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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, 1999
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
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COMMISSION FILE NUMBER 1-14343
MIDLAND CAPITAL HOLDINGS CORPORATION
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
DELAWARE 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 $365,000 in net income for the fiscal year ended June 30,
1999.
As of June 30, 1999, 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, 1999.
PART III of Form 10-KSB - Proxy Statement for the 1999 Annual Meeting of
Stockholders.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
Midland Capital Holdings 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, Chicago Ridge, Lockport, Orland Park and Lemont which it serves
through its main office in Bridgeview and three branch offices in southwest
Chicago. Its deposits are insured up to applicable limits by the Federal Deposit
Insurance Corporation ("FDIC"). At June 30, 1999, Midland Federal had $130.2
million of assets, deposits of $120.2 million and stockholders equity of $9.0
million.
The main offices of the Company and the Association are located at 8929
South Harlem Avenue, Bridgeview, Illinois 60455 and their 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,
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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
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.
YEAR 2000 ISSUE
GENERAL. The year 2000 ("Y2K") issue confronting the Company and its
suppliers, customers, customers' suppliers and competitors centers on the
inability of computer systems to recognize the year 2000. Many existing computer
programs and systems originally were programmed with six digit dates that
provided only two digits to identify the calendar year in the date field. With
the impending new millennium, these programs and computers will recognize "00"
as the year 1900 rather than the year 2000.
Financial institution regulators recently have increased their focus upon
Y2K compliance issues and have issued guidance concerning the responsibilities
of senior management and directors. The Federal Financial Institutions
Examination Council has issued several interagency statements on Y2K project
management awareness. These statements require financial institutions to, among
other things, examine the Y2K implications of their reliance on vendors and with
respect to the data exchange and the potential impact of the Y2K issue on their
customers, suppliers, and borrowers. These statements also require each
federally regulated institution to survey its exposure, measure its risk and
prepare a plan to address the Y2K issue. In addition, the federal banking
regulators have issued safety and soundness guidelines to be followed by insured
depository institutions, such as the Association, to assure resolution of any
Y2K problems. The federal banking agencies have assessed that Y2K testing and
certification is a key safety and soundness issue in conjunction with regulatory
exams and thus, that an institution's failure to address appropriately the Y2K
issue could result in supervisory action, including reduction of the
institution's supervisory ratings, the denial of applications for approval of
mergers or acquisitions or the imposition of civil money penalties.
RISKS. Like most financial service providers, the Company and its
operations may be significantly affected by the Y2K issue due to its dependence
on technology and date-sensitive data. Computer software and hardware and other
equipment, both within and outside the Company's direct control, and third
parties with whom the Company electronically or operationally interfaces
(including without limitation its customers and third party vendors) are likely
to be affected. If computer systems are not modified in order to be able to
identify the year 2000, many computer applications could fail or create
erroneous results. As a result, many calculations, which rely on date field
information such as interest, payment on due dates, and all operating functions,
could generate results which are significantly misstated, and the Company could
experience an inability to process transactions, prepare statements or engage in
similar normal business activities. Likewise, under certain circumstances, a
failure to adequately address the Y2K issue could adversely affect the viability
of the Company's suppliers and creditors and the creditworthiness of its
borrowers. Thus, if not adequately addressed, the Y2K issue could result in a
significant adverse impact on the Company's operations and, in turn, its
financial condition and results of operations.
STATE OF READINESS. In September 1998, the Company formulated its plan to
address the Y2K issue. Since that time, the Company has taken the following
steps:
* Established management advisory and review responsibilities;
* Completed a company-wide inventory of applications and system
software;
* Completed a computer network, hardware, and software upgrade;
* Completed in-house testing of all mission critical systems;
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* Obtained data processor vendor compliance certification;
* Completed data processor vendor testing;
* Began awareness and educational activities for employees through
existing internal communication channels; and
* Developed a process to respond to customer inquiries as well as help
educate customers on the Y2K issue.
The following paragraphs summarize the phases of the Company's Y2K plan:
AWARENESS PHASE. The Company formally established a Y2K plan, and a project
team was assembled for management of the Y2K project. The project team created a
plan of action that includes milestones, budget estimates, strategies, and
methodologies to track and report the status of the project. The Company's Y2K
project team has been assigned the task of ensuring that all systems across the
Company are identified, analyzed for Y2K compliance, corrected if necessary,
tested, and have the changes into service. The Y2K project team members
represent all functional areas of the Company, including branches, data
processing, loan administration, accounting, item processing and operations,
compliance, internal audit, human resources, and marketing. The Chief Operating
Officer heads the team. The Company's Board of Directors oversees the Y2K plan
and provides guidance and resources to, and receives updates from, the Y2K team.
This phase is substantially complete.
ASSESSMENT PHASE. The Company's strategies were further developed with
respect to how the objectives of the Y2K plan would be achieved, and a Y2K
business risk assessment was conducted to quantify the extent of the Company's
Y2K exposure. A corporate inventory (which is periodically updated as new
technology is acquired and as systems progress through subsequent phases) was
developed to identify and monitor Y2K readiness for information systems
(hardware, software, vendors, and utilities) as well as environmental systems
(security systems, facilities, etc.). Systems were prioritized based on business
impacts and available alternatives. Mission critical systems supplied by vendors
were researched to determine Y2K readiness. If Y2K ready versions were not
available, the Company began identifying functional replacements which were
either upgradable or Y2K ready, and a plan was developed to repair, upgrade or
replace all mission critical systems. This phase is substantially complete.
RENOVATION PHASE. The Company has verified that Y2K upgrades were available
for all vendor supplied mission critical systems. All these Y2K ready versions
have been delivered and placed into production and each upgraded version has
entered the validation process.
IMPLEMENTATION PHASE. Y2K ready modified or upgraded versions have been
installed and placed into production with respect to all mission critical
systems. In October 1998, in order to prepare the Company's mission critical
data processing systems for the Y2K century date change, the Company converted
its on-line customer account data processing systems to a new national data
service provider. At that time the Company also installed new, Year 2000
compliant, computer hardware at each of its offices. In October 1998, the
Company's data center also replaced its existing mainframe computers with new
Year 2000 compliant, computer mainframes in order to prepare for the Y2K century
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date change. The Company's data center has also completed necessary renovations
to their system software and has tested their computer hardware, software and
data communication systems for Year 2000 compliance. These tests were
successfully completed and the Company's data center has certified that all of
its data processing systems are Y2K ready. The Company has also successfully
completed its own testing of all of its mission critical data processing,
communication and computer systems, which testing has demonstrated that these
systems are ready to operate with accuracy beyond the year 2000. These systems
include all of the computer and information systems that maintain information
about the Company's customers, their accounts, balances and transactions. The
Company does not anticipate problems resulting from its tested systems.
VALIDATION PHASE. The validation phase is designed to test the ability of
hardware and software to accurately process date-sensitive data. The Company has
substantially completed the validation testing of each mission critical system.
During the validation testing process, no significant Y2K problems were
identified relating to any modified or upgraded mission critical systems.
COMPANY RESOURCES INVESTED. Since the commencement of the Y2K project in
September 1998 the Company incurred approximately $105,000 in costs associated
with required system changes, which costs were expensed as they were incurred.
As part of its Y2K plan, the Company also made additional capital expenditures
for computer and related equipment in the approximate amount of $225,000 in
order to convert its existing on-line data processing systems to a new data
services provider which costs are being amortized over the useful life of the
equipment purchased. The Company does not expect significant increases in future
data processing costs related to Y2K compliance.
CONTINGENCY PLANS. During the assessment phase, the Company began
developing back-up or contingency plans for each of its mission critical
systems. Virtually all of the Company's mission critical systems are dependent
upon third party vendors or service providers. For some systems, contingency
plans consist of using spreadsheet software or reverting to manual systems until
system problems can be corrected.
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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 consumer, multi-family and non-residential real
estate 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
relationships with other lenders in order to take applications which either do
not conform to the Association's underwriting guidelines or are mortgage loan
products that are 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 must be approved 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 for which the Association may, from time to time,
absorb such costs for promotional purposes.
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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, 1999, the Association had two borrowers with an outstanding
loan balances in excess of $500,000. One loan totaled $1.1 million, and was
secured by a 43 unit multi-family residential property in the Association's
market area. This loan was made prior to the imposition of the regulatory limits
described above, and is grandfathered. The other loan totaled $532,000 and was
secured by a single family residence. Both loans are current and performing in
accordance with their terms at June 30, 1999. See "-- Non-Performing Assets,
Classified Assets, Loan Delinquencies and Defaults."
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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,
-----------------------------------------------------
1999 1998 1997
-----------------------------------------------------
Amount Percent Amount Percent Amount Percent
-----------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
REAL ESTATE LOANS
One- to four-family................... $46,032 92.28% $35,030 87.82% $29,018 84.26%
Multi-family.......................... 1,713 3.43 1,790 4.49 2,201 6.39
Non-residential....................... 223 0.45 244 .61 264 0.77
Construction.......................... --- --- 450 1.13 300 0.87
------- ----- ------- ----- ------- -----
Total mortgage loans............... 47,968 96.16 37,514 94.05 31,783 92.29
------- ----- ------- ----- ------- -----
OTHER LOANS
Consumer Loans:
Deposit accounts..................... 274 0.55 464 1.16 425 1.23
Student.............................. 1,167 2.34 1,316 3.30 1,542 4.48
Automobile........................... 274 0.55 372 .93 456 1.33
Mobile home.......................... 2 --- 10 .03 21 .06
Other................................ 141 0.28 139 .35 138 .40
------- ----- ------- ----- ------- -----
Total consumer loans.............. 1,858 3.72 2,301 5.77 2,582 7.50
------- ----- ------- ----- ------- -----
Commercial business loans............ 58 0.12 71 .18 74 .21
------- ----- ------- ----- ------- -----
Total loans receivable............ 49,884 100.00 39,886 100.00 34,439 100.00%
------- ====== ------- ====== ------- ======
LESS
Loans in process...................... 4 41 137
Deferred yield adjustments............ (95) 17 97
Allowance for uncollected interest.... 260 262 262
Allowance for loan losses............. 366 394 551
------- ------- -------
Loans receivable, net............. $49,349 $39,172 $33,392
======= ======= =======
Mortgage-backed securities:
FHLMC................................ $10,245 64.53% $14,256 68.49% $14,234 65.03%
FNMA................................. 5,318 33.49 6,147 29.53 7,097 32.43
GNMA................................. 295 1.86 389 1.87 520 2.38
Collateralized mortgage obligation... 19 0.12 24 .11 36 .16
------- ----- ------- ----- ------- -----
Total mortgage-backed securities.. 15,877 100.00% 20,816 100.00% 21,887 100.00%
====== ====== ======
Net premiums......................... 5 29 49
------- ------- -------
Net mortgage-backed securities....... $15,882 $20,845 $21,936
======= ======= =======
</TABLE>
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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,
---------------------------------------------------
1999 1998 1997
---------------------------------------------------
Amount Percent Amount Percent Amount Percent
---------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
FIXED-RATE LOANS
Real Estate:
One- to four-family................................. $42,988 86.18% $32,057 80.37% $24,517 71.19%
Multi-family........................................ 178 0.36 179 .45 181 .53
------- ------ ------- ------ ------- ------
Total real estate loans......................... 43,166 86.54 32,236 80.82 24,698 71.72
------- ------ ------- ------ ------- ------
Consumer............................................ 2 --- 10 .03 21 .06
------- ------ ------- ------ ------- ------
Total fixed-rate loans........................... 43,168 86.54 32,246 80.85 24,719 71.78
------- ------ ------- ------ ------- ------
ADJUSTABLE-RATE LOANS
Real estate:
One- to four-family................................. 3,044 6.10 2,973 7.45 4,501 13.07
Multi-family........................................ 1,535 3.07 1,611 4.04 2,020 5.86
Non-residential..................................... 223 0.45 244 .61 264 .77
Construction........................................ --- --- 450 1.13 300 .87
------- ------ ------- ------ ------- ------
Total real estate loans.......................... 4,802 9.62 5,278 13.23 7,085 20.57
------- ------ ------- ------ ------- ------
Consumer............................................ 1,856 3.72 2,291 5.74 2,561 7.44
Commercial business................................. 58 0.12 71 .18 74 .21
------- ------ ------- ------ ------- ------
Total adjustable-rate loans...................... 6,716 13.46 7,640 19.48 9,720 28.22
------- ------ ------- ------ ------- ------
Total loans, net................................. 49,884 100.00% 39,886 100.00% 34,439 100.00%
====== ====== ======
LESS:
Loans in process.................................... 4 41 137
Deferred yield adjustments.......................... (95) 17 97
Allowance for uncollected interest.................. 260 262 262
Allowance for loan losses........................... 366 394 551
------- ------- -------
Loans receivable, net............................ $49,349 $39,172 $33,392
======= ======= =======
</TABLE>
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The following schedule illustrates the interest rate sensitivity of the
Association's loan portfolio at June 30, 1999. Mortgages which have adjustable
or renegotiable interest rates are shown as maturing in the period during which
the contract is due. The schedule does not reflect the effects of possible
prepayments or enforcement of due-on-sale clauses or interest rate adjustments.
<TABLE>
<CAPTION>
Real Estate
------------------------------------------------------------------------------
Multi-Family Construction Commercial
One-to Four-Family and Commercial or Development Consumer Business Total
--------------------- ---------------- ----------------- ---------- ------------- ------------------
Weighted Weighted Weighted Weighted Weighted Weighted
Average Average Average Average Average Average
Amount Rate Amount Rate Amount Rate Amount Rate Amount Rate Amount Rate
------------------- ------------------- ------------------ --------------- -------------- ------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Due During Years
ENDING JUNE 30,
2000(1)........$ 300 8.97% $645 10.07% --- ---% $488 9.08% $58 ---% $1,492 9.13%
2001........... 58 8.44 178 9.75 --- --- 204 7.85 --- --- 440 8.70
2002........... 212 8.68 --- --- --- --- 228 7.71 --- --- 440 8.18
2003 to 2004... 1,572 7.88 26 10.00 --- --- 277 8.01 --- --- 1,875 7.93
2005 to 2008... 3,172 7.95 1,086 7.78 --- --- 523 8.20 --- --- 4,782 7.94
2009 to 2023... 17,697 7.23 --- --- --- --- 138 8.24 --- --- 17,836 7.24
2024 and
following..... 23,020 7.18 --- --- --- --- --- --- --- --- 23,020 7.18
$46,032 $1,936 $--- $1,858 $58 $49,884 7.38%
</TABLE>
- -----------------
(1) Includes demand loans, loans having no stated maturity and overdraft loans.
The total amount of loans due after June 30, 2000 which have predetermined
interest rates is approximately $44.05 million while the total amount of loans
due after such date which have floating or adjustable interest rates is
approximately $4.34 million.
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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, 1999, $46.0 million or 92.3%, 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, 1999, approximately $719,000 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 the early 1980s, 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, 1999, the total balance of one- to four-family ARMs was $3.0
million, or 6.1% of the Association's gross loan portfolio.
The Association also originates home equity lines of credit which were
funded in the amount of $644,000 at June 30, 1999, and home equity loans, which
were $1.9 million at June 30, 1999. Unfunded commitments on home equity lines of
credit totaled $475,000 at June 30, 1999. 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
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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.
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 $1.7 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 six multi-family real estate loans totaling $1.7
million at June 30, 1999. The net amount of such loans which was non-performing
at June 30, 1999 was $38,000. See "-- Non-Performing 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. The risk is
greater 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.
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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.
Midland Federal offers a variety of secured consumer loans, including
educational 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, 1999, student loans amounted to $1.2 million or 2.3%
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 include 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, 1999, the Association had $274,000, or .55% 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, 1999, the Association had
$85,000 or .17% 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
13
<PAGE>
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, there can be no
assurance that delinquencies will not increase in the future.
COMMERCIAL BUSINESS LOANS
The Association also maintains a small portfolio of commercial business
loans , principally overdraft loans. At June 30, 1999, $24,000 or approximately
41.38% of commercial business portfolio was delinquent 90 days or more.
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, 1999, $223,000, or .45% 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 $15.9 million at June 30, 1999. 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, 1999. 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.
Due in Balance Outstanding
----------------------- -------------------
3 to 5 6 to 20 Over 20
Years Years Years Fixed Adjustable
------- ------- ------- ------- -----------
Federal Home Loan Mortgage
Corporation.........................$2,459 $ 2,138 $5,658 $2,460 $ 7,795
Federal National Mortgage
Association......................... 763 3,682 868 1,906 3,407
Government National Mortgage
Association......................... --- 295 --- 295 ---
Collateralized Mortgage Obligations. --- 19 --- 19 ---
------ ------ ------ ------ -------
Total..........................$3,222 $6,134 $6,526 $4,680 $11,202
====== ====== ====== ====== =======
14
<PAGE>
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
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.
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. During the
years ended June 30, 1999, 1998 and 1997, the Association sold loans to the
Illinois Housing Development Authority and other lenders, 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.
Year Ended June 30,
---------------------
1999 1998 1997
----- ------ ----
(Dollars in Thousands)
LOAN RECEIVABLE:
Adjustable-Rate:
Real estate - one- to
four-family.................. $ 784 $ 239 $ 986
- construction --- 408 300
Non-real estate - consumer.... 1,386 1,770 1,113
------- ------- -------
Total adjustable rate. 2,170 2,417 2,399
------- ------- -------
Fixed-Rate:
Real estate - One- to
four-family.................. 22,503 14,916 5,172
Non-real estate - consumer.... 173 173 254
------- ------- -------
Total fixed-rate...... 22,676 15,089 5,426
------- ------- -------
Total loans originated 24,846 17,506 7,825
------- ------- -------
Real estate loans sold.......... (3,298) (2,197) (832)
Transfer of loans to foreclosed
real estate..................... --- (58) (85)
Principal repayments............ (11,549) (9,804) (6,238)
------- ------- ------
Net increase (decrease)......... $ 9,999 $5,447 $ 670
======= ====== =======
MORTGAGE-BACKED SECURITIES:
Mortgage-backed securities
purchased................. $ 1,102 $4,592 $ ---
Mortgage-backed securities
sold...................... --- --- ---
Amortization and repayments (6,065) (5,663) (5,413)
------- ------- ------
Net increase (decrease)....... $ (4,963)$(1,071)$(5,413)
======== ======= =======
The Association's total loan originations increased primarily as a result
of lower interest rates which increased demand for mortgage loans, including
mortgage loan refinancing.
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
15
<PAGE>
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.
16
<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, 1999 and
June 30, 1998. The balances included in the table do not reflect specific
reserves.
<TABLE>
<CAPTION>
At June 30, 1999
Loans Delinquent For:
------------------------------------------------------------------------------
30 - 59 days 60 - 89 days 90 days and over Total
----------------------------------------------------------------------------------------------
Number Amount Percent Number Amount Percent Number Amount Percent Number Amount Percent
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Real estate:
One- to four-family. 14 $763 1.66% 5 $221 .48% 3 $ 162 .35% 22 $ 1,146 2.49%
Multi-family........ --- --- --- --- --- --- 3 194 11.35 3 194 11.35
Consumer.............. 2 12 .65 --- --- --- 2 1 .05 4 13 .70
Commercial business... --- --- --- --- --- --- 13 24 41.38 13 24 41.38
---- ---- ---- ---- --- ------ --- -------
Total............ 16 $775 1.55% 5 $221 .44% 21 $ 381 0.77% 42 $ 1,377 2.76%
==== ==== ==== ==== === ====== === =======
</TABLE>
<TABLE>
<CAPTION>
At June 30, 1998
Loans Delinquent For:
------------------------------------------------------------------------------
30 - 59 days 60 - 89 days 90 days and over Total
----------------------------------------------------------------------------------------------------
Number Amount Percent Number Amount Percent Number Amount Percent Number Amount Percent
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Real estate:
One- to four-family.. 7 $237 .68% 6 $485 1.38% 3 $220 .63% 16 $ 942 2.69%
Multi-family......... --- --- --- --- --- --- 4 237 13.24 4 237 13.24
Consumer............... 4 11 .48 --- --- --- 6 5 .22 10 16 .70
Commercial business.... --- --- --- --- --- --- 1 3 4.23 1 3 4.23
----- ---- ---- ---- ---- ------ --- ---- ------ --- ------- -----
Total............. 11 $248 .62% 6 $485 1.22% 14 $465 1.16% 31 $ 1,198 3.00%
==== ==== === ==== ==== ==== === ==== ===== === ======= =====
</TABLE>
17
<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.
At June 30,
---------------------------------
1999 1998 1997
---------------------------------
(Dollars in Thousands)
Non-Accruing Loans:
One- to four-family.......... $162 $ 220 $ 58
Multi-family................. 38 38 42
Consumer..................... --- 2 3
Commercial business......... 24 3 ---
------ ---------- ------
Total..................... 224 263 103
----- -------- ----
Accruing loans delinquent
90 days or more:
Multi-family................. --- --- ---
------- ---------- ------
Total..................... --- --- ---
------- ---------- ------
Foreclosed Assets:
One- to four-family.......... 276 747 855
----- -------- -----
Total..................... 276 747 855
----- -------- -----
Total non-performing assets.... $500 $1,010 $958
==== ====== ====
Total as a percentage of total
assets......................... .38% .86% .86%
===== ===== ====
As of June 30, 1999, there were no concentrations of loans in any types of
industry which exceeded 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, 1999, gross interest income which would
have been recorded had the non-accruing loans been current in accordance with
their original terms amounted to $11,000, which interest income was not accrued
into interest income for the fiscal year ended June 30, 1999.
REAL ESTATE OWNED. As of June 30, 1999, the Company owned one real estate
owned property totaling $276,400. 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. The Association
entered into a one year lease of the property for $36,000 per year and also
granted the lessee an option to purchase the property for $286,500. The purchase
option was subsequently exercised by the Lessee and the Association sold the
property in July 1999 for the option price in an all cash transaction.
NON-ACCRUING LOANS. As of June 30, 1999, 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
$162,000 and consisted of three loans secured by properties located in the
Association's primary market area.
18
<PAGE>
As of June 30, 1999, there were no other loans not included in 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.
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 unlike specific allowances, have not been allocated to
particular problem assets. When a savings association classifies problem assets
as a "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, 1999, the Association had
classified a total of $212,000 of its assets as substandard, none as doubtful,
$188,000 as loss (which have been fully reserved), and none 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 where full collectibility may
not be reasonably assured, considers among other matters, the estimated fair
value
19
<PAGE>
of the underlying collateral, economic conditions, historical loan loss
experience and other factors that warrant recognition in providing for an
adequate loan loss allowance.
The Company incurred $30,000 in loan charge-offs during fiscal 1999.
During fiscal 1999, the Company increased its general allowance for loan losses
to $178,000 at fiscal year end from $150,000 at the prior fiscal year end. At
fiscal year end, the $178,000 general allowance for loan losses was determined
by the Company to be consistent with its policy for the establishment and
maintenance of adequate levels of general loan loss allowances. The $28,000
increase in the Company's general allowance for loan losses during fiscal 1999
was the result of $54,000 in recoveries from fully reserved loans which loss
reserves were transferred from specific allowance to general and $2,000 in
recoveries from loans previously charged off. These loan loss recoveries were
offset by $28,000 in loans that were charged off out of the general allowance
for loan losses during the current fiscal year. 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, 1999 the
Association had a total allowance for losses on loans of $366,000 or .73% of
total loans. See Note 5 of the Notes to Financial Statements in the Annual
Report to Stockholders filed as Exhibit 13 hereto.
20
<PAGE>
The following table sets forth an analysis of the Association's allowance
for loan losses.
Year Ended June 30,
------------------------------
1999 1998 1997
------------------------------
(Dollars in Thousands)
Balance at beginning of period...... $394 $ 551 $596
Charge-offs:
One- to four-family................ --- --- 43
Consumer........................... 7 --- 3
Commercial business................ 23 --- ---
------ ------- -------
30 --- 46
------ ------- ------
Recoveries:
One- to four-family................ --- --- ---
Consumer........................... 2 3 1
------- ------- -------
Total recoveries............... 2 3 1
------- ------- -------
Net charge-offs..................... (28) 3 (45)
Additions charged to operations..... --- (160) ---
------- ----- -------
Balance at end of period............ $366 $ 394 $551
==== ===== ====
Ratio of net charge-offs during the
period to average loans outstanding
during the period................... .06% ---% .13%
Ratio of net charge-offs during the
period to average non-performing
assets.............................. 2.68% ---% 2.56%
Allowance for loan losses to
non-performing loans(1)............ 79.66% 57.16 % 274.39%
Allowance for loan losses to total
loans............................... .74% 1.00 % 1.62%
(1) General valuation allowances to non-performing loans (net of specific
allowances).
21
<PAGE>
The following table presents the portions of the allowance for loan losses
applicable to each loan category.
June 30,
--------------------------------------------------------
1999 1998 1997
--------------------------------------------------------
Percent Percent Percent
of Loans of Loans of Loans
in Each in Each in Each
Category Category Category
to Total to Total to Total
Amount Loans Amount Loans Amount Loans
--------------------------------------------------------
(Dollars in Thousands)
One- to four-family... $ 70 92.28% $ 78 87.82% $129 84.26%
Multi-family.......... 166 3.43 208 4.49 219 6.39
Non-residential....... --- 0.45 --- .61 1 .77
Construction.......... --- --- --- 1.13 --- .87
Consumer.............. 35 3.72 48 5.77 59 7.50
Commercial business... --- 0.12 --- .18 --- .21
Unallocated........... 95 --- 60 --- 143 ---
----- ------ ---- ------ ---- ------
Total............ $366 100.00% $394 100.00% $551 100.00%
===== ====== ==== ====== ==== ======
INVESTMENT ACTIVITIES
As a part of its asset/liability management strategy and as a response to a
relatively high level of competition for loans 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, 1999, the Association's liquidity ratio (liquid assets maturing within five
years as a percentage of net withdrawable savings and current borrowings) was
56.5%.
At June 30, 1999, the Association's interest-bearing deposits in other
financial institutions totaled $31.1 million, or 23.9% of its total assets, and
investment securities totaled $25.0 million, or 19.2% of its total assets. As of
such date, the Association also had a $636,000 investment in the common stock of
the FHLB of Chicago in order to satisfy the requirement for membership in this
institution. At June 30, 1999, the average term to maturity or repricing of the
investment securities portfolio was approximately two years.
22
<PAGE>
The following table sets forth the composition of the Association's
investment portfolio at the dates indicated.
<TABLE>
<CAPTION>
At June 30,
----------------------------------------------
1999 1998 1997
----------------------------------------------
Carrying Fair Carrying Fair Carrying Fair
VALUE VALUE VALUE VALUE VALUE VALUE
-------- ----- -------- ----- -------- -----
<S> <C> <C> <C> <C> <C> <C>
Investment Securities:
U.S. government securities...... $20,971 $21,063 $21,185 $21,226 $21,058 $21,057
U.S. agency securities.......... 4,000 3,969 --- --- --- ---
FHLB - Chicago stock............ 636 636 554 554 554 554
------- ------- ------- ------- ------- -------
Total investment securities... $25,607 $25,668 $21,739 $21,780 $21,612 $21,611
======= ======= ======= ======= ======= =======
Interest-bearing deposits:
FHLB daily investment........... $19,723 $19,723 $18,522 $18,522 $17,825 $17,825
Other daily investments......... 11,364 11,364 10,816 10,816 10,241 10,241
------- ------- ------- ------- ------- -------
Total interest-bearing deposits $31,087 $31,087 $29,338 $29,338 $28,066 $28,066
======= ======= ======= ======= ======= =======
</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, 1999
--------------------------------------------------
1 Year 1 to 5 Over Total Investment
or Less Years 10 Years Securities
Years
------- ------- -------- ----------------
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....................... $9,997 $13,997 $977 $24,971 $25,032 5.52%
</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.
23
<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
and retain 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.
Year Ended June 30,
-----------------------------------
1999 1998 1997
-----------------------------------
Opening balance............................ $107,762 $102,973 $107,914
Deposits................................... 388,101 360,039 332,833
Withdrawals................................ (379,590) (358,909) (341,491)
-------- -------- --------
Balance before interest credited........... 116,273 104,103 99,256
Interest credited.......................... 3,952 3,659 3,717
-------- -------- --------
Ending balance............................. $120,225 $107,762 $102,973
======== ======== ========
Net increase (decrease).................... $ 12,463 $ 4,789 $ (4,941)
======== ======== ========
Percent increase (decrease)................ 11.57% 4.65% (4.58)%
===== ====== =====
24
<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,
---------------------------------------------------------
1999 1998 1997
---------------------------------------------------------
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
---------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INTEREST RATE RANGE:
Passbook accounts.............. $43,456 36.15% $ 40,716 37.78% $ 40,984 39.80%
NOW accounts................... 8,755 7.28 8,266 7.67 8,468 8.22
Money market accounts.......... 5,343 4.44 3,706 3.44 3,769 3.66
Non-interest bearing deposits.. 9,278 7.72 7,823 7.26 7,327 7.12
-------- ------ --------- ------ -------- ------
Total non-certificates....... 66,832 55.59 60,511 56.15 60,548 58.80
-------- ------ --------- ------ -------- ------
CERTIFICATES:
Interest rate range:
0.00 - 3.99%.................. --- --- --- ---
4.00 - 4.99%.................. 36,937 30.72 --- --- --- ---
5.00 - 5.99%.................. 16,456 13.69 47,151 43.75 40,438 39.27
6.00 - 6.99%.................. --- --- 100 .10 1,987 1.93
-------- ------ --------- ------ -------- ------
Total certificates.......... 53,393 44.41 47,251 43.85 42,425 41.20
-------- ------ --------- ------ -------- ------
Total deposits.............. $120,225 100.00% $ 107,762 100.00% $102,973 100.00%
======== ====== ========= ====== ======== ======
</TABLE>
The following table shows rate and maturity information for the
Association's time deposits as of June 30, 1999.
4.00- 5.00- Percent
4.99 5.99 TOTAL OF TOTAL
---------------------------------------------
(Dollars in Thousands)
Certificate Accounts
Maturing
IN QUARTER ENDING:
September 30, 1999......... $14,634 $ 3,700 $18,334 34.34%
December 31, 1999.......... 13,269 4,302 17,571 32.91
March 31, 2000............. 4,879 6,249 11,128 20.84
June 30, 2000.............. 3,042 333 3,375 6.32
September 30, 2000......... 228 983 1,211 2.27
December 31, 2000.......... 49 386 435 0.82
March 31, 2001............. 25 367 392 0.73
June 30, 2001.............. 128 136 264 0.49
September 30, 2001......... 438 438 0.82
December 31, 2001.......... 245 245 0.46
--------- ------- -------
Total................. $36,937 $16,456 $53,393 100.00%
======= ======= ======= ======
Percent of total...... 69.18% 30.82% 100.00%
===== ===== ======
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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,
1999.
Maturity
-----------------------------------------
Over Over Over
3 Months 3 to 6 6 to 12 12
or Less Months Months Months Total
-----------------------------------------
(Dollars in Thousands)
Certificates of deposit less than
$100,000........................... $16,635 $14,574 $13,620 $2,630 $47,459
Certificates of deposit of $100,000
or more............................ 1,699 2,997 883 355 5,934
------- ------ ------- ------- -------
Total certificates of deposit... $18,334 $17,571 $14,503 $2,985 $53,393
======= ======= ======= ====== =======
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 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%.
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
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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, 1999, Midland Federal's equity investment in Midland Service Corporation was
approximately $181,000. During fiscal 1999, Midland Service Corporation recorded
a profit of $1,000.
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 $3,500 for the 1999 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 U. S. 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 June 21, 1999 using financial data as of March 31,
1999, 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, 1999 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,
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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.
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, 1999, 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 U. S. 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 semi-annual
basis, if it determines that the reserve ratio of the SAIF will be less than the
designated reserve ratio of 1.25% of SAIF
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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 U. S. 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, was paid in
November 1996. Effective January 1, 1997, the premium schedule for BIF and SAIF
insured institutions ranged from 0 to 27 basis points. However, SAIF-insured
institutions are required to pay a Financing Corporation (FICO) assessment, in
order to fund the interest on bonds issued to resolve thrift failures in the
1980s, equal to 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 be 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 2015.
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, 1999, the
Association had retained mortgage servicing assets and an unrealized gain, net
of tax, under SFAS No. 115 in the amount of $80,000.
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, 1999, the Association had tangible capital of $8.5 million, or
6.53% of adjusted total assets, which is approximately $6.5 million above the
minimum requirement of 1.5% of adjusted total assets in effect on that date.
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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, 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, 1999, the
Association had retained mortgage servicing assets which were subject to these
tests.
At June 30, 1999, the Association had core capital equal to $8.5 million,
or 6.53% of adjusted total assets, which is $4.6 million above the minimum
leverage ratio requirement of 3% in effect on that date.
The OTS risk-based requirement requires savings associations to have
total capital of at least 8% of risk-weighted assets. Total capital consists of
core capital, as defined above, and supplementary capital. Supplementary capital
consists of certain permanent and maturing capital instruments that do not
qualify as core capital and general valuation loan and lease loss allowances up
to a maximum of 1.25% of risk-weighted assets. Supplementary capital may be used
to satisfy the risk-based requirement only to the extent of core capital. At
June 30, 1999, Midland Federal had no capital instruments that qualify as
supplementary capital and $178,000 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 was $15,000 equity
investments at June 30, 1999. OTS regulations also require deduction from total
capital and total assets the net book value of real estate owned greater than
five years, unless the OTS provides otherwise. During the fiscal year ended June
30, 1999, the Company deducted $276,400 from its total capital and total assets.
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
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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, 1999, the Association had total capital of $8.6 million
(including $8.5 million in core capital and $178,000 of qualifying general loss
reserves) and risk-weighted assets of $42.1 million or total capital of 20.54%
of risk-weighted assets. This amount was $5.3 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.
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
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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 remain well-capitalized, may make capital
distributions during any calendar year equal to the greater of 100% of net
income for the year-to-date plus retained net income for the two preceding
years. However, an institution deemed to be in need of more than normal
supervision by the OTS may have its dividend authority restricted by the OTS.
The Association may pay dividends in accordance with this general authority.
Savings associations proposing to make any capital distribution need only
submit written notice to the OTS 30 days prior to such distribution. Savings
associations that do not, or would not meet their current minimum capital
requirements following a proposed capital distribution, however, must obtain OTS
approval prior to making such distribution. The OTS may object to the
distribution during that 30-day notice period based on safety and soundness
concerns. See "-- Regulatory Capital Requirements."
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, 1999, the Association was in compliance with the
requirement, with an overall liquid asset ratio of 56.5% .
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.
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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 1986 Internal
Revenue Code, as amended. Under either test, such assets primarily consist of
residential housing related loans and investments. At June 30, 1999 the
Association met the test and has always met the test since its effectiveness.
Any savings association that fails to meet the QTL test must convert to a
national bank charter, unless it requalifies as a QTL and thereafter remains a
QTL. If an association does not requalify and converts to a national bank
charter, it must remain SAIF-insured until the FDIC permits it to transfer to
the BIF. If 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 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 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, such as a branch or merger 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 1998 and received a rating of "unsatisfactory." The
Association is intensifying its efforts to improve its performance under the
CRA.
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
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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, 1999 the
Association was in compliance with these reserve requirements. The balances
maintained to meet the reserve requirements imposed by the Federal Reserve Board
may be used to satisfy liquidity requirements that may be imposed by the OTS.
See "--Liquidity."
Savings associations are authorized to borrow from the Federal Reserve Bank
"discount window," but Federal Reserve Board regulations require associations to
exhaust other reasonable alternative sources of funds, including FHLB
borrowings, before borrowing from the Federal Reserve Bank.
FEDERAL HOME LOAN BANK SYSTEM. The Association is a member of the FHLB of
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, 1999, 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, 1999 Midland Federal had $636,000 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 6.55% and were 6.63% for
calendar year 1998.
Under federal law, the FHLBs are required to provide funds for the
resolution of troubled savings associations and to contribute to low- and
moderately priced housing programs through direct loans or interest subsidies on
advances targeted for community investment and low- and moderate-income housing
projects. These contributions have affected adversely the level of FHLB
dividends paid and could continue to do so in the future. These contributions
could also have an adverse effect on the value of FHLB stock in the future. A
reduction in value of the Association's FHLB stock may result in a corresponding
reduction in Midland Federal's capital.
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For the year ended June 30, 1999, dividends paid by the FHLB of Chicago to
Midland Federal totaled $37,000, which was identical to the amount of dividends
received in fiscal year 1998.
The $10,000 dividend received for the quarter ended June 30, 1999 reflects an
annualized rate of 6.50%, or .13% below the rate for calender year 1998.
FEDERAL TAXATION. Savings institutions that met certain definitional tests
relating to the composition of assets and other conditions prescribed by the
Internal Revenue Code of 1986, as amended, had been permitted to establish
reserves for bad debts and to make annual additions 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 is
now computed under the experience method.
In addition to the regular income tax, corporations, including savings
institutions 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.
To the extent earnings appropriated to a savings institutions 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 institution's supplemental reserves
for losses on loans, 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,
1999, the Association's excess for tax purposes totaled approximately $1.4
million.
The Association and its subsidiaries file consolidated federal income tax
returns on a fiscal year basis using the accrual method of accounting. Savings
institutions that file federal income tax returns as part of a consolidated
group are required by applicable Treasury regulations to reduce their taxable
income for purposes of computing the percentage bad debt deduction for losses
attributable to activities of the non-savings association members of the
consolidated group that are functionally related to the activities of the
savings association member.
The Association and its consolidated subsidiaries have 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, 1996, for
the Association and its consolidated subsidiaries.
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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
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
36
<PAGE>
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
EMPLOYEES
At June 30, 1999, the Association had a total of 48 full-time employees
and 48 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 $973,000 at June 30, 1999. 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 $53,000 and $29,000
net book values at June 30, 1999, respectively.
The Association has had a lease on vacant land located in Homer Township,
Illinois since 1989. 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 Association established a full service branch banking facility at
this location which opened for business during May 1999. The net book value of
remodeling and leasehold improvement costs at this 32,846 square foot location
amount to approximately $567,000 at June 30, 1999.
37
<PAGE>
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, 1999 was $361,000.
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.
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,
1999.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Pages 21 and 49 of the 1999 Annual Report to Stockholders is herein
incorporated by reference.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Pages 6 through 18 of the 1999 Annual Report to Stockholders is herein
incorporated by reference.
ITEM 7. FINANCIAL STATEMENTS
Pages 23 through 47 of the 1999 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.
38
<PAGE>
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.
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.
39
<PAGE>
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS:
Reference to
Prior Filing
Regulation or Exhibit
S-K Exhibit Number Attached
NUMBER DOCUMENT HERETO
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
--------------------
*Filed on January 15, 1993 as 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, 1999.
40
<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 28, 1999 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 Charles A. Zogas, Director,
and Chief Executive Officer Executive Vice
(PRINCIPAL FINANCIAL AND ACCOUNTING President and Secretary
OFFICER)
Date: September 28, 1999 Date: September 28, 1999
/s/ Jonas Vaznelis /s/ Richard Taylor
- --------------------------------- -----------------------------------
Jonas Vaznelis, Director Richard Taylor, Director and Vice
President
Date: September 28, 1999 Date: September 28, 1999
/s/ Michael J. Kukanza /s/ Algred Brazis
- --------------------------------- -----------------------------------
Michael J. Kukanza, Director Algerd Brazis, Director
Date: September 28, 1999 Date: September 28, 1999
41
Corporate Profile
Midland Capital Holdings Corporation (the "Company") is a Delaware corporation
that was organized in 1998 by Midland Federal Savings and Loan Association (the
"Association" or "Midland Federal") for the purpose of becoming its thrift
institution holding company. Both the Company and the Association are
headquartered in Bridgeview, Illinois, a southwest suburb of Chicago. The
Association was founded in 1914 with the goal of providing personal financial
services and home mortgage loans to communities located within the southwest
side of the city of Chicago. The Company continues to fulfill that role today
with two branch banking offices located in the Brighton Park and Marquette Park
neighborhoods of the city of Chicago, its home office in Bridgeview, Illinois
and a branch banking office located in Homer Township, Illinois, a southwest
suburb of Chicago. Midland Federal 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................. 22
Consolidated Statements of
Financial Condition........................ 23
Consolidated Statements of Income............ 24
Consolidated Statements of Changes in
Stockholders' Equity....................... 25
Consolidated Statements of Cash Flows........ 26
Notes to Consolidated Financial
Statements................................. 27
<PAGE>
To Our Shareholders,
The Company completed fiscal 1999 with earnings of $365,000, or $0.99 per
diluted share and a book value of $24.71 per share, a year-end record. This year
we also completed our reorganization as a unitary thrift holding company,
successfully undertook a data center conversion of our on-line customer account
data processing system with a new service provider and opened our newest full
service banking facility in Homer Township, Illinois. While these initiatives
were partially responsible for a reduction in net income, we believe that they
have positioned the Company to compete more effectively in the future.
The adoption of a unitary thrift holding company structure will afford the
Company greater flexibility in its future operations. The data center conversion
was a major operational undertaking that required additional expenditures
related to data processing, computer software and support as well as staffing.
These costs, however, were a necessary expenditure in order to bring our
customers the latest in banking technology and to prepare our mission critical
data processing systems for the Year 2000. We have successfully completed the
renovation and testing of all of our mission critical systems, which testing has
demonstrated that these systems are ready to operate beyond the Year 2000. This
includes all of the computer and information systems that maintain information
about customers, their accounts, balances and transactions. As a result, we are
confident that the century date change will be transparent to our customers and
we do not anticipate problems resulting from our tested systems. The opening of
our Homer Township banking facility is an important investment in the growth of
the Company's banking franchise. We are pleased with the positive response of
the community to the Homer Township facility, which opened on April 12, 1999 and
had deposit growth totaling $6.4 million at fiscal year end.
The Company continued to build upon its core banking business in fiscal
1999 with a 12% increase in total deposits to $120.2 million, a year-end record.
The Company's lending operations achieved growth of 26% in total loans during
fiscal 1999, our fourth consecutive annual increase in the loan portfolio.
Non-performing assets continued to decline and amounted to just .38% of total
assets at fiscal year end. The Company also continued to build its capital base
with stockholders' equity totaling $9.0 million, also a year-end record. At June
30, 1999 the Company's ratio of stockholders' equity to total assets was 6.91%
and its banking subsidiary, Midland Federal, continued to meet all of the
regulatory criteria for a 'well capitalized' designation throughout fiscal 1999.
Fiscal 1999 was an important year for our Company. Not only did it mark its
final fiscal year of the millennium, but it also laid the groundwork for its
successful operations into the 21st century. I would like to thank all our
shareholders for their support this year and into the new millennium.
Sincerely,
Paul Zogas
Chairman and President
<PAGE>
FINANCIAL HIGHLIGHTS
Year Ended June 30,
1999 1998 1997 1996 1995
--------------------------------------------
(Dollars in Thousands)
Total assets.................... $130,193 117,373 111,678 116,460 113,364
Loans receivable, net........... 49,349 39,173 33,392 32,776 31,036
Mortgage-backed securities...... 15,882 20,845 21,936 27,410 28,736
Cash and cash equivalents....... 35,020 31,994 30,903 30,918 28,022
Investment securities .......... 25,092 21,185 21,058 21,033 21,078
Deposits........................ 120,225 107,762 102,973 107,914 105,090
Stockholders' equity............ 8,996 8,768 7,971 7,740 7,412
For the Period:
Net interest income........... $ 3,154 3,147 3,124 3,186 3,272
Net income ................... 365 595 296 575 692
Per Common Share:
Book value per share
outstanding................. $ 24.71 24.09 22.99 22.32 21.48
Earnings per share outstanding
basic....................... $ 1.00 1.68 .85 1.66 2.01
diluted..................... $ .99 1.66 .83 1.64 2.00
Financial Ratios:
Stockholders' equity to
total assets................ 6.91% 7.47 7.14 6.65 6.54
Non-performing assets to
total assets................ .38% .86 .86 1.90 2.24
Net charge-offs to total loans .06% -- .13 .21 .32
Net interest margin........... 2.73% 3.01 2.96 2.96 3.07
Operating expenses to
average assets (1).......... 3.01% 2.90 2.72 2.69 2.56
Return on average assets (2).. .30% .54 .66 .50 .61
Return on average
stockholders' equity (2).... 4.08% 7.11 9.21 7.62 9.89
(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>
SELECTED CONSOLIDATED FINANCIAL INFORMATION
SELECTED FINANCIAL CONDITION DATA:
At June 30,
1999 1998 1997 1996 1995
--------------------------------------------
(In Thousands)
Total assets.................... $130,193 117,373 111,678 116,460 113,364
Loans receivable, net........... 49,349 39,173 33,392 32,776 31,036
Mortgage-backed securities...... 15,882 20,845 21,936 27,410 28,736
Cash and cash equivalents....... 35,020 31,994 30,903 30,918 28,022
Investment securities .......... 25,092 21,185 21,058 21,033 21,078
Deposits........................ 120,225 107,672 102,973 107,914 105,090
Stockholders' equity............ $ 8,996 8,768 7,971 7,740 7,412
SELECTED OPERATIONS DATA: Year Ended June 30,
1999 1998 1997 1996 1995
--------------------------------------------
(In Thousands)
Total interest income........... $ 7,333 7,016 7,034 7,228 6,700
Total interest expense.......... 4,179 3,869 3,910 4,042 3,428
----- ----- ----- ----- -----
Net interest income............. 3,154 3,147 3,124 3,186 3,272
Provision for loan losses
(recoveries).................. -- (160) -- -- (80)
----- ----- ----- ----- -----
Net interest income after
provision for loan losses... 3,154 3,307 3,124 3,186 3,352
Non-interest income:
Loan related fees and charges... 300 238 146 102 32
Gain (loss) on sale of assets... 23 34 16 (7) 1
Deposit related fees .......... 529 596 613 597 624
Other income.................... 303 248 350 204 181
----- ----- ----- ----- -----
Total non-interest income..... 1,155 1,116 1,125 896 838
----- ----- ----- ----- -----
Non-interest expense:
Staffing costs.................. 2,008 1,789 1,670 1,546 1,393
Occupancy and equipment expense. 576 475 452 449 482
Federal deposit insurance
premiums...................... 64 63 142 239 263
FDIC special assessment......... -- -- 674 -- --
Real estate owned expenses...... 82 261 98 129 222
Other expense................... 1,027 902 816 833 788
----- ----- ----- ----- -----
Total non-interest expense.... 3,757 3,490 3,852 3,196 3,148
----- ----- ----- ----- -----
Income before income taxes...... 552 933 397 886 1,042
Provision for income taxes...... 187 338 101 311 350
----- ----- ----- ----- -----
Net income ..................... $ 365 595 296 575 692
===== ===== ===== ===== =====
4
<PAGE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION
SELECTED FINANCIAL RATIOS:
At or For the Year Ended June 30,
1999 1998 1997 1996 1995
--------------------------------------------
Performance Ratios:
Return on average assets (1).... .30% .54 .66 .50 .61
Return on average stockholders'
equity (1).................... 4.08% 7.11 9.21 7.62 9.89
Interest rate spread during
period (2).................... 2.65% 2.92 2.91 2.90 3.05
Net interest margin (3)......... 2.73% 3.01 2.96 2.96 3.07
Ratio of operating expenses to
average total assets (4)...... 3.01% 2.90 2.72 2.69 2.56
Ratio of average interest-
earning assets to average
interest-bearing liabilities.. 110.63% 110.25 108.76 108.34 107.33
Asset Quality Ratios:
Non-performing assets to
total assets.................. .38% .86 .86 1.90 2.24
Allowance for loan losses to
non-performing loans (5)...... 79.66% 57.16 274.39 22.00 18.84
Allowance for loan losses to
total loans................... .74% 1.00 1.62 1.78 2.10
Capital Ratios:
Stockholders' equity to
total assets.................. 6.91% 7.47 7.14 6.65 6.54
Average stockholders' equity to
average assets................ 7.33% 7.52 6.81 6.61 6.13
(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 Capital Holdings Corporation (the "Company") is a Delaware corporation
that was organized in 1998 for the purpose of becoming the thrift institution
holding company for Midland Federal Savings and Loan Association (the
"Association" or "Midland Federal"). 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. 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 holding company 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, 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. At June 30, 1999 there
were 363,975 shares of the Company's common stock outstanding.
The Company'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 Company'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.
The Company'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 four offices. The Company's immediate market area consists of
Southwest Chicago and the Southwest suburban communities of Bridgeview, Oak
Lawn, Palos Hills, Hickory Hills, Burbank, Chicago Ridge, Lockport, Orland Park
and Lemont. Consistent with its operating philosophy, the Company 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 Company also makes substantial investments
in mortgage-backed securities, investment securities consisting primarily of
U.S. government and agency 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 Company 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 300 basis point
increase to a 300 basis point decrease in market interest rates.
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 re-pricing 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.
7
<PAGE>
The interest rate risk policy of the Association has established Board approved
limits on interest rate risk that are defined in terms of net portfolio value.
These limits specify the minimum NPV Ratio that the Board is willing to allow
under current interest rates and for a range of six hypothetical interest rate
scenarios of plus and minus 100, 200 and 300 basis points from the actual term
structure of interest rates observed at quarter end. The Association uses a
variety of tools to limit interest rate risk. First, the Association has focused
a portion of its residential lending and investments on adjustable-rate
mortgages ("ARMs") and mortgage-backed securities, which generally both re-price
within one year, although the Association continues to originate long term
fixed-rate mortgages in recognition of market demand and the potential for
increased margin. Second, the Association maintains a high level of liquidity
and has focused its investment activities in cash equivalents, two year U.S
Treasury Notes, balloon mortgage-backed securities and intermediate term
investments. Third, the Association seeks to maintain 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 Association's interest rate sensitivity of net portfolio value is shown in
the following table, which shows the NPV and projected change in the NPV of the
Association at June 30, 1999 assuming an instantaneous and sustained change in
market interest rates of 100, 200 and 300 basis points.
NET PORTFOLIO VALUE NPV AS % OF ASSETS
Change in Rates $ Amount $ Change % Change NPV Ratio Change
(Basis Points) (Thousands)
+300 bp 9,985 -1,510 -13 7.63 -102 bp
+200 bp 10,656 -839 -7 8.09 -56 bp
+100 bp 11,212 -283 -2 8.47 -18 bp
0 bp 11,495 -- -- 8.65 -- bp
-100 bp 11,523 28 0 8.65 0 bp
-200 bp 12,167 672 6 9.07 +42 bp
-300 bp 12,974 1,479 13 9.60 +95 bp
8
<PAGE>
FINANCIAL CONDITION AT JUNE 30, 1999
During the year ended June 30, 1999, total assets of the Company increased by
$12.8 million to $130.2 million from $117.4 million at June 30, 1998. This
increase was primarily the result of an increase in deposits in the amount of
$12.4 million to $120.2 million at June 30, 1999. Net loans receivable and loans
available for sale increased $10.1 million to $49.3 million at June 30, 1999.
Loan disbursements totaled $24.96 million compared to $17.6 million during the
year ended June 30, 1998. Principal payments to loans during the year ended June
30, 1999 totaled $11.5 million compared to $9.8 million during the year ended
June 30, 1998. The balance of mortgage-backed securities decreased by $5.0
million to $15.9 million due to repayments of mortgage-backed securities in the
amount of $6.1 million, which exceeded purchases of mortgage-backed securities
in the amount of $1.1 million during the fiscal year. The $10.1 million increase
in net loans receivable was funded by both the $5.0 million decrease in
mortgage-backed securities and the by the increase in deposits during the fiscal
year.
In fiscal 1999 the Company originated $3.1 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 Company
completed the sale of $3.3 million of these loans to the IHDA in fiscal 1999 and
will continue to service these loans for the IHDA and these customers. In fiscal
2000 the Company 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 Company loan origination personnel.
Cash and cash equivalents increased to $35.0 million at June 30, 1999 from $32.0
million at June 30, 1998. The balance of investment securities also increased by
$3.9 million to $25.1 million at June 30, 1999. The weighted average remaining
maturity of the Company's investment securities portfolio at June 30, 1999 was
2.1 years. Both the $3.0 million increase in cash and cash equivalents and the
$3.9 million increase in investment securities were funded by the increase in
deposits, discussed above.
Deposits for the year ended June 30, 1999 increased $12.4 million as deposit
activity of $388.1 million and interest credited to deposit accounts in the
amount of $3.9 million exceeded withdrawal activity of $379.6 million. The
increase in deposits is the result of a $6.1 million increase in certificate of
deposit accounts, a $3.6 million increase in transaction accounts including
money market accounts and a $2.7 million increase in passbook deposit accounts.
The net increase in savings deposits is primarily attributed to aggressive
pricing and promotion of certificate of deposit accounts at the Company's new
branch office location in Homer Township, Illinois.
Stockholders' equity increased $228,000 to $9.0 million at June 30, 1999 from
$8.8 million at June 30, 1998. The increase in stockholders' equity was
primarily due to earnings in the amount of $365,000 offset by dividends paid on
common stock in the amount of $109,000 and a $65,000.00 decline in market value,
net of income taxes, from securities classified 'available for sale.
9
<PAGE>
Non-performing assets totaled $500,000 at June 30, 1999 as compared to $1.0
million at June 30, 1998. Non-performing assets at June 30, 1999 consist of
$263,000 in non-accruing loans and $276,000 in real estate owned property, both
stated net of specific reserves. At June 30, 1999 non-accruing loans are
comprised of $162,000 in three single family residential mortgage loans, $38,000
in one multi-family residential mortgage loan and $24,000 in non-mortgage loans.
General allowances for loan losses total $178,000 or 79.66% of net
non-performing loans at June 30, 1999. At June 30, 1999 real estate owned
consist of one out-of-state single family residential property with a net book
value of $276,000.
RESULTS OF OPERATIONS
The Company'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 Company 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 Company's loan origination and loan brokerage operations, as
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 Company'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,
1999 1998 1997
---------------------- ---------------------- ----------------------
Average Interest Yield Average Interest Yield Average Interest Yield
Balance Earned/ and Balance Earned/ and Balance Earned/ and
Paid Rates Paid Rates Paid Rates
-------- ------- ----- -------- ------- ----- -------- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Interest-Earning
Assets:
Loans Receivable (1) $ 46,270 $3,442 7.44% 34,701 $2,792 8.04% $ 32,868 $2,699 8.21%
Mortgage-backed
securities........ 18,457 1,214 6.58 23,065 1,552 6.73 24,518 1,604 6.54
Investment and other
securities........ 21,441 1,213 5.66 21,142 1,248 5.90 21,049 1,277 6.07
Interest-bearing
deposits.......... 28,826 1,426 4.95 25,234 1,387 5.50 26,549 1,416 5.33
FHLB stock.......... 582 38 6.43 554 37 6.75 554 38 6.81
------- ----- ---- ------ ----- ---- ------- ----- ----
Total interest-
earning assets $115,576 $7,333 6.34% $104,696 $7,016 6.70% $105,538 $7,034 6.67%
------- ----- ---- ------ ----- ---- ------- ----- ----
Interest-Bearing
Liabilities:
Certificates of
deposit........... $ 50,000 $2,557 5.11% $ 43,122 $2,330 5.40% $ 43,264 $2,311 5.34%
Passbook accounts... 41,323 1,229 2.97 40,097 1,185 2.96 41,564 1,228 2.95%
Money market and
NOW accounts...... 13,151 393 2.99 11,744 354 3.02 12,214 371 3.04%
------- ----- ---- ------ ----- ---- ------- ----- ----
Total interest-
bearing lia-
bilities...... $104,474 $4,179 4.00% $ 94,963 $3,869 4.07% $ 97,042 $3,910 4.03%
======= ----- ---- ====== ----- ---- ======= ----- ----
Net earning assets.. $ 11,102 $ 9,733 $ 8,496
======= ====== =======
Net-interest income. $3,154 $3,147 $3,124
===== ===== =====
Net-interest rate
spread (2)........ 2.34% 2.63% 2.64%
==== ==== ====
Net-interest margin. 2.73% 3.01% 2.96%
==== ==== ====
Average interest-
earning assets to
average interest-
bearing liabilities 110.63% 110.25% 108.76%
====== ====== ======
</TABLE>
(1) Calculated net of deferred yield adjustments, loan discounts, loans in
process and loss reserves.
(2) Net-interest rate spread would be increased to 2.65%, 2.92% and 2.91% for
the periods shown if the positive impact of average non-interest bearing
demand deposits ($8,581, $7,386 and $6,990 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,
1999 vs. 1998 1998 vs. 1997
------------------------------ ------------------------------
Increase (decrease) due to Increase (decrease) due to
------------------------------ ------------------------------
Rate/ Rate/
Volume Rate Volume Net Volume Rate Volume Net
------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Interest-Earning
Assets:
Loans Receivable.... $ 931 $(211) $( 70) $ 650 $ 150 $( 54) $(3) $ 93
Mortgage-backed
securities........ (310) ( 35) 7 (338) ( 95) 46 (3) ( 52)
Investment and other
securities........ 18 ( 52) ( 1) ( 35) 6 ( 35) -- ( 29)
Interest-bearing
deposits.......... 197 (138) ( 20) 39 ( 70) 43 (2) ( 29)
FHLB stock.......... 1 -- -- 1 -- ( 1) -- ( 1)
---- ---- --- --- ---- --- --- ----
Total interest-
earning assets $ 837 $(436) $( 84) $ 317 $( 9) $( 1) $(8) $( 18)
---- ---- --- --- ---- --- --- ----
Interest-Bearing
Liabilities:
Certificates of
deposit........... $ 372 (125) ( 20) 227 $( 8) $ 27 $-- $ 19
Passbook accounts... 36 8 -- 44 ( 43) -- -- ( 43)
Money market and
NOW accounts...... 42 ( 3) -- 39 ( 14) ( 3) -- ( 17)
---- ---- --- --- ---- --- --- ----
Total interest-
bearing liab-
ilities....... $ 450 $(120) $( 20) $ 310 $( 65) $ 24 $-- $( 41)
---- ---- --- --- ---- --- --- ----
Net change in net
interest income... $ 7 $ 23
=== ====
</TABLE>
12
<PAGE>
COMPARISON OF OPERATING RESULTS
FOR THE FISCAL YEARS ENDED
JUNE 30, 1999 AND JUNE 30, 1998
The Company had net income of $365,000 in fiscal 1999 compared to net income of
$595,000 for fiscal 1998. The decrease in net income is primarily attributed to
a $267,000 increase in non-interest expense and the elimination of a $160,000
recovery of loan loss provisions in the prior year period offset by a $39,000
increase in non-interest income and a $151,000 reduction in the provision for
income taxes.
Net interest income before provision for loan losses remained approximately the
same in fiscal 1999 and 1998, totaling $3.2 million in both years. The average
balance of net earning assets increased $1.4 million to $11.1 million in fiscal
1999 from $9.7 million in the prior fiscal year. Net interest margin and
interest rate spread decreased in fiscal 1999 to 2.73% and 2.65%, respectively,
from 3.01% and 2.92%, respectively, in fiscal 1998, as a result of lower market
interest rates during the current fiscal year. The ratio of average interest
earning assets to average interest bearing liabilities increased to 110.63% in
fiscal 1999 from 110.25% in fiscal 1998.
INTEREST INCOME
Interest income increased $317,000 in fiscal 1999 to $7.3 million. This increase
in interest income resulted from a $10.9 million increase in the average balance
of interest earning assets to $115.6 million in fiscal 1999 from $104.7 million
in fiscal 1998. The increase in the average outstanding balance of interest
earnings assets was partially offset by a decrease in the average yield earned
on interest earning assets to 6.34% in fiscal 1999 from 6.70% in fiscal 1998 as
a result of lower market interest rates.
Interest on loans receivable increased $650,000, or 23.3%, in fiscal 1999 to
$3.4 million compared with fiscal 1998. The increase in interest income was
attributed to an $11.6 million increase in the average outstanding balance of
net loans receivable to $46.3 million in fiscal 1999 from $34.7 million in
fiscal 1998. The increase in loans was the result of a 42% increase in loan
originations which more than offset a 24% increase in loan repayments and loan
sales during the current fiscal year. 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 7.44% in fiscal 1999 from 8.04% in fiscal 1998.
Interest on mortgage-backed securities decreased $338,000, or 21.7%, to $1.2
million in fiscal 1999 compared with fiscal 1998. The decrease in interest
income was primarily attributed to a $4.6 million reduction in the average
outstanding balance of mortgage-backed securities to $18.5 million in fiscal
1999 from $23.1 million in fiscal 1998 as well as to a decrease in the average
yield earned on mortgage-backed securities to 6.58% in fiscal 1999 from 6.73% in
fiscal 1998.
Interest earned on investment securities decreased $35,000, or 2.8%, in fiscal
1999. The decrease in interest income resulted primarily from a decrease in the
average yield on investment securities to 5.66% in fiscal 1999 compared to 5.90%
in fiscal 1998.
13
<PAGE>
Interest earned on interest bearing deposits increased $39,000, or 2.8%, in
fiscal 1999. The increase in interest income is attributed to a $3.6 million
increase in the average outstanding balance of interest bearing deposits to
$28.8 million in fiscal 1999 from $25.2 million in fiscal 1998 which offset a
decrease in the average yield earned on interest bearing deposits to 4.95% in
fiscal 1999 from 5.50% in fiscal 1998. The Company maintained its investments in
interest bearing deposits in response to the potential for higher short term
market interest rates at the end of fiscal 1999 and into fiscal 2000.
INTEREST EXPENSE
Interest expense increased $310,000, or 8.0%, to $4.2 million in fiscal 1999.
The increase in interest expense in fiscal 1999 was primarily the result of a
$9.5 million increase in the average outstanding balance of interest costing
deposits to $104.5 million in fiscal 1999 from $95.0 million in fiscal 1998
which was partially offset by a decrease in the average yield paid on interest
costing deposits to 4.00% in fiscal 1999 compared to 4.07% in fiscal 1998. The
increase in savings deposits is primarily attributed to aggressive pricing and
promotion of certificate of deposit accounts by the Company.
PROVISIONS FOR LOSSES ON LOANS
The Company maintains an allowance for loan losses based upon management's
periodic evaluation of known and inherent risks in the loan portfolio, the
Company'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. The Company incurred $30,000 in loan
charge-offs during fiscal 1999. During fiscal 1999 the Company increased its
general allowance for loan losses to $178,000 at fiscal year end from $150,000
at the prior fiscal year end. At fiscal year end, the $178,000 general allowance
for loan losses was determined by the Company to be consistent with its policy
for the establishment and maintenance of adequate levels of general loan loss
allowances. The $28,000 increase in the Company's general allowance for loan
losses during fiscal 1999 was the result of $54,000 in recoveries from fully
reserved loans which loss reserves were transferred from specific allowance to
general and $2,000 in recoveries from loans previously charged off. These loan
loss recoveries were offset by $28,000 in loans that were charged off out of the
general allowance for loan losses during the current fiscal year.
At June 30, 1999, the Company was aware of no regulatory directives or
suggestions that the Company make additional provisions for losses on loans.
Although the Company believes its allowance for loan losses is at a level that
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 $39,000 to $1.2 million in fiscal 1999 from $1.1
million in fiscal 1998. The increase in non-interest income in fiscal 1999 is
primarily attributed to a $63,000 increase in loan fees and service charges, a
$22,000 profit on the sale of real estate owned properties, a $16,000 increase
in profit on sale of loans and an $11,000 increase in commission income. The
increase in loan fees and service charges was the result of increased loan
brokerage revenues and loan origination activity in fiscal 1999 compared to
fiscal 1998, as discussed above. The increase in commission income was the
result of an increase in the sale of annuity products in fiscal 1999 compared to
the prior fiscal year. These increases in non-interest income were offset by a
$67,000 decrease in deposit related fees in fiscal 1999 compared to the prior
fiscal year. The decrease in deposit related fees in fiscal 1999 is attributed
to a decrease in the level of demand deposit service charges resulting from
decreased overdraft activity compared to the prior fiscal year. Deposit related
fees also declined as a result of the implementation of new customer account
data processing systems in the fiscal second quarter which system changes
negatively impacted fee income while these system changes were implemented.
NON-INTEREST EXPENSE
Non-interest expense increased $267,000 to $3.8 million in fiscal 1999 compared
to $3.5 million in the prior fiscal year. The primary factors for the increase
in non-interest expense were a $220,000 increase in staffing costs, a $101,000
increase in occupancy and equipment expense, a $52,000 increase in computer
software and support expense and a $47,000 increase in data processing fees, as
compared with the prior fiscal year. These increases in non-interest expense
14
<PAGE>
were offset by a $165,000 reduction in provision for loss on real estate owned,
a $21,000 reduction in legal expense and a $14,000 reduction in real estate
owned expenses in fiscal 1999 compared with the prior year period. The increase
in non-interest expense in fiscal 1999 is primarily attributed to the opening
and operations of the Company's fourth banking facility in Homer Township,
Illinois. Non-interest expense also increased as a result of the conversion of
the Company's on-line customer account data processing and certain other data
processing and computer systems to a new service provider in fiscal 1999 in
order to bring mission critical data processing and computer systems into year
2000 compliance.
INCOME TAXES
Provisions for income taxes decreased by $151,000 to $187,000 in fiscal 1999
from $338,000 in fiscal 1998. The decreased income tax provision for fiscal 1999
was due primarily to the decrease in operating income as compared to fiscal
1998.
COMPARISON OF OPERATING RESULTS
FOR THE FISCAL YEARS ENDED
JUNE 30, 1998 AND JUNE 30, 1997
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 re-capitalize
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
15
<PAGE>
$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 re-capitalize 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 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.
16
<PAGE>
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 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 that it considers to be adequate to provide for
potential losses, there can be no assurance that such losses will not exceed the
estimated amounts.
17
<PAGE>
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 re-capitalize 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
re-capitalization 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 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 was 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.
18
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company'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 (the "FHLB").
The Company maintains investments in liquid assets based upon management's
assessment of (i) the Company's need for funds, (ii) expected deposit flows,
(iii) the yields available on short-term liquid assets and (iv) the objectives
of the Company'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, 1999, the Association's regulatory liquidity ratio was 56.5%. At such
date, the Association had commitments to originate $842,000 in single family
mortgage loans, commitments to sell $535,000 in single family mortgage loans and
no commitments to purchase loans.
The Company considers its liquidity and capital reserves sufficient to meet its
outstanding short and long-term needs. The Company expects to be able to fund or
refinance, on a timely basis, its material commitments and long-term
liabilities. The Company'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,
1999 and 1998.
For the Year
Ended June 30,
----------------------
1999 1998
-------- --------
(Dollars in Thousands)
Net income............................. $ 365 $ 595
Adjustments to reconcile net income
to net cash provided by
operating activities................. 308 (235)
------- -------
Net cash provided by
operating activities................. 673 360
Net cash provided for
investing activities................. (10,124) (4,233)
Net cash provided by
financing activities................. 12,477 4,964
------- -------
Net change in cash and
cash equivalents..................... 3,026 1,091
Cash and cash equivalents at
beginning of period.................. 31,994 30,903
------- -------
Cash and cash equivalents at
end of period........................ $35,020 $31,994
------- -------
19
<PAGE>
At June 30, 1999 Midland Federal had tangible and core capital of $8.5 million,
or 6.52% of adjusted total assets, which was approximately $6.5 million and $4.6
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.
At June 30, 1999 Midland Federal had total capital of $8.6 million and
risk-weighted assets of $42.1 million, or total capital of 20.54% of
risk-weighted assets. This amount was approximately $5.3 million above the 8.0%
requirement for capital adequacy purposes 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 Company 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 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 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. The Company did not early adopt SFAS 133, however, management does not
expect the adoption of this statement to have a material impact on the Company'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 Company's operations. Unlike most industrial
20
<PAGE>
companies, nearly all of the assets and liabilities of the Company are monetary
in nature. As a result, interest rates have a greater impact on the Company's
performance than do the effects of general levels of inflation. Interest rates
do not necessarily move in the same direction or to the same extent as the price
of goods and services.
COMMON STOCK
As of June 30, 1999, there were approximately 60 holders of record of the
Company's common stock and 363,975 shares of issued and outstanding common
stock. The Company's common stock is quoted on the 'pink sheets' published by
the National Quotation Bureau Inc. 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 declared. The prices reflect
inter-dealer quotations without retail mark-up, mark-down or commissions and do
not necessarily represent actual transactions.
Cash dividends
Quarter ended High Low declared
- ------------------ ----- ----- --------------
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
September 30, 1998 30.25 23.00 0.075
December 31, 1998 26.38 22.00 0.075
March 31, 1999 23.00 23.00 0.075
June 30, 1999 22.00 20.50 0.075
Dividend payment decisions are made with consideration of a variety of factors
including earnings, financial condition, market considerations and regulatory
restrictions.
21
<PAGE>
[LETTERHEAD OF COBITZ, VANDENBERG & FENNESSY]
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Midland Capital Holdings Corporation
Bridgeview, Illinois
We have audited the consolidated statements of financial condition of
Midland Capital Holdings Corporation and subsidiaries as of June 30, 1999 and
1998, 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, 1999. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material 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
Capital Holdings Corporation and subsidiaries at June 30, 1999 and 1998, and the
results of their operations and their cash flows for each of the three years in
the period ending June 30, 1999, in conformity with generally accepted
accounting principles.
/s/Cobitz, Vandenberg & Fennessey
---------------------------------
COBITZ, VANDENBERG & FENNESSEY
August 13, 1999
Palos Hills, Illinois
22
<PAGE>
MIDLAND CAPITAL HOLDINGS CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Financial Condition
<TABLE>
<CAPTION>
JUNE 30,
1999 1998
------------- -------------
<S> <C> <C>
ASSETS
Cash and amounts due from depository institutions $ 3,933,658 2,656,448
Interest-bearing deposits 31,086,638 29,337,747
----------- -----------
Total cash and cash equivalents 35,020,296 31,994,195
Investment securities,
held to maturity (fair value:
1999 - $19,933,594; 1998 - $20,030,469) (note 2) 19,994,152 19,989,055
Investment securities available for sale,
at fair value (note 3) 5,098,307 1,195,938
Mortgage-backed securities, held to maturity (fair value:
1999 - $15,938,491; 1998 - $21,128,839) (note 4) 15,881,826 20,844,623
Loans receivable (net of allowance
for loan losses: 1999 - $365,863;
1998 - $393,884) (note 5) 48,914,195 38,513,121
Loans receivable held for sale (note 6) 435,150 659,450
Real estate owned, net 276,372 746,522
Stock in Federal Home Loan Bank of Chicago 636,000 554,000
Accrued interest receivable (note 7) 611,966 619,464
Office properties and equipment - net (note 8) 2,594,050 1,567,285
Prepaid expenses and other assets (note 9) 730,969 689,727
----------- -----------
Total assets 130,193,283 117,373,380
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits (note 10) 120,224,584 107,761,846
Advance payments by borrowers for taxes
and insurance 570,814 447,668
Other liabilities (note 11) 402,356 396,229
----------- -----------
Total liabilities 121,197,754 108,605,743
----------- -----------
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, 1999 and 1998 3,640 3,640
Additional paid-in capital 3,271,315 3,266,315
Retained earnings - substantially restricted 5,685,591 5,430,065
Accumulated other comprehensive income,
net of income taxes 80,030 145,099
Common stock awarded by Bank Incentive Plan (45,047) (77,482)
----------- -----------
Total stockholders' equity (notes 15 and 16) 8,995,529 8,767,637
----------- -----------
Commitments and contingencies (notes 17 and 18)
Total liabilities and stockholders' equity $ 130,193,283 117,373,380
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
23
<PAGE>
MIDLAND CAPITAL HOLDINGS CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Income
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
1999 1998 1997
------------- ------------ -----------
<S> <C> <C> <C>
Interest income:
Interest on loans $ 3,442,351 2,791,590 2,699,211
Interest on mortgage-backed securities 1,214,401 1,551,940 1,603,709
Interest on investment securities 1,212,855 1,247,576 1,277,457
Interest on interest-bearing deposits 1,425,567 1,387,391 1,416,267
Dividends on FHLB stock 37,435 37,401 37,717
--------- --------- ---------
Total interest income 7,332,609 7,015,898 7,034,361
--------- --------- ---------
Interest expense:
Interest on deposits (note 10) 4,179,051 3,868,946 3,910,529
--------- --------- ---------
Total interest expense 4,179,051 3,868,946 3,910,529
--------- --------- ---------
Net interest income before provision
for loan losses 3,153,558 3,146,952 3,123,832
Provision for loan losses (recoveries) (note 5) - (160,000) -
--------- --------- ---------
Net interest income after provision
for loan losses 3,153,558 3,306,952 3,123,832
--------- --------- ---------
Non-interest income:
Loan fees and service charges 300,328 237,768 145,586
Commission income 105,116 94,572 68,525
Profit on sale of loans (note 6) 45,154 29,076 10,802
Profit on sale of real estate owned - net 21,602 - -
Recovery from litigation settlement - - 143,000
Deposit related fees 529,367 596,194 612,567
Other income 153,777 158,233 144,820
--------- --------- ---------
Total non-interest income 1,155,344 1,115,843 1,125,300
--------- --------- ---------
Non-interest expense:
Staffing costs (notes 12 and 13) 2,008,128 1,788,697 1,670,423
Advertising 93,268 89,394 86,063
Occupancy and equipment expenses (note 8) 576,094 474,947 451,507
Data processing 199,828 152,830 136,634
Federal deposit insurance premiums 64,047 63,090 142,377
FDIC special assessment - - 674,061
Legal, audit and examination services 145,364 161,005 143,974
Real estate owned expense 80,418 93,917 97,602
Provision for loss on
real estate owned (note 1) 1,527 167,000 -
Other 588,608 498,968 449,862
--------- --------- ---------
Total non-interest expense 3,757,282 3,489,848 3,852,503
--------- --------- ---------
Income before income taxes 551,620 932,947 396,629
Provision for income taxes (note 14) 186,901 338,354 100,811
--------- --------- ---------
Net income $ 364,719 594,593 295,818
========= ========= =========
Earnings per share - basic $ 1.00 1.68 .85
========= ========= =========
Earnings per share - diluted $ .99 1.66 .83
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
24
<PAGE>
MIDLAND CAPITAL HOLDINGS CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
<TABLE>
<CAPTION>
Accumulated Common
Additional Other Stock
Common Paid-in Retained Comprehensive Awarded
Stock Capital Earnings Income by BIP Total
---------- ---------- --------- ------------ ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1996 $ 3,467 3,072,818 4,750,276 49,426 (136,275) 7,739,712
----- --------- --------- ------ ------- ---------
Comprehensive income:
Net income 295,818 295,818
Other comprehensive income,
net of tax:
Unrealized holding gain
during the year 11,949 11,949
--------- ------ ---------
Total comprehensive income 295,818 11,949 307,767
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 ($.30 per share) (104,017) (104,017)
----- --------- --------- ------ ------- ---------
Balance at June 30, 1997 3,467 3,073,664 4,942,077 61,375 (109,917) 7,970,666
----- --------- --------- ------ ------- ---------
Comprehensive income:
Net income 594,593 594,593
Other comprehensive income,
net of tax:
Unrealized holding gain
during the year 83,724 83,724
--------- ------ ---------
Total comprehensive income 594,593 83,724 678,317
Common stock issued in
connection with stock
options exercised 173 189,577 189,750
Tax benefit related to
employee stock plan 3,074 3,074
Amortization of award
of BIP stock 32,435 32,435
Dividends declared on
common stock ($.30 per
share) (106,605) (106,605)
----- --------- --------- ------ ------- ---------
Balance at June 30, 998 3,640 3,266,315 5,430,065 145,099 (77,482) 8,767,637
----- --------- --------- ------ ------- ---------
Comprehensive income:
Net income 364,719 364,719
Other comprehensive income,
net of tax:
Unrealized holding loss
during the year (65,069) (65,069)
--------- ------ ---------
Total comprehensive income 364,719 (65,069) 299,650
Tax benefit related to
employee stock plan 5,000 5,000
Amortization of award
of BIP stock 32,435 32,435
Dividends declared on
common stock ($.30
per share) (109,193) (109,193)
----- --------- --------- ------ ------- ---------
Balance at June 30, 1999 $ 3,640 3,271,315 5,685,591 80,030 (45,047) 8,995,529
===== ========= ========= ====== ======= =========
</TABLE>
25
See accompanying notes to consolidated financial statements.
<PAGE>
MIDLAND CAPITAL HOLDINGS CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Years Ended June 30,
-------------------------------------------
1999 1998 1997
-------------- ------------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 364,719 594,593 295,818
Adjustments to reconcile net income
to net cash from operating activities:
Depreciation 203,398 148,118 117,169
Amortization of premiums and discounts on securities 5,204 25,682 46,143
Amortization of cost of stock benefit plan 32,435 32,435 33,280
Profit on sale of real estate owned (21,602) -- --
Provision for loss on real estate owned 1,527 167,000 --
Provision for loan losses (recoveries) -- (160,000) --
Proceeds from sale of loans held for sale 3,298,250 2,196,672 831,600
Origination of loans held for sale (3,073,950) (2,625,722) (1,062,000)
Profit on sale of loans (45,154) (29,076) (10,802)
Decrease in accrued interest receivable 7,498 18,832 49,023
Increase (decrease) in accrued interest payable 4,731 4,672 (2,157)
Decrease in deferred income on loans (114,528) (79,462) (28,405)
Decrease in other assets 9,211 53,199 49,753
Increase (decrease) in other liabilities 1,396 13,332 (93,014)
------------ --------- ----------
Net cash provided by operating activities 673,135 360,275 226,408
------------ --------- ----------
Cash flows from investing activities:
Purchase of mortgage-backed securities,
held to maturity (1,101,593) (4,610,445) --
Proceeds from repayments of mortgage-backed
securities, held to maturity 6,049,456 5,663,017 5,413,446
Purchase of investment securities, held
to maturity (9,996,325) (9,987,650) (9,992,125)
Proceeds from maturities of investment securities,
held to maturity 10,000,000 10,000,000 10,000,000
Purchase of investment securities, available
for sale (4,000,000) -- --
Purchase of Federal Home Loan Bank stock (82,000) -- --
Loan disbursements (21,806,872) (14,927,543) (6,636,897)
Loan repayments 11,548,347 9,757,375 6,194,014
Proceeds from sale of real estate owned 495,425 -- --
Property and equipment expenditures (1,230,163) (127,379) (191,221)
------------ --------- ----------
Net cash provided by (for) investing activities (10,123,725) (4,232,625) 4,787,217
------------ --------- ----------
Cash flows from financing activities:
Proceeds from exercise of stock options -- 189,750 --
Deposit receipts 388,100,662 360,038,437 332,832,845
Deposit withdrawals (379,590,415) (358,908,515) (341,490,636)
Interest credited to deposit accounts 3,952,491 3,659,000 3,717,000
Payment of dividends (109,193) (106,605) (104,017)
Purchase of BIP stock -- -- (6,922)
Increase in advance payments
by borrowers for taxes and insurance 123,146 91,903 22,962
------------ ---------- ----------
Net cash provided by (for) financing activities 12,476,691 4,963,970 (5,028,768)
------------ ---------- ----------
Net change in cash and cash equivalents 3,026,101 1,091,620 (15,143)
Cash and cash equivalents at beginning of year 31,994,195 30,902,575 30,917,718
------------ ---------- ----------
Cash and cash equivalents at end of year $ 35,020,296 31,994,195 30,902,575
============ ========== ==========
Cash paid during the year for:
Interest $ 4,174,320 3,864,274 3,912,686
Income taxes 154,260 239,000 77,226
Non-cash investing activities:
Transfer of loans to foreclosed real estate $ -- 58,022 85,500
============ ========== ==========
</TABLE>
26
See accompanying notes to consolidated financial statements.
<PAGE>
MIDLAND CAPITAL HOLDINGS CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Midland Capital Holdings Corporation (the "Company") is a Delaware
corporation incorporated in April, 1998 for the purpose of becoming the
unitary thrift holding company for Midland Federal Savings and Loan
Association (the "Association"). 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 outstanding share of common stock of the
Association became, by operation of law, one share of common stock of the
Company.
The accounting and reporting policies of the Company 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 Company follows in
preparing and presenting its consolidated financial statements.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company,
and its wholly owned subsidiary, Midland Federal Savings and Loan
Association and the Association's wholly-owned subsidiaries, Midland
Service Corporation, MS Insurance Agency and Bridgeview Development
Company. Significant intercompany transactions and balances have been
eliminated in consolidation.
INDUSTRY SEGMENTS
The Company operates principally in the thrift industry through its
subsidiary savings and loan. As such, substantially all of the Company's
revenues, net income, identifiable assets and capital expenditures are
related to thrift operations.
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 Company 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 Company has designated certain investments in U.S. Government and
Agency 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.
27
<PAGE>
1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 Company has both the ability and the intent to hold them to
maturity.
LOANS RECEIVABLE AND RELATED FEES
Loans are stated at the principal amount outstanding, net of loans in
process, net deferred yield adjustments 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 and certain direct loan origination costs are
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 recognized as an adjustment to yield over the
contractual life of the loan.
The Company 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. Of the loans which are to be evaluated for impairment, management
has determined that there were no loans at June 30, 1999 and 1998, nor
during the years ended June 30, 1999 and 1998, which met the definition of
an impaired loan. A loan is considered impaired when it is probable that a
creditor will be unable to collect contractual principal and interest due
according to the contractual terms of the loan agreement.
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 Company 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, regardless of how 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.
The Company 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 Company'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.
28
<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 Company's allowance for loan
losses. Such agencies may require the Company 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.
DEPRECIATION
Depreciation of office properties and equipment is accumulated on the
straight line basis over estimated lives of the various assets.
INCOME TAXES
The Company 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.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the purposes of reporting cash flows, the Company 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.
29
<PAGE>
1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
EARNINGS PER SHARE
The Company 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,
1999 1998 1997
<S> <C> <C> <C>
Weighted average number of
common shares outstanding used
in basic EPS calculation 363,975 354,948 346,725
Add common stock equivalents
for shares issuable under
Stock Option Plans 4,634 4,262 8,362
--------- --------- ---------
Weighted average number of shares
outstanding adjusted for common
stock equivalents 368,609 359,210 355,087
========= ========= =========
Net income $ 364,719 594,593 295,818
Basic earnings per share $ 1.00 1.68 .85
Diluted earnings per share $ .99 1.66 .83
</TABLE>
EPS for prior periods has been restated to comply with the provisions of
SFAS 128.
30
<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, 1999
United States Treasury notes $ 19,994,152 16,492 77,050 19,933,594
========== ====== ====== ==========
Weighted average interest rate 5.31%
JUNE 30, 1998
United States Treasury notes $ 19,989,055 44,643 3,229 20,030,469
========== ====== ====== ==========
Weighted average interest rate 5.80%
</TABLE>
<TABLE>
<CAPTION>
The contractual maturity of investment securities held to maturity are
summarized as follows:
JUNE 30, 1999 JUNE 30, 1998
---------------------- ----------------------
Amortized Fair Amortized Fair
TERM TO MATURITY COST VALUE COST VALUE
<S> <C> <C> <C> <C>
Due in one year or less $ 9,997,571 10,014,063 9,997,659 10,028,125
Due after one year through
two years 9,996,581 9,919,531 9,991,396 10,002,344
---------- ---------- ---------- ----------
$ 19,994,152 19,933,594 19,989,055 20,030,469
========== ========== ========== ==========
</TABLE>
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
JUNE 30, 1999
<S> <C> <C> <C> <C>
Federal Home Loan Bank note $ 4,000,000 - 31,068 3,968,932
United States Treasury bond 977,049 152,326 - 1,129,375
--------- ------- ------- ---------
$ 4,977,049 152,326 31,068 5,098,307
========= ======= ======= =========
Weighted average interest rate 6.35%
JUNE 30, 1998
United States Treasury bond $ 976,091 219,847 - 1,195,938
========= ======= ======= =========
Weighted average interest rate 7.68%
</TABLE>
The contractual maturity of the Federal Home Loan Bank note is in the year
2002 and the United States Treasury bond is in the year 2016. There were
no sales of investment securities available for sale during any of the
periods presented. The change in net unrealized gains and losses during
the current year of $98,589, net of the tax effect of $33,520, resulted in
a $65,069 charge to stockholders' equity.
31
<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
JUNE 30, 1999
<S> <C> <C> <C> <C>
Participation certificates:
FHLMC - Adjustable rate $ 7,795,118 75,402 64,833 7,805,687
FNMA - Adjustable rate 3,407,037 13,806 8,584 3,412,259
FHLMC - Fixed rate 2,459,416 819 - 2,460,235
FNMA - Fixed rate 1,906,484 47,560 9,549 1,944,495
GNMA - Fixed rate 295,258 3,509 1,465 297,302
Investment in collateralized
mortgage obligations:
FHLMC 18,513 - - 18,513
---------- ------- ------- ----------
$ 15,881,826 141,096 84,431 15,938,491
========== ======= ======= ==========
Weighted average interest rate 6.45%
====
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%
====
</TABLE>
32
<PAGE>
5) LOANS RECEIVABLE
Loans receivable are summarized as follows:
<TABLE>
<CAPTION>
JUNE 30,
1999 1998
<S> <C> <C>
Mortgage loans:
One-to-four family $ 45,597,198 34,370,408
Multi-family 1,712,534 1,790,245
Non-residential 223,276 244,232
Construction - 450,000
---------- ----------
Total mortgage loans 47,533,008 36,854,885
---------- ----------
Other loans:
Loans on deposit accounts 273,589 463,748
Auto loans 274,213 371,743
Education loans 1,167,143 1,316,022
Mobile home loans 2,506 10,295
Other 140,681 138,825
---------- ----------
Total other loans 1,858,132 2,300,633
---------- ----------
Commercial business loans 58,022 70,988
---------- ----------
Total loans receivable 49,449,162 39,226,506
---------- ----------
Less:
Loans in process 4,510 40,379
Net deferred yield adjustments (95,151) 17,086
Allowance for uncollected interest 259,745 262,036
Allowance for loan losses 365,863 393,884
---------- ----------
Loans receivable, net $ 48,914,195 38,513,121
========== ==========
Weighted average interest rate 7.38% 7.85%
==== ====
</TABLE>
Activity in the allowance for loan losses is summarized as follows:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
1999 1998 1997
<S> <C> <C> <C>
Balance, beginning of year $ 393,884 551,509 595,601
Provision for loan losses (recoveries) - (160,000) -
Recoveries previously charged-off 1,876 2,375 1,629
Charge-offs (29,897) - (45,721)
------- ------- -------
Balance, end of year $ 365,863 393,884 551,509
======= ======= =======
</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, 1999 amounted to $380,537 or .8% of total loans in force.
Comparable figures for 1998 were $465,323 or 1.2% of total loans.
Loans to directors and executive officers aggregated $435,019 at June 30,
1999 and $444,842 at June 30, 1998. Such loans are made on substantially
the same terms as those for other loan customers.
33
<PAGE>
6) LOANS RECEIVABLE HELD FOR SALE
During the years ended June 30, 1999, 1998 and 1997, the Company sold
loans in the secondary market under various programs. As such, the Company
has designated a portion of the loan portfolio to be classified as held
for sale. During the years ended June 30, 1999, 1998 and 1997, the Company
sold first mortgage loans totaling $3,298,250, $2,196,672 and $831,600 in
the secondary market. The Company retained the servicing on these loans.
Proceeds from the sale of these loans during the years ended June 30,
1999, 1998 and 1997 were $3,298,250, $2,196,672 and $831,600 with no gain
or loss realized on those sales. In addition, the Company recorded a gain
of $45,154, $29,076 and $10,802 for the years ended June 30, 1999, 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, 1999, 1998 and 1997, the Company amortized $9,587, $2,137 and $292 of
mortgage servicing rights against current servicing fee income.
As of June 30, 1999, $435,150 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,
1999.
At June 30, 1999, 1998 and 1997, loans serviced for others amounted to
$6,353,747, 3,841,991 and $1,045,553 respectively.
7) ACCRUED INTEREST RECEIVABLE
Accrued interest receivable is summarized as follows:
<TABLE>
<CAPTION>
JUNE 30,
1999 1998
<S> <C> <C>
Investment securities $ 246,509 252,060
Mortgage-backed securities 127,769 178,297
Loans receivable 227,690 179,956
Other investments 9,998 9,151
------- -------
$ 611,966 619,464
======= =======
</TABLE>
34
<PAGE>
8) OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment are summarized as follows:
<TABLE>
<CAPTION>
JUNE 30,
1999 1998
<S> <C> <C>
Land $ 236,095 236,095
Buildings 1,683,008 1,655,841
Easement for parking lot and driveway 223,050 223,050
Leasehold improvements - Homer Township 579,253 -
Furniture, fixtures and equipment 2,374,711 1,750,969
Automobiles 17,993 17,993
--------- ---------
5,114,110 3,883,948
Less accumulated depreciation 2,520,060 2,316,663
--------- ---------
$ 2,594,050 1,567,285
========= =========
</TABLE>
Depreciation of office properties and equipment for the years ended June
30, 1999, 1998 and 1997 amounted to $203,398, $148,118 and $117,169
respectively.
The Association has had a lease on vacant land located in Homer Township,
Illinois since 1989. 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 Association established a full service branch banking
facility at this location which opened for business during May 1999. The
total capitalized cost to furnish, equip and remodel the Homer Township
branch location amounted to $863,868 as of June 30, 1999. Rent expense at
the Homer Township, Illinois location for the years ended June 30, 1999,
1998 and 1997 amounted to $43,641, $17,256 and $17,256 respectively.
Minimum rental commitments under the above leases are approximately as
follows:
Year ended June 30, 2000 $ 53,336
Year ended June 30, 2001 55,004
Year ended June 30, 2002 56,758
Thereafter through June 30, 2009 468,525
35
<PAGE>
9) PREPAID EXPENSES AND OTHER ASSETS
Prepaid expenses and other assets consist of the following:
<TABLE>
<CAPTION>
JUNE 30,
1999 1998
<S> <C> <C>
Prepaid federal insurance premiums $ 16,265 15,326
Prepaid insurance 27,910 44,866
Other prepaid expenses 111,966 72,422
Mortgage servicing rights 73,017 37,449
Overpayment of federal income tax 74,277 40,184
Deferred federal income tax benefit - net (a) 303,726 331,940
Accounts receivable and other assets 123,808 147,540
------- -------
$ 730,969 689,727
======= =======
</TABLE>
(a) The approximate tax effect of temporary differences that give rise
to the Company's net deferred tax asset at June 30, 1999 and 1998,
under SFAS 109 is as follows:
<TABLE>
<CAPTION>
ASSETS LIABILITIES NET
<S> <C> <C> <C>
JUNE 30, 1999
Loan fees deferred for financial
reporting purposes, net of costs $ - (43,849) (43,849)
Accelerated depreciation for tax
purposes - (88,478) (88,478)
Tax basis of office building in
excess of book basis 494,143 - 494,143
Bad debt reserves established for
financial reporting purposes 60,504 - 60,504
Increases to tax bad debt reserves
since January 1, 1988 - (58,992) (58,992)
Nondeductible incentive plan expense 6,451 - 6,451
Unrealized gain on securities
available for sale - (41,228) (41,228)
Other - (24,825) (24,825)
------- ------- -------
Total $ 561,098 (257,372) 303,726
======= ======= =======
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>
36
<PAGE>
10) DEPOSITS
Deposit accounts are summarized as follows:
<TABLE>
<CAPTION>
JUNE 30,
1999 1998
<S> <C> <C>
Passbook accounts $ 43,455,797 40,716,178
NOW accounts 8,754,952 8,265,836
Money market accounts 5,343,706 3,705,954
Non-interest bearing demand deposit accounts 9,277,757 7,823,387
----------- -----------
66,832,212 60,511,355
Certificates of deposit by original maturity:
7-91 days 2,713,083 2,630,620
6-11 months 24,554,159 20,796,435
12-29 months 14,720,322 13,286,120
30 months and over 7,552,838 7,183,846
Jumbo 3,851,970 3,353,470
----------- -----------
$ 120,224,584 107,761,846
=========== ===========
</TABLE>
The weighted average rate on deposit accounts at June 30, 1999 and 1998 was
3.61% and 3.85% respectively.
A summary of certificates of deposit by maturity is as follows:
<TABLE>
<CAPTION>
JUNE 30,
1999 1998
<S> <C> <C>
Within 12 months $ 50,407,705 40,712,462
12 months to 24 months 2,301,944 3,940,613
24 months to 36 months 682,723 2,597,416
---------- ----------
Total $ 53,392,372 47,250,491
========== ==========
</TABLE>
Interest expense on deposits consists of the following:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
1999 1998 1997
<S> <C> <C> <C>
Passbook accounts $ 1,229,227 1,184,927 1,228,031
Certificate accounts 2,547,398 2,329,762 2,311,239
NOW and money market accounts 402,426 354,257 371,259
--------- --------- ---------
Total $ 4,179,051 3,868,946 3,910,529
========= ========= =========
</TABLE>
The aggregate amount of deposit accounts with a balance of $100,000 or
greater was approximately $14,176,000 and $11,417,000 at June 30, 1999 and
1998 respectively. Deposits in excess of $100,000 are not insured by the
Federal Deposit Insurance Corporation.
37
<PAGE>
11) OTHER LIABILITIES
Other liabilities consist of the following:
<TABLE>
<CAPTION>
JUNE 30,
1999 1998
<S> <C> <C>
Accrued interest on deposits $ 29,520 24,789
Accrued real estate taxes 125,795 130,218
Other accrued expenses 100,469 90,076
Outstanding bank drafts 68,215 85,404
Other accounts payable 78,357 65,742
------- -------
$ 402,356 396,229
======= =======
</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, 1999, 1998 and
1997 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 $36,660,
$34,580 and $30,678 for the years ended June 30, 1999, 1998 and 1997,
respectively.
38
<PAGE>
13) OFFICER AND DIRECTOR PLANS
STOCK OPTION AND INCENTIVE PLAN
In conjunction with the Conversion, the Company adopted the 1993 Stock
Option and Incentive Plan (the "Stock Option Plan") for the benefit of the
senior officers and directors of the Company. The number of shares of
common stock authorized under the Stock Option Plan was 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 Company. These
options were granted at a price of at least 110% of the fair value per
share at the date of grant. These options had a five year expiration from
the date of grant and were subsequently exercised during the year ended
June 30, 1998. 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, 1999 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>
Outstanding at July 1, 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
Granted 0
Exercised 0
------ ----------- -------
Outstanding at June 30, 1999 8,625 $ 10.00-16.25 $ 97,031
====== =========== =======
Exercisable at June 30, 1999 8,625 $ 10.00-16.25 $ 97,031
====== =========== =======
Options available for future
grants at June 30, 1999 6,900
</TABLE>
As of June 30, 1999, the weighted average exercise price for options
outstanding was $11.25 with a weighted average remaining contractual life
of 4.67 years.
The Company 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 Company's employee stock options
equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized.
The Company has implemented SFAS No. 123 "Accounting for Stock-Based
Compensation". The Company will retain its current accounting method for
its stock based compensation plans. This statement will only result in
additional disclosures for the Company, and as such, its adoption is not
expected to have a material impact on the Company's financial condition or
its results of operations.
39
<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,
1999 1998 1997
<S> <C> <C> <C>
Net income (as reported) $ 364,719 594,593 295,818
Pro forma net income 364,719 594,593 293,041
Earnings per share - diluted (as reported) $ .99 1.66 .83
Pro forma diluted earnings per share .99 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 during 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 Company 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 Company.
This plan was established to award shares to employees in key management
positions in order to provide them with a proprietary interest in the
Company and to encourage them to remain with the Company. 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, 1999, 1998 and 1997, $32,435, $32,435 and $33,280 had
been amortized to expense. The unamortized cost, which is comparable to
deferred compensation, is reflected as a reduction of stockholders'equity.
40
<PAGE>
14) INCOME TAXES
The Company 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 Company 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, 1999 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,
1999 1998 1997
<S> <C> <C> <C>
Current $ 125,167 281,295 12,262
Deferred 61,734 57,059 88,549
------- ------- -------
$ 186,901 338,354 100,811
======= ======= =======
</TABLE>
A reconciliation of the statutory federal income tax rate to effective
income tax rate is as follows:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
1999 1998 1997
<S> <C> <C> <C>
Statutory federal income tax rate 34.0% 34.0% 34.0%
Provision for loss on real estate owned - 6.0 -
Recovery of loss on previous
disposition of real estate owned - - (10.3)
Other (.1) (3.7) 1.7
---- ---- ----
Effective income tax rate 33.9% 36.3% 25.4%
==== ==== ====
</TABLE>
Deferred federal income tax expense consists of the following tax effects of
timing differences:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
1999 1998 1997
<S> <C> <C> <C>
Loan fees $ 34,299 23,650 23,600
Depreciation 40,980 23,745 34,830
Book loan loss recovery (in excess of)
less than tax deduction (9,459) 44,920 12,260
Recapture of bad debt reserve (14,748) (31,560) -
Other 10,662 (3,696) 17,859
------ ------ ------
$ 61,734 57,059 88,549
====== ====== ======
</TABLE>
41
<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 all savings institutions 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, 1999, 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, 1999 and 1998, the Association's actual capital amounts and
ratios, minimum amounts and ratios required for capital adequacy purposes
and minimum amounts and ratios to meet the well-capitalized criteria under
prompt corrective action provisions, are 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, 1999
Tangible $ 8,485,918 6.53% $ 1,950,000 1.50% $ N/A N/A %
Core 8,485,918 6.53 3,900,000 3.00 6,500,000 5.00
Risk-based 8,648,872 20.54 3,367,976 8.00 4,209,971 10.00
JUNE 30, 1998
Tangible $ 8,622,538 7.33% $ 1,765,110 1.50% $ N/A N/A %
Core 8,622,538 7.33 3,530,220 3.00 5,883,700 5.00
Risk-based 8,757,669 23.36 2,999,165 8.00 3,748,955 10.00
</TABLE>
42
<PAGE>
15) REGULATORY CAPITAL REQUIREMENTS (CONTINUED)
<TABLE>
<CAPTION>
Tangible Core Risk-based
CAPITAL CAPITAL CAPITAL
<S> <C> <C> <C>
JUNE 30, 1999
Stockholders' equity $ 8,849,622 8,849,622 8,849,622
Unrealized gain on securities
available for sale, net of taxes (80,030) (80,030) (80,030)
Net book value of real estate owned
held greater than five years (276,372) (276,372) (276,372)
Retained mortgage servicing rights (7,302) (7,302) (7,302)
General loss allowances - - 177,954
Direct equity investments - - (15,000)
--------- --------- ---------
Regulatory capital computed $ 8,485,918 8,485,918 8,648,872
========= ========= =========
</TABLE>
A reconciliation of the Association's equity capital at June 30, 1999 is
as follows:
<TABLE>
<CAPTION>
<S> <C>
Stockholders' equity $ 8,995,529
Less Company stockholders' equity not available
for regulatory capital (145,907)
---------
Stockholders' equity of the Association $ 8,849,622
=========
</TABLE>
<TABLE>
<CAPTION>
Tangible Core Risk-based
CAPITAL CAPITAL CAPITAL
<S> <C> <C> <C>
JUNE 30, 1998
Stockholders' equity $ 8,767,637 8,767,637 8,767,637
Unrealized gain on securities
available for sale, net of taxes (145,099) (145,099) (145,099)
General loss allowances - - 150,131
Direct equity investments - - (15,000)
--------- --------- ---------
Regulatory capital computed $ 8,622,538 8,622,538 8,757,669
========= ========= =========
</TABLE>
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.
In addition, the Association may not declare or pay cash dividends on or
repurchase any of its shares of common stock if the effect thereof would
cause stockholders' equity to be reduced below applicable regulatory
capital maintenance requirements or if such declaration and payment would
otherwise violate regulatory requirements.
Unlike the Association, the Company is not subject to these regulatory
restrictions on the payment of dividends to its stockholders. However, the
Company's source of funds for future dividends may depend upon dividends
received by the Company from the Association.
43
<PAGE>
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 $842,100 at June 30, 1999
represents an amount which the Association plans to fund within the normal
commitment period of 60 to 90 days. All of the commitments are fixed rates
ranging from 6.75% to 8.50%. 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 $475,000 at June 30, 1999. In addition, the Association has
approved, but unused, credit card lines of credit amounting to
approximately $287,000. The Association has also issued outstanding letters
of credit totaling $50,000.
At June 30, 1999, the Association had committed to sell mortgage loans to
the Illinois Housing Development Authority in the amount of $416,700 and to
other third party lenders in the amount of $118,450.
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 believes that the Company and the Association are not
engaged in any legal proceedings of a material nature at the present time.
19) SUBSEQUENT EVENT
At the July 1999 Board of Directors' meeting, the Company declared a
quarterly dividend of $.075 per share, totaling $27,298, payable August 20,
1999 to shareholders of record as of August 10, 1999.
44
<PAGE>
20) 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, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
JUNE 30, 1999
Carrying Fair
AMOUNT VALUE
<S> <C> <C>
Financial assets:
Cash and cash equivalents $ 35,020,296 35,020,296
Investment securities, held to maturity 19,994,152 19,933,594
Investment securities, available for sale 5,098,307 5,098,307
Mortgage-backed securities, held to maturity 15,881,826 15,938,491
Loans receivable, gross 49,884,312 49,281,000
Financial liabilities:
Deposits 120,224,584 120,261,000
</TABLE>
<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
</TABLE>
45
<PAGE>
21) CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS
The following condensed statement of financial condition, as of June 30,
1999 and condensed statements of income and cash flows for the period from
July 23, 1998 to June 30, 1999 for Midland Capital Holdings Corporation
should be read in conjunction with the consolidated financial statements
and the notes thereto.
Statement of Financial Condition
JUNE 30, 1999
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Cash and cash equivalents $ 138,575
Equity investment in the Association 8,805,719
Prepaid expenses and other assets 23,632
---------
8,967,926
---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Other liabilities 16,300
Common stock 3,640
Additional paid-in capital 3,262,395
Retained earnings 5,685,591
---------
$ 8,967,926
---------
Statement of Income
PERIOD FROM JULY 23, 1998 TO JUNE 30, 1999
Interest income $ 2,920
Non-interest expense 91,099
-------
Net loss before income tax benefit
and equity in earnings of subsidiaries (88,179)
Benefit from income taxes 29,981
-------
Net loss before equity in earnings
of subsidiaries (58,198)
Equity in earnings of subsidiaries 422,917
-------
Net income $ 364,719
=======
</TABLE>
46
<PAGE>
21) CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS (CONTINUED)
Statement of Cash Flows
PERIOD FROM JULY 23, 1998 TO JUNE 30, 1999
<TABLE>
<CAPTION>
<S> <C>
Cash flows from operating activities:
Net income $ 364,719
Equity in earnings of the Association (422,917)
Increase in prepaid expenses and other assets (23,632)
Increase in other liabilities 16,300
-------
Net cash provided for operating activities (65,530)
-------
Cash flows from investing activities:
Purchase of common stock of the Association (4,000)
-------
Net cash provided for investing activities (4,000)
-------
Cash flows from financing activities:
Dividends received from Association 317,298
Dividends paid on common stock (109,193)
Net cash provided by financing activities 208,105
-------
Net increase in cash and cash equivalents 138,575
Cash and cash equivalents at beginning of period -
-------
Cash and cash equivalents at end of period $ 138,575
=======
</TABLE>
47
<PAGE>
MIDLAND CAPITAL HOLDINGS CORPORATION
AND SUBSIDIARIES
Consolidating Statement of Financial Condition
JUNE 30, 1999
<TABLE>
<CAPTION>
Midland
Capital Midland Federal Midland MS Bridgeview
Holdings Savings and Loan Service Insurance Development
Corporation Association Corporation Agency Company Eliminations Consolidated
----------- ---------------- ----------- -------- ----------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Cash and amounts due from
depository institutions $ 1,612 3,933,558 501 3,703 2,246 (c) 7,962 3,933,658
Interest-bearing deposits 136,963 31,086,638 197,425 4,628 (c) 339,016 31,086,638
----------- ------------ ------- ------ ------ ---------- -----------
Total cash and cash
equivalents 138,575 35,020,196 197,926 3,703 6,874 346,978 35,020,296
Investment securities, held
to maturity 19,994,152 19,994,152
Investment securities available
for sale 5,098,307 5,098,307
Mortgage-backed securities,
held to maturity 15,881,826 15,881,826
Loans receivable 48,914,195 48,914,195
Loans receivable held for sale 435,150 435,150
Real estate owned 276,372 276,372
Stock in Federal Home Loan Bank
of Chicago 636,000 636,000
Accrued interest receivable 611,966 611,966
Office properties and equipment 2,588,362 5,688 2,594,050
Investment in subsidiary 8,805,719 180,880 (8,739) (a) 6,640 --
(b) 8,971,220
Prepaid expenses and other assets 23,632 749,205 10,487 46,217 (d) 98,572 730,969
----------- ------------ ------- ------ ------ ---------- -----------
Total assets 8,967,926 130,386,611 189,187 19,878 53,091 9,423,410 130,193,283
=========== ============ ======= ====== ====== ========== ===========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Deposits 120,571,562 (c) 346,978 120,224,584
Advance payments by borrowers for
taxes and insurance 570,814 570,814
Other liabilities 16,300 394,613 8,307 79,760 1,948 (d) 98,572 402,356
Common stock 3,640 3,640 1,000 1,000 1,000 (a) 6,640 3,640
Additional paid-in capital 3,262,395 3,275,315 (b) 3,266,395 3,271,315
Retained earnings 5,685,591 5,535,684 179,880 (60,882) 50,143 (b) 5,704,825 5,685,591
Accumulated other comprehensive
income, net of income taxes 80,030 80,030
Common stock awarded by Bank
Incentive Plan (45,047) (45,047)
----------- ------------ ------- ------ ------ ---------- -----------
Total liabilities and
stockholders' equity $ 8,967,926 130,386,611 189,187 19,878 53,091 9,423,410 130,193,283
=========== ============ ======= ====== ====== ========== ===========
Elimination of intercompany items:
(a) Common Stock
(b) Investment in subsidiaries
(c) Deposit accounts
(d) Accounts receivable and payable
</TABLE>
48
<PAGE>
MIDLAND CAPITAL HOLDINGS CORPORATION
AND SUBSIDIARIES
Consolidating Statement of Income
Year ENDED JUNE 30, 1999
<TABLE>
<CAPTION>
Midland
Capital Midland Federal Midland MS Bridgeview
Holdings Savings and Loan Service Insurance Development
Corporation Association Corporation Agency Company Eliminations Consolidated
----------- ---------------- ----------- -------- ----------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Interest income:
Interest on loans $ 3,442,351 3,442,351
Interest on mortgage-backed
securities 1,214,401 1,214,401
Interest on investment
securities 1,212,855 1,212,855
Interest on interest-bearing
deposits 2,920 1,425,567 6,564 154 (c) 9,638 1,425,567
Dividends on FHLB stock 37,435 37,435
---------- ------------ ------- ------ ------ ---------- -----------
Total interest income 2,920 7,332,609 6,564 -- 154 9,638 7,332,609
---------- ------------ ------- ------ ------ ---------- -----------
Interest expense:
Interest on deposits 4,188,689 (c) 9,638 4,179,051
---------- ------------ ------- ------ ------ ---------- -----------
Total interest expense 4,188,689 -- -- -- 9,638 4,179,051
---------- ------------ ------- ------ ------ ---------- -----------
Net interest income before
provision for loan losses 2,920 3,143,920 6,564 -- 154 -- 3,153,558
Provision for loan losses -- --
---------- ------------ ------- ------ ------ ---------- -----------
Net interest income after
provision for loan losses 2,920 3,143,920 6,564 -- 154 -- 3,153,558
---------- ------------ ------- ------ ------ ---------- -----------
Non-interest income:
Loan fees and service charges 300,328 300,328
Commission income 105,116 105,116
Profit on sale of loans 45,154 45,154
Profit on sale of real estate
owned - net 21,602 21,602
Profit (loss) from subsidiary 422,917 913 (2,759) (a) 422,917 --
(a) 913
(a) (2,759)
Deposit related fees and other
income 752,719 1,537 (b) 71,112 683,144
---------- ------------ ------- ------ ------ ---------- -----------
Total non-interest income 422,917 1,120,716 (2,759) 105,116 1,537 492,183 1,155,344
---------- ------------ ------- ------ ------ ---------- -----------
Non-interest expense:
Staffing costs 1,914,672 93,456 2,008,128
Advertising 92,771 497 93,268
Occupancy and equipment
expenses 571,715 6,179 (b) 1,800 576,094
Data processing 199,828 199,828
Federal deposit insurance
premiums 64,047 64,047
Provision for loss on real
estate owned 1,527 1,527
Other 91,099 780,719 1,000 10,369 515 (b) 69,312 814,390
---------- ------------ ------- ------ ------ ---------- -----------
Total non-interest
expense 91,099 3,625,279 1,000 110,501 515 71,112 3,757,282
---------- ------------ ------- ------ ------ ---------- -----------
Income (loss) before
income taxes 334,738 639,357 2,805 (5,385) 1,176 421,071 551,620
Provision for income taxes
(benefit) (29,981) 216,440 1,892 (1,850) 400 186,901
---------- ------------ ------- ------ ------ ---------- -----------
Net income (loss) $ 364,719 422,917 913 (3,535) 776 421,071 364,719
========== ============ ======= ====== ====== ========== ===========
Elimination of intercompany items:
(a) Income of subsidiary
(b) Office rental and fees
(c) Interest on deposits
</TABLE>
49
<PAGE>
Officers and Directors
Officers Directors
Paul Zogas Paul Zogas
President, President, Chief Executive Officer,
Chief Executive Officer Chief Financial Officer and
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
and the Association Director, 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.
50
<PAGE>
Corporate Information
Investor Information
Midland Capital Holdings Corporation is the thrift holding company for Midland
Federal Savings and Loan Association. 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 to 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 20, 1999, 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 numbers, 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, 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
51
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
Parent Subsidiary Ownership Organization
- -------------------------------------------------------------------------------
Midland Capital Holdings Midland Federal Savings 100% Federal
Corporation and Loan
Association
Midland Federal Savings Midland Service Corporation 100% Illinois
and Loan Association
The financial statements of the Registrant are consolidated with those of
its subsidiary.
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
ANNUAL REPORT ON FORM 10-KSB FOR THE YEAR ENDED JUNE 30, 1999 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> JUN-30-1999
<CASH> 3,933,658
<INT-BEARING-DEPOSITS> 31,086,638
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 5,098,307
<INVESTMENTS-CARRYING> 35,875,978
<INVESTMENTS-MARKET> 35,872,085
<LOANS> 49,715,208
<ALLOWANCE> 365,863
<TOTAL-ASSETS> 130,193,283
<DEPOSITS> 120,224,584
<SHORT-TERM> 0
<LIABILITIES-OTHER> 973,170
<LONG-TERM> 0
<COMMON> 3,640
0
0
<OTHER-SE> 8,991,889
<TOTAL-LIABILITIES-AND-EQUITY> 130,193,283
<INTEREST-LOAN> 3,442,351
<INTEREST-INVEST> 3,890,258
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 7,332,609
<INTEREST-DEPOSIT> 4,179,051
<INTEREST-EXPENSE> 4,179,051
<INTEREST-INCOME-NET> 3,153,558
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 3,757,282
<INCOME-PRETAX> 551,620
<INCOME-PRE-EXTRAORDINARY> 551,620
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 364,719
<EPS-BASIC> 1.00
<EPS-DILUTED> 0.99
<YIELD-ACTUAL> 2.73
<LOANS-NON> 381,000
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 393,884
<CHARGE-OFFS> 29,897
<RECOVERIES> 1,876
<ALLOWANCE-CLOSE> 365,863
<ALLOWANCE-DOMESTIC> 187,909
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 177,954
</TABLE>
