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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, 2000
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ____________ to ____________
Commission File Number 1-14343
MIDLAND CAPITAL HOLDINGS CORPORATION
(Name of Small Business Issuer in its Charter)
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 $372,000 in net income for the fiscal year ended June 30,
2000.
As of June 30, 2000, 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, 2000.
PART III of Form 10-KSB - Proxy Statement for the 2000 Annual Meeting of
Stockholders.
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1
<PAGE>
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, 2000, Midland Federal had $137.2
million of assets, deposits of $126.9 million and stockholders equity of $9.3
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
2
<PAGE>
Company's market area, changes in policies by regulatory agencies, fluctuations
in interest rates, demand for loans in the Company's market area and
competition, all or some of which could cause actual results to differ
materially from historical earnings and those presently anticipated or
projected. The Company wishes to caution readers not to place undue reliance on
any such forward-looking statements, which speak only as of the date made and
are subject to the above-stated qualifications in any event. The Company wishes
to advise readers that the factors listed above could affect the Company's
financial performance and could cause the Company's actual results for future
periods to differ materially from any opinions or statements expressed with
respect to future periods in any current statements.
The Company does not undertake and specifically declines any obligation to
publicly release the result of any revisions which may be made to any
forward-looking statements to reflect events or circumstances after the date of
such statements or to reflect the occurrence of anticipated or unanticipated
events.
Lending Activities
------------------
General. 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.
Residential real estate loans are generally approved by the Loan Committee
in amounts up to $350,000. Residential real estate loans may also be approved by
the Chief Lending Officer in
3
<PAGE>
amounts up to $200,000 or the President in amounts up to $252,700 and then
ratified by the Loan Committee or the Board of Directors. Residential real
estate loans in amounts over $350,000 must be approved by the Board of
Directors. Non-residential real estate loans are generally approved by the Board
of Directors. Non-residential real estate loans may also be approved by the
President in amounts up to $252,700 and then ratified by the Board of Directors.
The Chief Lending Officer and the President each have approval authority for any
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.
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, 2000, 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 $638,000 and was
secured by a single family residence. Both loans are current and performing in
accordance with their terms at June 30, 2000. See "-- Non-Performing Assets,
Classified Assets, Loan Delinquencies and Defaults."
4
<PAGE>
Loan and Mortgage-backed Securities Portfolio Composition. The following
table sets forth information concerning the composition of the Association's
loan and mortgage-backed securities portfolios in dollar amounts and in
percentages as of the dates indicated.
<TABLE>
June 30,
---------------------------------------------------------------------------
2000 1999 1998
---------------------------------------------------------------------------
Amount Percent Amount Percent Amount Percent
---------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Real Estate Loans
-----------------
One- to four-family..................................... $49,545 91.84% $46,032 92.28% $35,030 87.82%
Multi-family............................................ 1,640 3.04 1,713 3.43 1,790 4.49
Non-residential......................................... 440 0.82 223 0.45 244 0.61
Construction............................................ 486 0.90 --- --- 450 1.13
---------- ------ ------- ------ ------- ------
Total mortgage loans................................. 52,111 96.60 47,968 96.16 37,514 94.05
-------- ------ ------- ------- ------- ------
Other Loans
-----------
Consumer Loans:
Deposit accounts....................................... 277 0.51 274 0.55 464 1.16
Student................................................ 1,016 1.88 1,167 2.34 1,316 3.30
Automobile............................................. 323 0.60 274 0.55 372 0.93
Credit card............................................ 97 0.18 85 0.17 73 0.19
Other.................................................. 81 0.15 58 0.11 76 0.19
---------- ------- ------- ------ ------- -----
Total consumer loans................................ 1,794 3.32 1,858 3.72 2,301 5.77
--------- ------- -------- ------ ------- -----
Commercial business loans.............................. 41 0.08 58 0.12 71 0.18
---------- ------- ------- ------ ------ ------
Total loans receivable.............................. 53,946 100.00% 49,884 100.00% 39,886 100.00%
-------- ====== ------- ====== ------ ======
Less
----
Loans in process........................................ 414 4 41
Deferred yield adjustments.............................. (128) (95) 17
Allowance for uncollected interest...................... 261 260 262
Allowance for loan losses............................... 369 366 394
---------- ------- -------
Loans receivable, net............................... $53,030 $49,349 $39,172
======= ======= =======
Mortgage-backed securities:
FHLMC.................................................. $17,341 79.00% $10,245 64.53% $14,256 68.49%
FNMA................................................... 4,375 19.93 5,318 33.49 6,147 29.53
GNMA................................................... 219 1.00 295 1.86 389 1.87
Collateralized mortgage obligation..................... 15 0.07 19 0.12 24 0.11
---------- ------- ------- ------ ------- ------
Total mortgage-backed securities..................... 21,950 100.00% 15,877 100.00% 20,816 100.00%
====== ====== ======
Net premiums (discounts)............................... (96) 5 29
---------- ------- -------
Net mortgage-backed securities......................... $21,854 $15,882 $20,845
======= ======= =======
</TABLE>
5
<PAGE>
The following table shows the composition of the Association's loan
portfolio by fixed and adjustable-rate at the dates indicated.
<TABLE>
June 30,
--------------------------------------------------------------------------
2000 1999 1998
--------------------------------------------------------------------------
Amount Percent Amount Percent Amount Percent
--------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Fixed-Rate Loans
----------------
Real Estate:
One- to four-family..................................... $44,038 81.63% $42,988 86.18% $32,057 80.37%
Multi-family............................................ 214 0.40 216 0.43 217 0.54
Non-residential......................................... 280 0.52 49 0.10 58 .15
-------- ------ ------- ------ ------ ------
Total real estate loans............................. 44,532 82.55 43,253 86.71 32,332 81.06
-------- ------ ------- ------ ------ ------
Consumer................................................ 465 0.86 393 0.79 507 1.27
-------- ------ ------- ------ ------ ------
Total fixed-rate loans............................... 44,997 83.41 43,646 87.50 32,839 82.33
-------- ------ ------- ------ ------ ------
Adjustable-Rate Loans
--------------------
Real estate:
One- to four-family..................................... 5,507 10.21 3,044 6.10 2,973 7.45
Multi-family............................................ 1,426 2.64 1,497 3.00 1,573 3.94
Non-residential......................................... 160 0.30 174 0.35 186 0.47
Construction............................................ 486 0.90 --- --- 450 1.13
-------- ------ ------- ------ ------- ------
Total real estate loans.............................. 7,579 14.05 4,715 9.45 5,182 12.99
-------- ------ ------- ------ ------- ------
Consumer................................................ 1,329 2.46 1,465 2.93 1,794 4.50
Commercial business..................................... 41 0.08 58 0.12 71 0.18
-------- ------ ------- ------ ------- ------
Total adjustable-rate loans.......................... 8,949 16.59 6,238 12.50 7,047 17.67
-------- ------ ------- ------- ------- ------
Total loans, net..................................... 53,946 100.00% 49,884 100.00% 39,886 100.00%
====== ====== ======
Less:
----
Loans in process........................................ 414 4 41
Deferred yield adjustments.............................. (128) (95) 17
Allowance for uncollected interest...................... 261 260 262
Allowance for loan losses............................... 369 366 394
-------- ------- -------
Loans receivable, net................................ $53,030 $49,349 $39,172
======= ======= =======
6
<PAGE>
The following schedule illustrates the interest rate sensitivity of the
Association's loan portfolio at June 30, 2000. Mortgages which have adjustable
or renegotiable interest rates are shown as maturing in the period during which
the contract is due. The schedule does not reflect the effects of possible
prepayments or enforcement of due-on-sale clauses or interest rate adjustments.
Real Estate
-------------------------------------------------------
Multi-Family Construction or Commercial
One- to Four-Family and Commercial Development Consumer Business Total
--------------------------------------------------------------------------------------------------------------
Weighted Weighted Weighted Weighted Weighted Weighted
Average Average Average Average Average Average
Amount Rate Amount Rate Amount Rate Amount Rate Amount Rate Amount Rate
----------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
Due During Years
Ending June 30,
----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
2001(1)..............$ 332 8.90% $ 764 10.01% $486 10.50% $ 456 8.91% $41 ---% $ 2,079 9.51%
2002................. 98 8.62 --- --- --- --- 120 7.58 --- --- 218 8.05
2003................. 427 8.94 --- --- --- --- 263 7.46 --- --- 690 8.38
2004 to 2005......... 1,422 8.51 262 8.61 --- --- 391 8.03 --- --- 2,075 8.43
2006 to 2009......... 4,272 7.59 1,054 9.08 --- --- 405 7.83 --- --- 5,731 7.88
2010 to 2024......... 17,358 7.36 --- --- --- --- 159 9.04 --- --- 17,517 7.38
2025 and following... 25,636 7.37 --- --- --- --- --- --- --- --- 25,636 7.37
-------- ------ ---- ----- --- -------
$49,545 $2,080 $486 $1,794 $41 $53,946 7.56%
======= ====== ==== ====== === =======
</TABLE>
(1) Includes demand loans, loans having no stated maturity and overdraft loans.
The total amount of loans due after June 30, 2001 which have predetermined
interest rates is approximately $44.63 million while the total amount of loans
due after such date which have floating or adjustable interest rates is
approximately $7.23 million.
7
<PAGE>
One- to Four-Family Residential Real Estate Lending
---------------------------------------------------
The Association's primary lending activity has been the origination and
purchase of permanent loans secured by mortgages on owner-occupied one- to
four-family residences. At June 30, 2000, $49.5 million or 91.8%, of the
Association's gross loan portfolio consisted of permanent loans on one- to
four-family residences. Most of these loans were secured by properties located
in the State of Illinois, with a substantial majority located in the
Association's primary market area. At June 30, 2000, approximately $708,000 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, 2000, the total balance of one- to four-family ARMs was $5.5
million, or 10.2% of the Association's gross loan portfolio.
The Association also originates home equity lines of credit which were
funded in the amount of $783,000 at June 30, 2000, and home equity loans, which
were $1.8 million at June 30, 2000. Unfunded commitments on home equity lines of
credit totaled $581,000 at June 30, 2000. 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
8
<PAGE>
Board of Directors has authorized originations of mortgage loans with
loan-to-value ratios of up to 90%. On any mortgage loan exceeding an 80%
loan-to-value ratio at the time of origination, Midland Federal generally
requires private mortgage insurance on the excess.
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 $1.6 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 $1.6
million at June 30, 2000. The net amount of such loans which was non-performing
at June 30, 2000 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.
9
<PAGE>
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, 2000, student loans amounted to $1.0 million or 1.9%
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, 2000, the Association had $323,000, or .60% of its
gross loan portfolio in automobile loans.
Lines of credit extended through the Association's Visa credit card program
is 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, 2000, the Association had $97,000 or .18% of its
gross loan portfolio in credit card loans.
Consumer loans may entail greater risk than residential mortgage loans,
particularly in the case of consumer loans which are unsecured or secured by
rapidly depreciable assets such as automobiles. In such cases, any repossessed
collateral for defaulted consumer loans may not provide adequate sources of
repayment for the outstanding loan balances as a result of the greater
likelihood of damage, loss or depreciation. In addition, consumer loan
collections are dependent on the borrower's continuing financial stability, and
thus are more likely to be affected by adverse personal
10
<PAGE>
circumstances. Furthermore, the application of various federal and state laws,
including federal and state bankruptcy and insolvency laws, may limit the amount
which can be recovered on such loans. Although the level of delinquencies in the
Association's consumer loan portfolio has generally been low, there can be no
assurance that delinquencies will not increase in the future.
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, 2000, $440,000, or .82% 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 $21.9 million at June 30, 2000. 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, 2000. It should be noted
that, due to prepayments, the actual maturity of the Association's long term
mortgage-backed securities will likely be significantly shorter than the
contractual maturities.
<TABLE>
Due in Balance Outstanding
---------------------------------------------------------------
1 to 5 6 to 20 Over 20
Years Years Years Fixed Adjustable
---------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Federal Home Loan Mortgage Corporation.............. $11,239 $1,752 $4,256 $11,239 $6,008
Federal National Mortgage Association............... 403 3,217 753 1,353 3,020
Government National Mortgage Association............ --- 219 --- 219 ---
Collateralized Mortgage Obligations................. --- 15 --- 15 ---
------- ------ ------ ------- ------
Total.......................................... $11,642 $5,203 $5,009 $12,826 $9,028
======= ====== ====== ======= ======
</TABLE>
11
<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, 2000, 1999 and 1998, 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.
<TABLE>
Year Ended June 30,
-------------------------------------
2000 1999 1998
-------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C>
Loans receivable:
Adjustable-Rate:
Real estate - one- to four-family................... $ 2,864 $ 784 $ 239
- construction..................... 486 --- 408
Non-real estate - consumer.......................... 946 1,031 1,450
-------- ---------- ---------
Total adjustable rate...................... 4,296 1,815 2,097
-------- ---------- ---------
Fixed-Rate:
Real estate - One- to four-family................... 10,357 22,503 14,916
Non-residential..................................... 243 --- ---
Non-real estate - consumer.......................... 600 528 493
-------- ----------- ---------
Total fixed-rate........................... 11,200 23,031 15,409
-------- --------- ---------
Total loans originated..................... 15,496 24,846 17,506
-------- --------- ---------
Real estate loans sold.............................. (3,173) (3,298) (2,197)
Transfer of loans to foreclosed real estate......... --- --- (58)
Principal repayments................................ (8,261) (11,549) (9,804)
-------- --------- ---------
Net increase........................................ $ 4,062 $ 9,999 $ 5,447
======== ========= =========
Mortgage-backed securities:
Mortgage-backed securities purchased................ $ 10,007 $ 1,102 $ 4,592
Mortgage-backed securities sold..................... --- --- ---
Amortization and repayments......................... (4,035) (6,065) (5,663)
-------- ---------- --------
Net increase (decrease)............................. $ 5,972 $ (4,963) $(1,071)
======== ========= =======
</TABLE>
The Association's total loan originations decreased from the prior year
primarily as a result of higher interest rates which decreased demand for
mortgage loans, including mortgage loan refinancing.
12
<PAGE>
Non-Performing Assets, Classified Assets, Loan Delinquencies and Defaults
-------------------------------------------------------------------------
When a borrower fails to make a required payment on a loan, the Association
attempts to cause the deficiency to be cured by contacting the borrower. A
notice is mailed to the borrower and late charges are assessed after a payment
is 30 days past due. Five days after the late notice is mailed, the Loan Service
Counselor/Collector will contact the borrower by telephone. After a payment is
60 days past due, the Loan Service Counselor/Collector conducts a personal
interview with the borrower after which if the loan continues to be delinquent,
it is referred to the Loan Service Manager. After the 90th day of delinquency,
the Association institutes action to foreclose on the property or to acquire it
by deed in lieu of foreclosure. If foreclosed on, real property is sold at a
public sale and may be purchased by the Association. A decision as to whether
and when to initiate foreclosure proceedings is based on such factors as the
amount of the outstanding loan in relation to the original indebtedness and the
current value of the property, the extent of delinquency and the borrower's
ability and willingness to cooperate in curing delinquencies. Generally, when a
loan becomes delinquent 90 days or more, the Association will place the loan on
a non-accrual status and, as a result, previously accrued interest income on the
loan is taken out of current income. Future interest income is recognized on a
cash basis. The loan will remain on a non-accrual status as long as the loan is
90 days delinquent, unless a repayment plan is being followed.
13
<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, 2000 and
June 30, 1999. The balances included in the table do not reflect specific
reserves.
<TABLE>
At June 30, 2000
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
------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate:
One- to four-family... 10 $593 1.20% 2 $122 0.24% 4 $232 0.47% 16 $ 947 1.91%
Multi-family.......... --- --- --- --- --- --- 3 155 9.45 3 155 9.45
Non-residential......... --- --- --- 1 19 4.32 --- --- --- 1 19 4.32
Consumer................ --- --- --- 1 6 0.33 13 54 3.01 14 60 3.34
Commercial business..... --- --- --- --- --- --- 7 4 9.76 7 4 9.76
---- --- ---- --- ---- ---- ------
Total.............. 10 $593 1.10% 4 $147 0.27% 27 $445 0.83% 41 $1,185 2.20%
=== ==== === ==== === ==== ==== ======
</TABLE>
<TABLE>
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
----------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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>
14
<PAGE>
The table below sets forth the amounts and categories of non-performing
assets, shown net of specific reserves, in the Association's loan portfolio.
Loans are placed on non-accrual status when the collection of principal and/or
interest becomes doubtful, generally when the loan is delinquent 90 days or
more. Foreclosed assets include assets acquired in settlement of loans.
<TABLE>
At June 30,
-------------------------------------------
2000 1999 1998
-------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C>
Non-Accruing Loans:
One- to four-family................................ $232 $162 $ 220
Multi-family....................................... 38 38 38
Consumer........................................... 13 --- 2
Commercial business............................... 1 24 3
---- ---- ------
Total........................................... 284 224 263
---- ---- ------
Accruing loans delinquent 90 days or more:
Multi-family....................................... --- --- ---
---- ---- ------
Total........................................... --- --- ---
---- ---- ------
Foreclosed Assets:
One- to four-family................................ --- 276 747
---- ---- ------
Total........................................... --- 276 747
---- ---- ------
Total non-performing assets.......................... $284 $500 $1,010
==== ==== ======
Total as a percentage of total assets................ .21% .38% .86%
==== ==== =====
</TABLE>
As of June 30, 2000, 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, 2000, gross interest income which would
have been recorded had the non-accruing loans been current in accordance with
their original terms amounted to $9,000, which interest income was not accrued
into interest income for the fiscal year ended June 30, 2000.
Non-Accruing Loans. As of June 30, 2000, 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
$232,000 and consisted of four loans secured by properties located in the
Association's primary market area.
As of June 30, 2000, 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
15
<PAGE>
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, 2000, the Association had
classified a total of $394,000 of its assets as substandard, none as doubtful,
$146,000 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 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 no loan charge-offs during fiscal 2000. During fiscal
2000, the Company increased its general allowance for loan losses to $185,000 at
fiscal year end from $178,000 at the prior fiscal year end. At fiscal year end,
the $185,000 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 $7,000 increase in the Company's
general
16
<PAGE>
allowance for loan losses during fiscal 2000 was the result of $48,000 in
recoveries from fully reserved loans which loss reserves were transferred from
specific allowance to general and $3,000 in recoveries from loans previously
charged off. These loan loss recoveries were offset by $44,000 in loans that
were specifically reserved 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, 2000 the Association had a total allowance for
losses on loans of $369,000 or .68% of total loans. See Note 5 of the Notes to
Financial Statements in the Annual Report to Stockholders filed as Exhibit 13
hereto.
The following table sets forth an analysis of the Association's allowance
for loan losses.
<TABLE>
Year Ended June 30,
------------------------------------------
2000 1999 1998
------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C>
Balance at beginning of period....................... $366 $394 $ 551
Charge-offs:
One- to four-family................................. --- --- ---
Consumer............................................ --- 7 ---
Commercial business................................. --- 23 ---
----- ---- -----
--- 30 ---
----- ---- -----
Recoveries:
One- to four-family................................. --- --- ---
Consumer............................................ 3 2 3
----- ---- -----
Total recoveries................................ 3 2 3
----- ---- -----
Net charge-offs...................................... 3 (28) 3
Additions charged to operations...................... --- --- (160)
----- ---- -----
Balance at end of period............................. $369 $366 $ 394
==== ==== =====
Ratio of net charge-offs during the period to
average loans outstanding during the period......... ---% .06% ---%
Ratio of net charge-offs during the period to
average non-performing assets....................... ---% 2.68% ---%
Allowance for loan losses to
non-performing loans(1)............................. 65.24% 79.66% 57.16%
Allowance for loan losses to total loans............. .69% .74% 1.00%
</TABLE>
--------------
(1) General valuation allowances to non-performing loans (net of specific
allowances).
17
<PAGE>
The following table presents the portions of the allowance for loan losses
applicable to each loan category.
<TABLE>
June 30,
-----------------------------------------------------------------------------
2000 1999 1998
-----------------------------------------------------------------------------
Percent Percent Percent
of Loans of Loans of Loans
in Each in Each in Each
Category Category Category
to Total to Total to Total
Amount Loans Amount Loans Amount Loans
-----------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
One- to four-family.............. $102 91.84% $ 70 92.28% $ 78 87.82%
Multi-family..................... 126 3.04 166 3.43 208 4.49
Non-residential.................. 1 0.82 --- 0.45 --- .61
Construction..................... --- 0.90 --- --- --- 1.13
Consumer......................... 67 3.32 35 3.72 48 5.77
Commercial business.............. 3 0.08 --- 0.12 --- .18
Unallocated...................... 70 --- 95 --- 60 ---
---- ------ ---- ------ ---- ------
Total....................... $369 100.00% $366 100.00% $394 100.00%
==== ====== ==== ====== ==== ======
</TABLE>
Investment Activities
---------------------
As a part of its asset/liability management strategy and as a response to a
relatively high level of competition 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, 2000, the Association's liquidity ratio (specified liquid assets as a
percentage of net withdrawable savings and current borrowings) was 52.9%.
At June 30, 2000, the Association's interest-bearing deposits in other
financial institutions totaled $29.6 million, or 21.6% of its total assets, and
investment securities totaled $25.0 million, or 18.2% of its total assets. As of
such date, the Association also had a $728,000 investment in the common stock of
the FHLB of Chicago in order to satisfy the requirement for membership in this
institution. At June 30, 2000, the average term to maturity or repricing of the
investment securities portfolio was approximately two years.
18
<PAGE>
The following table sets forth the composition of the Association's
investment portfolio at the dates indicated.
<TABLE>
At June 30,
---------------------------------------------------------------------
2000 1999 1998
---------------------------------------------------------------------
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................. $20,969 $21,025 $20,971 $21,063 $21,185 $21,226
U.S. agency securities..................... 4,000 3,914 4,000 3,969 --- ---
FHLB - Chicago stock....................... 728 728 636 636 554 554
------- ------- ------- ------- ------- -------
Total investment securities.............. $25,697 $25,667 $25,607 $25,668 $21,739 $21,780
======= ======= ======= ======= ======= =======
Interest-bearing deposits:
FHLB daily investment...................... $17,625 $17,625 $19,723 $19,723 $18,522 $18,522
Other daily investments.................... 12,005 12,005 11,364 11,364 10,816 10,816
------- ------- -------- -------- ------- -------
Total interest-bearing deposits........... $29,630 $29,630 $31,087 $31,087 $29,338 $29,338
======= ======= ======= ======= ======= =======
</TABLE>
The composition and maturities of the investment securities portfolio,
excluding FHLB of Chicago stock, are indicated in the following table.
<TABLE>
June 30, 2000
----------------------------------------------------------------------
1 Year 1 to 5 Over Total Investment
or Less Years 10 Years Securities
----------------------------------------------------------------------
Weighted
Book Book Book Book Fair Average
Value Value Value Value Value Yield
----------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
U.S. government and agency securities....... $9,999 $13,992 $978 $24,969 $24,939 5.63%
</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.
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").
19
<PAGE>
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.
<TABLE>
Year Ended June 30,
------------------------------------------------------------------------------
2000 1999 1998
------------------------------------------------------------------------------
<S> <C> <C> <C>
Opening balance...................................... $ 120,225 $ 107,762 $ 102,973
Deposits............................................. 438,125 388,101 360,039
Withdrawals.......................................... (436,191) (379,590) (358,909)
--------- --------- ---------
Balance before interest credited..................... 122,159 116,273 104,103
Interest credited.................................... 4,712 3,952 3,659
--------- --------- ---------
Ending balance....................................... $ 126,871 $ 120,225 $ 107,762
========= ========= =========
Net increase......................................... $ 6,646 $ 12,463 $ 4,789
========= ========== =========
Percent increase..................................... 5.53% 11.57% 4.65%
===== ===== ======
</TABLE>
20
<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>
June 30,
--------------------------------------------------------------------------
2000 1999 1998
--------------------------------------------------------------------------
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
--------------------------------------------------------------------------
Interest Rate Range:
--------------------
<S> <C> <C> <C> <C> <C> <C>
Passbook accounts....................... $ 42,814 33.75% $ 43,456 36.15% $ 40,716 37.78%
NOW accounts............................ 9,829 7.75 8,755 7.28 8,266 7.67
Money market accounts................... 8,364 6.59 5,343 4.44 3,706 3.44
Non-interest bearing deposits........... 9,109 7.18 9,278 7.72 7,823 7.26
--------- ----- -------- ----- -------- -----
Total non-certificates................ 70,116 55.27 66,832 55.59 60,511 56.15
--------- ----- -------- ----- -------- -----
</TABLE>
<TABLE>
Certificates:
--------------
<S> <C> <C> <C> <C> <C> <C>
Interest rate range:
4.00 - 4.99%........................... 16,284 12.83 36,937 30.72 --- ---
5.00 - 5.99%........................... 36,309 28.62 16,456 13.69 47,151 43.75
6.00 - 6.99%........................... 4,162 3.28 --- --- 100 .10
--------- ------ -------- ------ -------- ------
Total certificates................... 56,755 44.73 53,393 44.41 47,251 43.85
--------- ------ -------- ------ -------- ------
Total deposits....................... $126,871 100.00% $120,225 100.00% $107,762 100.00%
======== ====== ======== ====== ======== ======
</TABLE>
The following table shows rate and maturity information for the
Association's time deposits as of June 30, 2000.
<TABLE>
4.00- 5.00- 6.00- Percent
4.99 5.99 6.99 Total of Total
------------------------------------------------------------------------
(Dollars in Thousands)
Certificate Accounts Maturing
in Quarter Ending:
<S> <C> <C> <C> <C> <C>
September 30, 2000..................... $ 9,616 $11,868 $ 47 $21,531 37.94%
December 31, 2000...................... 2,870 13,870 2,027 18,767 33.06
March 31, 2001......................... 2,570 7,049 1,214 10,833 19.09
June 30, 2001.......................... 179 2,547 868 3,594 6.33
September 30, 2001..................... 397 65 --- 462 0.81
December 31, 2001...................... 218 87 6 311 0.55
March 31, 2002......................... 255 55 --- 310 0.55
June 30, 2002.......................... 179 76 --- 255 0.45
September 30, 2002..................... --- 447 --- 447 0.79
December 31, 2002...................... --- 245 --- 245 0.43
-------- ------- -------- ------- ------
Total............................. $ 16,284 $36,309 $ 4,162 $56,755 100.00%
======== ======= ======== ======= ======
Percent of total.................. 28.69% 63.98% 7.33% 100.00%
===== ===== ==== ======
</TABLE>
21
<PAGE>
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,
2000.
<TABLE>
Maturity
---------------------------------------------------------
Over Over Over
3 Months 3 to 6 6 to 12 12
or Less Months Months Months Total
---------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Certificates of deposit less than $100,000......... $19,460 $15,822 $12,859 $1,558 $49,699
Certificate of deposit of $100,000 or more......... 2,071 2,945 1,568 472 7,056
------- ------- ------- ------ -------
Total certificates of deposit................... $21,531 $18,767 $14,427 $2,030 $56,755
======= ======= ======= ====== =======
</TABLE>
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 unlimited
22
<PAGE>
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, 2000, Midland Federal's equity investment in Midland Service Corporation was
approximately $169,000. During fiscal 2000, Midland Service Corporation recorded
a loss of $12,000.
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 $17,000 for the 2000 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, 2000 was $37,000.
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
23
<PAGE>
or unsound practices. Other actions or inactions may provide the basis for
enforcement action, including misleading or untimely reports filed with the OTS.
Except under certain circumstances, public disclosure of final enforcement
actions by the OTS is required.
In addition, the investment and lending authority of the Association is
prescribed by federal laws and regulations, and it is prohibited from engaging
in any activities not permitted by such laws and regulations. For instance, no
savings association may invest in corporate debt securities not rated in one of
the four highest rating categories by a nationally recognized rating
organization. In addition, the permissible level of investment by federal
associations in loans secured by non-residential real property may not exceed
400% of regulatory capital, except with approval of the OTS. Midland Federal is
in compliance with each of these restrictions.
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, 2000, 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.
24
<PAGE>
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 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. At fiscal year end 2000, the premium schedule for BIF- and SAIF-
insured institutions ranged from 0 to 27 basis points, and both BIF- and 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 2.08 basis points for each $100 in domestic
deposits. These assessments, which may be revised based upon the level of BIF-
and SAIF- deposits, will continue until the bonds mature in the years 2017
through 2019.
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, 2000, the
Association had retained mortgage servicing assets and an unrealized gain, net
of tax, under SFAS No. 115 in the amount of $43,000.
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.
25
<PAGE>
At June 30, 2000, the Association had tangible capital of $8.9 million, or
6.48% of adjusted total assets, which is approximately $6.9 million above the
minimum requirement of 1.5% of adjusted total assets in effect on that date.
The capital standards also require core capital equal to at least 3% of
adjusted total assets (as defined by regulation). Core capital generally
consists of tangible capital plus certain intangible assets, including
supervisory goodwill (which is phased-out over a five-year period) and a limited
amount of purchased credit card relationships and purchased mortgage servicing
rights. As a result of the prompt corrective action provisions of FDICIA
discussed below, 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, 2000, the
Association had retained mortgage servicing assets which were subject to these
tests.
At June 30, 2000, the Association had core capital equal to $8.9 million,
or 6.48% of adjusted total assets, which is $4.8 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, 2000, Midland Federal had no capital instruments that qualify as
supplementary capital and $185,000 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, 2000.
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
26
<PAGE>
value is the present value of expected cash flows from assets, liabilities and
off-balance sheet contracts. The rule will not become effective until the OTS
evaluates the process by which savings associations may appeal an interest rate
risk deduction determination. It is uncertain as to when this evaluation may be
completed. Any savings association with less than $300 million in assets and a
total capital ratio in excess of 12% is exempt from this requirement unless the
OTS determines otherwise.
On June 30, 2000, the Association had total capital of $9.1 million
(including $8.9 million in core capital and $185,000 of qualifying general loss
reserves) and risk-weighted assets of $45.8 million or total capital of 19.90%
of risk-weighted assets. This amount was $5.4 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.
27
<PAGE>
Limitations on Dividends and Other Capital Distributions. OTS regulations
impose various restrictions on savings associations with respect to their
ability to make distributions of capital, which include dividends, stock
redemptions or repurchases, cash-out mergers and other transactions charged to
the capital account. OTS regulations also prohibit a savings association from
declaring or paying any dividends or from repurchasing any of its stock if, as a
result, the regulatory capital of the association would be reduced below the
amount required to be maintained for the liquidation account established in
connection with its mutual to stock conversion.
Generally, savings associations, such as the Association, that before and
after the proposed distribution 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, 2000, the Association was in compliance with the
requirement, with an overall liquid asset ratio of 52.9%.
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, 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 rules.
28
<PAGE>
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, 2000 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 2000 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
29
<PAGE>
any affiliate engaged in activities not permissible for a bank holding company
or acquire the securities of most affiliates. The Association's subsidiaries are
not deemed affiliates, however; the OTS has the discretion to treat subsidiaries
as affiliates on a case-by-case basis.
Certain transactions with directors, officers or controlling persons are
also subject to conflict of interest regulations enforced by the OTS. These
conflict of interest regulations and other statutes also impose restrictions on
loans to such persons and their related interests. Among other things, such
loans must be made on terms substantially the same as for loans to unaffiliated
persons.
Federal Reserve System. The Federal Reserve Board requires all depository
institutions to maintain non-interest bearing reserves at specified levels
against their transaction accounts (primarily checking, NOW and Super NOW
checking accounts) and non-personal time deposits. At June 30, 2000 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, 2000, 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, 2000 Midland Federal had $728,000 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 6.70% and were 6.69% for
calendar year 1999.
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
30
<PAGE>
adverse effect on the value of FHLB stock in the future. A reduction in value of
the Association's FHLB stock may result in a corresponding reduction in Midland
Federal's capital.
For the year ended June 30, 2000, dividends paid by the FHLB of Chicago to
Midland Federal totaled $46,000, which was a $9,000 increase over the amount of
dividends received in fiscal year 1999. The $13,000 dividend received for the
quarter ended June 30, 2000 reflects an annualized rate of 7.25%, or .56% above
the rate for calender year 1999.
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. As a result of tax legislation enacted in 1996,
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,
2000, the Association's excess for tax purposes totaled approximately $1.1
million.
The Company and its subsidiaries file consolidated federal income tax
returns on a fiscal year basis using the accrual method of accounting.
The Company 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, 1997, for the Company
and its consolidated subsidiaries.
Illinois Taxation. The Company and its subsidiaries file separate Illinois
income tax returns. For Illinois income tax purposes, the Company 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.
31
<PAGE>
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") which is effective for fiscal years beginning after June 15, 1999. The
statement requires all derivatives to be recorded on the balance sheet at fair
value. It also establishes "special accounting" for hedges of changes in the
fair value of assets, liabilities or firm commitments (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. To the extent the hedge is considered highly effective, both the
change in the fair value of the derivative and the change in the fair value of
the hedged item are recognized (offset) in earnings in the same period. Changes
in the fair value of derivatives that do not meet the criteria of one of these
three hedge categories are included in income.
Accounting for Derivative Instruments in Hedging Activities - Deferral of
the Effective Date of SFAS No. 133. In September 1999, the FASB issued Statement
of Financial Accounting Standards No. 137 ("SFAS No. 137"), entitled "Accounting
for Derivative Instruments in Hedging Activities -- Deferral of the Effective
Date of FASB Statement No. 133". SFAS No. 137 defers the effective date of SFAS
No. 133 from years beginning after June 15, 1999 to all fiscal quarters in all
fiscal years beginning after June 15, 2000. Management does not believe that
adoption of SFAS No. 133 will have a material impact on the Company'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 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 FASB
which are of particular interest to financial institutions.
MANAGEMENT
Employees
---------
At June 30, 2000, the Association had a total of 42 full-time employees and
47 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 $953,000 at June 30, 2000. 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
32
<PAGE>
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 $49,000
and $25,000 net book values at June 30, 2000, respectively.
The Association has had a lease on vacant land located in Homer Township,
Illinois since 1989. During the year ended June 30, 2000, the Association
purchased this property for $180,500.
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 $516,000 at June 30, 2000.
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, 2000 was $347,000.
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,
2000.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
-----------------------------------------------------------------
Pages 21 and 49 of the 2000 Annual Report to Stockholders is herein
incorporated by reference.
Item 6. Management's Discussion and Analysis or Plan of Operation
------------------------------------------------------------------
Pages 6 through 21 of the 2000 Annual Report to Stockholders is herein
incorporated by reference.
33
<PAGE>
Item 7. Financial Statements
-----------------------------
Pages 23 through 47 of the 2000 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.
34
<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.
35
<PAGE>
PART IV
Item 13. Exhibits and Reports on Form 8-K
------------------------------------------
(a) Exhibits:
------------
<TABLE>
Reference to
Prior Filing
Regulation or Exhibit
S-K Exhibit Number Attached
Number Document Hereto
---------- ----------------------------------------------------------------------- -----------------
<S> <C> <C>
2 Plan of acquisition, reorganization, arrangement, liquid, or succession None
3 Articles of Incorporation and Bylaws.................................... ***
4 Instruments defining the rights of security holders,
including indentures:
Common Stock Certificate............................................... ***
9 Voting trust agreement.................................................. None
10 Material contracts:
Employee Stock Ownership Plan.......................................... ***
1993 Stock Option and Incentive Plan................................... **
Employment Agreements.................................................. ***
Recognition and Retention Plan......................................... ***
401(k) Retirement/Savings Plan......................................... ***
11 Statement re computation of per share earnings.......................... ****
13 Annual Report to Security Holders....................................... 13
16 Letter on change in certifying accountant............................... None
18 Letter on change in accounting principles............................... None
21 Subsidiaries of Registrant.............................................. 21
22 Published report regarding matters submitted to vote of security holders None
23 Consent of Experts and Counsel.......................................... None
24 Power of Attorney....................................................... Not required
27 Financial Data Schedule................................................. 27
99 Additional Exhibits None
</TABLE>
--------------------
*Filed on January 15, 1993 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, 2000.
36
<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, 2000 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, Executive
and Chief Executive Officer Vice President and Secretary
(Principal Financial and Accounting
Officer)
Date: September 28, 2000 Date: September 28, 2000
/s/ Jonas Vaznelis /s/ Richard Taylor
---------------------------------- -------------------------------------
Jonas Vaznelis, Director Richard Taylor, Director and Vice
Predsident
Date: September 28, 2000 Date: September 28, 2000
/s/ Michael J. Kukanza /s/ Algerd Brazis
---------------------------------- -------------------------------------
Michael J. Kukanza, Director Algerd Brazis, Director
Date: September 28, 2000 Date: September 28, 2000
37
<PAGE>
Exhibit 13
<PAGE>
--------------------------------------------------------------------------------
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................. 23
Consolidated Statements of
Financial Condition........................ 24
Consolidated Statements of Income............ 25
Consolidated Statements of Changes in
Stockholders' Equity....................... 26
Consolidated Statements of Cash Flows........ 27
Notes to Consolidated Financial
Statements................................. 28
<PAGE>
To Our Shareholders,
The Company completed fiscal 2000 with earnings of $372,000, or $1.01
per diluted share and a record book value of $25.43 per common share. This year
marked our first full year of operations at the Company's newest full service
branch banking facility in Homer Township, Illinois.
The Company continued to build upon its core banking business in fiscal
2000 with a 6% increase in total deposits to $126.9 million, a year-end record.
The Company's lending operations achieved growth of 7% in total loans during
fiscal 2000, our fifth consecutive annual increase in the loan portfolio. As a
result of the sale of the Company's remaining real estate owned properties in
fiscal 2000, non-performing assets continued to decline and amounted to just
.21% of total assets at fiscal year end. The Company also continued to build its
capital base with stockholders' equity totaling $9.3 million, also a year-end
record. At June 30, 2000 the Company's ratio of stockholders' equity to total
assets was 6.75% and its banking subsidiary, Midland Federal, continued to meet
all of the regulatory capital requirements as a 'well capitalized' institution
during fiscal 2000.
Fiscal 2000 was a challenging year for the financial industry as a
result of several interest rate increases implemented by the Federal Reserve
Board designed to slow the nation's economy to a level consistent with
non-inflationary growth. The impact of these policies will continue to be felt
in the coming year as the industry adjusts to higher interest rates and weaker
loan demand. I would like to thank all our shareholders for their support this
year and we look forward to your continued support in the coming year.
Sincerely,
Paul Zogas
Chairman and President
<PAGE>
--------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------
<TABLE>
Year Ended June 30,
2000 1999 1998 1997 1996
--------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Total assets.................... $137,225 130,193 117,373 111,678 116,460
Loans receivable, net........... 53,030 49,349 39,173 33,392 32,776
Mortgage-backed securities...... 21,854 15,882 20,845 21,936 27,410
Cash and cash equivalents....... 32,667 35,020 31,994 30,903 30,918
Investment securities .......... 25,033 25,092 21,185 21,058 21,033
Deposits........................ 126,870 120,225 107,762 102,973 107,914
Stockholders' equity............ 9,257 8,996 8,768 7,971 7,740
For the Period:
Net interest income........... $ 3,510 3,154 3,147 3,124 3,186
Net income ................... 372 365 595 296 575
Per Common Share:
Book value per share
outstanding................. $ 25.43 24.71 24.09 22.99 22.32
Earnings per share outstanding
basic....................... $ 1.02 1.00 1.68 .85 1.66
diluted..................... $ 1.01 .99 1.66 .83 1.64
Financial Ratios:
Stockholders' equity to
total assets................ 6.75% 6.91 7.47 7.14 6.65
Non-performing assets to
total assets................ .21% .38 .86 .86 1.90
Net charge-offs to total loans -- .06 -- .13 .21
Net interest margin........... 2.65% 2.73 3.01 2.96 2.96
Operating expenses to
average assets (1).......... 2.75% 3.01 2.90 2.72 2.69
Return on average assets (2).. .27% .30 .54 .66 .50
Return on average
stockholders' equity (2).... 4.12% 4.08 7.11 9.21 7.62
</TABLE>
(1) Exclusive of real estate owned expenses and losses and FDIC special
assessment.
(2) Exclusive of FDIC special assessment in the 1997 period.
3
<PAGE>
--------------------------------------------------------------------------------
SELECTED CONSOLIDATED FINANCIAL INFORMATION
--------------------------------------------------------------------------------
<TABLE>
SELECTED FINANCIAL CONDITION DATA:
At June 30,
2000 1999 1998 1997 1996
--------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Total assets.................... $137,225 130,193 117,373 111,678 116,460
Loans receivable, net........... 53,030 49,349 39,173 33,392 32,776
Mortgage-backed securities...... 21,854 15,882 20,845 21,936 27,410
Cash and cash equivalents....... 32,667 35,020 31,994 30,903 30,918
Investment securities .......... 25,033 25,092 21,185 21,058 21,033
Deposits........................ 126,870 120,225 107,762 102,973 107,914
Stockholders' equity............ $ 9,257 8,996 8,768 7,971 7,740
</TABLE>
<TABLE>
SELECTED OPERATIONS DATA: Year Ended June 30,
2000 1999 1998 1997 1996
--------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Total interest income........... $ 8,473 7,333 7,016 7,034 7,228
Total interest expense.......... 4,963 4,179 3,869 3,910 4,042
------- ------- ------- ------- -------
Net interest income............. 3,510 3,154 3,147 3,124 3,186
Provision for loan losses
(recoveries).................. -- -- (160) -- --
-------- -------- ------- ------- -------
Net interest income after
provision for loan losses... 3,510 3,154 3,307 3,124 3,186
Non-interest income:
Loan related fees and charges... 198 300 238 146 102
Deposit related fees............ 500 529 596 613 597
Commission income............... 64 105 95 69 81
Income from real estate owned... 7 89 70 57 36
Profit on sale of loans......... 36 45 29 11 --
Other income.................... 75 87 88 229 80
------- ------- ------- -------- -------
Total non-interest income....... 880 1,155 1,116 1,125 896
------- ------- ------- ------- -------
Non-interest expense:
Staffing costs.................. 1,956 2,008 1,789 1,670 1,546
Occupancy and equipment expense. 721 576 475 452 449
Deposit insurance premiums...... 47 64 63 142 239
FDIC special assessment......... -- -- -- 674 --
Real estate owned expenses...... 5 82 261 98 129
Other expense................... 1,110 1,027 902 816 833
------- ------- ------- ------- -------
Total non-interest expense.... 3,839 3,757 3,490 3,852 3,196
------- ------- ------- ------- -------
Income before income taxes...... 551 552 933 397 886
Provision for income taxes...... 179 187 338 101 311
------- ------- ------- ------- -------
Net income ..................... $ 372 365 595 296 575
======= ======= ======= ======= =======
</TABLE>
4
<PAGE>
--------------------------------------------------------------------------------
SELECTED CONSOLIDATED FINANCIAL INFORMATION
--------------------------------------------------------------------------------
<TABLE>
SELECTED FINANCIAL RATIOS:
At or For the Year Ended June 30,
2000 1999 1998 1997 1996
--------------------------------------------
<S> <C> <C> <C> <C> <C>
Performance Ratios:
Return on average assets (1).... .27% .30 .54 .66 .50
Return on average stockholders'
equity (1).................... 4.12% 4.08 7.11 9.21 7.62
Interest rate spread during
period (2).................... 2.57% 2.65 2.92 2.91 2.90
Net interest margin (3)......... 2.65% 2.73 3.01 2.96 2.96
Ratio of operating expenses to
average total assets (4)...... 2.75% 3.01 2.90 2.72 2.69
Ratio of average interest-
earning assets to average
interest-bearing liabilities.. 109.87% 110.64 110.25 108.76 108.34
Asset Quality Ratios:
Non-performing assets to
total assets.................. .21% .38 .86 .86 1.90
Allowance for loan losses to
non-performing loans (5)...... 65.24% 79.66 57.16 274.39 22.00
Allowance for loan losses to
total loans................... .69% .74 1.00 1.62 1.78
Capital Ratios:
Stockholders' equity to
total assets.................. 6.75% 6.91 7.47 7.14 6.65
Average stockholders' equity to
average assets................ 6.47% 7.33 7.52 6.81 6.61
</TABLE>
(1) Exclusive of FDIC special assessment.
(2) Interest rate spread for the period shown includes the impact of
non-interest bearing demand deposits.
(3) Net interest income divided by average interest-earning assets.
(4) Exclusive of real estate owned expenses and losses and FDIC special
assessment.
(5) General valuation allowances to non-performing loans (net of specific
allowances).
5
<PAGE>
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Forward-Looking Statements
When used in this filing and in future filings by the Company with the
Securities and Exchange Commission, in the Company's press releases or other
public or shareholder communications, or in oral statements made with the
approval of an authorized executive officer, the words or phrases "would be",
"will allow", "intends to", "will likely result", "are expected to", "will
continue", "is anticipated", "estimate", "project" or similar expressions are
intended to identify "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. Such statements are subject to
risks and uncertainties, including but not limited to changes in economic
conditions in the Company's market area, changes in policies by regulatory
agencies, fluctuations in interest rates, demand for loans in the Company's
market area and competition, all or some of which could cause actual results to
differ materially from historical earnings and those presently anticipated or
projected.
The Company wishes to caution readers not to place undue reliance on any such
forward-looking statements, which speak only as of the date made, and advises
readers that various factors, including regional and national economic
conditions, substantial changes in levels of market interest rates, credit and
other risks of lending and investment activities and competitive and regulatory
factors, could affect the Company's financial performance and could cause the
Company's actual results for future periods to differ materially from those
anticipated or projected.
The Company does not undertake, and specifically disclaims any obligation, to
update any forward-looking statements to reflect occurrences or unanticipated
events or circumstances after the date of such statements.
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, 2000 there
were 363,975 shares of the Company's common stock outstanding.
6
<PAGE>
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.
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.
7
<PAGE>
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.
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, 2000 assuming an instantaneous and sustained change in
market interest rates of 100, 200 and 300 basis points.
<TABLE>
NET PORTFOLIO VALUE NPV AS % OF ASSETS
Change in Rates $ Amount $ Change % Change NPV Ratio Change
--------------- -------- -------- -------- --------- ------
<S> <C> <C> <C> <C> <C>
(Basis Points) (Thousands)
+300 bp 6,482 -5,406 -45 4.83 -365 bp
+200 bp 8,216 -3,673 -31 6.03 -244 bp
+100 bp 10,045 -1,843 -16 7.27 -121 bp
0 bp 11,888 -- -- 8.47 -- bp
-100 bp 13,481 1,593 +13 9.49 +101 bp
-200 bp 14,543 2,655 +22 10.14 +167 bp
-300 bp 16,669 4,781 +40 11.44 +296 bp
</TABLE>
8
<PAGE>
FINANCIAL CONDITION AT JUNE 30, 2000
During the year ended June 30, 2000, total assets of the Company increased by
$7.0 million to $137.2 million from $130.2 million at June 30, 1999. This
increase was primarily the result of an increase in deposits in the amount of
$6.6 million to $126.9 million at June 30, 2000. Net loans receivable and loans
available for sale increased $3.7 million to $53.0 million at June 30, 2000.
Loan disbursements totaled $15.1 million in fiscal 2000 compared to $24.9
million during the year ended June 30, 1999. Principal payments to loans during
the year ended June 30, 2000 totaled $8.3 million compared to $11.5 million
during the year ended June 30, 1999. The balance of mortgage-backed securities
increased by $6.0 million to $21.9 million due to purchases of mortgage-backed
securities in the amount of $10.0 million, which exceeded repayments of
mortgage-backed securities in the amount of $4.0 million during the fiscal year.
The $3.7 million increase in net loans receivable and the $6.0 million increase
in mortgage-backed securities were funded by the $2.3 million decrease in cash
and cash equivalents, discussed below, as well as the increase in deposits
during the fiscal year.
In fiscal 2000 the Company originated $2.7 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 $3.2 million of these loans to the IHDA in fiscal 2000 and
will continue to service these loans for the IHDA and these customers. In fiscal
2001 the Company plans to continue to participate in the IHDA first time home
buyers program as market demands warrant, and to market its loan products to
local real estate brokers through Company loan origination personnel.
Cash and cash equivalents decreased $2.3 million to $32.7 at June 30, 2000 from
$35.0 million at June 30, 1999. The balance of investment securities remained
stable at $25.0 million at June 30, 2000. The weighted average remaining
maturity of the Company's investment securities portfolio at June 30, 2000 was
2.1 years.
Deposits for the year ended June 30, 2000 increased $6.6 million as deposit
activity of $438.1 million and interest credited to deposit accounts in the
amount of $4.7 million exceeded withdrawal activity of $436.2 million. The
increase in deposits is the result of a $3.3 million increase in certificate of
deposit accounts, a $3.0 million increase in money market accounts and a $1.1
million increase in NOW accounts, offset by a $642,000 decrease in passbook
deposit accounts and a $169,000 decrease in demand deposit accounts. The net
increase in savings deposits is primarily attributed to aggressive pricing and
promotion of both certificate of deposit and money market accounts at the
Company's new branch office location in Homer Township, Illinois.
Stockholders' equity increased $261,000 to $9.3 million at June 30, 2000 from
$9.0 million at June 30, 1999. The increase in stockholders' equity was
primarily due to earnings in the amount of $372,000 offset by dividends paid on
common stock in the amount of $109,000 and a $37,000 decline in market value,
net of income taxes, from securities classified 'available for sale'.
Non-performing assets totaled $284,000 at June 30, 2000 as compared to $500,000
at June 30, 1999. Non-performing assets at June 30, 2000 consist of non-accruing
loans, net of specific reserves. At June 30, 2000 non-accruing loans are
comprised of $232,000 in four single family residential mortgage loans, $38,000
in one multi-family residential mortgage loan and $14,000 in non-mortgage loans.
General allowances for loan losses total $185,000 or 65.24% of net
non-performing loans at June 30, 2000.
9
<PAGE>
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>
Year Ended June 30,
------------------------------------------------------------------------
2000 1999 1998
---------------------- ---------------------- ----------------------
Average Interest Yield Average Interest Yield Average Interest Yield
Balance Earned/ and Balance Earned/ and Balance Earned/ and
Paid Rates Paid Rates Paid Rates
-------- ------- ----- -------- ------- ----- -------- ------- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-Earning
Assets:
Loans Receivable (1) $ 50,383 $3,691 7.33% 46,270 $3,442 7.44% $ 34,701 $2,792 8.04%
Mortgage-backed
securities........ 21,688 1,409 6.49 18,457 1,214 6.58 23,065 1,552 6.73
Investment and other
securities........ 25,055 1,397 5.58 21,441 1,213 5.66 21,142 1,248 5.90
Interest-bearing
deposits.......... 34,785 1,930 5.59 28,826 1,426 4.95 25,234 1,387 5.50
FHLB stock.......... 656 46 7.04 582 38 6.43 554 37 6.75
------- ----- ---- ------- ----- ---- ------- ----- ----
Total interest-
earning assets $132,567 $8,473 6.39% $115,576 $7,333 6.34% $104,696 $7,016 6.70%
------- ----- ---- ------- ----- ---- ------- ----- ----
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-Bearing
Liabilities:
Certificates of
deposit........... $ 61,878 $3,120 5.04% $ 50,000 $2,557 5.11% $ 43,122 $2,330 5.40%
Passbook accounts... 42,507 1,286 3.03 41,323 1,229 2.97 40,097 1,185 2.96%
Money market and
NOW accounts...... 16,273 557 3.43 13,136 393 2.99 11,744 354 3.02%
------- ----- ---- ------- ----- ---- ------- ----- ----
Total interest-
bearing lia-
bilities...... $120,658 $4,963 4.11% $104,459 $4,179 4.00% $ 94,963 $3,869 4.07%
======= ----- ---- ======= ----- ---- ======= ----- ----
Net earning assets.. $ 11,909 $ 11,117 $ 9,733
======= ======= =======
Net-interest income. $3,510 $3,154 $3,147
===== ===== =====
Net-interest rate
spread (2)........ 2.28% 2.34% 2.63%
==== ==== ====
Net-interest margin. 2.65% 2.73% 3.01%
==== ==== ====
Average interest-
earning assets to
average interest-
bearing liabilities 109.87% 110.64% 110.25%
====== ====== ======
</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 2.57%, 2.65% and 2.92% for
the periods shown if the positive impact of the average balance of
non-interest bearing demand deposits ($9,336, $8,581 and $7,386 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>
Year Ended June 30,
------------------------------------------------------------------
2000 vs. 1999 1999 vs. 1998
------------------------------ ------------------------------
Increase (decrease) due to Increase (decrease) due to
------------------------------ ------------------------------
Rate/ Rate/
Volume Rate Volume Net Volume Rate Volume Net
------ ------ ------ ------ ------ ------ ------ ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-Earning
Assets:
Loans Receivable.... $ 306 $( 52) $( 5) $ 249 $ 931 $(211) $( 70) $ 650
Mortgage-backed
securities........ 213 ( 15) ( 3) 195 (310) ( 35) 7 (338)
Investment and other
securities........ 204 ( 17) ( 3) 184 18 ( 52) ( 1) ( 35)
Interest-bearing
deposits.......... 295 173 36 504 197 (138) ( 20) 39
FHLB stock.......... 5 3 -- 8 1 -- -- 1
---- ---- ---- ---- ---- --- --- ---
Total interest-
earning assets $1,023 $ 92 $ 25 $1,140 $ 837 $(436) $( 84) $ 317
----- ---- ---- ----- ---- ---- ---- ----
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-Bearing
Liabilities:
Certificates of
deposit........... $ 607 (36) ( 8) $ 563 $ 372 $(125) $ (20) $ 227
Passbook accounts... 35 21 1 57 36 8 -- 44
Money market and
NOW accounts...... 93 57 14 164 42 ( 3) -- 39
----- ---- ---- ----- ----- ---- ---- ----
Total interest-
bearing liab-
ilities....... $ 735 $ 42 $ 7 $ 784 $ 450 $(120) $(20) $ 310
----- ---- ---- ----- ---- --- --- -----
Net change in net
interest income... $ 356 $ 7
===== ====
</TABLE>
12
<PAGE>
COMPARISON OF OPERATING RESULTS
FOR THE FISCAL YEARS ENDED
JUNE 30, 2000 AND JUNE 30, 1999
The Company had net income of $372,000 in fiscal 2000 compared to net income of
$365,000 for fiscal 1999. The increase in net income is attributable to a
$356,000 increase in net interest income and an $8,000 decrease in income taxes
offset by a $275,000 decrease in non-interest income and an $82,000 increase in
non-interest expense.
Net interest income before provision for loan losses increased $356,000 to $3.5
million in fiscal 2000 from $3.2 million in fiscal 1999. The average balance of
net earning assets increased $792,000 to $11.9 million in fiscal 2000 from $11.1
million in the prior fiscal year. Net interest margin and interest rate spread
decreased in fiscal 2000 to 2.65% and 2.57%, respectively, from 2.73% and 2.65%,
respectively, in fiscal 1999, primarily as a result of increasing short term
market interest rates and increased competition for deposit liabilities during
the current fiscal year which resulted in a higher average cost of interest
bearing liabilities. The ratio of average interest earning assets to average
interest bearing liabilities also decreased to 109.87% in fiscal 2000 from
110.64% in fiscal 1999.
INTEREST INCOME
Interest income increased $1.1 million in fiscal 2000 to $8.5 million. This
increase in interest income resulted from a $17.0 million increase in the
average balance of interest earning assets to $132.6 million in fiscal 2000 from
$115.6 million in fiscal 1999 as well as an increase in the average yield earned
on interest earning assets to 6.39% in fiscal 2000 from 6.35% in fiscal 1999 as
a result of higher short term market interest rates.
Interest on loans receivable increased $249,000, or 7.2%, in fiscal 2000 to $3.7
million compared with fiscal 1999. The increase in interest income was
attributed to a $4.1 million increase in the average outstanding balance of net
loans receivable to $50.4 million in fiscal 2000 from $46.3 million in fiscal
1999. 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 7.33% in
fiscal 2000 from 7.44% in fiscal 1999 as repayments of higher yielding loans
within the loan portfolio were replaced with lower yielding loans originated
over both the prior and current fiscal year.
Interest on mortgage-backed securities increased $195,000, or 16.0%, to $1.4
million in fiscal 2000 compared with fiscal 1999. The increase in interest
income was attributed to a $3.2 million increase in the average outstanding
balance of mortgage-backed securities to $21.7 million in fiscal 2000 from $18.5
million in fiscal 1999. The Company increased its investment in mortgage-backed
securities in fiscal 2000 in order to maintain compliance with regulatory
requirements regarding qualified thrift lender status. The increase in the
average outstanding balance of mortgage-backed securities was offset by a
decrease in the average yield earned on mortgage-backed securities to 6.49% in
fiscal 2000 from 6.58% in fiscal 1999.
Interest earned on investment securities increased $184,000, or 15.2%, in fiscal
2000. The increase in interest income resulted from a $3.6 million increase in
the average outstanding balance of investment securities to $25.1 million from
the prior fiscal year. The increase in the average outstanding balance of
investment securities was offset by a decrease in the average yield earned on
investment securities to 5.58% in fiscal 2000 compared to 5.66% in fiscal 1999.
13
<PAGE>
Interest earned on interest bearing deposits increased $504,000, or 35.4%, to
$1.9 million in fiscal 2000 compared with fiscal 1999. The increase in interest
income is attributed to a $6.0 million increase in the average outstanding
balance of interest bearing deposits to $34.8 million in fiscal 2000 from $28.8
million in fiscal 1999 as well as an increase in the average yield earned on
interest bearing deposits to 5.59% in fiscal 2000 from 4.95% in fiscal 1999. The
Company maintained its investments in interest bearing deposits in response to
increasing higher short term market interest rates during 2000.
INTEREST EXPENSE
Interest expense increased $784,000, or 18.8%, to $5.0 million in fiscal 2000
from $4.2 million in fiscal 1999. The increase in interest expense in fiscal
2000 was the result of a $16.2 million increase in the average outstanding
balance of interest costing deposits to $120.7 million in fiscal 2000 from
$104.5 million in fiscal 1999 as well as an increase in the average yield paid
on interest costing deposits to 4.11% in fiscal 2000 compared to 4.00% in fiscal
1999. The increase in savings deposits is primarily attributed to aggressive
pricing and promotion of certificate and money market deposit accounts by the
Company at its Homer Township branch banking facility.
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 no loan
charge-offs during fiscal 2000. During fiscal 2000 the Company increased its
general allowance for loan losses to $185,000 at fiscal year end from $178,000
at the prior fiscal year end. At fiscal year end, the $185,000 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 $7,000 increase in the Company's general allowance for loan
losses during fiscal 2000 was the result of $48,000 in recoveries from fully
reserved loans which loss reserves were transferred from specific allowance to
general and $3,000 in recoveries from loans previously charged off. These loan
loss recoveries were offset by $44,000 in loans that were specifically reserved
out of the general allowance for loan losses during the current fiscal year.
At June 30, 2000, 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 decreased $275,000 to $880,000 in fiscal 2000 from $1.2
million in fiscal 1999. The decrease in non-interest income in fiscal 2000 is
primarily attributed to a $102,000 decrease in loan fees and service charges, an
$82,000 decrease in income from the sale and rental of real estate owned
properties, a $41,000 decrease in commission income and a $29,000 decrease in
deposit related fees. The decrease in loan fees and service charges was the
result of decreased loan brokerage revenues and loan origination activity in
fiscal 2000 compared to fiscal 1999. The decrease in commission income was the
result of a decrease in the sale of annuity products in fiscal 2000 compared to
the prior fiscal year. The decrease in deposit related fees in fiscal 2000 is
attributed to a decrease in the level of demand deposit service charges
resulting from decreased overdraft activity compared to the prior fiscal year.
14
<PAGE>
NON-INTEREST EXPENSE
Non-interest expense increased $82,000 to $3.8 million in fiscal 2000 compared
with the prior fiscal year. The primary factors for the increase in non-interest
expense were a $145,000 increase in occupancy and equipment expense and a
$26,000 increase in advertising expense, as compared with the prior fiscal year.
These increases in non-interest expense were offset by a $52,000 decrease in
staffing costs and a $24,000 decrease in data processing fees, as compared with
the prior fiscal year. The increase in office occupancy and advertising expense
in fiscal 2000 reflected the first full year of operations for the Company's
Homer Township, Illinois branch banking facility, which opened for business in
April 1999. The decrease in staffing costs was the result of a reduction in
commissions paid to the Company's staff loan originators due to a reduction in
loan originations compared with the prior fiscal year. The decrease in data
processing fees in fiscal 2000 was the result of the elimination of a $38,000
de-conversion fee incurred in the prior fiscal year when the Company converted
its data processing systems to another service provider.
INCOME TAXES
Provisions for income taxes decreased by $8,000 to $179,000 in fiscal 2000 from
$187,000 in fiscal 1999 primarily due to a decreased amount of non-deductible
items in the current year as compared to the prior year.
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.
15
<PAGE>
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.
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.
16
<PAGE>
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
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.
17
<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, 2000, the Association's regulatory liquidity ratio was 52.9%. At such
date, the Association had commitments to originate $1.4 million in single family
mortgage loans and no commitments to either purchase or sell 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,
2000 and 1999.
<TABLE>
For the Year
Ended June 30,
----------------------
2000 1999
-------- --------
(Dollars in Thousands)
<S> <C> <C>
Net income............................. $ 372 $ 365
Adjustments to reconcile net income
to net cash provided by
operating activities................. 713 308
------ ------
Net cash provided by
operating activities................. 1,085 673
Net cash provided for
investing activities................. (10,098) (10,124)
Net cash provided by
financing activities................. 6,659 12,477
------ -------
Net change in cash and
cash equivalents..................... (2,354) 3,026
Cash and cash equivalents at
beginning of period.................. 35,020 31,994
------ ------
Cash and cash equivalents at
end of period........................ $32,666 $35,020
====== ======
</TABLE>
At June 30, 2000 Midland Federal had tangible and core capital of $8.9 million,
or 6.48% of adjusted total assets, which was approximately $6.9 million and $4.8
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, 2000 Midland Federal had total capital of $9.1 million and
risk-weighted assets of $45.8 million, or total capital of 19.90% of
risk-weighted assets. This amount was approximately $5.4 million above the 8.0%
requirement for capital adequacy purposes in effect on that date.
18
<PAGE>
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 Hedging
Activities", which is effective for fiscal years beginning after June 15, 1999.
SFAS 133 requires all derivatives to be recorded on the balance sheet at fair
value. It also establishes "special accounting" for hedges of changes in the
fair value of assets, liabilities, or firm commitments (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. To the extent the hedge is considered highly effective, both the
change in the fair value of the derivative and the change in the fair value of
the hedged item are recognized (offset) in earnings in the same period. Changes
in fair value of derivatives that do not meet the criteria of one of these three
hedge categories are included in income.
In September 1999, the FASB issued Statement of Financial Accounting Standards
No. 137 ("SFAS 137"), entitled "Accounting for Derivative Instruments in Hedging
Activities - Deferral of the Effective Date of FASB Statements no. 133". SFAS
137 defers the effective date of SFAS 133 from years beginning after June 15,
1999 to all fiscal quarters of all fiscal years beginning after June 15, 2000.
Management does not believe that adoption of SFAS 133 will 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
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.
19
<PAGE>
COMMON STOCK
As of June 30, 2000, 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.
<TABLE>
Cash dividends
Quarter ended High Low declared
------------------- ----- ----- --------------
<S> <C> <C> <C>
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
September 30, 1999 21.00 19.50 0.075
December 31, 1999 19.88 15.75 0.075
March 31, 2000 17.00 13.75 0.075
June 30, 2000 14.00 13.25 0.075
</TABLE>
Dividend payment decisions are made with consideration of a variety of factors
including earnings, financial condition, market considerations and regulatory
restrictions.
20
<PAGE>
<TABLE>
Officers and Directors
Officers Directors
<S> <C>
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.
Lois Gajdorus
Assistant Vice President of
the Association
</TABLE>
21
<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 18, 2000, 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
22
<PAGE>
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, 2000 and
1999, 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, 2000. 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, 2000 and 1999, and the
results of their operations and their cash flows for each of the three years in
the period ending June 30, 2000, in conformity with generally accepted
accounting principles.
August 10, 2000
Palos Hills, Illinois
23
<PAGE>
MIDLAND CAPITAL HOLDINGS CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Financial Condition
<TABLE>
June 30,
---------------------
2000 1999
Assets ---- ----
<S> <C> <C>
Cash and amounts due from depository institutions $ 3,036,708 3,933,658
Interest-bearing deposits 29,629,809 31,086,638
------------- -----------
Total cash and cash equivalents 32,666,517 35,020,296
Investment securities,
held to maturity (fair value:
2000 - $19,896,031; 1999 - $19,933,594) (note 2) 19,990,723 19,994,152
Investment securities available for sale,
at fair value (note 3) 5,042,710 5,098,307
Mortgage-backed securities, held to maturity (fair value:
2000 - $21,508,988; 1999 - $15,938,491) (note 4) 21,854,112 15,881,826
Loans receivable (net of allowance
for loan losses: 2000 - $368,885;
1999 - $365,863) (note 5) 53,030,170 48,914,195
Loans receivable held for sale (note 6) - 435,150
Real estate owned, net - 276,372
Stock in Federal Home Loan Bank of Chicago 728,500 636,000
Accrued interest receivable (note 7) 650,954 611,966
Office properties and equipment - net (note 8) 2,580,061 2,594,050
Prepaid expenses and other assets (note 9) 681,743 730,969
----------- -----------
Total assets 137,225,490 130,193,283
=========== ===========
</TABLE>
<TABLE>
Liabilities and Stockholders' Equity
<S> <C> <C>
Liabilities:
Deposits (note 10) 126,870,476 120,224,584
Advance payments by borrowers for taxes
and insurance 693,302 570,814
Other liabilities (note 11) 404,995 402,356
----------- -----------
Total liabilities 127,968,773 121,197,754
----------- -----------
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, 2000 and 1999 3,640 3,640
Additional paid-in capital 3,274,654 3,271,315
Retained earnings - substantially restricted 5,948,332 5,685,591
Accumulated other comprehensive income,
net of income taxes 42,704 80,030
Common stock awarded by Bank Incentive Plan (12,613) (45,047)
----------- -----------
Total stockholders' equity (notes 15 and 16) 9,256,717 8,995,529
----------- -----------
Commitments and contingencies (notes 17 and 18)
Total liabilities and stockholders' equity $ 137,225,490 130,193,283
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
24
<PAGE>
MIDLAND CAPITAL HOLDINGS CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Income
<TABLE>
Years Ended June 30,
----------------------------------
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Interest income:
Interest on loans $ 3,690,971 3,442,351 2,791,590
Interest on mortgage-backed securities 1,408,639 1,214,401 1,551,940
Interest on investment securities 1,397,537 1,212,855 1,247,576
Interest on interest-bearing deposits 1,929,995 1,425,567 1,387,391
Dividends on FHLB stock 46,171 37,435 37,401
--------- --------- ---------
Total interest income 8,473,313 7,332,609 7,015,898
--------- --------- ---------
Interest expense:
Interest on deposits (note 10) 4,963,447 4,179,051 3,868,946
--------- --------- ---------
Total interest expense 4,963,447 4,179,051 3,868,946
--------- --------- ---------
Net interest income before provision
for loan losses 3,509,866 3,153,558 3,146,952
Provision for loan losses (recoveries) (note 5) - - (160,000)
--------- --------- ---------
Net interest income after provision
for loan losses 3,509,866 3,153,558 3,306,952
--------- --------- ---------
Non-interest income:
Loan fees and service charges 198,381 300,328 237,768
Commission income 64,205 105,116 94,572
Profit on sale of loans (note 6) 35,734 45,154 29,076
Profit on sale of real estate owned - net 4,491 21,602 -
Deposit related fees 499,865 529,367 596,194
Other income 77,734 153,777 158,233
--------- --------- ---------
Total non-interest income 880,410 1,155,344 1,115,843
--------- --------- ---------
Non-interest expense:
Staffing costs (notes 12 and 13) 1,955,963 2,008,128 1,788,697
Advertising 119,177 93,268 89,394
Occupancy and equipment expenses (note 8) 720,895 576,094 474,947
Data processing 175,752 199,828 152,830
Federal deposit insurance premiums 47,428 64,047 63,090
Legal, audit and examination services 139,952 145,364 161,005
Real estate owned expense 4,729 80,418 93,917
Provision for loss on
real estate owned (note 1) - 1,527 167,000
Other 675,562 588,608 498,968
--------- --------- ---------
Total non-interest expense 3,839,458 3,757,282 3,489,848
--------- --------- ---------
Income before income taxes 550,818 551,620 932,947
Provision for income taxes (note 14) 178,884 186,901 338,354
--------- --------- ---------
Net income $ 371,934 364,719 594,593
========= ========= =========
Earnings per share - basic $ 1.02 1.00 1.68
========= ========= =========
Earnings per share - diluted $ 1.01 .99 1.66
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
25
<PAGE>
MIDLAND CAPITAL HOLDINGS CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
<TABLE>
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, 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 ($.30 per share) (106,605) (106,605)
------ --------- --------- ------- ------- ---------
Balance at June 30, 1998 3,640 3,266,315 5,430,065 145,099 (77,482) 8,767,637
------ --------- --------- ------- ------- ---------
Comprehensive income:
Net income 364,719 364,719
Other comprehensive income,
net of tax:
Unrealized holding loss
during the year (65,069) (65,069)
--------- ------- ---------
Total comprehensive income 364,719 (65,069) 299,650
Tax benefit related to
employee stock plan 5,000 5,000
Amortization of award of BIP stock 32,435 32,435
Dividends declared on
common stock ($.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
------ --------- --------- ------- ------- ---------
Comprehensive income:
Net income 371,934 371,934
Other comprehensive income,
net of tax:
Unrealized holding loss
during the year (37,326) (37,326)
--------- ------- ---------
Total comprehensive income 371,934 (37,326) 334,608
Tax benefit related to
employee stock plan 3,339 3,339
Amortization of award of BIP stock 32,434 32,434
Dividends declared on
common stock ($.30 per share) (109,193) (109,193)
------ --------- --------- ------- ------- ---------
Balance at June 30, 2000 $ 3,640 3,274,654 5,948,332 42,704 (12,613) 9,256,717
====== ========= ========= ======= ======= =========
</TABLE>
See accompanying notes to consolidated financial statements.
26
<PAGE>
MIDLAND CAPITAL HOLDINGS CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
<TABLE>
Years Ended June 30,
-------------------------------------------
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 371,934 364,719 594,593
Adjustments to reconcile net income to net cash
from operating activities:
Depreciation 311,378 203,398 148,118
Amortization of premiums and discounts on securities (49,270) 5,204 25,682
Amortization of cost of stock benefit plan 32,434 32,435 32,435
Federal Home Loan Bank stock dividend (23,600) - -
Profit on sale of real estate owned (4,491) (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 3,172,515 3,298,250 2,196,672
Origination of loans held for sale (2,737,365) (3,073,950) (2,625,722)
Profit on sale of loans (35,734) (45,154) (29,076)
(Increase) decrease in accrued interest receivable (38,988) 7,498 18,832
Increase in accrued interest payable 5,101 4,731 4,672
Decrease in deferred income on loans (26,666) (114,528) (79,462)
Decrease in other assets 107,211 9,211 53,199
Increase in other liabilities 877 1,396 13,332
----------- ----------- -----------
Net cash provided by operating activities 1,085,336 673,135 360,275
----------- ----------- -----------
Cash flows from investing activities:
Purchase of mortgage-backed securities, held to maturity (10,007,275) (1,101,593) (4,610,445)
Proceeds from repayments of mortgage-backed securities,
held to maturity 4,071,981 6,049,456 5,663,017
Purchase of investment securities, held to maturity (9,985,251) (9,996,325) (9,987,650)
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 (68,900) (82,000) -
Loan disbursements (12,348,587) (21,806,872) (14,927,543)
Loan repayments 8,260,647 11,548,347 9,757,375
Proceeds from sale of real estate owned 276,472 495,425 -
Property and equipment expenditures (297,389) (1,230,163) (127,379)
----------- ----------- -----------
Net cash provided for investing activities (10,098,302) (10,123,725) (4,232,625)
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from exercise of stock options - - 189,750
Deposit receipts 438,125,311 388,100,662 360,038,437
Deposit withdrawals (436,191,332) (379,590,415) (358,908,515)
Interest credited to deposit accounts 4,711,913 3,952,491 3,659,000
Payment of dividends (109,193) (109,193) (106,605)
Increase in advance payments
by borrowers for taxes and insurance 122,488 123,146 91,903
----------- ----------- -----------
Net cash provided by financing activities 6,659,187 12,476,691 4,963,970
----------- ----------- -----------
Net change in cash and cash equivalents (2,353,779) 3,026,101 1,091,620
Cash and cash equivalents at beginning of year 35,020,296 31,994,195 30,902,575
----------- ----------- -----------
Cash and cash equivalents at end of year $ 32,666,517 35,020,296 31,994,195
=========== =========== ===========
Cash paid during the year for:
Interest $ 4,958,346 4,174,320 3,864,274
Income taxes 50,000 154,260 239,000
Non-cash investing activities:
Transfer of loans to real estate owned $ - - 58,022
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
27
<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 No. 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 No. 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.
28
<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, 2000 and 1999, nor during the years ended June 30, 2000 and 1999,
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 generally retains the right to service mortgage loans sold
to others. The cost allocated to mortgage servicing rights has been
recognized as a separate asset and is being amortized in proportion to
and over the period of estimated net servicing income, using a method
that approximates a level yield and taking into consideration
prepayment of the underlying loans. Mortgage servicing rights are
periodically evaluated for impairment based on the fair value of those
rights. Fair values are estimated using discounted cash flows based on
current market rates of interest. 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.
29
<PAGE>
1) Summary of Significant Accounting Policies (continued)
-----------------------------------------------------
Allowance for Loan Losses
-------------------------
The determination of the allowance for loan losses involves material
estimates that are susceptible to significant change in the near term.
The allowance for loan losses is maintained at a level adequate to
provide for losses through charges to operating expense. The allowance
is based upon past loss experience and other factors which, in
management's judgement, deserve current recognition in estimating
losses. Such factors considered by management include growth and
composition of the loan portfolio, the relationship of the allowance
for losses to outstanding loans and economic conditions.
Management believes that the allowance is adequate. While management
uses available information to recognize losses on loans, future
additions to the allowance may be necessary based on changes in
economic conditions. In addition, various regulatory agencies, as an
integral part of their examination process, periodically review the
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.
30
<PAGE>
1) Summary of Significant Accounting Policies (continued)
-----------------------------------------------------
Earnings Per Share
------------------
Earnings per share is determined by dividing net income for the period
by the weighted average number of shares outstanding. Stock options are
regarded as future common stock and are considered in the earnings per
share calculations, and are the only adjustments made to average shares
outstanding in computing diluted earnings per share.
Weighted average shares used in calculating earnings per share are
summarized below.
<TABLE>
Years Ended June 30,
---------------------------------
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Weighted average number of
common shares outstanding used
in basic EPS calculation 363,975 363,975 354,948
Add common stock equivalents
for shares issuable under
Stock Option Plans 2,937 4,634 4,262
------- ------- -------
Weighted average number of shares
outstanding adjusted for common
stock equivalents 366,912 368,609 359,210
======= ======= =======
Net income $ 371,934 364,719 594,593
Basic earnings per share $ 1.02 1.00 1.68
Diluted earnings per share $ 1.01 .99 1.66
</TABLE>
31
<PAGE>
2) Investment Securities, Held to Maturity
---------------------------------------
Investment securities, held to maturity, are summarized as follows:
<TABLE>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- -----
June 30, 2000
<S> <C> <C> <C> <C>
United States Treasury notes $ 17,491,062 4,240 116,396 17,378,906
Federal Home Loan Mortgage
Corporation Reference note 2,499,661 17,464 - 2,517,125
---------- ------ ------- ----------
$ 19,990,723 21,704 116,396 19,896,031
========== ====== ======= ==========
Weighted average interest rate 5.45%
====
June 30, 1999
United States Treasury notes $ 19,994,152 16,492 77,050 19,933,594
========== ====== ====== ==========
Weighted average interest rate 5.31%
====
</TABLE>
The contractual maturity of investment securities held to maturity are
summarized as follows:
<TABLE>
June 30, 2000 June 30, 1999
---------------------- -----------------------
Amortized Fair Amortized Fair
Term to Maturity Cost Value Cost Value
---------------- ---------------------- ------------------------
<S> <C> <C> <C> <C>
Due in one year or less $ 9,998,419 9,926,562 9,997,571 10,014,063
Due after one year through
two years 9,992,304 9,969,469 9,996,581 9,919,531
---------- ---------- ---------- ----------
$ 19,990,723 19,896,031 19,994,152 19,933,594
========== ========== ========== ==========
</TABLE>
3) Investment Securities, Available for Sale
-----------------------------------------
Investment securities available for sale are recorded at fair value in
accordance with SFAS No. 115. This portfolio issummarized as follows:
<TABLE>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------------------------------------------
June 30, 2000
<S> <C> <C> <C> <C>
Federal Home Loan Bank note $4,000,000 - 86,040 3,913,960
United States Treasury bond 978,007 150,743 - 1,128,750
--------- ------- ------- ---------
$4,978,007 150,743 86,040 5,042,710
========= ======= ======= =========
Weighted average interest rate 6.35%
=====
</TABLE>
<TABLE>
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%
=====
</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 $56,555, net of the tax effect of
$19,229, resulted in a $37,326 charge to stockholders' equity.
32
<PAGE>
4) Mortgage-Backed Securities, Held to Maturity
--------------------------------------------
Mortgage-backed securities, held to maturity, are summarized as
follows:
<TABLE>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------------------------------------------------
June 30, 2000
<S> <C> <C> <C> <C>
Participation certificates:
FHLMC - Adjustable rate $ 6,008,480 24,286 88,539 5,944,227
FNMA - Adjustable rate 3,019,797 457 76,072 2,944,182
FHLMC - Fixed rate 11,238,964 - 219,719 11,019,245
FNMA - Fixed rate 1,353,692 15,052 589 1,368,155
GNMA - Fixed rate 218,517 - - 218,517
Investment in collateralized
mortgage obligations:
FHLMC 14,662 - - 14,662
---------- ------- ------- ----------
$ 21,854,112 39,795 384,919 21,508,988
========== ======= ======= ==========
Weighted average interest rate 6.67%
====
</TABLE>
<TABLE>
June 30, 1999
--------------
Participation certificates:
<S> <C> <C> <C> <C>
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%
====
</TABLE>
33
<PAGE>
5) Loans Receivable
----------------
Loans receivable are summarized as follows:
<TABLE>
June 30,
-----------------------------
2000 1999
---- ----
<S> <C> <C>
Mortgage loans:
One-to-four family $ 49,545,281 45,597,198
Multi-family 1,639,506 1,712,534
Non-residential 439,991 223,276
Construction 486,000 -
---------- ----------
Total mortgage loans 52,110,778 47,533,008
---------- ----------
Other loans:
Loans on deposit accounts 277,306 273,589
Auto loans 323,123 274,213
Education loans 1,016,484 1,167,143
Credit card loans 96,806 85,158
Other 80,523 58,029
---------- ----------
Total other loans 1,794,242 1,858,132
---------- ----------
Commercial business loans 41,491 58,022
---------- ----------
Total loans receivable 53,946,511 49,449,162
---------- ----------
Less:
Loans in process 413,919 4,510
Net deferred yield adjustments (127,869) (95,151)
Allowance for uncollected interest 261,406 259,745
Allowance for loan losses 368,885 365,863
---------- ----------
Loans receivable, net $ 53,030,170 48,914,195
========== ==========
Weighted average interest rate 7.56% 7.38%
==== ====
</TABLE>
Activity in the allowance for loan losses is summarized as follows:
<TABLE>
Years Ended June 30,
-------------------------------------
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Balance, beginning of year $ 365,863 393,884 551,509
Provision for loan losses (recoveries) - - (160,000)
Recoveries previously charged-off 3,022 1,876 2,375
Charge-offs - (29,897) -
------- ------- -------
Balance, end of year $ 368,885 365,863 393,884
======= ======= =======
</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, 2000 amounted to $445,095 or .8% of total loans in force. Comparable figures
for 1999 were $380,537 or .8% of total loans.
Loans to directors and executive officers aggregated $424,464 at June 30, 2000
and $435,019 at June 30, 1999. Such loans are made on substantially the same
terms as those for other loan customers.
34
<PAGE>
6) Loans Receivable Held for Sale
-----------------------------
The Company sells loans in the secondary market under various
programs. During the years ended June 30, 2000, 1999 and 1998, the
Company sold first mortgage loans totaling $3,172,515, $3,298,250 and
$2,196,672 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, 2000, 1999 and 1998 were $3,172,515, $3,298,250 and
$2,196,672 with no gain or loss realized on those sales. In addition,
the Company recorded a gain of $35,734, $45,154 and $29,076 for the
years ended June 30, 2000, 1999 and 1998 on loan sales from the
establishment of a mortgage servicing right asset in accordance with
SFAS No. 122. During the years ended June 30, 2000, 1999 and 1998, the
Company amortized $12,606, $9,587 and $2,137 of mortgage servicing
rights against current servicing fee income.
As of June 30, 2000, there were no loans qualifying for sale into the
secondary market. 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, 2000 and 1999.
At June 30, 2000, 1999 and 1998, loans serviced for others amounted to
$8,393,035, $6,353,747 and $3,841,991 respectively.
7) Accrued Interest Receivable
---------------------------
Accrued interest receivable is summarized as follows:
<TABLE>
June 30,
----------------------
2000 1999
----------------------
<S> <C> <C>
Investment securities $ 258,177 246,509
Mortgage-backed securities 151,705 127,769
Loans receivable 241,013 227,690
Other investments 59 9,998
------- -------
$ 650,954 611,966
======= =======
</TABLE>
35
<PAGE>
8) Office Properties and Equipment
---------------------------------------
Office properties and equipment are summarized as follows:
<TABLE>
June 30,
--------------------------
2000 1999
--------------------------
<S> <C> <C>
Land $ 416,595 236,095
Buildings 1,697,498 1,683,008
Easement for parking lot and driveway 223,050 223,050
Leasehold improvements - Homer Township 579,253 579,253
Furniture, fixtures and equipment 2,477,110 2,374,711
Automobiles 17,993 17,993
--------- ---------
5,411,499 5,114,110
Less accumulated depreciation 2,831,438 2,520,060
--------- ---------
$ 2,580,061 2,594,050
========= =========
</TABLE>
Depreciation of office properties and equipment for the years ended June 30,
2000, 1999 and 1998 amounted to $311,378, $203,398 and $148,118 respectively.
The Association has had a lease on vacant land located in Homer Township,
Illinois since 1989. During the year ended June 30, 2000, the Association
purchased this property for $180,500.
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
purchased by the Association.
The Association established a full service branch banking facility at this
location which opened for business during April 1999. Rent expense at the Homer
Township, Illinois location for the years ended June 30, 2000, 1999 and 1998
amounted to $61,314, $43,641 and $17,256 respectively. Rent expense includes
charges for real estate taxes and insurance, and other costs of occupancy
relating to common areas shared with other tenants.
Minimum rental commitments under the above leases, exclusive of future
escalation charges for real estate taxes, insurance and occupancy costs are
approximately as follows:
<TABLE>
<S> <C>
Year ended June 30, 2001 $ 35,156
Year ended June 30, 2002 36,910
Year ended June 30, 2003 38,751
Thereafter through June 30, 2009 334,557
</TABLE>
36
<PAGE>
9) Prepaid Expenses and Other Assets
--------------------------------
Prepaid expenses and other assets consist of the following:
<TABLE>
June 30,
----------------------
2000 1999
----------------------
<S> <C> <C>
Prepaid federal insurance premiums $ 6,722 16,265
Prepaid insurance 63,436 27,910
Other prepaid expenses 107,680 111,966
Mortgage servicing rights 96,145 73,017
Overpayment of federal income tax - 74,277
Deferred federal income tax benefit - net (a) 300,031 303,726
Accounts receivable and other assets 107,729 123,808
------- -------
$ 681,743 730,969
======= =======
</TABLE>
(a) The approximate tax effect of temporary differences that give
rise to the Company's net deferred tax asset at June 30, 2000
and 1999, under SFAS No. 109 is as follows:
<TABLE>
Assets Liabilities Net
---------------------------------------
June 30, 2000
-------------
<S> <C> <C> <C>
Loan fees deferred for financial
reporting purposes, net of costs $ - (58,453) (58,453)
Accelerated depreciation for tax
purposes - (76,300) (76,300)
Tax basis of office building in
excess of book basis 473,816 - 473,816
Bad debt reserves established for
financial reporting purposes 76,665 - 76,665
Increases to tax bad debt reserves
since January 1, 1988 - (35,976) (35,976)
Nondeductible incentive plan expense 6,451 - 6,451
Unrealized gain on securities
available for sale - (21,999) (21,999)
Other - (64,173) (64,173)
------- ------- -------
Total $ 556,932 (256,901) 300,031
======= ======= =======
</TABLE>
<TABLE>
June 30, 1999
-------------
<S> <C> <C> <C>
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
======= ======= =======
</TABLE>
37
<PAGE>
10) Deposits
--------
Deposit accounts are summarized as follows:
<TABLE>
June 30,
----------------------------
2000 1999
----------------------------
<S> <C> <C>
Passbook accounts $ 42,814,177 43,455,797
NOW accounts 9,828,378 8,754,952
Money market accounts 8,364,031 5,343,706
Non-interest bearing demand deposit accounts 9,109,078 9,277,757
----------- -----------
70,115,664 66,832,212
Certificates of deposit by original maturity:
7-91 days 3,190,494 2,713,083
6-11 months 24,309,788 24,554,159
12-29 months 16,702,273 14,720,322
30 months and over 7,538,238 7,552,838
Jumbo 5,014,020 3,851,970
----------- -----------
56,754,812 53,392,372
----------- -----------
$ 126,870,476 120,224,584
=========== ===========
</TABLE>
The weighted average rate on deposit accounts at June 30, 2000 and 1999
was 3.93% and 3.61% respectively.
A summary of certificates of deposit by maturity is as follows:
<TABLE>
June 30,
-----------------------------
2000 1999
-----------------------------
<S> <C> <C>
Within 12 months $ 54,724,246 50,407,705
12 months to 24 months 1,337,866 2,301,944
24 months to 36 months 692,700 682,723
---------- ----------
Total $ 56,754,812 53,392,372
========== ==========
</TABLE>
Interest expense on deposits consists of the following:
<TABLE>
Years Ended June 30,
---------------------------------------
2000 1999 1998
---------------------------------------
<S> <C> <C> <C>
Passbook accounts $ 1,286,343 1,229,227 1,184,927
Certificate accounts 3,119,648 2,557,036 2,329,762
NOW and money market accounts 557,456 392,788 354,257
--------- --------- ---------
Total $ 4,963,447 4,179,051 3,868,946
========= ========= =========
</TABLE>
The aggregate amount of deposit accounts with a balance of $100,000 or
greater was approximately $16,130,000 and $14,176,000, or approximately
12.7% and 11.8% of total deposit balances at June 30, 2000 and 1999,
respectively. Deposits in excess of $100,000 are not insured by the
Federal Deposit Insurance Corporation.
38
<PAGE>
11) Other Liabilities
-----------------
Other liabilities consist of the following:
<TABLE>
June 30,
-----------------------
2000 1999
-----------------------
<S> <C> <C>
Accrued interest on deposits $ 34,621 29,520
Accrued real estate taxes 123,578 125,795
Accrued federal income taxes 28,344 -
Other accrued expenses 118,717 100,469
Outstanding bank drafts 46,577 68,215
Other accounts payable 53,158 78,357
------- -------
$ 404,995 402,356
======= =======
</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, 2000, 1999 and 1998 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
15% 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 $32,974, $36,660 and $34,580 for the years
ended June 30, 2000, 1999 and 1998, respectively.
39
<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.
Grantees of the remaining outstanding shares at June 30, 2000 were
awarded 10-year options to acquire shares at the market price on the
date the options were granted. 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, 2000 and the stock options
outstanding at the end of the respective periods:
<TABLE>
Exercise Price
-------------------------
Number
Options of Shares Per Share Total
------- --------- -------------------------
<S> <C> <C> <C>
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
Granted 0
Exercised 0
------ ----------- -------
Outstanding at June 30, 2000 8,625 $ 10.00-16.25 $ 97,031
====== =========== =======
Exercisable at June 30, 2000 8,625 $ 10.00-16.25 $ 97,031
====== =========== =======
Options available for future
grants at June 30, 2000 6,900
=====
</TABLE>
As of June 30, 2000, the weighted average exercise price for options outstanding
was $11.25 with a weighted average remaining contractual life of 3.67 years.
The Company accounts for its stock options in accordance with Accounting
Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees" ("APB
25"). Under APB 25, as 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.
40
<PAGE>
13) Officer and Director Plans (continued)
--------------------------------------
The following summarizes the pro forma net income and earnings per
shares as if the fair value method of accounting for stock-based
compensation plans had been utilized:
<TABLE>
Years Ended June 30,
--------------------------------
2000 1999 1998
--------------------------------
<S> <C> <C> <C>
Net income (as reported) $ 371,934 364,719 594,593
Pro forma net income 371,934 364,719 594,593
Earnings per share - diluted (as reported) $ 1.01 .99 1.66
Pro forma diluted earnings per share 1.01 .99 1.66
</TABLE>
The pro forma results presented above may not be representative of the effects
reported in pro form net income for future years.
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, 2000, 1999 and 1998, $32,434, $32,435 and
$32,435 had been amortized to expense. The unamortized cost, which is
comparable to deferred compensation, is reflected as a reduction of
stockholders' equity.
41
<PAGE>
14) Income Taxes
------------
The 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 No. 109 which impact the Company is the
tax treatment of bad debt reserves. SFAS No. 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, 2000
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>
Years Ended June 30,
-------------------------------------
2000 1999 1998
-------------------------------------
<S> <C> <C> <C>
Current $ 155,960 125,167 281,295
Deferred 22,924 61,734 57,059
------- ------- -------
$ 178,884 186,901 338,354
======= ======= =======
</TABLE>
A reconciliation of the statutory federal income tax rate to effective
income tax rate is as follows:
<TABLE>
Years Ended June 30,
------------------------------------
2000 1999 1998
-------------------------------------
<S> <C> <C> <C>
Statutory federal income tax rate 34.0% 34.0% 34.0%
Provision for loss on real estate owned - - 6.0
Other (1.5) (.1) (3.7)
---- ---- ----
Effective income tax rate 32.5% 33.9% 36.3%
==== ==== ====
</TABLE>
Deferred federal income tax expense consists of the following tax
effects of timing differences:
<TABLE>
Years Ended June 30,
--------------------------------------
2000 1999 1998
--------------------------------------
<S> <C> <C> <C>
Loan fees $ 14,604 34,299 23,650
Depreciation 8,149 40,980 23,745
Book loan loss recovery (in excess of)
less than tax deduction (16,161) (9,459) 44,920
Recapture of bad debt reserve (23,016) (14,748) (31,560)
Other 39,348 10,662 (3,696)
------ ------ ------
$ 22,924 61,734 57,059
====== ====== ======
</TABLE>
42
<PAGE>
15) Regulatory Capital Requirements
-------------------------------
The Association is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum
total requirements can initiate certain mandatory and possible
additional discretionary actions by regulators that, if undertaken,
could have a direct material effect on the Association's financial
statements. Under capital adequacy guidelines and the regulatory
framework for prompt correction action, the Association must meet
specific capital guidelines that involve quantitative measures of the
Association's assets, liabilities, and certain off-balance-sheet items
as calculated under regulatory accounting practices. The Association's
capital amounts and classification are also subject to quantitative
judgments by the regulators about components, risk weightings, and
other factors.
Quantitative measures established by regulation to ensure capital
adequacy require 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, 2000, 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, 2000 and 1999, 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>
To Be Well-
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
--------------- ----------------- ----------------
Amount Ratio Amount Ratio Amount Ratio
--------------- ----------------- ----------------
June 30, 2000
-------------
<S> <C> <C> <C> <C> <C> <C>
Tangible $ 8,940,569 6.48% $ 2,070,000 1.50% $ N/A N/A %
Core 8,940,569 6.48 4,140,000 3.00 6,900,000 5.00
Risk-base 9,110,686 19.90 3,663,000 8.00 4,579,000 10.00
</TABLE>
<TABLE>
June 30, 1999
-------------
<S> <C> <C> <C> <C> <C> <C>
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-base 8,648,872 20.54 3,368,000 8.00 4,210,000 10.00
</TABLE>
43
<PAGE>
15) Regulatory Capital Requirements (continued)
--------------------------------------------
<TABLE>
Tangible Core Risk-based
Capital Capital Capital
------------------------------------
June 30, 2000
-------------
<S> <C> <C> <C>
Stockholders' equity $ 8,992,888 8,992,888 8,992,888
Unrealized gain on securities
available for sale, net of taxes (42,704) (42,704) (42,704)
Retained mortgage servicing rights (9,615) (9,615) (9,615)
General loss allowances - - 185,117
Direct equity investments - - (15,000)
--------- --------- ---------
Regulatory capital computed $ 8,940,569 8,940,569 9,110,686
========= ========= =========
</TABLE>
A reconciliation of the Association's equity capital at June 30, 2000
is as follows:
<TABLE>
<S> <C>
Stockholders' equity $ 9,256,717
Less Company stockholders' equity not available
for regulatory capital (263,829)
----------
Stockholders' equity of the Association $ 8,992,888
=========
</TABLE>
<TABLE>
Tangible Core Risk-based
Capital Capital Capital
-------------------------------------
June 30, 1999
--------------
<S> <C> <C> <C>
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>
<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>
44
<PAGE>
16) Stockholders' Equity
--------------------
As part of the Conversion, the Association established a liquidation
account for the benefit of all eligible depositors who continue to
maintain their deposit accounts in the Association after conversion. In
the unlikely event of a complete liquidation of the Association, each
eligible depositor will be entitled to receive a liquidation
distribution from the liquidation account, in the proportionate amount
of the then current adjusted balance for deposit accounts held, before
distribution may be made with respect to the Association's capital
stock. The Association may not declare or pay a cash dividend on, or
repurchase any of, its capital stock if the effect thereof would cause
the retained earnings of the Association to be reduced below the amount
required for the liquidation account. Except for such restrictions, the
existence of the liquidation account does not restrict the use or
application of retained earnings.
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.
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 $1,392,300 at June 30, 2000
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 7.875% to 8.625%. 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 $581,000 at June 30, 2000. In addition, the Association
has approved, but unused, credit card lines of credit amounting to
approximately $241,000. The Association has also issued outstanding
letters of credit totaling $55,000.
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 2000 Board of Directors' meeting, the Company declared a
quarterly dividend of $.075 per share, totaling $27,298, payable August
17, 2000 to shareholders of record as of August 7, 2000.
45
<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, 2000 and 1999 are as follows:
<TABLE>
June 30, 2000
--------------------------
Carrying Fair
Amount Value
--------------------------
<S> <C> <C>
Financial assets:
Cash and cash equivalents $ 32,666,517 32,666,517
Investment securities, held to maturity 19,990,723 19,896,031
Investment securities, available for sale 5,042,710 5,042,710
Mortgage-backed securities, held to maturity 21,854,112 21,508,988
Loans receivable, gross 53,946,511 52,189,000
Financial liabilities:
Deposits 126,870,476 126,846,000
</TABLE>
<TABLE>
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>
46
<PAGE>
21) Condensed Parent Company Only Financial Statements
--------------------------------------------------
The following condensed statements of financial condition, as of June
30, 2000 and 1999 and condensed statements of income and cash flows for
the year ended June 30 2000 and 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.
<TABLE>
Statements of Financial Condition
June 30,
------------------------
2000 1999
------------------------
Assets
<S> <C> <C>
Cash and cash equivalents $ 311,756 138,575
Equity investment in the Association 8,950,538 8,805,719
Prepaid expenses and other assets - 23,632
--------- ---------
9,262,294 8,967,926
Liabilities and Stockholders' Equity
------------------------------------
Liabilities:
------------
Accrued taxes and other liabilities 47,927 16,300
--------- ---------
Stockholders' Equity:
--------------------
Common stock 3,640 3,640
Additional paid-in capital 3,262,395 3,262,395
Retained earnings 5,948,332 5,685,591
--------- ---------
Total stockholders' equity 9,214,367 8,951,626
--------- ---------
$ 9,262,294 8,967,926
========= =========
</TABLE>
Statements of Income
<TABLE>
Period from
Year Ended July 23, 1998
June 30, to June 30,
2000 1999
---------------------------
<S> <C> <C>
Interest income $ 5,640 2,920
Non-interest expense 63,042 91,099
------- -------
Net loss before income tax benefit
and equity in earnings of subsidiaries (57,402) (88,179)
Benefit from income taxes 19,517 29,981
------- -------
Net loss before equity in earnings
of subsidiaries (37,885) (58,198)
Equity in earnings of subsidiaries 409,819 422,917
------- -------
Net income $ 371,934 364,719
======= =======
</TABLE>
47
<PAGE>
21) Condensed Parent Company Only Financial Statements (continued)
<TABLE>
Statements of Cash Flows
Period from
Year Ended July 23, 1998
June 30, to June 30,
2000 1999
------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 371,934 364,719
Equity in earnings of the Association (409,819) (422,917)
(Increase) decrease in prepaid expenses
and other assets 23,632 (23,632)
Increase in accrued taxes
and other liabilities 31,627 16,300
------- -------
Net cash provided by (for) operating activities 17,374 (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 265,000 317,298
Dividends paid on common stock (109,193) (109,193)
------- -------
Net cash provided by financing activities 155,807 208,105
------- -------
Net increase in cash and cash equivalents 173,181 138,575
Cash and cash equivalents at beginning of period 138,575 -
------- -------
Cash and cash equivalents at end of period $ 311,756 138,575
======= =======
</TABLE>
48
<PAGE>
Exhibit 21
<PAGE>
<TABLE>
SUBSIDIARIES OF THE REGISTRANT
Parent Subsidiary Ownership Organization
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Midland Capital Holdings Midland Federal Savings and Loan 100% Federal
Corporation Association
Midland Federal Savings and Loan Midland Service Corporation 100% Illinois
Association
Midland Service Corporation MS Insurance Agency, Inc. 100% Illinois
Midland Service Corporation Bridgeview Development Company 100% Illinois
</TABLE>
The financial statements of the Registrant are consolidated with those of
its subsidiary.
<PAGE>
EXHIBIT 27
FINANCIAL DATA SCHEDULE
