Non-cash investing activities:
Transfer of loans to foreclosed real estate $ 58,022 85,500 -
=========== =========== ========
</TABLE>
See accompanying notes to consolidated financial statements.
27
<PAGE>
MIDLAND FEDERAL SAVINGS AND LOAN ASSOCIATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1) Summary of Significant Accounting Policies
The accounting and reporting policies of Midland Federal Savings and
Loan Association (the "Association") and its subsidiaries conform to
generally accepted accounting principles and to general practice within
the thrift industry. The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. The following is a
description of the more significant policies which the Association
follows in preparing and presenting its consolidated financial
statements.
Principles of Consolidation
The consolidated financial statements include the accounts of Midland
Federal Savings and Loan Association and its wholly-owned subsidiaries,
Midland Service Corporation, MS Insurance Agency and Bridgeview
Development Company. Significant intercompany transactions and balances
have been eliminated in consolidation.
Investment Securities, Available for Sale
Investment securities available for sale are recorded in accordance
with Statement of Financial Accounting Standards ("SFAS") No. 115
"Accounting for Certain Investments in Debt and Equity Securities".
SFAS 115 requires the use of fair value accounting for securities
available for sale or trading and retains the use of the amortized cost
method for securities the Association has the positive ability and
intent to hold to maturity.
SFAS 115 requires the classification of debt and equity securities into
one of three categories: held to maturity, available for sale, or
trading. Held to maturity securities are measured at amortized cost.
Unrealized gains and losses for trading securities are included in
income. Unrealized holding gains and losses on available for sale
securities are excluded from income and reported net of taxes as a
separate component of stockholders' equity.
The Association has designated certain investments in U.S. Government
securities as available for sale, and has recorded these investments at
their current fair value. Premiums and discounts are amortized and
accreted into income over the remaining life of the security using the
level yield method. Unrealized gains and losses are recorded in a
valuation account which is included, net of income taxes, as a separate
component of stockholders' equity. Gains and losses on the sale of
these securities are determined using the specific identification
method and are reflected in earnings when realized.
Investment Securities and Mortgage-Backed Securities, Held to Maturity
These securities are carried at cost, adjusted for amortization of
premiums and accretion of discounts over the term of the security using
the level yield method. These securities are not carried at fair value
because the Association has both the ability and the intent to hold
them to maturity.
28
<PAGE>
1) Summary of Significant Accounting Policies (continued)
Loans Receivable and Related Fees
Loans are stated at the principal amount outstanding, net of loans in
process, deferred fees and the allowance for losses. 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 charged against current
income.
Loan origination fees are being deferred in accordance with SFAS No. 91
"Accounting for Nonrefundable Fees and Costs Associated with
Originating or Acquiring Loans and Initial Direct Costs of Leases".
This statement requires that loan origination fees and direct loan
origination costs for a completed loan be netted and then deferred and
amortized into interest income as an adjustment of yield over the
contractual life of the loan.
The Association has adopted the provisions of SFAS No. 114 "Accounting
by Creditors for Impairment of a Loan" and SFAS No. 118 "Accounting by
Creditors for Impairment of a Loan - Income Recognition and
Disclosures". These statements apply to all loans that are identified
for evaluation except for large groups of smaller-balance homogeneous
loans that are collectively evaluated for impairment. These loans
include, but are not limited to, credit card, residential mortgage and
consumer installment loans. Substantially all of the Association's
lending is excluded from the provisions of SFAS 114 and SFAS 118.
Under these statements, of the remaining loans which are evaluated for
impairment (a loan is considered impaired when, based on current
information and events, it is probable that a creditor will be unable
to collect all amounts due according to the contractual terms of the
loan agreement), there were no material amounts of loans which met the
definition of an impaired loan during the year ended June 30, 1998 and
no loans to be evaluated for impairment at June 30, 1998.
Loans Receivable Held for Sale
That portion of loans receivable designated as held for sale are
recorded at the lower of cost or fair value in accordance with SFAS No.
65 "Accounting for Certain Mortgage Banking Activities". Unrealized
declines in fair value are reflected as a charge to current earnings.
Mortgage Servicing Rights
The Association has adopted the provisions of SFAS 122, "Accounting for
Mortgage Servicing Rights". This statement amends SFAS 65, "Accounting
for Certain Mortgage Banking Activities" to require that a mortgage
banking enterprise recognize as separate assets rights to service
mortgage loans for others, however those servicing rights are acquired.
SFAS 122 requires that a mortgage banking enterprise assess its
capitalized mortgage servicing rights for impairment based on the fair
value of those rights. The mortgage servicing rights are to be
amortized over the life of the asset in proportion to the estimated net
servicing income.
<PAGE>
The Association initially accounts for mortgage servicing rights using
the discounted present value of estimated expected future cash flows.
This amount is initially capitalized in other assets and subsequently
amortized over the estimated life of the loan servicing income stream.
The carrying value of the Association's mortgage serving rights, in
relation to estimated servicing values, and the related amortization is
reviewed by management on a quarterly basis. See note 6 for a
discussion of the current year impact on financial position and results
of operations.
29
<PAGE>
1) Summary of Significant Accounting Policies (continued)
Allowance for Loan Losses
The determination of the allowance for loan losses involves material
estimates that are susceptible to significant change in the near term.
The allowance for loan losses is maintained at a level adequate to
provide for losses through charges to operating expense. The allowance
is based upon past loss experience and other factors which, in
management's judgement, deserve current recognition in estimating
losses. Such factors considered by management include growth and
composition of the loan portfolio, the relationship of the allowance
for losses to outstanding loans and economic conditions.
Management believes that the allowance is adequate. While management
uses available information to recognize losses on loans, future
additions to the allowance may be necessary based on changes in
economic conditions. In addition, various regulatory agencies, as an
integral part of their examination process, periodically review the
Association's allowance for loan losses. Such agencies may require the
Association to recognize additions to the allowance based on their
judgements about information available to them at the time of their
examination.
Real Estate Owned
Real estate acquired through foreclosure or deed in lieu of foreclosure
is carried at the lower of fair value minus estimated costs to sell or
the related loan balance at the date of foreclosure. Valuations are
periodically performed by management and an allowance for loss is
established by a charge to operations if the carrying value of a
property exceeds its fair value minus estimated costs to sell. As of
June 30, 1998, all real estate owned properties were evaluated for
impairment based upon current appraisals, pending real estate contracts
or other pertinent documentation. As a result of this evaluation, two
real estate owned properties, located out of state, were written down
by a charge to earnings in the amount of $167,000.
Depreciation
Depreciation of office properties and equipment is accumulated on the
straight line basis over estimated lives of the various assets.
Income Taxes
The Association files a consolidated federal income tax return with its
subsidiaries. The provision for federal and state taxes on income is
based on earnings reported in the financial statements. Deferred income
taxes arise from the recognition of certain items of income and expense
for tax purposes in years different from those in which they are
recognized in the consolidated financial statements. Deferred tax
assets and liabilities are recognized for the estimated future tax
consequences attributable to differences between the financial
statement carrying amount of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured
using tax rates in effect for the year in which those temporary
differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
<PAGE>
Consolidated Statements of Cash Flows
For the purposes of reporting cash flows, the Association has defined
cash and cash equivalents to include cash on hand, amounts due from
depository institutions, interest-bearing deposits in other financial
institutions and federal funds sold.
30
<PAGE>
1) Summary of Significant Accounting Policies (continued)
Earnings per Share
The Association computes its earnings per share (EPS) in accordance
with SFAS No. 128, "Earnings per Share". This statement simplifies the
standards for computing EPS previously found in Accounting Principles
Board Opinion No. 5, "Earnings per Share" and makes them comparable to
international EPS standards. It replaces the presentation of primary
EPS with a presentation of basic EPS and fully diluted EPS with diluted
EPS.
Basic EPS, unlike primary EPS, excludes dilution and is computed by
dividing income available to common stockholders by the
weighted-average number of common shares outstanding for the period.
Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or
converted into common stock or resulted in the issuance of common stock
that then shared in the earnings of the entity.
The following presentation illustrates basic and diluted EPS in
accordance with the provisions of SFAS 128:
<TABLE>
<CAPTION>
Years Ended June 30,
------------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Weighted average number of
common shares outstanding used
in basic EPS calculation 354,948 346,725 345,551
Add common stock equivalents
for shares issuable under
Stock Option Plans 4,262 8,362 5,884
-------- -------- --------
Weighted average number of shares
outstanding adjusted for common
stock equivalents 359,210 355,087 351,435
======== ======== ========
Net income $594,593 295,818 575,176
Basic earnings per share $ 1.68 .85 1.66
Diluted earnings per share $ 1.66 .83 1.64
</TABLE>
EPS for prior periods has been restated to comply with the provisions
of SFAS 128.
31
<PAGE>
2) Investment Securities, Held to Maturity
Investment securities, held to maturity, are summarized as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------ ---------- ---------- ----------
<S> <C> <C> <C> <C>
June 30, 1998
United States Treasury notes $19,989,055 44,643 3,229 20,030,469
=========== ======= ======= ==========
Weighted average interest rate 5.80%
===========
June 30, 1997
United States Treasury notes $19,989,524 24,881 25,342 19,989,063
=========== ======= ======= ==========
Weighted average interest rate 5.80%
===========
</TABLE>
The contractual maturity of investment securities held to maturity are
summarized as follows:
<TABLE>
<CAPTION>
June 30, 1998 June 30, 1997
--------------------------- --------------------------
Amortized Fair Amortized Fair
Term to Maturity Cost Value Cost Value
---------------- ---- ----- ---- -----
<S> <C> <C> <C> <C>
Due in one year or less $ 9,997,659 10,028,125 9,995,802 9,992,969
Due after one year through
two years 9,991,396 10,002,344 9,993,722 9,996,094
----------- ----------- ----------- -----------
$19,989,055 20,030,469 19,989,524 19,989,063
=========== =========== =========== ===========
</TABLE>
<PAGE>
3) Investment Securities, Available for Sale
Investment securities available for sale are recorded at fair value in
accordance with SFAS 115. This portfolio is summarized as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------ ------- ------- ----------
<S> <C> <C> <C> <C>
June 30, 1998
United States Treasury bond $ 976,091 219,847 - 1,195,938
============ ======= ======= =========
Weighted average interest rate 7.68%
============
June 30, 1997
United States Treasury bond $ 975,133 92,992 - 1,068,125
============= ======= ======= =========
Weighted average interest rate 7.71%
=============
</TABLE>
The contractual maturity of the above security is in the year 2016.
There were no sales of investment securities available for sale during
any of the periods presented.
32
<PAGE>
4) Mortgage-Backed Securities, Held to Maturity
Mortgage-backed securities, held to maturity, are summarized as
follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
June 30, 1998
Participation certificates:
FHLMC - Adjustable rate $10,269,222 109,291 4,352 10,374,161
FNMA - Adjustable rate 4,291,512 71,187 -- 4,362,699
FHLMC - Fixed rate 4,011,807 25,246 -- 4,037,053
FNMA - Fixed rate 1,859,437 74,107 -- 1,933,544
GNMA - Fixed rate 388,814 8,867 130 397,551
Investment in collateralized
mortgage obligations:
FHLMC 23,831 -- -- 23,831
----------- ----------- ----------- -----------
$20,844,623 288,698 4,482 21,128,839
=========== =========== =========== ===========
Weighted average interest rate 6.82%
===========
<CAPTION>
June 30, 1997
<S> <C> <C> <C> <C>
Participation certificates:
FHLMC - Adjustable rate $13,360,001 206,406 91,034 13,475,373
FNMA - Adjustable rate 4,791,249 37,817 -- 4,829,066
FHLMC - Fixed rate 911,497 -- 16,521 894,976
FNMA - Fixed rate 2,317,416 79,101 -- 2,396,517
GNMA - Fixed rate 520,049 1,408 4,434 517,023
Investment in collateralized
mortgage obligations:
FHLMC 35,504 -- -- 35,504
----------- ----------- ----------- -----------
$21,935,716 324,732 111,989 22,148,459
=========== =========== =========== ===========
Weighted average interest rate 6.82%
===========
</TABLE>
33
<PAGE>
5) Loans Receivable
Loans receivable are summarized as follows:
<TABLE>
<CAPTION>
June 30,
------------------------------
1998 1997
----------- -----------
<S> <C> <C>
Mortgage loans:
One-to-four family $34,370,408 28,788,335
Multi-family 1,790,245 2,200,801
Non-residential 244,232 263,949
Construction 450,000 300,000
----------- -----------
Total mortgage loans 36,854,885 31,553,085
----------- -----------
Other loans:
Loans on deposit accounts 463,748 425,224
Auto loans 371,743 455,367
Education loans 1,316,022 1,542,205
Mobile home loans 10,295 20,920
Other 138,825 138,079
----------- -----------
Total other loans 2,300,633 2,581,795
----------- -----------
Commercial business loans 70,988 74,196
----------- -----------
Total loans receivable 39,226,506 34,209,076
----------- -----------
Less:
Loans in process 40,379 137,470
Deferred loan fees and discounts 17,086 96,780
Allowance for uncollected interest 262,036 261,804
Allowance for loan losses 393,884 551,509
----------- -----------
Loans receivable, net $38,513,121 33,161,513
=========== ===========
Weighted average interest rate 7.85% 8.19%
=========== ===========
</TABLE>
<PAGE>
Activity in the allowance for loan losses is summarized as follows:
<TABLE>
<CAPTION>
Years Ended June 30,
-------------------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Balance, beginning of year $ 551,509 595,601 666,043
Provision for loan losses (recoveries) (160,000) - -
Recoveries previously charged-off 2,375 1,629 103,771
Charge-offs - (45,721) (174,213)
------- ------- -------
Balance, end of year $ 393,884 551,509 595,601
======= ======= =======
</TABLE>
During the year ended June 30, 1998, the Association revised its policy
for the establishment and maintenance of adequate levels of the
allowance for loan and lease losses ("ALLL"). The loan loss recovery
was the result of a reduction in the ALLL to a level consistent with
the Association's revised policy based upon as assessment of the level
of risk inherent in the Association's loan portfolio.
Delinquent loans (loans having payments past due ninety days or more)
at June 30, 1998 amounted to $465,323 or 1.2% of total loans in force.
Comparable figures for 1997 were $317,198 or .9% of total loans.
Loans to directors and executive officers aggregated $444,842 at June
30, 1998 and $454,085 at June 30, 1997. Such loans are made on
substantially the same terms as those for other loan customers.
34
<PAGE>
6) Loans Receivable Held for Sale
During the years ended June 30, 1998 and 1997, the Association sold
loans to the Illinois Housing Development Authority under various
programs. As such, the Association has designated a portion of the loan
portfolio to be classified as held for sale. During the years ended
June 30, 1998 and 1997, the Association sold first mortgage loans
totaling $2,196,672 and $831,600 to the Illinois Housing Development
Authority. The Association retained the servicing on these loans.
Proceeds from the sale of these loans during the years ended June 30,
1998 and 1997 were $2,196,672 and $831,600 with no gain or loss
realized on those sales. In addition, the Association recorded a gain
of $29,076 and $10,802 for the years ended June 30, 1998 and 1997 on
loan sales from the establishment of a mortgage servicing right asset
in accordance with SFAS No. 122. During the years ended June 30, 1998
and 1997, the Association amortized $2,137 and $292 of this amount
against current servicing fee income.
As of June 30, 1998, $659,450 of newly originated fixed-rate thirty
year original term loans qualifying for sale into the secondary market
were classified in this portfolio. Loans held for sale are valued at
the lower of cost or fair value in accordance with generally accepted
accounting principles. There were no recognized, but unrealized, losses
at June 30, 1998.
At June 30, 1998, 1997 and 1996, loans serviced for others amounted to
$3,841,991, $1,045,553 and $251,184 respectively.
7) Accrued Interest Receivable
Accrued interest receivable is summarized as follows:
<TABLE>
<CAPTION>
June 30,
---------------------------
1998 1997
-------- --------
<S> <C> <C>
Investment securities $252,060 250,087
Mortgage-backed securities 178,297 206,573
Loans receivable 179,956 172,313
Other investments 9,151 9,323
-------- --------
$619,464 638,296
======== ========
</TABLE>
35
<PAGE>
8) Office Properties and Equipment
Office properties and equipment are summarized as follows:
<TABLE>
<CAPTION>
June 30,
---------------------------
1998 1997
---------- ----------
<S> <C> <C>
Land $ 236,095 236,095
Buildings 1,655,841 1,655,841
Easement for parking lot and driveway 223,050 223,050
Furniture, fixtures and equipment 1,750,969 1,623,590
Automobiles 17,993 17,993
---------- ----------
3,883,948 3,756,569
Less accumulated depreciation 2,316,663 2,168,545
---------- ----------
$1,567,285 1,588,024
========== ==========
</TABLE>
Depreciation of office properties and equipment for the years ended
June 30, 1998, 1997 and 1996 amounted to $148,118, $117,169 and
$134,225 respectively.
The Association has a lease on vacant land located in Homer Township,
Illinois. Rent expense for the years ended June 30, 1998, 1997 and 1996
amounted to $17,256 in each year.
During July 1998, the Association entered into a lease for retail space
and additional vacant land at the same location in Homer Township,
Illinois. The retail space is leased for a period of ten years with a
single ten year renewal option. The vacant land is leased for ten years
with eight successive ten year renewal options and is contiguous to
both the leased retail space and the land previously leased by the
Association. The intent of the Association is to establish a full
service branch banking facility at this location. The cost to construct
this branch is anticipated to be approximately $425,000.
Minimum rental commitments under the above leases are approximately as
follows:
Year ended June 30, 1999 $ 41,556
Year ended June 30, 2000 53,336
Year ended June 30, 2001 55,004
Thereafter 524,000
36
<PAGE>
9) Prepaid Expenses and Other Assets
Prepaid expenses and other assets consist of the following:
<TABLE>
<CAPTION>
June 30,
-----------------------
1998 1997
-------- --------
<S> <C> <C>
Prepaid federal insurance premiums $ 15,326 16,091
Prepaid insurance 44,866 60,861
Other prepaid expenses 72,422 59,768
Deferred premium on sale of loans 4,209 4,327
Overpayment of federal income tax 40,184 79,404
Deferred federal income tax benefit - net (a) 331,940 432,130
Insurance premiums due from customers 7,195 8,100
Accounts receivable and other assets 173,585 93,226
-------- --------
$689,727 753,907
======== ========
</TABLE>
(a) The approximate tax effect of temporary differences that give
rise to the Association's net deferred tax asset at June 30,
1998 and 1997, under SFAS 109 is as follows:
<TABLE>
<CAPTION>
Assets Liabilities Net
-------- -------- --------
<S> <C> <C> <C>
June 30, 1998
Loan fees deferred for financial
reporting purposes, net of costs $ -- (9,550) (9,550)
Accelerated depreciation for tax
purposes -- (67,750) (67,750)
Tax basis of office building in
excess of book basis 514,395 -- 514,395
Bad debt reserves established for
financial reporting purposes 51,045 -- 51,045
Increases to tax bad debt reserves
since January 1, 1988 -- (73,740) (73,740)
Nondeductible incentive plan expense 6,451 -- 6,451
Unrealized gain on securities
available for sale -- (74,748) (74,748)
Other -- (14,163) (14,163)
-------- -------- --------
Total $571,891 (239,951) 331,940
======== ======== ========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
June 30, 1997
Loan fees deferred for financial
reporting purposes, net of costs $ 14,100 -- 14,100
Accelerated depreciation for tax
purposes -- (63,900) (63,900)
Tax basis of office building in
excess of book basis 534,290 -- 534,290
Bad debt reserves established for
financial reporting purposes 95,965 -- 95,965
Increases to tax bad debt reserves
since January 1, 1988 -- (105,300) (105,300)
Nondeductible incentive plan expense 6,451 -- 6,451
Unrealized gain on securities
available for sale -- (31,617) (31,617)
Other -- (17,859) (17,859)
-------- -------- --------
Total $650,806 (218,676) 432,130
======== ======== ========
</TABLE>
37
<PAGE>
10) Deposits
Deposit accounts are summarized as follows:
<TABLE>
<CAPTION>
June 30,
-----------------------------
1998 1997
------------ ------------
<S> <C> <C>
Passbook accounts $ 40,716,178 40,983,575
NOW accounts 8,265,836 8,468,143
Money market accounts 3,705,954 3,768,922
Non-interest bearing demand deposit accounts 7,823,387 7,327,508
------------ ------------
60,511,355 60,548,148
Certificates of deposit by original maturity:
7-91 days 2,630,620 1,544,158
6-11 months 20,796,435 20,768,703
12-29 months 13,286,120 10,662,363
30 months and over 7,183,846 6,588,724
Jumbo 3,353,470 2,860,828
------------ ------------
$107,761,846 102,972,924
============ ============
</TABLE>
The weighted average rate on deposit accounts at June 30, 1998 and 1997
was 3.85% and 3.77% respectively.
A summary of certificates of deposit by maturity is as follows:
<TABLE>
<CAPTION>
June 30,
1998 1997
----------- -----------
<S> <C> <C> <C>
Within 12 months $40,712,462 37,094,050
12 months to 24 months 3,940,613 4,091,070
24 months to 36 months 2,597,416 1,239,656
----------- -----------
Total $47,250,491 42,424,776
=========== ===========
</TABLE>
<PAGE>
Interest expense on deposits consists of the following:
<TABLE>
<CAPTION>
Years Ended June 30,
--------------------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Passbook accounts $1,184,927 1,228,031 1,272,295
Certificate accounts 2,329,762 2,311,239 2,374,281
NOW accounts 227,604 223,683 218,486
Money market accounts 126,653 147,576 176,686
---------- ---------- ----------
Total $3,868,946 3,910,529 4,041,748
========== ========== ==========
</TABLE>
The aggregate amount of deposit accounts with a balance of $100,000 or
greater was approximately $11,417,000 and $9,340,000 at June 30, 1998
and 1997 respectively. Deposits in excess of $100,000 are not insured
by the Federal Deposit Insurance Corporation.
38
<PAGE>
11) Other Liabilities
Other liabilities consist of the following:
<TABLE>
<CAPTION>
June 30,
--------------------------
1998 1997
-------- --------
<S> <C> <C>
Accrued interest on deposits $ 24,789 20,117
Accrued real estate taxes 130,218 140,922
Other accrued expenses 90,076 76,994
Insurance premiums payable 3,616 6,509
Outstanding bank drafts 85,404 74,361
Other accounts payable 62,126 59,322
-------- --------
$396,229 378,225
======== ========
</TABLE>
12) Retirement Plans and Other Employee Benefits
The Association participates in the Financial Institution's Retirement
Fund, a tax-qualified pension trust, which covers all eligible
employees. The Plan is considered a multi-employer plan and as such,
does not make separate actuarial valuations with respect to each
employer, nor does it segregate plan assets. The procedures followed by
the Retirement Fund meet the requirements of Financial Accounting
Standards Board Statement No. 87, "Employers' Accounting for Pensions".
The practice with respect to multiemployer plans has been to accept
employer's contributions that are paid as its expense for accounting
purposes. There have been no contributions paid to the Plan for the
years ended June 30, 1998, 1997 and 1996 as the amount necessary to
fund the Plan was eliminated by previous years' overfunding of the
Plan.
In addition, the Association established a qualified defined
contribution plan (401(k) Plan) which covers all full-time employees
having a minimum of twelve months of service and who are at least
twenty-one years of age. Eligible employees may contribute from 2% to
12% of their monthly salaries. The Association will contribute an
amount equal to 50%, 75% or 100% of the monthly contribution up to 3%
of salary, depending upon years of employment. Employer contributions
to the Plan amounted to $34,580, $30,678 and $27,864 for the years
ended June 30, 1998, 1997 and 1996, respectively.
39
<PAGE>
13) Officer and Director Plans
Stock Option and Incentive Plan
In conjunction with the Conversion, the Association adopted the 1993
Stock Option and Incentive Plan (the "Stock Option Plan") for the
benefit of the senior officers and directors of the Association. The
number of shares of common stock authorized under the Stock Option Plan
is 34,500, equal to 10.0% of the total number of shares issued in the
Conversion. At the date of Conversion, 8,625 options were granted at
$10 per share. The term of these options expire ten years from the date
of grant. In addition, 17,250 options were granted to individuals who,
at the time such incentive stock options were granted, owned stock
possessing more than 10% of the total combined voting power of all
classes of stock of the Association. These options were granted at a
price of at least 110% of the fair value per share at the date of
grant. The term of these options expire five years from the date of
grant. Future grants are determined by the Board of Directors at option
prices that are not less than the fair market value of the stock at the
grant date and expire no later than ten years from the date of grant.
All options granted under the Stock Option Plan become exercisable
immediately. The following is an analysis of the stock option activity
for each of the years in the three year period ended June 30, 1998 and
the stock options outstanding at the end of the respective periods:
<TABLE>
<CAPTION>
Exercise Price
Number ---------------------------
Options of Shares Per Share Total
------- --------- --------- -----
<S> <C> <C> <C> <C>
Outstanding at July 1, 1995 25,875 $ 10.00-11.00 $ 276,000
Granted 0
Exercised (1,725) 10.00 (17,250)
------ ----------- -------
Outstanding at June 30, 1996 24,150 10.00-11.00 258,750
Granted 1,725 16.25 28,031
Exercised 0
Outstanding at June 30, 1997 25,875 10.00-16.25 286,781
Granted 0
Exercised (17,250) 11.00 (189,750)
------ ----------- -------
Outstanding at June 30, 1998 8,625 $ 10.00-16.25 $ 97,031
====== =========== =======
Exercisable at June 30, 1998 8,625 $ 10.00-16.25 $ 97,031
====== =========== =======
Options available for future
grants at June 30, 1998 6,900
======
</TABLE>
<PAGE>
As of June 30, 1998, the weighted average exercise price for options
outstanding was $11.25 with a weighted average remaining contractual
life of 5.6 years.
The Association has elected to follow Accounting Principles Board
Opinion No. 25 "Accounting for Stock Issued to Employees" ("APB 25")
and related interpretations in accounting for its employee stock
options. Under APB 25, because the exercise price of the Association's
employee stock options equals the market price of the underlying stock
on the date of grant, no compensation expense is recognized.
The Association implemented SFAS No. 123 "Accounting for Stock-Based
Compensation" during the year ended June 30, 1997. The Association will
retain its current accounting method for its stock based compensation
plans. This statement will only result in additional disclosures for
the Association, and as such, its adoption did not, nor is it expected
to have, a material impact on the Association's financial condition or
its results of operations.
40
<PAGE>
13) Officer and Director Plans (continued)
The following summarizes the pro forma net income as if the fair value
method of accounting for stock-based compensation plan had been
utilized:
<TABLE>
<CAPTION>
Years Ended June 30,
---------------------------
1998 1997
----------- -------
<S> <C> <C>
Net income (as reported) $ 594,593 295,818
Pro forma net income 594,593 293,041
Earnings per share - diluted (as reported) $ 1.66 .83
Pro forma diluted earnings per share 1.66 .82
</TABLE>
The pro forma results presented above may not be representative of the
effects reported in pro form net income for future years.
The fair value of the option grants for the year ended June 30, 1997
was estimated using the Black Scholes Method, using the following
assumptions: dividend yield of approximately 2.00%, expected volatility
of 20.0%, risk free interest rate of 6.25%, and an expected life of
approximately 10 years period.
Bank Incentive Plan
In conjunction with the Conversion, the Association formed a Bank
Incentive Plan ("BIP"), which was authorized to acquire 3% of the total
number of shares of common stock issued in the Conversion. The 10,350
shares were purchased for $162,172 with funds contributed to the BIP
from the Association. This plan was established to award shares to
employees in key management positions in order to provide them with a
proprietary interest in the Association and to encourage them to remain
with the Association. The shares have all been awarded and are vesting
at a rate of 20% per year.
The $162,172 contributed to the BIP is being amortized to compensation
expense as the plan participants become vested in those shares. For the
years ended June 30, 1998, 1997 and 1996, $32,435, $33,280 and $18,975
had been amortized to expense. The unamortized cost, which is
comparable to deferred compensation, is reflected as a reduction of
stockholders' equity.
41
<PAGE>
14) Income Taxes
The Association has adopted SFAS No. 109 which requires a change from
the deferred method to the liability method of accounting for income
taxes. Under the liability method, deferred income taxes are recognized
for the tax consequences of "temporary differences" by applying
statutory tax rates applicable to future years to differences between
the financial statement carrying amounts and tax bases of existing
assets and liabilities.
Among the provisions of SFAS 109 which impact the Association is the
tax treatment of bad debt reserves. SFAS 109 provides that a deferred
tax asset is to be recognized for the bad debt reserve established for
financial reporting purposes and requires a deferred tax liability to
be recorded for increases in the tax bad debt reserve since January 1,
1988, the effective date of certain changes made by The Tax Reform Act
of 1986 to the calculation of savings institutions' bad debt deduction.
Accordingly, retained earnings at June 30, 1998 includes approximately
$1,100,000 for which no deferred federal income tax liability has been
recognized. The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
Years Ended June 30,
----------------------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Current $281,295 12,262 298,563
Deferred 57,059 88,549 12,323
-------- -------- --------
$338,354 100,811 310,886
======== ======== ========
</TABLE>
A reconciliation of the statutory federal income tax rate to effective
income tax rate is as follows:
<TABLE>
<CAPTION>
Years Ended June 30,
----------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Statutory federal income tax rate 34.0% 34.0% 34.0%
Provision for loss on real estate owned 6.0 -- 1.2
Recovery of loss on previous
disposition of real estate owned -- (10.3) --
Other (3.7) 1.7 (.1)
---- ---- ----
Effective income tax rate 36.3% 25.4% 35.1%
==== ==== ====
</TABLE>
<PAGE>
Deferred federal income tax expense consists of the following tax
effects of timing differences:
<TABLE>
<CAPTION>
Years Ended June 30,
-----------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Loan fees $ 23,650 23,600 5,547
Depreciation 23,745 34,830 20,630
Incentive plan -- -- (6,451)
Book loan loss provision (in excess of)
less than tax deduction 44,920 12,260 (5,565)
Recapture of bad debt reserve (31,560) -- --
Other (3,696) 17,859 (1,838)
-------- -------- --------
$ 57,059 88,549 12,323
======== ======== ========
</TABLE>
42
<PAGE>
15) Regulatory Capital Requirements
The Association is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum
total requirements can initiate certain mandatory and possible
additional discretionary actions by regulators that, if undertaken,
could have a direct material effect on the Association's financial
statements. Under capital adequacy guidelines and the regulatory
framework for prompt correction action, the Association must meet
specific capital guidelines that involve quantitative measures of the
Association's assets, liabilities, and certain off-balance-sheet items
as calculated under regulatory accounting practices. The Association's
capital amounts and classification are also subject to quantitative
judgments by the regulators about components, risk weightings, and
other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Association to maintain minimum amounts and
ratios, set forth in the table below of the total risk-based, tangible
and core capital, as defined in the regulations. Management believes,
as of June 30, 1998, that the Association meets all capital adequacy
requirements to which it is subject.
The Association, according to federal regulatory standards, is
well-capitalized under the regulatory framework for prompt corrective
action. To be categorized as adequately capitalized, the Association
must maintain minimum total risk-based, tangible, and core ratios as
set forth in the table. There are no conditions or events since that
notification that management believes have changed the institution's
category.
At June 30, 1998 and 1997, the Association's regulatory equity capital
was as follows:
<TABLE>
<CAPTION>
To Be Well-
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------------------ ------------------ -------------------
Amount Ratio Amount Ratio Amount Ratio
----------- ----- ----------- ---- ----------- -----
<S> <C> <C> <C> <C> <C> <C>
June 30, 1998
Risk-based $ 8,757,669 23.36% $ 2,999,165 8.00% $ 3,748,955 10.00%
Tangible 8,622,538 7.33 1,765,110 1.50 2,941,850 2.50
Core 8,622,538 7.33 3,530,220 3.00 5,883,700 5.00
June 30, 1997
Risk-based $ 8,191,549 24.21% $ 2,706,821 8.00% $ 3,383,525 10.00%
Tangible 7,909,291 7.07 1,678,550 1.50 2,797,580 2.50
Core 7,909,291 7.07 3,357,100 3.00 5,595,170 5.00
</TABLE>
43
<PAGE>
16) Stockholders' Equity
As part of the Conversion, the Association established a liquidation
account for the benefit of all eligible depositors who continue to
maintain their deposit accounts in the Association after conversion. In
the unlikely event of a complete liquidation of the Association, each
eligible depositor will be entitled to receive a liquidation
distribution from the liquidation account, in the proportionate amount
of the then current adjusted balance for deposit accounts held, before
distribution may be made with respect to the Association's capital
stock. The Association may not declare or pay a cash dividend on, or
repurchase any of, its capital stock if the effect thereof would cause
the retained earnings of the Association to be reduced below the amount
required for the liquidation account. Except for such restrictions, the
existence of the liquidation account does not restrict the use or
application of retained earnings.
The Association's capital exceeds all of the fully phased-in capital
requirements imposed by the Financial Institution Reform, Recovery, and
Enforcement Act. OTS regulations generally provide that an institution
that exceeds all fully phased-in capital requirements before and after
a proposed capital distribution could, after prior notice but without
the approval by the OTS, make capital distributions during the fiscal
year of up to 100% of its net income to date during the fiscal 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 fiscal year. Any additional
capital distributions would require prior regulatory approval.
17) Financial Instruments with Off-Balance Sheet Risk
The Association is a party to various transactions with off-balance
sheet risk in the normal course of business. These transactions are
primarily commitments to originate loans and to extend credit on
previously approved unused lines of credit. These financial instruments
carry varying degrees of credit and interest-rate risk in excess of
amounts recorded in the consolidated financial statements.
Commitments to originate mortgage loans of $2,057,360 at June 30, 1998
represents an amount which the Association plans to fund within the
normal commitment period of 60 to 90 days. Of this amount, $2,007,360
are in fixed rate commitments with rates ranging from 6.750% to 7.625%
and $50,000 in adjustable rate commitments. Because the credit
worthiness of each customer is reviewed prior to extension of the
commitment, the Association adequately controls their credit risk on
these commitments, as it does for loans recorded on the balance sheet.
The Association conducts all of its lending activities in the
Chicagoland area. Management believes the Association has a diversified
loan portfolio and the concentration of lending activities in these
local communities does not result in an acute dependency upon economic
conditions of the lending region.
The Association has approved, but unused, equity lines of credit of
approximately $597,000 at June 30, 1998. In addition, the Association
has approved, but unused, credit card lines of credit amounting to
approximately $176,000. The Association has also issued outstanding
letters of credit totaling $50,000.
<PAGE>
At June 30, 1998, the Association had committed to sell mortgage loans
to the Illinois Housing Development Authority in the amount of
$659,450.
18) Contingencies
The Association is, from time to time, a party to certain lawsuits
arising in the ordinary course of its business, wherein it enforces its
security interest. Management, based upon discussions with legal
counsel, believes that the Association is not engaged in any legal
proceedings of a material nature at the present time.
44
<PAGE>
19) Litigation Settlement
During the prior year, the Association settled a lawsuit that it had
filed against a local real estate appraisal firm, arising out of the
appraisers' alleged negligent appraisals of two single family
residences which the Association had relied upon in its origination of
mortgage loans secured by the two properties. The loans subsequently
went into default. The Association obtained title to both properties by
foreclosure and during a prior period disposed of both properties by
sale at a substantial loss to the Association. The agreed upon
settlement between the parties amounted to payment of $143,000 to the
Association which resulted in the Association recovering its entire
previously recorded loss on these two properties.
20) FDIC Special Assessment and its Impact on SAIF Insurance Premiums
The deposits of Midland Federal Savings and Loan Association, are
presently insured by the Savings Association Insurance Fund ("SAIF"),
which together with the Bank Insurance Fund ("BIF"), are the two
insurance funds administered by the Federal Deposit Insurance
Corporation ("FDIC"). Financial institutions which are members of the
BIF were experiencing substantially lower deposit insurance premiums
because the BIF had achieved its required level of reserves while the
SAIF had not yet achieved its required reserves. In order to help
eliminate this disparity and any competitive disadvantage due to
disparate deposit insurance premium schedules, legislation to
recapitalize the SAIF was enacted in September 1996.
The legislation required a special one-time assessment of approximately
65.7 cents per $100 of SAIF insured deposits held by the Association at
March 31, 1995. The one-time special assessment has resulted in a
charge to earnings of approximately $674,000 during the year ended June
30, 1997. The after-tax effect of this one-time charge to earnings
totaled $445,000. The legislation was intended to fully recapitalize
the SAIF fund so that commercial bank and thrift deposits would be
charged the same FDIC premiums beginning January 1, 1997. As of such
date, deposit insurance premiums for highly rated institutions, such as
the Association, have been substantially reduced.
The Association, however, will continue to be subject to an assessment
to fund repayment of the Financing Corporation's ("FICO") obligations.
The FICO assessment for SAIF insured institutions will be 6.48 cents
per $100 of deposits while BIF insured institutions will pay 1.52 cents
per $100 of deposits until the year 2000 when the assessment will be
imposed at the same rate on all FDIC insured institutions.
45
<PAGE>
21) Disclosures About the Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments for which it is
practicable to estimate that value:
Cash and cash equivalents: For cash and interest-bearing deposits, the
carrying amount is a reasonable estimate of fair value.
Investment securities: Fair values for securities are based on quoted
market prices as published in financial publications or on quotes from
third-party brokers.
Securities available for sale: Fair values for securities available for
sale are based on quoted market prices as published in financial
publications or broker quotes.
Mortgage-backed securities: Fair values for mortgage-backed securities
are based on the lower of quotes received from various third-party
brokers.
Loans receivable: The fair value for fixed and adjustable rate mortgage
loans are estimated using discounted cash flow analyses, using interest
rates currently being offered for loans with similar terms and
collateral to borrowers of similar credit quality.
Deposit liabilities: The fair value of demand deposits, savings
accounts and money market deposits is the amount payable on demand at
the reporting date. The 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 original maturities.
The fair value of the Association's off-balance-sheet instruments is
nominal.
The estimated fair value of the Association's financial instruments as
of June 30, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
June 30, 1998
-----------------------------
Carrying Fair
Amount Value
------------ ----------
<S> <C> <C>
Financial assets:
Cash and cash equivalents $ 31,994,195 31,994,195
Investment securities, held to maturity 19,989,055 20,030,469
Investment securities, available for sale 1,195,938 1,195,938
Mortgage-backed securities, held to maturity 20,844,623 21,128,839
Loans receivable, gross 39,885,956 40,353,000
Financial liabilities:
Deposits 107,761,846 107,831,000
<CAPTION>
June 30, 1997
-----------------------------
Carrying Fair
Amount Value
------------ ----------
<S> <C> <C>
Financial assets:
Cash and cash equivalents $ 30,902,575 30,902,575
Investment securities, held to maturity 19,989,524 19,989,063
Investment securities, available for sale 1,068,125 1,068,125
Mortgage-backed securities, held to maturity 21,935,716 22,148,459
Loans receivable, gross 34,439,476 34,597,000
Financial liabilities:
Deposits 102,972,924 102,908,000
</TABLE>
46
<PAGE>
22) Subsequent Event
During July 1998, the Association announced that it had adopted a
holding company structure with the consummation of a reorganization
transaction with Midland Capital Holdings Corporation (the "Company"),
a Delaware corporation, becoming its unitary thrift holding company.
The reorganization transaction was completed pursuant to a Merger
Agreement and Plan of Reorganization adopted by the Association's Board
of Directors on March 19, 1998 and approved by the Association's
shareholders on July 15, 1998.
The effective date of the reorganization was July 23, 1998. As a result
of the reorganization transaction, each share of the Association's
common stock outstanding on July 23, 1998 is converted and exchangeable
for one share of the Company's common stock.
At the July 1998 Board of Directors' meeting, the Company declared a
quarterly dividend of $.075 per share, totaling $27,298, payable August
20, 1998 to shareholders of record as of August 10, 1998.
47
<PAGE>
Officers and Directors
Officers Directors
Paul Zogas Paul Zogas
President, President, Chief Executive Officer
Chief Executive Officer and Chief Financial Officer
and Chief Financial Officer of Chairman of the Board for
the Company and the Association the Company and the Association
Charles Zogas Charles Zogas
Executive Vice President, Executive Vice President,
Chief Operating Officer, Chief Operating Officer,
Secretary and Treasurer of Secretary and Treasurer
the Company and the Association
Richard Taylor Richard Taylor
Vice President, Trust Officer Vice President, Trust Officer
and Assistant Secretary of and Assistant Secretary
the Company and the Association
Janice Cecott Algerd Brazis
Controller of the Company Retired businessman and President
and the Association of the Knights of Lithuania Mid-America
District
Muriel Kowalski Michael J. Kukanza
Assistant Vice President of Principal in Compass Asset
the Company and the Association Management, L.L.C.
Donna Chmiel Jonas Vaznelis
Internal Auditor of the Retired businessman and Committee
Company and the Association member of the Board of Zoning Appeals
for Beverly Shores, Indiana.
48
<PAGE>
Corporate Information
Investor Information
Midland Federal Savings and Loan Association is a wholly-owned subsidiary of
Midland Capital Holdings Corporation. Shareholders, investors and analysts
interested in additional information may contact at the Corporate Office: Paul
Zogas, President, 8929 S. Harlem Avenue, Bridgeview, Illinois 60455
Annual Report on Form 10-KSB
A copy of Midland Capital Holdings Corporation's annual report on Form 10-KSB
including financial statements, as filed with the SEC, is available without
charge by writing our Corporate Office, Attn: Charles Zogas, Executive Vice
President, 8929 S. Harlem Avenue, Bridgeview, Illinois 60455.
Annual Meeting of Shareholders
The Annual meeting of the Shareholders of Midland Capital Holdings Corporation
will be held at 2:00 p.m., October 21, 1998, at the Corporate Office of the
Company, 8929 S. Harlem Avenue, Bridgeview, Illinois. All shareholders are
cordially invited to attend.
Stock Transfer Agent
Midland Capital Holdings Corporation's transfer agent, Registrar and Transfer
Company, maintains all stockholder records and can assist with stock transfer
and registration, lost certificates or address change, changes or corrections in
social security or tax identification number, and 1099 tax reporting questions.
If you have questions, please contact the stock transfer agent in writing at the
address below:
Registrar and Transfer Company
10 Commerce Drive
Cranford, New Jersey 07016-3572
Attn: Corporate Relations
Corporate Counsel/Washington, D.C.
Silver, Freedman & Taff, L.L.P.
1100 New York Avenue, N.W.
Washington, D.C. 20005-3934
Corporate Counsel/Chicago, Illinois
Kamm, Shapiro & Blumenthal, Ltd.
230 West Monroe Street - Suite 1100
Chicago, Illinois 60606
Independent Auditors
Cobitz, VandenBerg & Fennessy
9944 South Roberts Road - Suite 202
Palos Hills, Illinois 60465
49
Exhibit 21
<TABLE>
<CAPTION>
SUBSIDIARIES OF THE REGISTRANT
Parent Subsidiary Ownership Organization
------ ---------- --------- ------------
<S> <C>
Midland Capital Holdings Midland Federal Savings and Loan 100% Federal
Corporation Association
</TABLE>
The financial statements of the Registrant are consolidated with those of
its subsidiary.
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS LEGEND CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE ANNUAL REPORT ON
FORM 10-KSB FOR THE YEAR ENDED JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> JUN-30-1998
<CASH> 2,656,448
<INT-BEARING-DEPOSITS> 29,337,747
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 1,195,938
<INVESTMENTS-CARRYING> 40,833,678
<INVESTMENTS-MARKET> 41,159,308
<LOANS> 39,566,455
<ALLOWANCE> 393,884
<TOTAL-ASSETS> 117,373,380
<DEPOSITS> 107,761,846
<SHORT-TERM> 0
<LIABILITIES-OTHER> 843,897
<LONG-TERM> 0
3,640
0
<COMMON> 0
<OTHER-SE> 8,763,997
<TOTAL-LIABILITIES-AND-EQUITY> 117,373,380
<INTEREST-LOAN> 2,791,590
<INTEREST-INVEST> 4,224,308
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 7,015,898
<INTEREST-DEPOSIT> 3,868,946
<INTEREST-EXPENSE> 3,868,946
<INTEREST-INCOME-NET> 3,146,952
<LOAN-LOSSES> (160,000)
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 3,489,848
<INCOME-PRETAX> 932,947
<INCOME-PRE-EXTRAORDINARY> 932,947
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 594,593
<EPS-PRIMARY> 1.68
<EPS-DILUTED> 1.66
<YIELD-ACTUAL> 3.01
<LOANS-NON> 465,000
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 551,509
<CHARGE-OFFS> 0
<RECOVERIES> 2,375
<ALLOWANCE-CLOSE> 393,884
<ALLOWANCE-DOMESTIC> 243,752
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 150,132
</TABLE>
