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Exhibit 13 ANNUAL REPORT TO SECURITY HOLDERS




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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 incorporated July
18, 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, a branch banking office located in
Homer Glen, Illinois, a southwest suburb of
Chicago and its home office in Bridgeview,
Illinois. Midland Federal also operates a
wholly owned subsidiary, Midland Service
Corporation. Common stock in Midland Capital
Holdings Corporation is traded on the Electronic
Bulletin Board of the National Association of
Securities Dealers. Table of ContentsLetter to Shareholders
    
    
    2Financial Highlights
    
    
    3Selected Consolidated Financial
Information
    
    
    4Managements Discussion and Analysis
    
    
    6Independent Auditors Report
    
    
    21Consolidated Statements of
Financial Condition
    
    
    22Consolidated Statements of Income
    
    
    23Consolidated Statements of Changes in
Stockholders Equity
    
    
    24Consolidated Statements of Cash Flows
    
    
    25Notes to Consolidated Financial
Statements
    
    
    26
 1




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To Our Shareholders, Midland Capital Holdings Corporation completed its fiscal year ended June
30, 2004 with earnings of $1.04 million, or $2.80 per diluted common share.
The Companys assets totaled $153.6 million at June 30, 2004 and the loan
portfolio continued another year of growth, totaling $94.5 million at fiscal
year end. Total stockholders equity rose to a record $11.7 million, resulting
in a book value per common share of $31.51 at June 30, 2004. Asset quality remained excellent in fiscal 2004 with non-performing loans
totaling .06% of total loans at June 30, 2004. The Companys allowance for
loan losses amounted to 0.49% of total loans at fiscal year end after net loan
charge offs of only .02% of total loans in fiscal 2004. Also at June 30, 2004,
the Companys ratio of stockholders equity to total assets rose to 7.65% and
its banking subsidiary, Midland Federal Savings, continued to meet all of the
regulatory capital requirements as a well capitalized savings institution
during fiscal 2004. As a result of the Companys positive financial performance the Board of
Directors increased the amount of cash dividends paid to $0.68 per common share
in fiscal 2004. As in years past, I wish to thank all of our stockholders and customers
for their continued support. I look forward to building upon our
accomplishments this year and to continued positive results in the coming year. Sincerely,/s/ Paul ZogasPaul ZogasChairman and President 2




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FINANCIAL HIGHLIGHTS Year Ended June 30,2004
    
    2003
    
    2002
    
    2001
    
    2000(Dollars in Thousands)Total assets
    
    $
    153,560
    
    
    
    159,976
    
    
    
    150,589
    
    
    $
    142,496
    
    
    
    137,225Loans receivable, net
    
    
    94,543
    
    
    
    93,300
    
    
    
    86,087
    
    
    
    68,486
    
    
    
    53,030Mortgage-backed securities
    
    
    2,942
    
    
    
    6,272
    
    
    
    10,360
    
    
    
    17,310
    
    
    
    21,854Cash and cash equivalents
    
    
    50,497
    
    
    
    49,421
    
    
    
    32,921
    
    
    
    20,719
    
    
    
    32,666Investment securities
    
    
    1,234
    
    
    
    6,389
    
    
    
    16,306
    
    
    
    31,338
    
    
    
    25,033Deposits
    
    
    140,437
    
    
    
    147,490
    
    
    
    138,444
    
    
    
    131,504
    
    
    
    126,870Stockholders equity
    
    
    11,742
    
    
    
    11,056
    
    
    
    10,397
    
    
    
    9,662
    
    
    
    9,257For the Period:Net interest income
    
    $
    4,635
    
    
    
    4,554
    
    
    
    4,448
    
    
    
    3,661
    
    
    
    3,510Net income
    
    
    1,043
    
    
    
    690
    
    
    
    866
    
    
    
    379
    
    
    
    372Per Common Share:Book value per share
outstanding
    
    $
    31.51
    
    
    
    29.67
    
    
    
    28.56
    
    
    
    26.55
    
    
    
    25.43Earnings per share outstandingbasic
    
    $
    2.80
    
    
    
    1.88
    
    
    
    2.38
    
    
    
    1.04
    
    
    
    1.02diluted
    
    $
    2.80
    
    
    
    1.88
    
    
    
    2.36
    
    
    
    1.03
    
    
    
    1.01Financial Ratios:Stockholders equity to
total assets
    
    
    7.65
    %
    
    
    6.91
    
    
    
    6.90
    
    
    
    6.78
    
    
    
    6.75Non-performing assets to
total assets
    
    
    .04
    %
    
    
    .30
    
    
    
    .11
    
    
    
    .16
    
    
    
    .21Net charge-offs to total loans
    
    
    .02
    %
    
    
    
    
    
    
    .03
    
    
    
    .04
    
    
    
    Net interest margin
    
    
    3.13
    %
    
    
    3.05
    
    
    
    3.19
    
    
    
    2.73
    
    
    
    2.65Operating expenses to
average assets
    
    
    2.93
    %
    
    
    2.96
    
    
    
    2.88
    
    
    
    2.84
    
    
    
    2.74Return on average assets
    
    
    .67
    %
    
    
    .44
    
    
    
    .59
    
    
    
    .27
    
    
    
    .27Return on average
Stockholders equity
    
    
    9.06
    %
    
    
    6.41
    
    
    
    8.64
    
    
    
    3.99
    
    
    
    4.11
 3




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SELECTED CONSOLIDATED FINANCIAL INFORMATION SELECTED FINANCIAL CONDITION DATA: At June 30,2004
    
    2003
    
    2002
    
    2001
    
    2000(In Thousands)Total assets
    
    $
    153,560
    
    
    
    159,976
    
    
    
    150,589
    
    
    
    142,496
    
    
    
    137,225Loans receivable, net
    
    
    94,543
    
    
    
    93,300
    
    
    
    86,087
    
    
    
    68,486
    
    
    
    53,030Mortgage-backed securities
    
    
    2,942
    
    
    
    6,272
    
    
    
    10,360
    
    
    
    17,310
    
    
    
    21,854Cash and cash equivalents
    
    
    50,497
    
    
    
    49,421
    
    
    
    32,921
    
    
    
    20,719
    
    
    
    32,666Investment securities
    
    
    1,234
    
    
    
    6,389
    
    
    
    16,306
    
    
    
    31,338
    
    
    
    25,033Deposits
    
    
    140,437
    
    
    
    147,490
    
    
    
    138,444
    
    
    
    131,504
    
    
    
    126,870Stockholders equity
    
    $
    11,742
    
    
    
    11,056
    
    
    
    10,397
    
    
    
    9,662
    
    
    
    9,257
 SELECTED OPERATIONS DATA: Year Ended June 30,2004
    
    2003
    
    2002
    
    2001
    
    2000(In Thousands)Total interest income
    
    $
    6,340
    
    
    
    7,278
    
    
    
    8,282
    
    
    
    8,975
    
    
    
    8,473Total interest expense
    
    
    1,706
    
    
    
    2,724
    
    
    
    3,834
    
    
    
    5,314
    
    
    
    4,963Net interest income
    
    
    4,634
    
    
    
    4,554
    
    
    
    4,448
    
    
    
    3,661
    
    
    
    3,510Provision for loan losses
    
    
    60
    
    
    
    60
    
    
    
    15
    
    
    
    
    
    
    
    Net interest income after
provision for loan losses
    
    
    4,574
    
    
    
    4,494
    
    
    
    4,433
    
    
    
    3,661
    
    
    
    3,510Non-interest income:Loan related fees and charges
    
    
    399
    
    
    
    542
    
    
    
    429
    
    
    
    269
    
    
    
    198Deposit related fees
    
    
    473
    
    
    
    512
    
    
    
    514
    
    
    
    481
    
    
    
    500Commission income
    
    
    70
    
    
    
    70
    
    
    
    74
    
    
    
    73
    
    
    
    64Profit on sale of loans
    
    
    102
    
    
    
    27
    
    
    
    44
    
    
    
    7
    
    
    
    36Gain on satisfaction of
foreclosure judgments
    
    
    433
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other income
    
    
    86
    
    
    
    57
    
    
    
    67
    
    
    
    88
    
    
    
    82Total non-interest income
    
    
    1,563
    
    
    
    1,208
    
    
    
    1,128
    
    
    
    918
    
    
    
    880Non-interest expense:Staffing costs
    
    
    2,635
    
    
    
    2,627
    
    
    
    2,381
    
    
    
    2,163
    
    
    
    1,956Occupancy and equipment expense
    
    
    729
    
    
    
    773
    
    
    
    745
    
    
    
    713
    
    
    
    721Deposit insurance premiums
    
    
    22
    
    
    
    24
    
    
    
    24
    
    
    
    26
    
    
    
    47Advertising expense
    
    
    70
    
    
    
    58
    
    
    
    57
    
    
    
    82
    
    
    
    119Data processing fees
    
    
    213
    
    
    
    207
    
    
    
    209
    
    
    
    195
    
    
    
    176Legal, audit and examination
    
    
    161
    
    
    
    141
    
    
    
    125
    
    
    
    139
    
    
    
    140Other expense
    
    
    744
    
    
    
    820
    
    
    
    707
    
    
    
    686
    
    
    
    680Total non-interest expense
    
    
    4,574
    
    
    
    4,650
    
    
    
    4,248
    
    
    
    4,004
    
    
    
    3,839Income before income taxes
    
    
    1,563
    
    
    
    1,052
    
    
    
    1,313
    
    
    
    575
    
    
    
    551Provision for income taxes
    
    
    520
    
    
    
    362
    
    
    
    447
    
    
    
    196
    
    
    
    179Net income
    
    $
    1,043
    
    
    
    690
    
    
    
    866
    
    
    
    379
    
    
    
    372
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SELECTED FINANCIAL RATIOS: At or For the Year Ended June 30,2004
    
    2003
    
    2002
    
    2001
    
    2000Performance Ratios:Return on average assets
    
    
    .67
    %
    
    
    .44
    
    
    
    .59
    
    
    
    .27
    
    
    
    .27Return on average stockholders
equity
    
    
    9.06
    %
    
    
    6.41
    
    
    
    8.64
    
    
    
    3.99
    
    
    
    4.11Interest rate spread during
period
    
    
    2.98
    %
    
    
    2.85
    
    
    
    2.89
    
    
    
    2.30
    
    
    
    2.28Net interest margin (1)
    
    
    3.13
    %
    
    
    3.05
    
    
    
    3.19
    
    
    
    2.73
    
    
    
    2.65Ratio of operating expenses to
average total assets
    
    
    2.93
    %
    
    
    2.96
    
    
    
    2.88
    
    
    
    2.84
    
    
    
    2.74Ratio of average interest-
earning assets to average
interest-bearing liabilities
    
    
    112.56
    %
    
    
    111.07
    
    
    
    110.76
    
    
    
    110.86
    
    
    
    109.87Asset Quality Ratios:Non-performing assets to
total assets
    
    
    .04
    %
    
    
    .30
    
    
    
    .11
    
    
    
    .16
    
    
    
    .21Allowance for loan losses to
non-performing loans
    
    
    829.00
    %
    
    
    84.80
    
    
    
    213.29
    
    
    
    104.63
    
    
    
    78.91Allowance for loan losses to
total loans
    
    
    .49
    %
    
    
    .44
    
    
    
    .41
    
    
    
    .52
    
    
    
    .69Capital Ratios:Stockholders equity to
total assets
    
    
    7.65
    %
    
    
    6.91
    
    
    
    6.90
    
    
    
    6.78
    
    
    
    6.75Average stockholders equity to
average assets
    
    
    7.37
    %
    
    
    6.85
    
    
    
    6.80
    
    
    
    6.74
    
    
    
    6.46
  (1)
    
    Net interest income divided by average interest-earning assets. 5




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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 and real estate values in the Companys market area, changes in
policies by regulatory agencies, fluctuations in the amounts of and
relationship between long and short term 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 for the purpose of becoming the thrift 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 July 23, 1998, as
a result of a reorganization, the Association became a wholly owned subsidiary
of the Company, and each outstanding share of common stock of the Association
became, by operation of law, one share of common stock of the Company. At June
30, 2004 there were 372,600 shares of the Companys common stock outstanding. The Companys results of operations are dependent primarily on net interest
income, which is the difference between the interest income earned on its loan,
mortgage-backed securities, and investment portfolios and its cost of funds, 6




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consisting of the interest paid on its deposits. 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, Homer Glen, 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 loans, and to a lesser extent,
consumer, multi-family and other loans in its primary market area. The Company
also makes substantial investments in investment securities, consisting
primarily of short-term U.S. government and agency obligations and in
mortgage-backed securities, to a lesser extent, in an effort to manage interest
rate risk. MANAGEMENT OF INTEREST RATE RISK An evaluation of the interest rate risk position of a financial institution may
involve 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. Certain shortcomings are inherent in the methodology described in the above
interest rate risk measurements. Measuring changes in NPV requires certain
assumptions that may 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. In addition, 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. Also, the model does not take into account
the impact of changing interest rates on the credit quality of the underlying
assets. Finally, the model does not attempt to measure the impact of a change
in interest rates on a companys results of operations or net interest income.
Accordingly, although the NPV measurement provides an indication of the
Associations interest 7




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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 financial position and
actual results will likely differ from the NPV presented below. 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 includes 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 maintains
a relatively high level of liquidity. Second, 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 in the current interest rate
environment and the potential for increased margin. 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 interest rate sensitivity of the Associations 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, 2004 assuming an instantaneous and sustained 300
basis point change in market interest rates, measured in 100 basis point
increments. As of June 30, 2004, due to the current level of interest rates,
the OTS did not provide NPV estimates for decreases in interest rates greater
than 100 basis points. NET PORTFOLIO VALUE
    
    NPV AS % OF ASSETSChange in Rates
    
    $ Amount
    
    $ Change
    
    % Change
    
    NPV Ratio
    
    Change(Basis Points)
    
    (Thousands)+300 bp
    
    
    12,499
    
    
    
    -7,064
    
    
    
    -36
    %
    
    
    8.05
    %
    
    -396 bp+200 bp
    
    
    14,756
    
    
    
    -4,807
    
    
    
    -25
    %
    
    
    9.36
    %
    
    -265 bp+100 bp
    
    
    17,153
    
    
    
    -2,410
    
    
    
    -12
    %
    
    
    10.70
    %
    
    -131 bp0 bp
    
    
    19,563
    
    
    
    
    
    
    
    
    
    
    
    12.01
    %- 100 bp
    
    
    20,409
    
    
    
    847
    
    
    
    + 4
    %
    
    
    12.45
    %
    
    + 44 bp
 FINANCIAL CONDITION AT JUNE 30, 2004 At June 30, 2004 total assets of the Company decreased by $6.4 million to
$153.6 million from $160.0 million at June 30, 2003. This decrease was the
result of pay downs and redemptions of investment securities and
mortgage-backed securities, the proceeds of which were used in part to fund a
$7.1 million decline in deposit balances to $140.4 millions at June 30, 2004. 8




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Loans receivable, including loans held for sale, increased $1.2 million to
$94.5 million at June 30, 2004 despite a reduction in loan originations. The
Company originated $43.0 million of loans during the year ended June 30, 2004
compared to loan originations of $55.9 million during the prior fiscal year.
The lower loan origination volume in the current year was due in part to a
decrease in mortgage refinancing activity that occurred during the second half
of fiscal 2004. Offsetting loan originations in the current fiscal year were
loan repayments of $40.6 million as well as loan sales of $1.5 million. There
were no new purchases of mortgage-backed securities during fiscal 2004 and the
balance of mortgage-backed securities decreased by $3.3 million to $2.9 million
at June 30, 2004 due to repayments and amortization. Investment securities available for sale decreased $5.2 million to $1.2 million
at June 30, 2004. Gross unrealized gains in the available for sale portfolio
were $253,000 at June 30, 2004 compared to gross unrealized gains of $409,000
at June 30, 2003, reflecting the negative impact of higher interest rates. The
weighted average remaining term to maturity of the Companys investment
securities portfolio at June 30, 2004 was 12.7 years. The Company increased the balance of cash and cash equivalents by $1.1 million
to $50.5 million at June 30, 2004 from $49.4 million at June 30, 2003 in
response to upward pressure on interest rates in the second half of fiscal
2004. The increase in cash equivalents was funded by the decrease in the
investment securities portfolio, discussed above. Non-performing assets consisted of $55,000 in non-accruing loans at June 30,
2004 compared to $482,000 at June 30, 2003. The allowance for loan losses
increased by $50,000 at June 30, 2004, as a result of $60,000 in loan loss
provisions offset by $10,000 in net loan charge offs during the year.
Non-accruing loans at June 30, 2004 consisted of one single-family residential
mortgage loan in the amount of $36,000 and $19,000 in non-mortgage loans. At
June 30, 2004 the Companys ratio of allowance for loan losses to
non-performing loans was 829.00% compared to 84.80% at June 30, 2003.
Management believes that the current allowance for loan losses is adequate to
cover probable accrued losses in the portfolio. Deposits for the year ended June 30, 2004 decreased $7.1 million to $140.4
million as a result of actual deposit outflows, net of deposits, in the amount
of $8.7 million, offset by interest credited to deposits in the amount of $1.6
million. The net decrease in deposits is primarily attributed to less
competitive pricing of certificate of deposit accounts based upon managements
view that current asset yields did not justify aggressive pricing for these
deposits. The decrease in deposits is the result of a $9.8 million decrease in
certificate of deposit accounts, an $802,000 decrease in NOW accounts and a
$151,000 decrease in money market accounts, offset by a $3.3 million increase
in passbook deposit accounts and a $450,000 increase in demand deposit
accounts. Stockholders equity increased $686,000, or 6.2%, to $11.7 million at June 30,
2004. The increase in stockholders equity was due to net income of $1.0
million offset by a decrease in other comprehensive income of $103,000 and the
payment of cash dividends in the amount of $254,000. 9




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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
data processing fees 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




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##### Table of Contents



Year Ended June 30,2004
    
    2003
    
    2002Interest
    
    Yield
    
    
    
    
    
    Interest
    
    Yield
    
    
    
    
    
    Interest
    
    YieldAverage
    
    Earned/
    
    and
    
    Average
    
    Earned/
    
    and
    
    Average
    
    Earned/
    
    andBalance
    
    Paid
    
    Rates
    
    Balance
    
    Paid
    
    Rates
    
    Balance
    
    Paid
    
    Rates(Dollars in Thousands)Interest-Earning
Assets:Loans receivable (1)
    
    $
    93,096
    
    
    
    5,503
    
    
    
    5.91
    %
    
    $
    90,852
    
    
    
    5,738
    
    
    
    6.32
    %
    
    $
    78,998
    
    
    
    5,446
    
    
    
    6.89
    %Mortgage-backed
securities
    
    
    4,274
    
    
    
    205
    
    
    
    4.80
    
    
    
    7,947
    
    
    
    448
    
    
    
    5.63
    
    
    
    13,656
    
    
    
    875
    
    
    
    6.40Investment and other
securities
    
    
    2,521
    
    
    
    118
    
    
    
    4.69
    
    
    
    11,384
    
    
    
    518
    
    
    
    4.55
    
    
    
    26,639
    
    
    
    1,476
    
    
    
    5.54Interest-bearing
deposits
    
    
    47,229
    
    
    
    448
    
    
    
    0.95
    
    
    
    38,071
    
    
    
    523
    
    
    
    1.37
    
    
    
    19,449
    
    
    
    441
    
    
    
    2.27FHLB stock
    
    
    1,032
    
    
    
    66
    
    
    
    6.38
    
    
    
    931
    
    
    
    51
    
    
    
    5.51
    
    
    
    817
    
    
    
    44
    
    
    
    5.43Total interest-earning assets
    
    
    148,152
    
    
    
    6,340
    
    
    
    4.28
    
    
    
    149,185
    
    
    
    7,278
    
    
    
    4.88
    
    
    
    139,559
    
    
    
    8,282
    
    
    
    5.93Non-interest earning
assets
    
    
    8,170
    
    
    
    
    
    
    
    
    
    
    
    8,067
    
    
    
    
    
    
    
    
    
    
    
    7,800Total assets
    
    $
    156,322
    
    
    
    
    
    
    
    
    
    
    $
    157,252
    
    
    
    
    
    
    
    
    
    
    $
    147,359Interest-Bearing
Liabilities:Certificates of
deposit
    
    $
    53,542
    
    
    
    1,013
    
    
    
    1.89
    %
    
    $
    59,052
    
    
    
    1,540
    
    
    
    2.61
    %
    
    $
    57,235
    
    
    
    2,189
    
    
    
    3.82
    %Passbook accounts
    
    
    57,163
    
    
    
    509
    
    
    
    0.89
    
    
    
    53,651
    
    
    
    849
    
    
    
    1.58
    
    
    
    48,179
    
    
    
    1,152
    
    
    
    2.39Money market and
NOW accounts
    
    
    20,911
    
    
    
    184
    
    
    
    0.88
    
    
    
    21,609
    
    
    
    335
    
    
    
    1.55
    
    
    
    20,592
    
    
    
    493
    
    
    
    2.40Total interest-bearing
liabilities
    
    
    131,616
    
    
    
    1,706
    
    
    
    1.30
    
    
    
    134,312
    
    
    
    2,724
    
    
    
    2.03
    
    
    
    126,006
    
    
    
    3,834
    
    
    
    3.04Non-interest bearing
deposits
    
    
    11,793
    
    
    
    
    
    
    
    
    
    
    
    10,554
    
    
    
    
    
    
    
    
    
    
    
    9,763Other liabilities
    
    
    1,397
    
    
    
    
    
    
    
    
    
    
    
    1,615
    
    
    
    
    
    
    
    
    
    
    
    1,565Total liabilities
    
    
    144,806
    
    
    
    
    
    
    
    
    
    
    
    146,481
    
    
    
    
    
    
    
    
    
    
    
    137,334Stockholders equity
    
    
    11,516
    
    
    
    
    
    
    
    
    
    
    
    10,771
    
    
    
    
    
    
    
    
    
    
    
    10,025Liabilities and
stockholders
equity
    
    $
    156,322
    
    
    
    
    
    
    
    
    
    
    $
    157,252
    
    
    
    
    
    
    
    
    
    
    $
    147,359Net earning assets
    
    $
    16,536
    
    
    
    
    
    
    
    
    
    
    $
    14,873
    
    
    
    
    
    
    
    
    
    
    $
    13,553Net-interest income
    
    
    
    
    
    $
    4,634
    
    
    
    
    
    
    
    
    
    
    $
    4,554
    
    
    
    
    
    
    
    
    
    
    $
    4,448Net-interest rate spread
    
    
    
    
    
    
    
    
    
    
    2.98
    %
    
    
    
    
    
    
    
    
    
    
    2.85
    %
    
    
    
    
    
    
    
    
    
    
    2.89
    %Net-interest margin
    
    
    
    
    
    
    
    
    
    
    3.13
    %
    
    
    
    
    
    
    
    
    
    
    3.05
    %
    
    
    
    
    
    
    
    
    
    
    3.19
    %Average interest-earning
assets to average
interest-bearing
liabilities
    
    
    
    
    
    
    
    
    
    
    112.56
    %
    
    
    
    
    
    
    
    
    
    
    111.07
    %
    
    
    
    
    
    
    
    
    
    
    110.76
    %
  (1)
    
    Calculated net of deferred yield adjustments, loan discounts, loans in
process and loss
reserves. 11




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##### Table of Contents



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). Year Ended June 30,2004 vs. 2003
    
    2003 vs. 2002Increase (decrease) due to
    
    Increase (decrease) due toRate/
    
    
    
    
    
    
    
    
    
    
    
    
    
    Rate/Volume
    
    Rate
    
    Volume
    
    Net
    
    Volume
    
    Rate
    
    Volume
    
    Net(Dollars in Thousands)Interest-Earning
Assets:Loans Receivable
    
    $
    142
    
    
    $
    (368
    )
    
    $
    (9
    )
    
    $
    (235
    )
    
    $
    817
    
    
    $
    (457
    )
    
    $
    (68
    )
    
    $
    292Mortgage-backed
securities
    
    
    (207
    )
    
    
    (66
    )
    
    
    30
    
    
    
    (243
    )
    
    
    (366
    )
    
    
    (105
    )
    
    
    44
    
    
    
    (427
    )Investment and other
securities
    
    
    (403
    )
    
    
    16
    
    
    
    (13
    )
    
    
    (400
    )
    
    
    (845
    )
    
    
    (264
    )
    
    
    151
    
    
    
    (958
    )Interest-bearing
deposits
    
    
    126
    
    
    
    (162
    )
    
    
    (39
    )
    
    
    (75
    )
    
    
    422
    
    
    
    (174
    )
    
    
    (166
    )
    
    
    82FHLB stock
    
    
    6
    
    
    
    8
    
    
    
    1
    
    
    
    15
    
    
    
    6
    
    
    
    1
    
    
    
    
    
    
    
    7Total interest-earning assets
    
    $
    (336
    )
    
    $
    (572
    )
    
    $
    (30
    )
    
    $
    (938
    )
    
    $
    34
    
    
    $
    (999
    )
    
    $
    (39
    )
    
    $
    (1,004
    )Interest-Bearing
Liabilities:Certificates of
deposit
    
    $
    (144
    )
    
    $
    (422
    )
    
    $
    39
    
    
    $
    (527
    )
    
    $
    69
    
    
    $
    (696
    )
    
    $
    (22
    )
    
    $
    (649
    )Passbook accounts
    
    
    56
    
    
    
    (372
    )
    
    
    (24
    )
    
    
    (340
    )
    
    
    131
    
    
    
    (390
    )
    
    
    (44
    )
    
    
    (303
    )Money market and
NOW accounts
    
    
    (10
    )
    
    
    (146
    )
    
    
    5
    
    
    
    (151
    )
    
    
    24
    
    
    
    (174
    )
    
    
    (8
    )
    
    
    (158
    )Total interest-bearing liabilities
    
    $
    (98
    )
    
    $
    (940
    )
    
    $
    20
    
    
    $
    (1,018
    )
    
    $
    224
    
    
    $
    (1,260
    )
    
    $
    (74
    )
    
    $
    (1,110
    )Net change in net
interest income
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    80
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    106
 12




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##### Table of Contents



COMPARISON OF OPERATING RESULTS
FOR THE FISCAL YEARS ENDED
JUNE 30, 2004 AND JUNE 30, 2003 The Company had net income of $1.0 million in fiscal 2004 compared to net
income of $690,000 for fiscal 2003. The increase in net income is attributable
to a $355,000 increase in non-interest income, an $80,000 increase in net
interest income and a $76,000 decrease in non-interest expense offset by a
$158,000 increase in income taxes. Net interest income increased $80,000 to $4.6 million in fiscal 2004 from $4.5
million in fiscal 2003. The increase in net interest income was the result of
an increase in the Companys interest rate spread to 2.98% in fiscal 2004 from
2.85% in fiscal 2003 as well as a $1.6 million increase in the average balance
of net earning assets to $16.5 million in fiscal 2004 from $14.9 million in the
prior fiscal year. The primary factor for the increase in the Companys
interest rate spread was the collection of non-accruing loan interest in both
periods from loan workout agreements. In fiscal 2004 the Company collected
$233,000 in non-accruing loan interest compared to the collection of $64,000 in
non-accruing loan interest in fiscal 2003. INTEREST INCOME Interest income decreased $938,000 in fiscal 2004 to $6.3 million. This
decrease in interest income resulted from a decrease in the average yield
earned on interest earning assets as well as a decrease in the average balance
of interest earning assets. The average yield on interest earning assets
decreased to 4.28% in fiscal 2004 from 4.88% in fiscal 2003 and the average
balance of interest earning assets decreased $938,000 to $148.2 million in
fiscal 2004 from $149.2 million in fiscal 2003. Interest on loans receivable decreased $235,000, or 4.1%, in fiscal 2004 to
$5.5 million compared with fiscal 2003. The decrease in interest income was
attributed to a decrease in the average yield earned on loans receivable to
5.91% in fiscal 2004 from 6.32% in fiscal 2003 due to prepayments of higher
yielding fixed rate loans and current originations at lower interest rates as a
result of the low interest rate environment. The Companys average yield on
loans receivable was increased in both periods by the collection of
non-accruing loan interest from loan workout agreements. In fiscal 2004 the
Company collected $233,000 in non-accruing loan interest compared to the
collection of $64,000 in non-accruing loan interest in fiscal 2003. Net of the
collection of non-accruing loan interest in both periods, the average yield
earned on loans receivable decreased to 5.66% in fiscal 2004 from 6.25% in
fiscal 2003. The decrease in the average yield earned on loans receivable was
offset by a $2.2 million increase in the average outstanding balance of net
loans receivable to $93.1 million in fiscal 2004 from $90.9 million in fiscal
2003. Interest on mortgage-backed securities decreased $243,000, or 54.1%, to
$205,000 in fiscal 2004 compared with fiscal 2003. The decrease in interest
income was attributed to a $3.7 million decrease in the average outstanding
balance of mortgage-backed securities to $4.3 million in fiscal 2004 from $8.0
million in fiscal 2003 as well as a decrease in the average yield earned on
mortgage-backed securities to 4.80% in fiscal 2004 from 5.63% in fiscal 2003. 13




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##### Table of Contents



Interest earned on investment securities decreased $400,000, or 77.2%, to
$118,000 in fiscal 2004. The decrease in interest income resulted from an $8.8
million decrease in the average outstanding balance of investment securities to
$2.6 million in fiscal 2004 from $11.4 in fiscal 2003. The decrease in the
average outstanding balance of investment securities was offset by an increase
in the average yield earned on investment securities to 4.69% in fiscal 2004
compared to 4.55% in fiscal 2003 as a result of the maturity of lower yielding
securities in the portfolio. Interest earned on interest bearing deposits decreased $75,000, or 14.4%, to
$448,000 in fiscal 2004 compared with fiscal 2003. The decrease in interest
income is attributed to a decrease in the average yield earned on interest
bearing deposits to 0.95% in fiscal 2004 from 1.37% in fiscal 2003. The
decrease in the average yield on interest bearing deposits was offset by a $9.1
million increase in the average outstanding balance of interest bearing
deposits to $47.2 million in fiscal 2004 from $38.1 million in fiscal 2003.
The Company increased its average balance of interest bearing deposits during
fiscal 2004 in anticipation of an increase in economic activity and upward
pressure on interest rates in fiscal 2005. The increase in interest bearing
deposits in fiscal 2004 was partly funded by the $8.8 million decrease in the
average outstanding balance of investment securities, discussed above. INTEREST EXPENSE Interest expense decreased $1.0 million, or 37.4%, to $1.7 million in fiscal
2004 from $2.7 million in fiscal 2003. The decrease in interest expense in
fiscal 2004 was the result of a decrease in the average yield paid on interest
costing deposits as well as a decrease in the average outstanding balance of
interest costing deposits. The average yield paid on interest costing deposits
decreased to 1.30% in fiscal 2004 compared to 2.03% in fiscal 2003 and the
average outstanding balance of interest costing deposits decreased by $2.7
million to $131.6 million in fiscal 2004 from $134.3 million in fiscal 2003.
The decrease in the average yield paid on interest costing deposits is
primarily attributed to the general decline in interest rates that occurred
between the two periods. PROVISIONS FOR LOSSES ON LOANS The Company maintains an allowance for loan losses based upon managements
periodic evaluation of probable accrued losses in the portfolio based on 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. After considering non-performing loans, the high
concentration of one-to-four family mortgage loans in the loan portfolio, the
level and nature of its charge offs and recoveries, the strong housing market
and the volume of its loan activity, the Company made $60,000 in loan loss
provisions during fiscal 2004. The allowance for loan losses totaled $460,000,
or .49% of total loans, at June 30, 2004, compared to $410,000, or .44% of
total loans, at June 30, 2003. Non-accruing loans totaled $55,000 at June 30,
2004 compared to $482,000 at June 30, 2003. The Companys ratio of allowance
for loan losses to non-performing loans was 829.0% at June 30, 2004 compared to
84.8% at June 30, 2003. The $460,000 allowance for loan losses at June 30,
2004 was determined by the Company to be consistent with its policy for the
establishment and maintenance of adequate levels of loan loss reserves. At June 30, 2004, 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 14




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##### Table of Contents



considers to be adequate to provide for probable accrued losses, there can be
no assurance that such losses will not exceed the estimated amounts. NON-INTEREST INCOME Non-interest income increased $355,000 to $1.6 million in fiscal 2004 from $1.2
million in fiscal 2003. The increase in non-interest income in fiscal 2004 is
primarily attributed to a $433,000 gain on the satisfaction of deficiency
judgments resulting from the payment in full of a loan workout agreement and an
$87,000 gain from the sale of a non-performing loan without recourse.
Offsetting these gains, were a $143,000 decrease in loan fees and service
charges and a $39,000 decrease in deposit related fees. The decrease in loan
fees and service charges in fiscal 2004 is attributed to a decrease in loan
origination activity compared to the prior fiscal year. NON-INTEREST EXPENSE Non-interest expense decreased $76,000 to $4.6 million in fiscal 2004 compared
with the prior year period. The primary factors for the decrease in
non-interest expense in fiscal 2004 were a $43,000 decrease in office occupancy
and equipment expense and a $27,000 decrease in computer software and support
expense. The decrease in computer software and support expense is primarily
attributed to the elimination of costs associated with the conversion to a new
computer network operating system during the prior year. The decrease in
office occupancy and equipment expense is primarily attributed to a $46,000
decrease in depreciation expense. INCOME TAXES Provisions for income taxes increased by $158,000 to $520,000 in fiscal 2004
from $362,000 in fiscal 2003 primarily due to the increase in operating income
in the current fiscal year as compared to the prior year. COMPARISON OF OPERATING RESULTS
FOR THE FISCAL YEARS ENDED
JUNE 30, 2003 AND JUNE 30, 2002 The Company had net income of $690,000 in fiscal 2003 compared to net income of
$866,000 for fiscal 2002. The decrease in net income is attributable to a
$402,000 increase in non-interest expense and a $45,000 increase in provision
for loan losses offset by a $106,000 increase in net interest income, an
$80,000 increase in non-interest income and an $85,000 decrease in income
taxes. Net interest income increased $106,000 to $4.5 million in fiscal 2003 from $4.4
million in fiscal 2002. The average balance of net earning assets increased
$1.3 million to $14.9 million in fiscal 2003 from $13.6 million in the prior
fiscal year. The increase in the average balance of net earning assets was
offset by a decrease in interest rate spread to 2.85% for fiscal 2003 compared
to 2.89% for the prior fiscal year. Net interest margin also decreased in
fiscal 2003 to 3.05% from 3.19% in fiscal 2002. INTEREST INCOME Interest income decreased $1.0 million in fiscal 2003 to $7.3 million. This
decrease in interest income resulted from a decrease in the average yield
earned on interest earning assets to 4.89% in fiscal 2003 from 5.93% in fiscal
2002. 15




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##### Table of Contents



The decrease in the average yield earned on interest earning assets was offset
by a $9.6 million increase in the average balance of interest earning assets to
$149.2 million in fiscal 2003 from $139.6 million in fiscal 2002. Interest on loans receivable increased $293,000, or 5.4%, in fiscal 2003 to
$5.7 million compared with fiscal 2002. The increase in interest income was
attributed to an $11.9 million increase in the average outstanding balance of
net loans receivable to $90.9 million in fiscal 2003 from $79.0 million in
fiscal 2002. The increase in the average outstanding balance of loans
receivable was offset by a decrease in the average yield earned on loans
receivable to 6.32% in fiscal 2003 from 6.89% in fiscal 2002 due to prepayments
of higher yielding fixed rate loans and lower yielding originations in a low
interest rate environment. Interest on mortgage-backed securities decreased $427,000, or 48.8%, to
$448,000 in fiscal 2003 compared with fiscal 2002. The decrease in interest
income was attributed to a $5.7 million decrease in the average outstanding
balance of mortgage-backed securities to $8.0 million in fiscal 2003 from $13.7
million in fiscal 2002 as well as a decrease in the average yield earned on
mortgage-backed securities to 5.63% in fiscal 2003 from 6.40% in fiscal 2002. Interest earned on investment securities decreased $958,000, or 64.9%, to
$518,000 in fiscal 2003. The decrease in interest income resulted from a $15.2
million decrease in the average outstanding balance of investment securities to
$11.4 million in fiscal 2003 from $26.6 in fiscal 2002 as well as a decrease in
the average yield earned on investment securities to 4.55% in fiscal 2003
compared to 5.54% in fiscal 2002. Interest earned on interest bearing deposits increased $82,000, or 18.5%, to
$523,000 in fiscal 2003 compared with fiscal 2002. The increase in interest
income is attributed to an $18.7 million increase in the average outstanding
balance of interest bearing deposits to $38.1 million in fiscal 2003 from $19.4
million in fiscal 2002. The increase in the average outstanding balance of
interest bearing deposits was offset by a decrease in the average yield earned
on interest bearing deposits to 1.37% in fiscal 2003 from 2.27% in fiscal 2002.
The Company increased its average balance of interest bearing deposits during
fiscal 2003 in anticipation of an increase in economic activity and upward
pressure on interest rates in fiscal 2004. The increase in interest bearing
deposits in fiscal 2003 was partly funded by the $15.2 million decrease in the
average outstanding balance of investment securities, discussed above. INTEREST EXPENSE Interest expense decreased $1.1 million, or 28.9%, to $2.7 million in fiscal
2003 from $3.8 million in fiscal 2002. The decrease in interest expense in
fiscal 2003 was the result of a decrease in the average yield paid on interest
costing deposits to 2.03% in fiscal 2003 compared to 3.04% in fiscal 2002. The
decrease in the average yield paid on interest costing deposits was offset by
an $8.3 million increase in the average outstanding balance of interest costing
deposits to $134.3 million in fiscal 2003 from $126.0 million in fiscal 2002.
The decrease in the average yield paid on interest costing deposits is
primarily attributed to the general decline in interest rates that occurred
between the two periods. 16




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##### Table of Contents



PROVISIONS FOR LOSSES ON LOANS The Company maintains an allowance for loan losses based upon managements
periodic evaluation of probable accrued losses in the portfolio based on 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. After considering non-performing loans, the high
concentration of one-to-four family mortgage loans in the loan portfolio, the
level and nature of its charge offs and recoveries, the strong housing market
and the volume of its loan activity, the Company made $60,000 in loan loss
provisions during fiscal 2003. The allowance for loan losses totaled $410,000,
or .44% of total loans, at June 30, 2003, compared to $350,000, or .41% of
total loans, at June 30, 2002. Non-accruing loans totaled $482,000 at June 30,
2003 compared to $164,000 at June 30, 2002. The Companys ratio of allowance
for loan losses to non-performing loans was 84.8% at June 30, 2003 compared to
213.29% at June 30, 2002. The $410,000 allowance for loan losses at June 30,
2003 was determined by the Company to be consistent with its policy for the
establishment and maintenance of adequate levels of loan loss reserves. At June 30, 2003, 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 probable accrued losses, there can
be no assurance that such losses will not exceed the estimated amounts. NON-INTEREST INCOME Non-interest income increased $80,000 to $1.2 million in fiscal 2003 from $1.1
million in fiscal 2002. The increase in non-interest income in fiscal 2003 is
primarily attributed to a $113,000 increase in loan fees and service charges,
offset by a $17,000 decrease in profit on the sale of loans. The increase in
loan fees and service charges in the fiscal 2003 is attributed to an increase
in loan origination activity compared to the prior fiscal year. NON-INTEREST EXPENSE Non-interest expense increased $402,000 to $4.6 million in fiscal 2003 from
$4.2 million in the prior fiscal year. The primary factors for the increase in
non-interest expense in fiscal 2003 were a $246,000 increase in staffing costs,
a $28,000 increase in office occupancy and equipment expense, a $27,000
increase in computer software and support expense and a $16,000 increase in
professional fees. The increase in staffing costs in fiscal 2003 is primarily
attributed to a $76,000 increase in loan origination commissions, due to an
increase in lending volume and a $94,000 increase in employee benefit costs
which was primarily due to higher pension costs as a result of an unfavorable
investment market and higher medical benefits compared with the prior fiscal
year. The increase in computer software and support expense is primarily
attributed to the conversion to a new computer network operating system during
fiscal 2003. INCOME TAXES Provisions for income taxes decreased by $85,000 to $362,000 in fiscal 2003
from $447,000 in fiscal 2002 primarily due to the decrease in operating income
in the current fiscal year as compared to the prior year. 17




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##### Table of Contents



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. 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. At June 30, 2004 the
Association had commitments to originate $1.8 million in single family mortgage
loans and commitments to sell $582,000 in 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, 2004 and 2003. For the YearEnded June 30,2004
    
    2003(Dollars in Thousands)Net income
    
    $
    1,043
    
    
    $
    690Adjustments to reconcile net income
to net cash provided (for) by
operating activities
    
    
    (163
    )
    
    
    546Net cash provided by operating activities
    
    
    880
    
    
    
    1,236Net cash provided by
investing activities
    
    
    7,546
    
    
    
    6,328Net cash provided (for) by
financing activities
    
    
    (7,350
    )
    
    
    8,936Net change in cash and
cash equivalents
    
    
    1,076
    
    
    
    16,500Cash and cash equivalents at
beginning of year
    
    
    49,421
    
    
    
    32,921Cash and cash equivalents at
end of year
    
    $
    50,497
    
    
    $
    49,421
 At June 30, 2004 Midland Federal had tangible and core capital of $10.4
million, or 6.77% of adjusted total assets, which was approximately $8.1
million and $5.8 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, 2004 Midland Federal had total capital of $10.9 million and
risk-weighted assets of $81.3 million, or total capital of 13.35% of
risk-weighted assets. This amount was approximately $4.4 million above the
8.0% requirement for capital adequacy purposes in effect on that date. 18




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##### Table of Contents



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 December 2003, the American Institute of Certified Public Accountants
(AICPA) released Statement of Position 03-3, Accounting for Certain Loans or
Debt Securities Acquired in a Transfer (SOP 03-3). SOP 03-3 addresses
accounting for differences between contractual cash flows and cash flows
expected to be collected from an investors initial investment in loans or debt
securities acquired in a transfer if those differences are attributable to
credit quality. SOP 03-3 is effective for loans acquired in fiscal years
beginning after December 15, 2004. Adoption of this Statement is not expected
to have a material impact on the Companys consolidated financial statements. In March 2004, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 105 (SAB No. 105), Application of Accounting Principles to Loan
Commitments. SAB No. 105 prohibits the inclusion of estimated servicing cash
flows and internally developed intangible assets within the valuation of
interest rate lock commitments under Statement of Accounting Standards No. 133.
SAB No. 105 is effective for disclosures and interest rate lock commitments
initiated after March 31, 2004. Adoption of this Bulletin did not have a
material impact on the Companys consolidated financial statements. 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. COMMON STOCK As of June 30, 2004, there were approximately 60 holders of record of the
Companys common stock and 372,600 shares of issued and outstanding common
stock. The Companys common stock is quoted on the Electronic Bulletin Board
of the National Association of Securities Dealers, Inc. under the symbol
MCPH. 19




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##### Table of Contents



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. Quarter ended
    
    High
    
    Low
    
    Cash dividends declaredSeptember 30, 2002
    
    $
    27.00
    
    
    $
    21.55
    
    
    $
    0.15December 31, 2002
    
    
    26.85
    
    
    
    22.00
    
    
    
    0.15March 31, 2003
    
    
    32.00
    
    
    
    28.75
    
    
    
    0.15June 30, 2003
    
    
    31.50
    
    
    
    28.50
    
    
    
    0.15September 30, 2003
    
    $
    32.25
    
    
    $
    28.00
    
    
    $
    0.17December 31, 2003
    
    
    35.75
    
    
    
    30.30
    
    
    
    0.17March 31, 2004
    
    
    40.00
    
    
    
    34.25
    
    
    
    0.17June 30, 2004
    
    
    38.00
    
    
    
    35.75
    
    
    
    0.17
 Dividend payment decisions are made with consideration of a variety of factors
including earnings, financial condition, market considerations and regulatory
restrictions. 20




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##### Table of Contents



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, 2004 and 2003, 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, 2004.
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 auditing standards generally
accepted in the United States of America. 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, 2004 and 2003, and the
results of their operations and their cash flows for each of the three years in
the period ending June 30, 2004, in conformity with accounting principles
generally accepted in the United States of America. August 10, 2004
Palos Hills, Illinois




---



TABLE OF CONTENTS  Consolidated Statements of Financial ConditionConsolidated Statements of IncomeConsolidated Statements of Changes in Stockholders EquityConsolidated Statements of Cash FlowsNotes to Consolidated Financial Statements    Table of Contents  
 MIDLAND CAPITAL HOLDINGS CORPORATION
AND SUBSIDIARIES Consolidated Statements of Financial Condition June 30,2004
    
    2003AssetsCash and amounts due from depository institutions
    
    $
    3,786,039
    
    
    
    3,742,724Interest-bearing deposits
    
    
    46,710,590
    
    
    
    45,678,341Total cash and cash equivalents
    
    
    50,496,629
    
    
    
    49,421,065Investment securities available for sale,
at fair value (note 2)
    
    
    1,234,375
    
    
    
    6,388,900Mortgage-backed securities, held to maturity (fair value:2004 - $2,980,932; 2003 - $6,425,722) (note 3)
    
    
    2,941,517
    
    
    
    6,272,466Loans receivable (net of allowance
for loan losses: 2004 - $459,472;
2003 - $409,560) (note 4)
    
    
    93,961,360
    
    
    
    92,932,253Loans receivable held for sale (note 5)
    
    
    581,500
    
    
    
    367,300Stock in Federal Home Loan Bank of Chicago
    
    
    1,061,800
    
    
    
    996,200Accrued interest receivable (note 6)
    
    
    359,702
    
    
    
    448,762Office
properties and equipment - net (note 7)
    
    
    2,376,025
    
    
    
    2,607,389Prepaid expenses and other assets (note 8)
    
    
    547,453
    
    
    
    542,049Total assets
    
    
    153,560,361
    
    
    
    159,976,384Liabilities and Stockholders EquityLiabilities:Deposits (note 9)
    
    
    140,436,704
    
    
    
    147,489,604Advance payments by borrowers for taxes
and insurance
    
    
    954,259
    
    
    
    998,779Other liabilities (note 10)
    
    
    427,084
    
    
    
    431,854Total liabilities
    
    
    141,818,047
    
    
    
    148,920,237Stockholders Equity:Preferred stock, $.01 par value: authorized
50,000 shares; none outstanding
    
    
    
    
    
    
    Common stock, $.01 par value: authorized
600,000 shares; issued and outstanding
372,600 shares at June 30, 2004 and 2003
    
    
    3,726
    
    
    
    3,726Additional paid-in capital
    
    
    3,395,580
    
    
    
    3,395,580Retained
earnings - substantially restricted
    
    
    8,176,334
    
    
    
    7,387,034Accumulated other comprehensive income,
net of income taxes
    
    
    166,674
    
    
    
    269,807Total stockholders equity (notes 14 and 15)
    
    
    11,742,314
    
    
    
    11,056,147Commitments and contingencies (notes 16 and 17)Total liabilities and stockholders equity
    
    $
    153,560,361
    
    
    
    159,976,384
 See accompanying notes to consolidated financial statements.




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##### Table of Contents



MIDLAND CAPITAL HOLDINGS CORPORATION
AND SUBSIDIARIES Consolidated Statements of Income Years Ended June 30,2004
    
    2003
    
    2002Interest income:Interest on loans
    
    $
    5,502,835
    
    
    
    5,738,429
    
    
    
    5,445,564Interest on mortgage-backed securities
    
    
    205,278
    
    
    
    447,705
    
    
    
    874,514Interest on investment securities
    
    
    118,257
    
    
    
    517,552
    
    
    
    1,475,782Interest on interest-bearing deposits
    
    
    447,894
    
    
    
    523,067
    
    
    
    441,318Dividends on FHLB stock
    
    
    65,824
    
    
    
    51,330
    
    
    
    44,411Total interest income
    
    
    6,340,088
    
    
    
    7,278,083
    
    
    
    8,281,589Interest expense:Interest on deposits (note 9)
    
    
    1,705,562
    
    
    
    2,724,478
    
    
    
    3,834,055Total interest expense
    
    
    1,705,562
    
    
    
    2,724,478
    
    
    
    3,834,055Net interest income
    
    
    4,634,526
    
    
    
    4,553,605
    
    
    
    4,447,534Provision for loan losses
    
    
    60,000
    
    
    
    60,000
    
    
    
    15,000Net interest
income after provision for loan losses
    
    
    4,574,526
    
    
    
    4,493,605
    
    
    
    4,432,534Non-interest income:Loan fees and service charges
    
    
    398,685
    
    
    
    541,800
    
    
    
    429,092Deposit related fees
    
    
    472,890
    
    
    
    512,245
    
    
    
    514,388Commission income
    
    
    70,282
    
    
    
    70,254
    
    
    
    73,868Profit on sale of loans (notes 4 and 5)
    
    
    101,769
    
    
    
    27,128
    
    
    
    43,819Gain on satisfaction of
foreclosure judgments (note 4)
    
    
    433,285
    
    
    
    
    
    
    
    Other income
    
    
    86,160
    
    
    
    56,938
    
    
    
    66,901Total non-interest income
    
    
    1,563,071
    
    
    
    1,208,365
    
    
    
    1,128,068Non-interest expense:Staffing costs (notes 11 and 12)
    
    
    2,634,908
    
    
    
    2,627,468
    
    
    
    2,380,528Advertising
    
    
    69,620
    
    
    
    58,195
    
    
    
    56,711Occupancy and equipment expenses (note 7)
    
    
    729,604
    
    
    
    772,573
    
    
    
    745,486Data processing
    
    
    212,688
    
    
    
    206,745
    
    
    
    209,141Federal deposit insurance premiums
    
    
    22,450
    
    
    
    23,753
    
    
    
    24,238Legal, audit and examination services
    
    
    160,976
    
    
    
    141,113
    
    
    
    124,521Other
    
    
    744,159
    
    
    
    819,667
    
    
    
    707,223Total non-interest expense
    
    
    4,574,405
    
    
    
    4,649,514
    
    
    
    4,247,848Income before income taxes
    
    
    1,563,192
    
    
    
    1,052,456
    
    
    
    1,312,754Provision for income taxes (note 13)
    
    
    520,524
    
    
    
    362,273
    
    
    
    446,414Net income
    
    $
    1,042,668
    
    
    
    690,183
    
    
    
    866,340Earnings per share  basic
    
    $
    2.80
    
    
    
    1.88
    
    
    
    2.38Earnings per share  diluted
    
    $
    2.80
    
    
    
    1.88
    
    
    
    2.36
 See accompanying notes to consolidated financial statements.




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##### Table of Contents



MIDLAND CAPITAL HOLDINGS CORPORATION
AND SUBSIDIARIES Consolidated Statements of Changes in Stockholders Equity AccumulatedAdditional
    
    
    
    
    
    OtherCommon
    
    Paid-In
    
    Retained
    
    ComprehensiveStock
    
    Capital
    
    Earnings
    
    Income
    
    TotalBalance at June 30, 2001
    
    $
    3,640
    
    
    
    3,276,855
    
    
    
    6,218,393
    
    
    
    162,985
    
    
    
    9,661,873Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    866,340
    
    
    
    
    
    
    
    866,340Other comprehensive income,
net of tax:Unrealized holding gain
during the year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    35,770
    
    
    
    35,770Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    866,340
    
    
    
    35,770
    
    
    
    902,110Dividends declared on
common stock ($.46 per share)
    
    
    
    
    
    
    
    
    
    
    (167,428
    )
    
    
    
    
    
    
    (167,428
    )Balance at June 30, 2002
    
    
    3,640
    
    
    
    3,276,855
    
    
    
    6,917,305
    
    
    
    198,755
    
    
    
    10,396,555Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    690,183
    
    
    
    
    
    
    
    690,183Other comprehensive income,
net of tax:Unrealized holding gain
during the year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    71,052
    
    
    
    71,052Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    690,183
    
    
    
    71,052
    
    
    
    761,235Exercise of stock options
    
    
    86
    
    
    
    96,945
    
    
    
    
    
    
    
    
    
    
    
    97,031Tax benefit related to
stock options exercised
    
    
    
    
    
    
    21,780
    
    
    
    
    
    
    
    
    
    
    
    21,780Dividends declared on
common stock ($.60 per share)
    
    
    
    
    
    
    
    
    
    
    (220,454
    )
    
    
    
    
    
    
    (220,454
    )Balance at June 30, 2003
    
    
    3,726
    
    
    
    3,395,580
    
    
    
    7,387,034
    
    
    
    269,807
    
    
    
    11,056,147Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    1,042,668
    
    
    
    
    
    
    
    1,042,668Other comprehensive income,
net of tax:Unrealized holding loss
during the year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (103,133
    )
    
    
    (103,133
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    1,042,668
    
    
    
    (103,133
    )
    
    
    939,535Dividends declared on
common stock ($.68 per share)
    
    
    
    
    
    
    
    
    
    
    (253,368
    )
    
    
    
    
    
    
    (253,368
    )Balance at June 30, 2004
    
    $
    3,726
    
    
    
    3,395,580
    
    
    
    8,176,334
    
    
    
    166,674
    
    
    
    11,742,314
 See accompanying notes to consolidated financial statements.




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##### Table of Contents



MIDLAND CAPITAL HOLDINGS CORPORATION
AND SUBSIDIARIES Consolidated Statements of Cash Flows Years Ended June 30,2004
    
    2003
    
    2002Cash flows from operating activities:Net income
    
    $
    1,042,668
    
    
    
    690,183
    
    
    
    866,340Adjustments to reconcile net income to net cash
from operating activities:Depreciation
    
    
    270,315
    
    
    
    316,663
    
    
    
    322,450Amortization of premiums and discounts on securities
    
    
    (13,564
    )
    
    
    7,427
    
    
    
    (22,618
    )Federal Home Loan Bank stock dividend
    
    
    (65,600
    )
    
    
    (51,100
    )
    
    
    (44,200
    )Provision for loan losses
    
    
    60,000
    
    
    
    60,000
    
    
    
    15,000Proceeds from sale of loans held for sale
    
    
    1,054,750
    
    
    
    1,902,945
    
    
    
    3,160,571Origination of loans held for sale
    
    
    (1,268,950
    )
    
    
    (1,530,439
    )
    
    
    (3,449,100
    )Profit on sale of loans
    
    
    (101,769
    )
    
    
    (27,128
    )
    
    
    (43,819
    )Decrease in accrued interest receivable
    
    
    89,060
    
    
    
    201,094
    
    
    
    255,278Decrease in accrued interest payable
    
    
    (6,653
    )
    
    
    (10,666
    )
    
    
    (11,023
    )Decrease in deferred income on loans
    
    
    (244,135
    )
    
    
    (23,163
    )
    
    
    (140,684
    )Decrease in other assets
    
    
    62,579
    
    
    
    281
    
    
    
    62,140Increase (decrease) in other liabilities
    
    
    1,883
    
    
    
    (299,980
    )
    
    
    289,074Net cash provided by operating activities
    
    
    880,584
    
    
    
    1,236,117
    
    
    
    1,259,409Cash flows from investing activities:Proceeds from repayments of mortgage-backed securities,
held to maturity
    
    
    3,342,775
    
    
    
    4,104,875
    
    
    
    6,977,487Proceeds from maturities of investment securities,
held to maturity
    
    
    
    
    
    
    10,000,000
    
    
    
    10,080,000Purchase of investment securities, available for sale
    
    
    
    
    
    
    
    
    
    
    (4,998,531
    )Proceeds from maturities and early redemption of
investment securities, available for sale
    
    
    5,000,000
    
    
    
    
    
    
    
    10,000,000Purchase of Federal Home Loan Bank stock
    
    
    
    
    
    
    (48,500
    )
    
    
    (69,700
    )Loan disbursements
    
    
    (41,776,527
    )
    
    
    (54,341,935
    )
    
    
    (38,379,056
    )Loan repayments
    
    
    40,615,105
    
    
    
    46,720,391
    
    
    
    21,216,903Proceeds from sale of non-performing loan
    
    
    403,366
    
    
    
    
    
    
    
    Property and equipment expenditures
    
    
    (38,951
    )
    
    
    (107,468
    )
    
    
    (772,709
    )Net cash provided by investing activities
    
    
    7,545,768
    
    
    
    6,327,363
    
    
    
    4,054,394Cash flows from financing activities:Deposit receipts
    
    
    400,918,154
    
    
    
    431,628,993
    
    
    
    421,210,595Deposit withdrawals
    
    
    (409,569,491
    )
    
    
    (425,169,131
    )
    
    
    (417,924,197
    )Interest credited to deposit accounts
    
    
    1,598,437
    
    
    
    2,586,073
    
    
    
    3,653,606Proceeds from exercise of stock options
    
    
    
    
    
    
    97,031
    
    
    
    Payment of dividends
    
    
    (253,368
    )
    
    
    (220,454
    )
    
    
    (167,428
    )(Decrease) increase in advance payments
by borrowers for taxes and insurance
    
    
    (44,520
    )
    
    
    13,635
    
    
    
    116,388Net cash provided (for) by financing activities
    
    
    (7,350,788
    )
    
    
    8,936,147
    
    
    
    6,888,964Net change in cash and cash equivalents
    
    
    1,075,564
    
    
    
    16,499,627
    
    
    
    12,202,767Cash and cash equivalents at beginning of year
    
    
    49,421,065
    
    
    
    32,921,438
    
    
    
    20,718,671Cash and cash equivalents at end of year
    
    $
    50,496,629
    
    
    
    49,421,065
    
    
    
    32,921,438Cash paid during the year for:Interest
    
    $
    1,712,215
    
    
    
    2,735,144
    
    
    
    3,845,078Income taxes
    
    
    528,318
    
    
    
    580,143
    
    
    
    161,654
 See accompanying notes to consolidated financial statements.




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##### Table of Contents



MIDLAND CAPITAL HOLDINGS CORPORATION
AND SUBSIDIARIES Notes to Consolidated Financial Statements  1)
    
    Summary of Significant Accounting PoliciesMidland 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 accounting principles generally accepted in the United States
of America and to general practice within the thrift industry. The
preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America 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 ConsolidationThe 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 SegmentsThe 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 SaleInvestment 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.




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##### Table of Contents



1)
    
    Summary of Significant Accounting Policies (continued)Investment Securities and Mortgage-Backed Securities, Held to MaturityThese 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 FeesLoans 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, 2004 and 2003, nor
during the years ended June 30, 2004 and 2003, 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 SaleThat 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 RightsThe 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 5 for a discussion
of the current year impact on financial position and results of
operations.




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##### Table of Contents



1)
    
    Summary of Significant Accounting Policies (continued)Allowance for Loan LossesThe 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.DepreciationDepreciation of office properties and equipment is accumulated on the
straight line basis over estimated lives of the various assets. Useful
lives are 25 to 40 years for office properties, 5 to 15 years for
leasehold improvements and 3 to 10 years for furniture, fixtures and
equipment.Income TaxesThe 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 FlowsFor 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.




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##### Table of Contents



1)
    
    Summary of Significant Accounting Policies (continued)Earnings Per ShareEarnings 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. Years Ended June 30,2004
    
    2003
    
    2002Weighted average number of common shares
outstanding used in basic EPS calculation
    
    
    372,600
    
    
    
    367,283
    
    
    
    363,975Add common stock equivalents for shares
issuable under Stock Option Plans
    
    
    
    
    
    
    
    
    
    
    3,882Weighted average number of shares
outstanding adjusted for common
stock equivalents
    
    
    372,600
    
    
    
    367,283
    
    
    
    367,857Net income
    
    $
    1,042,668
    
    
    
    690,183
    
    
    
    866,340Basic earnings per share
    
    $
    2.80
    
    
    
    1.88
    
    
    
    2.38Diluted earnings per share
    
    $
    2.80
    
    
    
    1.88
    
    
    
    2.36




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##### Table of Contents



2)
    
    Investment Securities, Available for SaleThe amortized cost and fair value of investment securities available for
sale are as follows: Gross
    
    GrossAmortized
    
    Unrealized
    
    Unrealized
    
    FairCost
    
    Gains
    
    Losses
    
    ValueJune 30, 2004United States Treasury bond
    
    $
    981,839
    
    
    
    252,536
    
    
    
    
    
    
    
    1,234,375Weighted average interest rate
    
    
    7.60
    %June 30, 2003Federal National Mortgage
Association notes
    
    $
    4,999,220
    
    
    
    29,680
    
    
    
    
    
    
    
    5,028,900United States Treasury bond
    
    
    980,881
    
    
    
    379,119
    
    
    
    
    
    
    
    1,360,000$
    5,980,101
    
    
    
    408,799
    
    
    
    
    
    
    
    6,388,900Weighted average interest rate
    
    
    4.23
    %
  The contractual maturity of investment securities available for sale are summarized as follows: June 30, 2004
    
    June 30, 2003Amortized
    
    Fair
    
    Amortized
    
    FairTerm to Maturity
    
    Cost
    
    Value
    
    Cost
    
    ValueDue in one year or less
    
    $
    
    
    
    
    
    
    
    
    4,999,220
    
    
    
    5,028,900Due after ten years through
fifteen years
    
    
    981,839
    
    
    
    1,234,375
    
    
    
    980,881
    
    
    
    1,360,000$
    981,839
    
    
    
    1,234,375
    
    
    
    5,980,101
    
    
    
    6,388,900
  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 $156,263, net of the tax effect of $53,130,
resulted in a $103,133 charge to stockholders equity.




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##### Table of Contents



3)
    
    Mortgage-Backed Securities, Held to MaturityMortgage-backed securities, held to maturity, are summarized as follows: Gross
    
    GrossAmortized
    
    Unrealized
    
    Unrealized
    
    FairCost
    
    Gains
    
    Losses
    
    ValueJune 30, 2004Participation certificates:FHLMC  Adjustable rate
    
    $
    1,707,372
    
    
    
    17,058
    
    
    
    
    
    
    
    1,724,430FNMA   Adjustable rate
    
    
    921,361
    
    
    
    11,308
    
    
    
    
    
    
    
    932,669FHLMC  Fixed rate
    
    
    178,240
    
    
    
    3,734
    
    
    
    
    
    
    
    181,974FNMA   Fixed rate
    
    
    90,551
    
    
    
    7,315
    
    
    
    
    
    
    
    97,866GNMA   Fixed rate
    
    
    43,993
    
    
    
    
    
    
    
    
    
    
    
    43,993$
    2,941,517
    
    
    
    39,415
    
    
    
    
    
    
    
    2,980,932Weighted average interest rate
    
    
    3.88
    %June 30, 2003Participation certificates:FHLMC  Adjustable rate
    
    $
    2,520,373
    
    
    
    49,507
    
    
    
    
    
    
    
    2,569,880FNMA   Adjustable rate
    
    
    988,737
    
    
    
    20,388
    
    
    
    
    
    
    
    1,009,125FHLMC  Fixed rate
    
    
    2,262,411
    
    
    
    42,735
    
    
    
    
    
    
    
    2,305,146FNMA   Fixed rate
    
    
    434,080
    
    
    
    37,617
    
    
    
    
    
    
    
    471,697GNMA   Fixed rate
    
    
    66,865
    
    
    
    3,009
    
    
    
    
    
    
    
    69,874$
    6,272,466
    
    
    
    153,256
    
    
    
    
    
    
    
    6,425,722Weighted average interest rate
    
    
    5.09
    %




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##### Table of Contents



4)
    
    Loans ReceivableLoans receivable are summarized as follows: June 30,2004
    
    2003Mortgage loans:One-to-four family
    
    $
    90,636,479
    
    
    
    89,424,113Multi-family
    
    
    1,118,995
    
    
    
    1,993,811Non-residential
    
    
    821,322
    
    
    
    686,662Construction
    
    
    
    
    
    
    250,000Total mortgage loans
    
    
    92,576,796
    
    
    
    92,354,586Other loans:Loans on deposit accounts
    
    
    311,128
    
    
    
    292,747Auto loans
    
    
    464,871
    
    
    
    336,332Education loans
    
    
    587,107
    
    
    
    658,326Credit card loans
    
    
    159,061
    
    
    
    138,652Other
    
    
    17,021
    
    
    
    15,215Total other loans
    
    
    1,539,188
    
    
    
    1,441,272Commercial business loans
    
    
    25,815
    
    
    
    18,933Total loans receivable
    
    
    94,141,799
    
    
    
    93,814,791Less:Loans in process
    
    
    109,190
    
    
    
    617,066Net deferred yield adjustments
    
    
    (397,787
    )
    
    
    (406,725
    )Allowance for uncollected interest
    
    
    9,564
    
    
    
    262,637Allowance for loan losses
    
    
    459,472
    
    
    
    409,560Loans receivable, net
    
    $
    93,961,360
    
    
    
    92,932,253Weighted average interest rate
    
    
    5.78
    %
    
    
    6.22
    %
  Activity in the allowance for loan losses is summarized as follows: Years Ended June 30,2004
    
    2003
    
    2002Balance, beginning of year
    
    $
    409,560
    
    
    
    350,260
    
    
    
    359,445Provision for loan losses
    
    
    60,000
    
    
    
    60,000
    
    
    
    15,000Recoveries previously charged-off
    
    
    8,215
    
    
    
    
    
    
    
    14,361Charge-offs
    
    
    (18,303
    )
    
    
    (700
    )
    
    
    (38,546
    )Balance, end of year
    
    $
    459,472
    
    
    
    409,560
    
    
    
    350,260
  Delinquent loans (loans having payments past due ninety days or more) at
June 30, 2004 amounted to $55,425 or .1% of total loans in force.
Comparable figures for 2003 were $482,758 or .5% of total loans.During the current year, the Association sold a non-performing loan in the
amount of $316,450 which was in foreclosure. The loan was sold to an
unrelated third party without recourse for $403,366, resulting in a profit
of $86,916. A majority of this profit was due to default interest that
was added to the purchase price.




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##### Table of Contents



4)
    
    Loans Receivable (continued)The Association has held forbearance agreements since 1996 to resolve
non-performance on three loans that were cross-collateralized by a
multi-family residential property located in Chicago, Illinois. As a
result of the agreements, excess cash flow from the Chicago multi-family
property was used to reduce the amounts due on the three loans. The
Association also held $433,285 in deficiency judgments stemming from
various foreclosure actions on residential properties located in Florida
that were also cross-collateralized by the Chicago multi-family property
under the agreements. This amount was expensed and charged-off in a prior
period. During the current year, the Chicago multi-family property was
sold and the proceeds were sufficient to repay the existing mortgage on
that property in full, the remaining obligations due on the three loans
and the deficiency judgments, all in satisfaction of the forbearance
agreements.Loans to directors and executive officers aggregated $676,888 at June 30,
2004 and $619,675 at June 30, 2003. Such loans are made on substantially
the same terms as those for other loan customers.5)
    
    Loans Receivable Held for SaleThe Company sells loans in the secondary market under various programs.
During the years ended June 30, 2004, 2003 and 2002, the Company sold
first mortgage loans totaling $1,054,750, $1,902,945 and $3,160,571 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,
2004, 2003 and 2002 were $1,054,750, $1,902,945 and $3,160,571 with no
gain or loss realized on those sales. In addition, the Company recorded a
gain of $14,853, $27,128 and $43,819 for the years ended June 30, 2004,
2003 and 2002 on loan sales from the establishment of a mortgage servicing
right asset. During the years ended June 30, 2004, 2003 and 2002, the
Company amortized $56,402, $42,322 and $19,468 of mortgage servicing
rights against current servicing fee income.As of June 30, 2004, $581,500 of newly originated fixed rate thirty year
original term loans qualifying for sale into the secondary market were
classified in this portfolio. Loans held for sale are valued at the lower
of cost or fair value in accordance with accounting principles generally
accepted in the United States of America. There were no recognized, but
unrealized, losses at June 30, 2004 and 2003.At June 30, 2004, 2003 and 2002, loans serviced for others amounted to
$6,014,542, $9,398,448 and $11,277,638 respectively.6)
    
    Accrued Interest ReceivableAccrued interest receivable is summarized as follows: June 30,2004
    
    2003Investment securities
    
    $
    9,375
    
    
    
    56,918Mortgage-backed securities
    
    
    14,665
    
    
    
    35,916Loans receivable
    
    
    335,662
    
    
    
    355,928$
    359,702
    
    
    
    448,762




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##### Table of Contents



7)
    
    Office Properties and EquipmentOffice properties and equipment are summarized as follows: June 30,2004
    
    2003Land
    
    $
    416,595
    
    
    
    416,595Buildings
    
    
    2,331,939
    
    
    
    2,331,939Easement for parking lot and driveway
    
    
    223,050
    
    
    
    223,050Leasehold improvements  Homer Glen
    
    
    579,253
    
    
    
    579,253Furniture, fixtures and equipment
    
    
    2,860,958
    
    
    
    2,822,0076,411,795
    
    
    
    6,372,844Less accumulated depreciation
    
    
    4,035,770
    
    
    
    3,765,455$
    2,376,025
    
    
    
    2,607,389
  Depreciation of office properties and equipment for the years ended June
30, 2004, 2003 and 2002 amounted to $270,315, $316,663 and $322,450
respectively.During July 1998, the Association entered into a lease for retail space
and vacant land in Homer Glen, 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 land
previously purchased by the Association.During the current year, the Association exercised their option to
purchase the vacant land discussed above in the amount of approximately
$23,800. The property was scheduled to close in August, 2004.The Association established a full service branch banking facility at this
location. Rent expense at the Homer Glen, Illinois location for the years
ended June 30, 2004, 2003 and 2002 amounted to $51,009, $49,045 and
$46,495 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: Year ended June 30, 2005
    
    $
    39,520Year ended June 30, 2006
    
    
    41,480Year ended June 30, 2007
    
    
    43,536Thereafter through June 30, 2009
    
    
    92,144




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##### Table of Contents



8)
    
    Prepaid Expenses and Other AssetsPrepaid expenses and other assets consist of the following: June 30,2004
    
    2003Prepaid federal insurance premiums
    
    $
    5,158
    
    
    
    5,851Prepaid insurance
    
    
    59,057
    
    
    
    77,976Other prepaid expenses
    
    
    126,711
    
    
    
    122,621Mortgage servicing rights
    
    
    56,242
    
    
    
    97,791Deferred federal income tax benefit  net (a)
    
    
    181,211
    
    
    
    119,533Accounts receivable and other assets
    
    
    119,074
    
    
    
    118,277$
    547,453
    
    
    
    542,049
  (a)
    
    Significant components of the deferred tax assets and
liabilities are as follows: June 30,2004
    
    2003Deferred tax assets:Tax basis of office building in
excess of book basis
    
    $
    392,505
    
    
    
    412,833Book allowance for loan losses
    
    
    156,040
    
    
    
    139,070Total deferred tax assets
    
    
    548,545
    
    
    
    551,903Deferred tax liabilities:Loan fees deferred for financial
reporting purposes, net of costs
    
    
    153,265
    
    
    
    150,049Accelerated tax depreciation
    
    
    4,467
    
    
    
    27,766FHLB stock dividends
    
    
    104,618
    
    
    
    82,314Mortgage servicing rights
    
    
    19,122
    
    
    
    33,249Unrealized gain on securities
available for sale
    
    
    85,862
    
    
    
    138,992Total deferred tax liabilities
    
    
    367,334
    
    
    
    432,370Net deferred tax benefit
    
    $
    181,211
    
    
    
    119,533




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##### Table of Contents



9)
    
    DepositsDeposit accounts are summarized as follows: June 30,2004
    
    2003Passbook accounts
    
    $
    59,697,411
    
    
    
    56,420,273NOW accounts
    
    
    12,982,903
    
    
    
    13,785,293Money market accounts
    
    
    7,497,335
    
    
    
    7,648,455Non-interest bearing demand deposit accounts
    
    
    12,097,020
    
    
    
    11,647,10892,274,669
    
    
    
    89,501,129Certificates of deposit by interest rate:0.75 - 1.00%
    
    
    3,209,598
    
    
    
    233,2561.01 - 2.00
    
    
    32,082,845
    
    
    
    32,536,2642.01 - 3.00
    
    
    10,075,339
    
    
    
    15,204,1303.01 - 4.00
    
    
    2,794,253
    
    
    
    8,615,3674.01 - 5.00
    
    
    
    
    
    
    1,141,1625.01 - 6.00
    
    
    
    
    
    
    258,29648,162,035
    
    
    
    57,988,475$
    140,436,704
    
    
    
    147,489,604
  The weighted average rate on deposit accounts at June 30, 2004 and 2003
was 1.01% and 1.38% respectively.The aggregate amount of certificates of deposit with a minimum
denomination of $100,000 was $7,950,000 and $11,521,000 at June 30, 2004
and 2003, respectively.A summary of certificates of deposit by maturity is as follows: June 30,2004
    
    2003Within 12 months
    
    $
    45,384,440
    
    
    
    54,859,23212 months to 24 months
    
    
    2,121,274
    
    
    
    2,176,02724 months to 36 months
    
    
    656,321
    
    
    
    953,216Total
    
    $
    48,162,035
    
    
    
    57,988,475
  Interest expense on deposits consists of the following: Years Ended June 30,2004
    
    2003
    
    2002Passbook accounts
    
    $
    508,804
    
    
    
    849,284
    
    
    
    1,152,317Certificate accounts
    
    
    1,013,354
    
    
    
    1,539,654
    
    
    
    2,188,361NOW and money market accounts
    
    
    183,404
    
    
    
    335,540
    
    
    
    493,377Total
    
    $
    1,705,562
    
    
    
    2,724,478
    
    
    
    3,834,055




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##### Table of Contents



10)
    
    Other LiabilitiesOther liabilities consist of the following: June 30,2004
    
    2003Accrued interest on deposits
    
    $
    7,968
    
    
    
    14,621Accrued real estate taxes
    
    
    134,600
    
    
    
    135,111Accrued federal income taxes
    
    
    26,755
    
    
    
    26,000Other accrued expenses
    
    
    176,089
    
    
    
    180,100Outstanding bank drafts
    
    
    30,153
    
    
    
    37,871Other accounts payable
    
    
    51,519
    
    
    
    38,151$
    427,084
    
    
    
    431,854
  11)
    
    Retirement Plans and Other Employee BenefitsThe Association participates in the Financial Institutions Retirement
Fund, a tax-qualified pension trust, which covers all eligible employees.
The Plan meets the criteria of a multiemployer pension plan as defined in
Financial Accounting Standards Board Statement No. 87, Employers
Accounting for Pensions and as such, does not make separate actuarial
valuations with respect to each employer, nor does it segregate plan
assets. The practice with respect to multiemployer plans has been to
accept employers contributions that are paid as its expense for
accounting purposes. A contribution of $211,753, $157,362 and $106,874
were paid and expensed by the Association for the years ended June 30,
2004, 2003 and 2002, respectively.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 $43,077,
$37,734 and $36,948 for the years ended June 30, 2004, 2003 and 2002,
respectively.




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##### Table of Contents



12)
    
    Stock Option PlanIn 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. 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, 2004 and the stock options outstanding at
the end of the respective periods: Number
    
    Exercise PriceOptions
    
    of Shares
    
    Per Share
    
    TotalOutstanding at June 30, 2001
    
    
    8,625
    
    
    $
    10.00-16.25
    
    
    $
    97,031Granted
    
    
    0Exercised
    
    
    0Outstanding at June 30, 2002
    
    
    8,625
    
    
    
    10.00-16.25
    
    
    
    97,031Granted
    
    
    0Exercised
    
    
    (8,625
    )
    
    
    (10.00-16.25
    )
    
    
    (97,031
    )Outstanding at June 30, 2003
    
    
    
    
    
    
    
    
    
    
    Granted
    
    
    0Exercised
    
    
    0Outstanding at June 30, 2004
    
    
    
    
    
    $
    
    
    
    $
    Options available for future
grants at June 30, 2004
    
    
    6,900
  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.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: Years Ended June 30,2004
    
    2003
    
    2002Net income (as reported)
    
    $
    1,042,668
    
    
    
    690,183
    
    
    
    866,340Pro forma net income
    
    
    1,042,668
    
    
    
    690,183
    
    
    
    866,340Earnings per share  diluted (as reported)
    
    $
    2.80
    
    
    
    1.88
    
    
    
    2.36Pro forma diluted earnings per share
    
    
    2.80
    
    
    
    1.88
    
    
    
    2.36
  The pro forma results presented above may not be representative of the
effects reported in pro form net income for future years.




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##### Table of Contents



13)
    
    Income TaxesAs a result of legislation that changed the method used by many thrifts to
calculate their bad debt reserve for federal income tax purposes, the
Association must recapture that portion of the reserve that exceeds the
amount that could have been taken under the experience method for tax
years beginning after December 31, 1987. The legislation also requires
thrifts to account for bad debts for federal income tax purposes on the
same basis as commercial banks for tax years beginning after December 31,
1995. The recapture is occurring over a six year period. The commencement
of the recapture by the Association was delayed two years as the
Association met certain residential lending requirements. For the three
years ended June 30, 2004, the Association recaptured approximately
$71,000 in excess bad debt reserves resulting in tax payments of
approximately $24,000 which were previously accrued. The pre-1988 reserve
provisions are subject only to recapture requirements if the Association
no longer qualifies as a thrift. Tax bad debt deductions accumulated
prior to 1988 by the Association and included in retained earnings total
approximately $1,100,000. No deferred income taxes have been provided for
these bad debt deductions and no recapture of these amounts is
anticipated. Years Ended June 30,2004
    
    2003
    
    2002Current
    
    $
    529,072
    
    
    
    362,448
    
    
    
    421,495Deferred
    
    
    (8,548
    )
    
    
    (175
    )
    
    
    24,919$
    520,524
    
    
    
    362,273
    
    
    
    446,414
  A reconciliation of the statutory federal income tax rate to effective
income tax rate is as follows: Years Ended June 30,2004
    
    2003
    
    2002Statutory federal income tax rate
    
    
    34.0
    %
    
    
    34.0
    %
    
    
    34.0
    %Other
    
    
    (.7
    )
    
    
    .4
    
    
    
    Effective income tax rate
    
    
    33.3
    %
    
    
    34.4
    %
    
    
    34.0
    %
  Deferred federal income tax expense consists of the following tax effects
of timing differences: Years Ended June 30,2004
    
    2003
    
    2002Loan fees net of costs
    
    $
    3,216
    
    
    
    14,397
    
    
    
    38,900Depreciation
    
    
    (2,971
    )
    
    
    5,374
    
    
    
    (2,098
    )FHLB stock dividends
    
    
    22,304
    
    
    
    17,374
    
    
    
    15,028Book loan loss provision in
excess of tax deduction
    
    
    (16,970
    )
    
    
    (20,162
    )
    
    
    (23,198
    )Recapture of bad debt reserve
    
    
    
    
    
    
    (11,992
    )
    
    
    (11,992
    )Mortgage servicing rights
    
    
    (14,127
    )
    
    
    (5,166
    )
    
    
    8,279$
    (8,548
    )
    
    
    (175
    )
    
    
    24,919




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##### Table of Contents



14)
    
    Regulatory Capital RequirementsThe 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, 2004, 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, 2004 and 2003, 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: To Be Well-Capitalized UnderFor Capital
    
    Prompt CorrectiveActual
    
    Adequacy Purposes
    
    Action ProvisionsAmount
    
    Ratio
    
    Amount
    
    Ratio
    
    Amount
    
    RatioJune 30, 2004Tangible
    
    $
    10,412,617
    
    
    
    6.77
    %
    
    $
    2,307,000
    
    
    
    1.50
    %
    
    $
    N/A
    
    
    
    N/A
    %Core
    
    
    10,412,617
    
    
    
    6.77
    
    
    
    4,614,000
    
    
    
    3.00
    
    
    
    7,689,000
    
    
    
    5.00Risk-based
    
    
    10,857,089
    
    
    
    13.35
    
    
    
    6,505,000
    
    
    
    8.00
    
    
    
    8,131,000
    
    
    
    10.00June 30, 2003Tangible
    
    $
    9,422,982
    
    
    
    5.88
    %
    
    $
    2,404,000
    
    
    
    1.50
    %
    
    $
    N/A
    
    
    
    N/A
    %Core
    
    
    9,422,982
    
    
    
    5.88
    
    
    
    4,808,000
    
    
    
    3.00
    
    
    
    8,013,000
    
    
    
    5.00Risk-based
    
    
    9,817,542
    
    
    
    11.98
    
    
    
    6,555,000
    
    
    
    8.00
    
    
    
    8,194,000
    
    
    
    10.00




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##### Table of Contents



14)
    
    Regulatory Capital Requirements (continued) Tangible
    
    Core
    
    Risk-basedCapital
    
    Capital
    
    CapitalJune 30, 2004Stockholders equity
    
    $
    10,584,915
    
    
    
    10,584,915
    
    
    
    10,584,915Unrealized gain on securities
available for sale, net of taxes
    
    
    (166,674
    )
    
    
    (166,674
    )
    
    
    (166,674
    )Retained mortgage servicing rights
    
    
    (5,624
    )
    
    
    (5,624
    )
    
    
    (5,624
    )General loss allowances
    
    
    
    
    
    
    
    
    
    
    459,472Direct equity investments
    
    
    
    
    
    
    
    
    
    
    (15,000
    )Regulatory capital computed
    
    $
    10,412,617
    
    
    
    10,412,617
    
    
    
    10,857,089
  A reconciliation of the Associations equity capital at June 30, 2004 is
as follows: Stockholders equity
    
    $
    11,742,314Less Company stockholders equity not available
for regulatory capital
    
    
    (1,157,399
    )Stockholders equity of the Association
    
    $
    10,584,915
 Tangible
    
    Core
    
    Risk-basedCapital
    
    Capital
    
    CapitalJune 30, 2003Stockholders equity
    
    $
    9,702,568
    
    
    
    9,702,568
    
    
    
    9,702,568Unrealized gain on securities
available for sale, net of taxes
    
    
    (269,807
    )
    
    
    (269,807
    )
    
    
    (269,807
    )Retained mortgage servicing rights
    
    
    (9,779
    )
    
    
    (9,779
    )
    
    
    (9,779
    )General loss allowances
    
    
    
    
    
    
    
    
    
    
    409,560Direct equity investments
    
    
    
    
    
    
    
    
    
    
    (15,000
    )Regulatory capital computed
    
    $
    9,422,982
    
    
    
    9,422,982
    
    
    
    9,817,542
  A reconciliation of the Associations equity capital at June 30, 2003 is
as follows: Stockholders equity
    
    $
    11,056,147Less Company stockholders equity not available
for regulatory capital
    
    
    (1,353,579
    )Stockholders equity of the Association
    
    $
    9,702,568




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##### Table of Contents



15)
    
    Stockholders EquityAs 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.16)
    
    Financial Instruments with Off-Balance Sheet RiskThe 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 $1,722,300 at June 30, 2004
represents an amount which the Association plans to fund within the normal
commitment period of 60 to 90 days. Of this amount, $1,472,300 are fixed
rate commitments with rates ranging from 5.875% to 6.375% and $250,000
are in adjustable rate commitments. Because the credit worthiness of each
customer is reviewed prior to extension of the commitment, the Association
adequately controls their credit risk on these commitments, as it does for
loans recorded on the balance sheet. The Association conducts all of its
lending activities in the Chicagoland area. Management believes the
Association has a diversified loan portfolio and the concentration of
lending activities in these local communities does not result in an acute
dependency upon economic conditions of the lending region.The Association has approved, but unused, equity lines of credit of
approximately $2,499,000 at June 30, 2004. In addition, the Association
has approved, but unused, credit card lines of credit amounting to
approximately $436,000. The Association has also issued outstanding
letters of credit totaling $123,650.17)
    
    ContingenciesThe 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.18)
    
    Subsequent EventAt the July, 2004 Board of Directors meeting, the Company declared a
quarterly dividend of $.20 per share, totaling $74,520, payable August 12,
2004 to shareholders of record as of August 2, 2004.




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##### Table of Contents



19)
    
    Disclosures About the Fair Value of Financial InstrumentsThe 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.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.Accrued interest receivable and payable: The carrying value of accrued
interest receivable, net of the allowance for uncollected interest, and
accrued interest payable approximates fair value due to the relatively
short period of time between accrual and expected realization.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, 2004 and 2003 are as follows: June 30, 2004Carrying
    
    FairAmount
    
    ValueFinancial assets:Cash and cash equivalents
    
    $
    50,496,629
    
    
    
    50,496,629Investment securities, available for sale
    
    
    1,234,375
    
    
    
    1,234,375Mortgage-backed securities, held to maturity
    
    
    2,941,517
    
    
    
    2,980,932Loans receivable, gross
    
    
    94,723,299
    
    
    
    94,995,000Accrued interest receivable
    
    
    359,702
    
    
    
    359,702Financial liabilities:Deposits
    
    
    140,436,704
    
    
    
    140,396,000Accrued interest payable
    
    
    7,968
    
    
    
    7,968
 June 30, 2003Carrying
    
    FairAmount
    
    ValueFinancial assets:Cash and cash equivalents
    
    $
    49,421,065
    
    
    
    49,421,065Investment securities, available for sale
    
    
    6,388,900
    
    
    
    6,388,900Mortgage-backed securities, held to maturity
    
    
    6,272,466
    
    
    
    6,425,722Loans receivable, gross
    
    
    94,182,091
    
    
    
    97,467,000Accrued interest receivable
    
    
    448,762
    
    
    
    448,762Financial liabilities:Deposits
    
    
    147,489,604
    
    
    
    148,054,000Accrued interest payable
    
    
    14,621
    
    
    
    14,621




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##### Table of Contents



20)
    
    Condensed Parent Company Only Financial StatementsThe following condensed statements of financial condition, as of June 30,
2004 and 2003 and condensed statements of income and cash flows for the
years ended June 30 2004, 2003 and 2002 for Midland Capital Holdings
Corporation should be read in conjunction with the consolidated financial
statements and the notes thereto. Statements of Financial Condition June 30,2004
    
    2003AssetsCash and cash equivalents
    
    $
    1,143,111
    
    
    
    1,348,817Loans receivable
    
    
    14,893
    
    
    
    Equity investment in the Association
    
    
    10,403,781
    
    
    
    9,418,301Prepaid expenses and other assets
    
    
    1,559
    
    
    
    8,10311,563,344
    
    
    
    10,775,221Liabilities and Stockholders EquityLiabilities:Accrued taxes and other liabilities
    
    
    2,164
    
    
    
    3,341Stockholders Equity:Common stock
    
    
    3,726
    
    
    
    3,726Additional paid-in capital
    
    
    3,381,120
    
    
    
    3,381,120Retained earnings
    
    
    8,176,334
    
    
    
    7,387,034Total stockholders equity
    
    
    11,561,180
    
    
    
    10,771,880$
    11,563,344
    
    
    
    10,775,221
 Statements of Income Years Ended June 30,2004
    
    2003
    
    2002Interest income
    
    $
    11,281
    
    
    
    18,399
    
    
    
    16,986Non-interest expense
    
    
    76,147
    
    
    
    88,124
    
    
    
    69,678Net loss before income tax benefit
and equity in earnings of subsidiaries
    
    
    (64,866
    )
    
    
    (69,725
    )
    
    
    (52,692
    )Benefit from income taxes
    
    
    22,054
    
    
    
    23,706
    
    
    
    17,915Net loss before equity in earnings
of subsidiaries
    
    
    (42,812
    )
    
    
    (46,019
    )
    
    
    (34,777
    )Equity in earnings of subsidiaries
    
    
    1,085,480
    
    
    
    736,202
    
    
    
    901,117Net income
    
    $
    1,042,668
    
    
    
    690,183
    
    
    
    866,340




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##### Table of Contents



20)
    
    Condensed Parent Company Only Financial Statements (continued) Statements of Cash Flows Years Ended June 30,2004
    
    2003
    
    2002Cash flows from operating activities:Net income
    
    $
    1,042,668
    
    
    
    690,183
    
    
    
    866,340Equity in earnings of the Association
    
    
    (1,085,480
    )
    
    
    (736,202
    )
    
    
    (901,117
    )Decrease in prepaid expenses
and other assets
    
    
    6,544
    
    
    
    20,343
    
    
    
    11,102(Decrease) increase in accrued taxes
and other liabilities
    
    
    (1,177
    )
    
    
    (1,399
    )
    
    
    1,751Net cash provided for
operating activities
    
    
    (37,445
    )
    
    
    (27,075
    )
    
    
    (21,924
    )Cash flows from investing activities:Loan disbursements
    
    
    (15,000
    )
    
    
    
    
    
    
    Loan repayments
    
    
    107
    
    
    
    
    
    
    
    Net cash provided for
investing activities
    
    
    (14,893
    )
    
    
    
    
    
    
    Cash flows from financing activities:Proceeds from exercise of stock options
    
    
    
    
    
    
    97,031
    
    
    
    Dividends received from Association
    
    
    100,000
    
    
    
    610,000
    
    
    
    410,000Dividends paid on common stock
    
    
    (253,368
    )
    
    
    (220,454
    )
    
    
    (167,428
    )Net cash provided (for) by
financing activities
    
    
    (153,368
    )
    
    
    486,577
    
    
    
    242,572Net change in cash and cash equivalents
    
    
    (205,706
    )
    
    
    459,502
    
    
    
    220,648Cash and cash equivalents at
beginning of year
    
    
    1,348,817
    
    
    
    889,315
    
    
    
    668,667Cash and cash equivalents at
end of year
    
    $
    1,143,111
    
    
    
    1,348,817
    
    
    
    889,315




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##### Table of Contents



Officers and Directors Officers
    
    DirectorsPaul
Zogas
President,
Chief Executive Officer
and Chief Financial Officer of
the Company and the Association
    
    Paul Zogas
President, Chief Executive Officer,
Chief Financial Officer and
Chairman of the Board for
the Company and the AssociationCharles Zogas
Executive Vice President,
Chief Operating Officer,
Secretary and Treasurer of
the Company and the Association
    
    Charles Zogas
Executive Vice President,
Chief Operating Officer,
Secretary and TreasurerRichard Taylor
Vice President, Trust Officer
and Assistant Secretary of
the Company and the Association
    
    Richard Taylor
Vice President, Trust Officer
and Assistant SecretaryJanice Cecott
Controller of the Company
and the Association
    
    Algerd Brazis
Retired businessman and
Director, Knights of Lithuania Mid-America DistrictDonna Chmiel
Internal Auditor of the
Company and the Association
    
    Michael J. Kukanza
Self-employed private investorLois Gajdorus
Assistant Vice President
of the Association
    
    Jonas Vaznelis
Retired businessman and Committee
member of the Board of Zoning Appeals for Beverly Shores, Indiana.Linda Kolecki
Assistant Vice President
of the Association
 46




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##### Table of Contents



Corporate Information Investor Information Midland Capital Holdings Corporation is the thrift holding company for Midland
Federal Savings and Loan Association. Shareholders, investors and analysts
interested in additional information may contact at the Corporate Office: Paul
Zogas, President, 8929 S. Harlem Avenue, Bridgeview, Illinois 60455. Annual Report on Form 10-KSB A copy of Midland Capital Holdings Corporations Annual Report on Form 10-KSB
including financial statements, as filed with the SEC, is available without
charge by writing to our Corporate Office, Attn: Charles Zogas, Executive Vice
President, 8929 S. Harlem Avenue, Bridgeview, Illinois 60455. Annual Meeting of Shareholders The Annual Meeting of the Shareholders of Midland Capital Holdings Corporation
will be held at 2:00 p.m., October 20, 2004, 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 Company10 Commerce DriveCranford, New Jersey 07016-3572Attn: Corporate RelationsCorporate Counsel/Washington, D.C.Luse, Gorman, Pomerenk & Schick, P.C.5335 Wisconsin Avenue, N.W.  Suite 400Washington, D.C. 20015Corporate Counsel/Chicago, IllinoisKamm & Shapiro, Ltd.318 W. Adams Street  Suite 1700Chicago, Illinois 60606Independent AuditorsCobitz, VandenBerg & Fennessy9944 South Roberts Road  Suite 202Palos Hills, Illinois 60465
 47