##### Table of Contents



FORM 10-KSB [X]       ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934  For the Fiscal Year Ended June 30, 2004 OR [  ]       TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934  For the transition period from  to Commission File Number 1-14343 MIDLAND CAPITAL HOLDINGS CORPORATION 
  Delaware
    
    36-4238089(State or Other Jurisdiction of
    
    (I.R.S. EmployerIncorporation or Organization)
    
    Identification Number)8929 South Harlem AvenueBridgeview, Illinois
    
    60455(Address of Principal Executive Offices)
    
    Zip Code
 Registrants telephone number, including area code: (708) 598-9400   Securities Registered Pursuant to Section 12(b) of the Act: None Securities Registered Pursuant to Section 12(g) of the Act: Common Stock, par value
$.01 per share   Check whether the Issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past twelve months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.   YES   [X]
  NO   [  ] Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrants knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB.  [X] The Issuer had $1.04 million in net income for the fiscal year ended June
30, 2004. As of June 30, 2004, there were issued and outstanding 372,600 shares of
the Issuers Common Stock. The Issuers voting stock is not regularly and
actively traded, and there are no regularly quoted bid and asked prices for the
Issuers voting stock. Accordingly, the Issuer is unable to determine the
aggregate market value of the voting stock held by non-affiliates. DOCUMENTS INCORPORATED BY REFERENCE PARTS II and IV of Form 10-KSB - Annual Report to Stockholders for the
Fiscal Year Ended June 30, 2004 and certain parts of Proxy Statement for 2004
Annual Meeting of Stockholders. PART III of Form 10-KSB - Proxy Statement for the 2004 Annual Meeting of
Stockholders.




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TABLE OF CONTENTS  PART IItem 1. Description of BusinessItem 2. Description of PropertyItem 3. Legal ProceedingsItem 4. Submission of Matters to a Vote of Security HoldersPART IIItem 5. Market for Common Equity and Related Stockholder MattersItem 6. Managements Discussion and Analysis or Plan of OperationItem 7. Financial StatementsItem 8. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureItem 8A. Controls and ProceduresItem 8B. Other InformationPART IIIItem 9. Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange ActItem 10. Executive CompensationItem 11. Security Ownership of Certain Beneficial Owners and ManagementItem 12. Certain Relationships and Related TransactionsPART IVItem 13. ExhibitsItem 14. Principal Accountant Fees and ServicesSIGNATURESAnnual Report to Security HoldersCode of EthicsSubsidiaries of RegistrantCertificationCertification    Table of Contents  
 PART I 
 Item 1. Description of Business Midland Capital Holdings Corporation, which we refer to as Midland
Capital, is a Delaware corporation which was organized in 1998 by Midland
Federal Savings and Loan Association, which we refer to as Midland Federal, for
the purpose of becoming a thrift institution holding company. Midland Capital
and Midland Federal are headquartered in Bridgeview, Illinois. On June 30, 1993, Midland Federal completed a conversion to the stock form
of organization. In that conversion, Midland Federal issued 345,000 shares of
common stock, raising net proceeds of approximately $3.1 million. On July 23,
1998, Midland Federal became a wholly-owned subsidiary of Midland Capital. The principal asset of Midland Capital is the outstanding stock of Midland
Federal. Midland Capital presently has no separate operations and its business
consists only of the business of Midland Federal. All references to Midland
Capital, unless otherwise indicated, at or before July 23, 1998 refer to
Midland Federal. Midland Federal has been principally engaged in the business of attracting
deposits from the general public and using such deposits to originate
residential mortgage and, to a lesser extent, consumer, multi-family, and other
loans in its primary market area. Midland Federal also has substantial
investments in liquid assets, mortgage-backed securities and investment
securities. Midland Federals primary 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 which it serves through its main office in Bridgeview and three branch
offices in southwest Chicago. Its deposits are insured up to applicable limits
by the Federal Deposit Insurance Corporation. At June 30, 2004, Midland
Federal had $153.6 million of assets, deposits of $140.4 million and
stockholders equity of $11.7 million. The main offices of Midland Capital and Midland Federal are located at
8929 South Harlem Avenue, Bridgeview, Illinois 60455 and their telephone number
at that address is (708) 598-9400. Forward-Looking Statements When used in this Form 10-KSB and in future filings by Midland Capital
with the SEC, in Midland Capitals press releases or other public or
shareholder communications, and in oral statements made with the approval of an
authorized executive officer, the words or phrases will likely result, are
expected to, will continue, is anticipated, estimate, project or
similar expressions are intended to identify forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995.
Such statements are subject to risks and uncertainties, including but not
limited to changes in economic conditions in Midland Capitals market area,
changes in policies by regulatory agencies, fluctuations in interest rates,
demand for loans, real estate values and competition in Midland Capitals
market area, all or some of which could cause actual results to differ
materially from historical earnings and those presently anticipated or
projected. Midland Capital wishes to caution readers not to place undue
reliance on any such forward-looking 2




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statements, which speak only as of the date made and are subject to the
above-stated qualifications in any event. Midland Capital wishes to advise
readers that the factors listed above could affect Midland Capitals financial
performance and could cause Midland Capitals actual results for future periods
to differ materially from any opinions or statements expressed with respect to
future periods in any current statements. Midland Capital does not undertake and specifically declines any
obligation to publicly release the result of any revisions which may be made to
any forward-looking statements to reflect events or circumstances after the
date of such statements or to reflect the occurrence of anticipated or
unanticipated events. Lending Activities General. The principal lending activity of Midland Federal has been the
origination for its portfolio of conventional first mortgage real estate loans
secured by owner occupied one- to four-family residential property. Midland
Federal also originates consumer, multi-family, non-residential real estate,
construction and other loans. Loan originations come primarily from walk-in customers, continued
business from customers and referrals from local real estate brokers. Midland
Federals loan originators earn a base salary plus commissions based upon
first mortgage loans generated by the originator. All completed loan
applications are reviewed by Midland Federals salaried loan officers. As part
of the application process, information is obtained concerning the income,
financial condition, employment and credit history of the applicant. If
multi-family or commercial real estate is involved, information is also
obtained concerning cash flow after debt service. Loan applications are
analyzed based on Midland Federals credit underwriting guidelines as well as,
in the case of residential loans, the guidelines issued by the Federal Home
Loan Mortgage Corporation. Midland Federal has established correspondent lending relationships with
other lenders in order to take applications which either do not conform to its
underwriting guidelines or are mortgage loan products that it does not offer,
such as FHA and VA insured mortgage loans. In consideration of a loan broker
fee paid by the lender to Midland Federal, it processes the loan application
and forwards a completed loan application package to the lender, who
underwrites and originates the loan. All real estate loans are appraised by independent fee appraisers approved
by the Board of Directors. Midland Federal obtains current financial
statements in connection with the underwriting process as well as annual
financial statements for borrowers with loans secured by commercial real
estate. Residential real estate loans are generally approved by the Loan Committee
in amounts up to $400,000. Residential real estate loans may also be approved
by the Chief Lending Officer in amounts up to $275,000 or the President in
amounts up to $350,000, and then ratified by the Loan Committee or the Board of
Directors. Residential real estate loans in amounts over $400,000 must be
approved by the Board of Directors. Non-residential real estate loans are
generally approved by the Board of Directors. Non-residential real estate
loans may also be approved by the President in 3




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amounts up to $400,000 and then ratified by the Board of Directors. The
Chief Lending Officer and the President each have approval authority for any
consumer loans. Midland Federal generally requires, in connection with the origination of
real estate loans, fire and casualty insurance coverage, as well as flood
insurance where appropriate, to protect its interest. The cost of this
insurance coverage is paid by the borrower. Midland Federal also requires title
insurance coverage on all real estate loans except for second mortgage loans in
amounts of less than $25,000 for which loans it only requires that good and
marketable title be verified by an independent title search. The cost of title
insurance coverage is paid for by the borrower, except in the case of second
mortgage loans for which Midland Federal may, from time to time, absorb such
costs for promotional purposes. The aggregate amount of loans that Midland Federal is permitted to make
under applicable federal regulations to any one borrower, including related
entities, and the aggregate amount that it could have invested in any one real
estate project is generally the greater of 15% of unimpaired capital and
surplus or $500,000. See Regulation  Federal Regulation of Savings
Associations. At June 30, 2004, Midland Federal had one borrower with outstanding loan
balances in excess of $500,000. The borrowers loans totaled $545,000 and were
secured by a single-family residence. These loans were current and performing
in accordance with their terms at June 30, 2004. See  Non-Performing
Assets, Classified Assets, Loan Delinquencies and Defaults. 4




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Loan and Mortgage-backed Securities Portfolio Composition. The following
table sets forth information concerning the composition of Midland Federals
loan and mortgage-backed securities portfolios in dollar amounts and in
percentages as of the dates indicated. June 30,2004
    
    2003
    
    2002Amount
    
    Percent
    
    Amount
    
    Percent
    
    Amount
    
    Percent(Dollars in Thousands)Real Estate LoansOne-to four-family:Held for investment
    
    $
    90,636
    
    
    
    95.69
    %
    
    $
    89,424
    
    
    
    94.95
    %
    
    $
    81,803
    
    
    
    94.70
    %Available for sale
    
    
    582
    
    
    
    0.61
    
    
    
    367
    
    
    
    0.39
    
    
    
    740
    
    
    
    0.86Multi-family
    
    
    1,119
    
    
    
    1.18
    
    
    
    1,994
    
    
    
    2.12
    
    
    
    1,222
    
    
    
    1.41Non-Residential
    
    
    821
    
    
    
    0.87
    
    
    
    687
    
    
    
    0.73
    
    
    
    935
    
    
    
    1.08Construction
    
    
    
    
    
    
    
    
    
    
    250
    
    
    
    0.26
    
    
    
    
    
    
    
    Total real estate loans
    
    
    93,158
    
    
    
    98.35
    
    
    
    92,722
    
    
    
    98.45
    
    
    
    84,700
    
    
    
    98.05Other LoansConsumer Loans:Deposit accounts
    
    
    311
    
    
    
    0.33
    
    
    
    293
    
    
    
    0.31
    
    
    
    397
    
    
    
    0.46Student
    
    
    587
    
    
    
    0.62
    
    
    
    658
    
    
    
    0.70
    
    
    
    822
    
    
    
    0.95Automobile
    
    
    465
    
    
    
    0.49
    
    
    
    336
    
    
    
    0.36
    
    
    
    321
    
    
    
    0.37Credit card
    
    
    159
    
    
    
    0.16
    
    
    
    139
    
    
    
    0.15
    
    
    
    116
    
    
    
    0.14Other
    
    
    17
    
    
    
    0.02
    
    
    
    15
    
    
    
    0.01
    
    
    
    20
    
    
    
    0.02Total consumer loans
    
    
    1,539
    
    
    
    1.62
    
    
    
    1,441
    
    
    
    1.53
    
    
    
    1,676
    
    
    
    1.94Commercial business loans
    
    
    26
    
    
    
    0.03
    
    
    
    19
    
    
    
    0.02
    
    
    
    8
    
    
    
    0.01Total loans receivable
    
    
    94,723
    
    
    
    100.00
    %
    
    
    94,182
    
    
    
    100.00
    %
    
    
    86,384
    
    
    
    100.00
    %LessLoans in process
    
    
    109
    
    
    
    
    
    
    
    617
    
    
    
    
    
    
    
    67Deferred yield adjustments
    
    
    (398
    )
    
    
    
    
    
    
    (407
    )
    
    
    
    
    
    
    (379
    )Allowance for uncollected interest
    
    
    9
    
    
    
    
    
    
    
    263
    
    
    
    
    
    
    
    259Allowance for loan losses
    
    
    460
    
    
    
    
    
    
    
    410
    
    
    
    
    
    
    
    350Loans receivable, net
    
    $
    94,543
    
    
    
    
    
    
    $
    93,229
    
    
    
    
    
    
    $
    86,087Mortgage-backed securities:FHLMC
    
    $
    1,887
    
    
    
    64.12
    %
    
    $
    4,795
    
    
    
    76.29
    %
    
    $
    8,324
    
    
    
    80.12
    %FNMA
    
    
    1,012
    
    
    
    34.38
    
    
    
    1,423
    
    
    
    22.64
    
    
    
    1,965
    
    
    
    18.91GNMA
    
    
    44
    
    
    
    1.50
    
    
    
    67
    
    
    
    1.07
    
    
    
    92
    
    
    
    0.88Collateralized mortgage obligations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9
    
    
    
    0.09Total mortgage-backed securities
    
    
    2,943
    
    
    
    100.00
    %
    
    
    6,285
    
    
    
    100.00
    %
    
    
    10,390
    
    
    
    100.00
    %Net discounts
    
    
    (1
    )
    
    
    
    
    
    
    (13
    )
    
    
    
    
    
    
    (30
    )Net mortgage-backed securities
    
    $
    2,942
    
    
    
    
    
    
    $
    6,272
    
    
    
    
    
    
    $
    10,360
 5




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The following table shows the composition of Midland Federals loan
portfolio by fixed and adjustable-rate at the dates indicated. June 30,2004
    
    2003
    2002Amount
    
    Percent
    
    Amount
    
    Percent
    
    Amount
    
    Percent(Dollars in Thousands)Fixed-Rate LoansReal Estate:One-to four-family
    
    $
    83,540
    
    
    
    88.19
    %
    
    $
    83,491
    
    
    
    88.65
    %
    
    $
    76,488
    
    
    
    88.55
    %Multi-family
    
    
    425
    
    
    
    0.45
    
    
    
    370
    
    
    
    0.39
    
    
    
    254
    
    
    
    0.29Non-Residential
    
    
    588
    
    
    
    0.62
    
    
    
    452
    
    
    
    0.48
    
    
    
    698
    
    
    
    0.81Total real estate loans
    
    
    84,553
    
    
    
    89.26
    
    
    
    84,313
    
    
    
    89.52
    
    
    
    77,440
    
    
    
    89.65Consumer
    
    
    935
    
    
    
    0.99
    
    
    
    776
    
    
    
    0.82
    
    
    
    842
    
    
    
    0.97Total fixed-rate loans
    
    
    85,488
    
    
    
    90.25
    
    
    
    85,089
    
    
    
    90.34
    
    
    
    78,282
    
    
    
    90.62Adjustable-Rate LoansReal estate:One-to four-family
    
    
    7,678
    
    
    
    8.11
    
    
    
    6,300
    
    
    
    6.69
    
    
    
    6,055
    
    
    
    7.01Multi-family
    
    
    694
    
    
    
    0.73
    
    
    
    1,624
    
    
    
    1.73
    
    
    
    968
    
    
    
    1.12Non-Residential
    
    
    233
    
    
    
    0.25
    
    
    
    235
    
    
    
    0.25
    
    
    
    237
    
    
    
    0.27Construction
    
    
    
    
    
    
    
    
    
    
    250
    
    
    
    0.26
    
    
    
    
    
    
    
    Total real estate loans
    
    
    8,605
    
    
    
    9.09
    
    
    
    8,409
    
    
    
    8.93
    
    
    
    7,260
    
    
    
    8.40Consumer
    
    
    604
    
    
    
    0.63
    
    
    
    665
    
    
    
    0.71
    
    
    
    834
    
    
    
    0.97Commercial business
    
    
    26
    
    
    
    0.03
    
    
    
    19
    
    
    
    0.02
    
    
    
    8
    
    
    
    0.01Total adjustable-rate loans
    
    
    9,235
    
    
    
    9.75
    
    
    
    9,093
    
    
    
    9.66
    
    
    
    8,102
    
    
    
    9.38Total loans receivable
    
    
    94,723
    
    
    
    100.00
    %
    
    
    94,182
    
    
    
    100.00
    %
    
    
    86,384
    
    
    
    100.00
    %LessLoans in process
    
    
    109
    
    
    
    
    
    
    
    617
    
    
    
    
    
    
    
    67Deferred yield adjustments
    
    
    (398
    )
    
    
    
    
    
    
    (407
    )
    
    
    
    
    
    
    (379
    )Allowance for uncollected interest
    
    
    9
    
    
    
    
    
    
    
    263
    
    
    
    
    
    
    
    259Allowance for loan losses
    
    
    460
    
    
    
    
    
    
    
    410
    
    
    
    
    
    
    
    350Loans receivable, net
    
    $
    94,543
    
    
    
    
    
    
    $
    93,229

    
    
    
    
    
    
    $
    86,087
 6




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##### Table of Contents



The following schedule illustrates the contractual maturity of Midland
Federals loan portfolio at June 30, 2004. Mortgages which have adjustable or
renegotiable interest rates are shown as maturing in the period during which
the contract is due. The schedule does not reflect the effects of possible
prepayments or enforcements of due-on-sale clauses or interest rate
adjustments. Multi-Family and
    
    
    
    
    
    
    
    
    
    CommercialOne-to Four-Family
    
    Commercial
    
    Consumer
    
    Business
    
    TotalWeighted
    
    
    
    
    
    Weighted
    
    
    
    
    
    Weighted
    
    
    
    
    
    Weighted
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    Average
    
    
    
    
    
    Average
    
    
    
    
    
    Average
    
    
    
    
    
    AverageAmount
    
    Rate
    
    Amount
    
    Rate
    
    Amount
    
    Rate
    
    Amount
    
    Rate
    
    Amount
    
    RateDue During Years
Ending June 30,2005(1)
    
    $
    692
    
    
    
    5.14
    %
    
    $
    
    
    
    
    
    %
    
    $
    538
    
    
    
    6.38
    %
    
    $
    26
    
    
    
    0.0
    %
    
    $
    1,256
    
    
    
    5.56
    %2006
    
    
    255
    
    
    
    3.95
    %
    
    
    233
    
    
    
    9.00
    %
    
    
    96
    
    
    
    4.98
    %
    
    
    
    
    
    
    
    %
    
    
    584
    
    
    
    6.13
    %2007
    
    
    826
    
    
    
    4.40
    %
    
    
    315
    
    
    
    6.00
    %
    
    
    424
    
    
    
    5.30
    %
    
    
    
    
    
    
    
    %
    
    
    1,565
    
    
    
    4.97
    %2008 to 2009
    
    
    2,544
    
    
    
    4.67
    %
    
    
    
    
    
    
    
    %
    
    
    402
    
    
    
    6.39
    %
    
    
    
    
    
    
    
    %
    
    
    2.946
    
    
    
    4.90
    %2010 to 2013
    
    
    1,920
    
    
    
    6.19
    %
    
    
    123
    
    
    
    8.50
    %
    
    
    70
    
    
    
    4.48
    %
    
    
    
    
    
    
    
    %
    
    
    2,113
    
    
    
    6.27
    %2014 to 2028
    
    
    37,281
    
    
    
    5.64
    %
    
    
    112
    
    
    
    7.25
    %
    
    
    9
    
    
    
    4.42
    %
    
    
    
    
    
    
    
    %
    
    
    37,402
    
    
    
    5.64
    %2029 and following
    
    $
    47,700
    
    
    
    5.93
    %
    
    $
    1,157
    
    
    
    6.08
    %
    
    $
    
    
    
    
    
    %
    
    $
    
    
    
    
    
    %
    
    $
    48,857
    
    
    
    5.93
    %$
    91,218
    
    
    
    
    
    
    $
    1,940
    
    
    
    
    
    
    $
    1,539
    
    
    
    
    
    
    $
    26
    
    
    
    
    
    
    $
    94,723
    
    
    
    5.78
    %
   (1)
    
    Includes demand loans, loans having no stated maturity and overdraft
loans. The total amount of loans due after June 30, 2005 which have predetermined
interest rates is approximately $84.87 million, while the total amount of loans
due after such date which have floating or adjustable interest rates is
approximately $8.60 million. 7




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##### Table of Contents



One- to Four-Family Residential Real Estate Lending Midland Federals primary lending activity has been the origination and
purchase of permanent loans secured by mortgages on owner-occupied one- to
four-family residences. Midland Federal has recently increased its one to four
family residential lending due to more aggressive organization efforts, a
decline in market interest rates and increased demand. At June 30, 2004, $91.2
million or 96.3% of our gross loan portfolio consisted of permanent loans on
one- to four-family residences. All of these loans were secured by properties
located in the State of Illinois, with a substantial majority located in
Midland Federals primary market area. Historically, Midland Federal originated for retention in its own
portfolio 30-year fixed-rate loans secured by one- to four-family residential
real estate. Beginning in the early 1980s, in order to reduce its exposure to
changes in interest rates, Midland Federal began to originate adjustable-rate
mortgages (ARMs), subject to market conditions and consumer preference.
However, as a result of continued consumer demand, Midland Federal has
continued to originate for retention in its portfolio primarily
fixed-rate-residential loans, although in amounts and at rates which are
monitored for compliance with Midland Federals asset/liability management
policy. Most of Midland Federals fixed rate residential loans have terms up to 30
years although approximately 40% of Midland Federals fiscal 2004 originations
have terms of 15 year or less. Midland Federal establishes interest rates on
its fixed rate residential loans based on published agency pricing, an analysis
of its asset/liability needs and competitive factors. Midland Federals current one- to four-family residential ARMs are fully
amortizing loans with contractual maturities of up to 30 years. The interest
rates on substantially all the ARMs originated by Midland Federal are subject
to adjustment at one-year intervals. Midland Federals ARM products generally
carry interest rates which are reset to a stated margin over the one-year U.S.
Treasury Rate. Adjustments in the interest rate of Midland Federals ARMs are
generally limited to 2% at any adjustment date and 6% over the life of the
loan. At June 30, 2004, the total balance of one- to four-family ARMs was $7.7
million, or 8.1% of our gross loan portfolio. From time to time, Midland Federal will make owner-occupied one- to
four-family construction loans for a six-month interest only term, which
Midland Federal will convert to a permanent mortgage for a fee generally of one
point. Midland Federal requires the interest on such loans during the
construction term to be paid or placed in escrow when the loan is funded. Also classified as one- to four-family residential loans are our home
equity lines of credit which were funded in the amount of $3.0 million at June
30, 2004, and home equity loans, which were $282,000 at June 30, 2004. Our
unfunded commitments on home equity lines of credit totaled $2.5 million at
June 30, 2004. Midland Federals home equity lines of credit are five year
interest-only balloon loans secured by second liens on the property, and are
made in amounts of up to 75% of the appraised value of the property (including
first lien amounts). Midland Federals home equity loans are three to 15 year
fixed-rate loans secured by second liens on the property, and are made in
amounts up to 80% of the appraised value of the property (including first lien
amounts). 8




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##### Table of Contents



Midland Federals residential loans are generally underwritten and
documented to permit their sale in the secondary market. Midland Federal
evaluates both the borrowers ability to make principal and interest payments
and the value of the property that will secure the loan. Midland Federal
generally originates residential mortgage loans with loan-to-value ratios of up
to 80%, although the Board of Directors has authorized originations of mortgage
loans with loan-to-value ratios of up to 95%. On any mortgage loan exceeding
an 80% loan-to-value ratio at the time of origination, Midland Federal
generally requires private mortgage insurance on the excess. Midland Federals residential mortgage loans customarily include
due-on-sale clauses, which are provisions that give Midland Federal the right
to declare a loan immediately due and payable in the event the borrower sells
or otherwise disposes of the real property subject to the mortgage and the loan
is not repaid. Multi-Family Residential Lending Midland Federals multi-family residential portfolio at June 30, 2004
included $1.1 million in loans secured by residential buildings (5 or more
units) located in Midland Federals primary market area. Midland Federal
originates primarily adjustable-rate, multi-family real estate loans. Rates on
Midland Federals adjustable-rate, multi-family real estate loans generally
adjust in a manner consistent with Midland Federals ARMs. Multi-family real estate loans are generally underwritten in amounts of up
to 75% of the appraised value of the underlying property. Midland Federals
underwriting procedures for multi-family generally require verification of the
borrowers credit history, income and financial statements, banking
relationships, references and income projections for the property. Personal
guarantees are generally obtained for Midland Federals multi-family real
estate loans. Midland Federal monitors the cash flow and operating performance of
borrowers through inspection of collateral, calls on borrowers, inspection of
business premises and evaluation of interim financial statements. Multi-family residential real estate loans generally present a higher
level of risk than loans secured by one- to four-family residences. The risk
is greater due to several factors, including the concentration of principal in
a limited number of loans and borrowers, the effects of general economic
conditions on income producing properties and the increased difficulty of
evaluating and monitoring these types of loans. Furthermore, the repayment of
loans secured by multi-family residential real estate is typically dependent
upon the successful operation of the related real estate project. If the cash
flow from the project is reduced (for example, if leases are not obtained or
renewed), the borrowers ability to repay the loan may be impaired. Consumer Lending Management believes that consumer loans help Midland Federal expand its
customer base and create stronger ties to its existing customer base. In
addition, because consumer loans generally have shorter terms to maturity and
carry higher rates of interest than do residential loans, they can be valuable
asset/liability management tools. 9




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##### Table of Contents



Midland Federal offers a variety of secured consumer loans, including
educational loans (which are guaranteed from a State agency), automobile loans
and loans secured by savings deposits. In addition, Midland Federal offers
unsecured consumer loans through its Visa/MasterCard credit card program.
Midland Federal currently originates substantially all of its consumer loans in
its principal market area. Consumer loan terms vary according to the type of collateral, term of the
loan and creditworthiness of the borrower. The underwriting standards employed
by Midland Federal for consumer loans include a determination of the
applicants payment history on other debts and an assessment of the borrowers
ability to meet payments on the proposed loan along with his or her existing
obligations. In addition to the creditworthiness of the applicant, the
underwriting process also includes a comparison of the value of the security,
if any, in relation to the proposed loan amount. Student loans are originated by Midland Federal in compliance with the
guidelines established by the Illinois Guaranteed Loan Program (IGLP). As a
result, any loans that become delinquent 30-90 days are sold to IGLP. As of
June 30, 2004, student loans amounted to $587,000 or 0.62% of Midland Federals
gross loan portfolio. Midland Federal also originates consumer loans secured by automobiles in
its primary market area. Underwriting standards employed by Midland Federal in
connection with these loans include a review of the borrowers
creditworthiness, verification of collateral value and perfection of a lien
against the collateral. Midland Federal requires vehicle insurance on all
loans secured by automobiles. At June 30, 2004, Midland Federal had $465,000,
or 0.49% of its gross loan portfolio in automobile loans. Lines of credit extended through Midland Federals Visa credit card
program are offered in amounts up to $10,000. Midland Federal obtains an
application from the borrower, a credit report on the borrower and verifies
employment for credit card borrowers. At June 30, 2004, Midland Federal had
$159,000 or 0.16% of its gross loan portfolio in credit card loans. Consumer loans may entail greater risk than residential mortgage loans,
particularly in the case of consumer loans which are unsecured or secured by
rapidly depreciable assets such as automobiles. In such cases, any repossessed
collateral for defaulted consumer loans may not provide adequate sources of
repayment for the outstanding loan balances as a result of the greater
likelihood of damage, loss or depreciation. In addition, the application of
various federal and state laws, including federal and state bankruptcy and
insolvency laws, may limit the amount which can be recovered on such loans.
Although the level of delinquencies in Midland Federals consumer loan
portfolio has generally been low, there can be no assurance that delinquencies
will not increase in the future. Commercial Real Estate Lending Midland Federal maintains a portion of its portfolio in permanent loans
secured by commercial real estate. Midland Federals commercial real estate
portfolio consists of loans on a variety of non-residential property, including
an automobile repair center and office properties. At 10




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##### Table of Contents



June 30, 2004, $821,000, or 0.87% of Midland Federals gross loan
portfolio consisted of permanent loans secured by commercial real estate. In
the future, Midland Federal intends to continue to engage in a modest level of
commercial real estate lending, subject to regulatory restrictions. Management
expects that most future commercial real estate loans will carry adjustable
interest rates or balloon maturities and a loan-to-value ratio of 75% or less.
Nevertheless, in view of the significant amount of risk generally associated
with commercial real estate lending, there can be no assurance that Midland
Federal will not experience delinquencies on its commercial real estate
portfolio. Mortgage-Backed Securities Midland Federal has a portfolio of mortgage-backed securities totaling
$2.9 million at June 30, 2004. Most of Midland Federals mortgage-backed
securities are passed through certificates issued by federal agencies. Midland
Federal utilizes its mortgage-backed securities to supplement loan production
and to meet its asset/liability management objectives. Mortgage-backed
securities can also serve as collateral for borrowings and, through repayments,
as a source of liquidity. For information regarding the carrying and fair
values of Midland Federals mortgage-backed securities portfolio, see Note 4 of
the Notes to Financial Statements in the Annual Report to Stockholders filed as
Exhibit 13 hereto. See Regulation. The following table sets forth the contractual maturities of Midland
Federals mortgage-backed securities at June 30, 2004. It should be noted
that, due to prepayments, the actual maturity of Midland Federals long term
mortgage-backed securities will likely be significantly shorter than the
contractual maturities. Due In
    
    Balance Outstanding1 to 5
    
    6 to 20
    
    Over 20Years
    
    Years
    
    Years
    
    Fixed
    
    Adjustable(In Thousands)Federal Home Loan Mortgage Corporation
    
    $
    178
    
    
    $
    1,246
    
    
    $
    462
    
    
    $
    178
    
    
    $
    1,708Federal National Mortgage Association
    
    
    31
    
    
    
    960
    
    
    
    21
    
    
    
    91
    
    
    
    921Government National Mortgage Association
    
    
    
    
    
    
    44
    
    
    
    
    
    
    
    44
    
    
    
    Total
    
    $
    209
    
    
    $
    2,250
    
    
    $
    483
    
    
    $
    313
    
    
    $
    2,629
 Loan Originations, Purchases and Sales Real estate loans are originated by Midland Federals staff of salaried
loan officers. In addition, Midland Federal utilizes commissioned loan
originators. Loan applications are taken at each office, processed in Midland
Federals main office and then submitted to the Chief Lending Officer, the
President or the Loan Committee for approval. Midland Federals ability to originate loans is dependent upon the
relative customer demand for loans in its market. Demand is also affected by
the interest rate environment. Loan sales consist primarily of loans sold to
the Illinois Housing Development Authority and other lenders under various
government programs. 11




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##### Table of Contents



The following tables set forth our loan and mortgage-backed securities
activity for the periods indicated. Year Ended June 30,2004
    
    2003
    
    2002(Dollars in Thousands)Originations by type:Adjustable-Rate:Real estate  one- to- four family
    
    $
    5,987
    
    
    $
    3,211
    
    
    $
    4,062Real estate  multi-family
    
    
    
    
    
    
    717
    
    
    
    Construction
    
    
    
    
    
    
    400
    
    
    
    Non-real estate  consumer
    
    
    47
    
    
    
    34
    
    
    
    51Total adjustable rate
    
    
    6,034
    
    
    
    4,362
    
    
    
    4,113Fixed-Rate:Real estate  one- to- four family
    
    
    34,810
    
    
    
    50,857
    
    
    
    35,565Real estate  multi-family
    
    
    316
    
    
    
    117
    
    
    
    Non-Residential
    
    
    150
    
    
    
    
    
    
    
    474Non-real estate  consumer
    
    
    1,227
    
    
    
    1,086
    
    
    
    1,076Total fixed-rate
    
    
    36,503
    
    
    
    52,060
    
    
    
    37,115Total loans originated.
    
    
    42,537
    
    
    
    56,422
    
    
    
    41,228Sales:Real estate loans sold
    
    
    (1,371
    )
    
    
    (1,903
    )
    
    
    (3,160
    )Principal repayments
    
    
    (40,625
    )
    
    
    (46,720
    )
    
    
    (21,217
    )Net increase
    
    
    541
    
    
    $
    7,799
    
    
    $
    16,851Mortgage-backed securities:Purchased
    
    $
    
    
    
    $
    
    
    
    $
    Sold
    
    
    
    
    
    
    
    
    
    
    Amortization and repayments
    
    $
    (3,331
    )
    
    $
    (4,087
    )
    
    $
    (6,950
    )Net decrease
    
    $
    (3,331
    )
    
    $
    (4,087
    )
    
    $
    (6,950
    )
 12




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##### Table of Contents



Non-Performing Assets, Classified Assets, Loan Delinquencies and Defaults When a borrower fails to make a required payment on a loan, Midland
Federal attempts to cause the deficiency to be cured by contacting the
borrower. A notice is mailed to the borrower and late charges are assessed
after a payment is 30 days past due. Five days after the late notice is
mailed, the Loan Service Counselor/Collector will contact the borrower by
telephone. After a payment is 60 days past due, the Loan Service
Counselor/Collector conducts a personal interview with the borrower after which
if the loan continues to be delinquent, it is referred to the Loan Service
Manager. After the 90th day of delinquency, Midland Federal institutes action
to foreclose on the property or to acquire it by deed in lieu of foreclosure.
If foreclosed on, real property is sold at a public sale and may be purchased
by Midland Federal. A decision as to whether and when to initiate foreclosure
proceedings is based on such factors as the amount of the outstanding loan in
relation to the original indebtedness and the current value of the property,
the extent of delinquency and the borrowers ability and willingness to
cooperate in curing delinquencies. Generally, when a loan becomes delinquent
90 days or more, Midland Federal will place the loan on a non-accrual status
and, as a result, previously accrued interest income on the loan is taken out
of current income. Future interest income is recognized on a cash basis. The
loan will remain on a non-accrual status as long as the loan is 90 days
delinquent, unless a repayment plan is being followed. 13




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##### Table of Contents



The amounts presented represent the total remaining principal balances of
the related loans, rather than actual payment amounts which are overdue and are
reflected as a percentage of total loans. The following table sets forth
information concerning delinquent mortgage and other loans at June 30, 2004 and
June 30, 2003. The balances included in the table do not reflect specific
reserves. At June 30, 2004Loans Delinquent For:30-59 days
    
    60-89 days
    
    90 days and over
    
    TotalNumber
    
    Amount
    
    Percent
    
    Number
    
    Amount
    
    Percent
    
    Number
    
    Amount
    
    Percent
    
    Number
    
    Amount
    
    Percent(Dollars in Thousands)Real estate:One-to four-family
    
    
    6
    
    
    $
    324
    
    
    
    0.36
    %
    
    
    3
    
    
    $
    212
    
    
    
    0.23
    %
    
    
    1
    
    
    $
    36
    
    
    
    0.04
    %
    
    
    10
    
    
    $
    572
    
    
    
    0.63
    %Consumer
    
    
    2
    
    
    
    11
    
    
    
    0.07
    
    
    
    1
    
    
    
    1
    
    
    
    0.01
    
    
    
    3
    
    
    
    19
    
    
    
    0.12

    
    
    
    6
    
    
    
    31
    
    
    
    0.20Total
    
    
    8
    
    
    $
    335
    
    
    
    0.35
    %
    
    
    4
    
    
    $
    213
    
    
    
    0.23
    %
    
    
    4
    
    
    $
    55
    
    
    
    0.06
    %
    
    
    16
    
    
    $
    603
    
    
    
    0.64
    %
 At June 30, 2003Loans Delinquent For:30-59 days
    
    60-89 days
    
    90 days and over
    
    TotalNumber
    
    Amount
    
    Percent
    
    Number
    
    Amount
    
    Percent
    
    Number
    
    Amount
    
    Percent
    
    Number
    
    Amount
    
    Percent(Dollars in Thousands)Real estate:One-to four-family
    
    
    14
    
    
    $
    1,151
    
    
    
    1.41
    %
    
    
    3
    
    
    $
    78
    
    
    
    0.09
    %
    
    
    5
    
    
    $
    148
    
    
    
    0.18
    %
    
    
    22
    
    
    $
    1,377
    
    
    
    1.68
    %Consumer
    
    
    2
    
    
    
    17
    
    
    
    1.01
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8
    
    
    
    15
    
    
    
    0.90
    
    
    
    10
    
    
    
    32
    
    
    
    1.91Commercial business
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    
    
    
    
    
    
    
    
    1
    
    
    
    1
    
    
    
    6.76
    
    
    
    1
    
    
    
    1
    
    
    
    6.76Total
    
    
    16
    
    
    $
    1,168
    
    
    
    1.37
    %
    
    
    3
    
    
    $
    78
    
    
    
    0.09
    %
    
    
    14
    
    
    $
    164
    
    
    
    0.19
    %
    
    
    33
    
    
    $
    1,410
    
    
    
    1.65
    %
 14




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##### Table of Contents



The table below sets forth the amounts and categories of non-performing
assets in Midland Federals loan portfolio. Loans are placed on non-accrual
status when the collection of principal and/or interest becomes doubtful,
generally when the loan is delinquent 90 days or more. For all of the
indicated periods, the Company had no accruing loans 90 or more days
delinquent. Foreclosed assets include assets acquired in settlement of loans. At June 30,2004
    
    2003
    
    2002(Dollars in Thousands)Non-Accruing Loans:One- to four-family
    
    $
    36
    
    
    $
    472
    
    
    $
    148Multi-family
    
    
    
    
    
    
    
    
    
    
    Consumer
    
    
    19
    
    
    
    10
    
    
    
    15Commercial business
    
    
    
    
    
    
    
    
    
    
    1Total non-performing assets
    
    
    55
    
    
    
    482
    
    
    
    164Foreclosed Assets:Total
    
    
    
    
    
    
    
    
    
    
    Total non-performing assets
    
    $
    55
    
    
    $
    482
    
    
    $
    164Total as a percentage of total assets
    
    
    0.04
    %
    
    
    0.30
    %
    
    
    0.11
    %
 As of June 30, 2004, non-accruing one-to-four family loans totaled $36,000
and consisted of one loan secured by a property located in Midland Federals
primary market area. As of June 30, 2004, there were no concentrations of loans in any types of
industry which exceeded 10% of Midland Federals total loans that are not
included as a loan category in the preceding table. For the fiscal year ended June 30, 2004, gross interest income which would
have been recorded had the non-accruing loans been current in accordance with
their original terms amounted to $2,000, which interest income was not accrued
into interest income for the fiscal year ended June 30, 2004. As of June 30, 2004, there were no other loans not included in the table
or discussed above where known information about the possible credit problems
of borrowers caused management to have serious doubts as to the ability of the
borrower to comply with present loan repayment terms and which may result in
disclosure of such loans in the future. Classified Assets Federal regulations require that each savings institution classify its own
assets on a regular basis. In addition, in connection with examinations of
savings institutions, OTS and Federal Deposit Insurance Corporation examiners
have authority to identify problem assets and, if appropriate, require them to
be classified. There are three classifications for problem assets:
substandard, doubtful or loss. An asset is considered substandard if
it is inadequately protected by the 15




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##### Table of Contents



current net worth and paying capacity of the obligor or of the collateral pledged, if any.
Substandard assets include those characterized by the distinct possibility that the savings association
will sustain some loss if the deficiencies are not corrected. Assets classified as doubtful have all of
the weaknesses inherent in those classified substandard, with the added characteristic that the weaknesses
present make collection or liquidation in full, on the basis of currently existing facts, conditions, and
values, highly questionable and improbable. Assets classified as loss are those considered
uncollectible and of such little value that their continuance as assets without the establishment of a
specific loss reserve is not warranted. Assets which do not currently expose the savings association to
sufficient risk to warrant classification in one of the aforementioned categories, but possess weaknesses,
are required to be designated special mention by management. When a savings association classifies problem assets as either substandard
or doubtful, it may establish general allowances for loan losses in an amount
deemed prudent by management. General allowances represent loss allowances
which have been established to recognize the inherent risk associated with
lending activities, but unlike specific allowances, have not been allocated to
particular problem assets. When a savings association classifies problem
assets as a loss, it is required either to establish a specific allowance for
losses equal to 100% of that portion of the asset so classified or to
charge-off such amount. An associations determination as to the
classification of its assets and the amount of its valuation allowances is
subject to review by Midland Federals District Director at the regional OTS
office, who may order the establishment of additional general or specific loss
allowances. In connection with the filing of its periodic reports with the OTS and in
accordance with its classification of assets policy, Midland Federal regularly
reviews the assets in its portfolio to determine whether any assets require
classification in accordance with applicable regulations. On the basis of
managements review of its assets, at June 30, 2004, Midland Federal had
classified a total of $136,000 of its assets as substandard, none as doubtful,
none as loss and $19,000 as special mention. Allowance for Losses on Loans and Real Estate The allowance for loan losses is established through a provision for loan
losses based on managements evaluation of the risks inherent in its loan
portfolio and changes in the nature and volume of its loan activity. Such
evaluation, which includes a review of all loans where full collectibility may
not be reasonably assured, considers among other matters, the estimated fair
value of the underlying collateral, economic conditions, historical loan loss
experience and other factors that warrant recognition in providing for an loan
loss allowance adequate to cover probable accrued losses in the portfolio. Midland Capitals allowance for loan losses increased by $50,000 to
$460,000 at June 30, 2004 from $410,000 at the prior fiscal year end. At
fiscal year end, the $460,000 in general allowance for loan losses was
determined by Midland Capital to be consistent with its policy for the
establishment and maintenance of adequate levels of general loan loss
allowances. The $50,000 increase in loan loss allowances was the result of
$60,000 of loan loss provisions during fiscal 2004 offset by $10,000 in net
loan charge-offs. Although management believes that it uses the best 16




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##### Table of Contents



information available to determine the allowances, unforeseen market
conditions could result in adjustments and net earnings could be significantly
affected if circumstances differ substantially from the assumptions used in
making the final determination. Future additions to Midland Federals
allowances will be the result of periodic loan, property and collateral reviews
and thus cannot be predicted in advance. At June 30, 2004 Midland Federal had
a total allowance for losses on loans of $460,000 or 0.49% of total loans. See
Note 5 of the Notes to Financial Statements in the Annual Report to
Stockholders filed as Exhibit 13 hereto. The following table sets forth an analysis of Midland Federals allowance
for loan losses. Year Ended June 30,2004
    
    2003
    
    2002(Dollars in Thousands)Balance at beginning of period
    
    $
    410
    
    
    $
    350
    
    
    $
    359Charge-offs:One- to four-family
    
    
    
    
    
    
    
    
    
    
    Consumer
    
    
    18
    
    
    
    
    
    
    
    35Commercial business
    
    
    
    
    
    
    
    
    
    
    3Total charge-offs
    
    
    18
    
    
    
    
    
    
    
    38Recoveries:One- to four-family
    
    
    
    
    
    
    
    
    
    
    14Consumer
    
    
    8
    
    
    
    
    
    
    
    Total recoveries
    
    
    8
    
    
    
    
    
    
    
    14Net charge-offs
    
    
    (10
    )
    
    
    
    
    
    
    (24
    )Additions charged to operations
    
    
    60
    
    
    
    60
    
    
    
    15Balance at end of period
    
    $
    460
    
    
    $
    410
    
    
    $
    350Ratio of net charge-offs during the year to
average loans outstanding during the period
    
    
    0.01
    %
    
    
    
    %
    
    
    0.03
    %Ratio of net charge-offs during the year to
average non-performing assets
    
    
    3.19
    %
    
    
    
    %
    
    
    9.60
    %Allowance for loan losses to
non-performing loans
    
    
    829.00
    %
    
    
    84.80
    %
    
    
    213.29
    %Allowance for loan losses to total loans
    
    
    0.49
    %
    
    
    0.44
    %
    
    
    0.41
    %
 17




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##### Table of Contents



The following table presents the portions of the allowance for loan losses
applicable to each loan category. June 30,2004
    
    2003
    
    2002Percent
    
    
    
    
    
    Percent of
    
    
    
    
    
    Percent ofof Loans
    
    
    
    
    
    Loans in
    
    
    
    
    
    Loans inin Each
    
    
    
    
    
    Each
    
    
    
    
    
    EachCategory
    
    
    
    
    
    Category
    
    
    
    
    
    Categoryto Total
    
    
    
    
    
    to Total
    
    
    
    
    
    to TotalAmount
    
    Loans
    
    Amount
    
    Loans
    
    Amount
    
    Loans(Dollars in Thousands)One- to four-family
`
    
    $
    110
    
    
    
    96.30
    %
    
    $
    177
    
    
    
    95.34
    %
    
    $
    113
    
    
    
    95.56
    %Multi-family
    
    
    2
    
    
    
    1.18
    
    
    
    2
    
    
    
    2.12
    
    
    
    2
    
    
    
    1.41Non-residential
    
    
    2
    
    
    
    0.87
    
    
    
    1
    
    
    
    0.73
    
    
    
    2
    
    
    
    1.08Construction
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.26
    
    
    
    
    
    
    
    Consumer
    
    
    4
    
    
    
    1.62
    
    
    
    4
    
    
    
    1.53
    
    
    
    4
    
    
    
    1.94Commercial business
    
    
    
    
    
    
    0.03
    
    
    
    
    
    
    
    0.02
    
    
    
    
    
    
    
    0.01Unallocated
    
    
    342
    
    
    
    
    
    
    
    226
    
    
    
    
    
    
    
    229
    
    
    
    Total
    
    $
    460
    
    
    
    100.00
    %
    
    $
    410
    
    
    
    100.00
    %
    
    $
    350
    
    
    
    100.00
    %
 Investment Activities As a part of its asset/liability management strategy and as a response to
a high level of competition for loans and low level of loan demand in parts of
Midland Federals market area, Midland Federal invests in various types of
liquid assets, short and medium term government securities as well as smaller
amounts of other assets. Cash flow projections are regularly reviewed and
updated to assure that adequate liquidity is provided. At June 30, 2004, Midland Federals interest-bearing deposits in other
financial institutions totaled $46.7 million, or 30.4% of its total assets, and
investment securities totaled $1.2 million, or 0.8% of its total assets. As of
such date, Midland Federal also had a $1.1 million investment in the common
stock of the FHLB of Chicago in order to satisfy the requirement for membership
in this institution. At June 30, 2004, the average term to maturity or
repricing of the investment securities portfolio was approximately 12.7 years. 18




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##### Table of Contents



The following table sets forth the composition of Midland Federals
investment portfolio at the dates indicated. At June 30,2004
    
    2003
    
    2002Carrying
    
    Fair
    
    Carrying
    
    Fair
    
    Carrying
    
    FairValue
    
    Value
    
    Value
    
    Value
    
    Value
    
    Value(In Thousands)Investment Securities:U.S. government securities
    
    $
    982
    
    
    $
    1,234
    
    
    $
    981
    
    
    $
    1,360
    
    
    $
    980
    
    
    $
    1,205U.S. agency securities
    
    
    
    
    
    
    
    
    
    
    4,999
    
    
    
    5,029
    
    
    
    15,025
    
    
    
    15,257FHLB  Chicago stock
    
    
    1,062
    
    
    
    1,062
    
    
    
    996
    
    
    
    996
    
    
    
    897
    
    
    
    897Total investment securities
    
    $
    2,044
    
    
    $
    2,296
    
    
    $
    6,976
    
    
    $
    7,385
    
    
    $
    16,902
    
    
    $
    17,359Interest-bearing deposits:FHLB daily investment
    
    $
    2,850
    
    
    $
    2,850
    
    
    $
    8,264
    
    
    $
    8,264
    
    
    $
    3,569
    
    
    $
    3,569Other daily investments
    
    
    43,861
    
    
    
    43,861
    
    
    
    37,414
    
    
    
    37,414
    
    
    
    24,913
    
    
    
    24,913Total interest-bearing deposits
    
    $
    46,711
    
    
    $
    46,711
    
    
    $
    45,678
    
    
    $
    45,678
    
    
    $
    28,482
    
    
    $
    28,482
 The composition and maturities of the investment securities portfolio,
excluding FHLB of Chicago stock, are indicated in the following table. June 30, 20041 Year or
    
    1 to 5
    
    Over 10
    
    Total InvestmentLess
    
    Years
    
    Years
    
    SecuritiesWeightedBook
    
    Book
    
    Book
    
    Book
    
    Fair
    
    AverageValue
    
    Value
    
    Value
    
    Value
    
    Value
    
    Yield(In Thousands)U.S. government and agency securities
    
    $
    
    
    
    $
    
    
    
    $
    982
    
    
    $
    982
    
    
    $
    1,234U.S. Agency securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    
    
    
    $
    
    
    
    $
    982
    
    
    $
    982
    
    
    $
    1,234
    
    
    
    7.60
    %
 Sources of Funds General. Deposit accounts have traditionally been the principal source of
Midland Federals funds for use in lending and for other general business
purposes. In addition to deposits, Midland Federal derives funds from loan
repayments and cash flows generated from operations. Scheduled loan payments
are a relatively stable source of funds, while deposit inflows and outflows and
the related cost of such funds have varied. Borrowings may be used on a
short-term basis to compensate for seasonal reductions in deposits or deposit
inflows at less than projected levels and may be used on a longer term basis to
support expanded lending activities. Deposits. Midland Federal attracts principally short-term and
intermediate-term deposits from Midland Federals primary market area. Midland
Federal offers regular passbook accounts, 19




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##### Table of Contents



NOW accounts, money market deposit accounts, fixed interest rate
certificates of deposit with varying maturities, and negotiated rate $100,000
jumbo certificates of deposit. Deposit account terms vary, according to the minimum balance required, the
time period the funds must remain on deposit and the interest rate, among other
factors. Midland Federal has not actively sought deposits outside of its
primary market area. The flow of deposits is influenced significantly by general economic
conditions, changes in money market and prevailing interest rates, competition
and Midland Federals pricing policies and capital requirements. Midland
Federal regularly evaluates the internal cost of funds, surveys rates offered
by competing institutions, reviews its cash flow requirements for liquidity and
executes rate changes when deemed appropriate. Midland Federal has utilized high quality service and promotion to attract
and retain passbook and transaction accounts. Midland Federal believes that
these accounts are less interest rate sensitive and, in most interest rate
environments, carry lower interest charges than certificate accounts. While
there are costs associated with offering transaction accounts, Midland Federal
believes that the fee income and enhanced spread outweigh any additional
administrative expense. Midland Federal does not have any brokered deposits
and has no present intention to accept or solicit such deposits. The following table sets forth the savings flows at Midland Federal during
the periods indicated. Year Ended June 30,2004
    
    2003
    
    2002(Dollars in Thousands)Opening balance
    
    $
    147,490
    
    
    $
    138,444
    
    
    $
    131,504Deposits
    
    
    400,918
    
    
    
    431,629
    
    
    
    421,210Withdrawals
    
    
    (409,569
    )
    
    
    (425,169
    )
    
    
    (417,924
    )Balance before interest credited
    
    
    138,839
    
    
    
    144,904
    
    
    
    134,790Interest credited
    
    
    1,598
    
    
    
    2,586
    
    
    
    3,654Ending balance
    
    $
    140,437
    
    
    $
    147,490
    
    
    $
    138,444Net increase (decrease)
    
    $
    (7,053
    )
    
    $
    9,046
    
    
    $
    6,940Percent increase (decrease)
    
    
    (4.78
    %)
    
    
    6.53
    %
    
    
    5.28
    %
 20




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##### Table of Contents



The following table sets forth the dollar amount of savings deposits in
the various types of deposit programs offered by Midland Federal at the dates
indicated. June 30,2004
    
    2003
    
    2002Percent of
    
    
    
    
    
    Percent of
    
    
    
    
    
    Percent ofAmount
    
    Total
    
    Amount
    
    Total
    
    Amount
    
    Total(Dollars in Thousands)Interest Rate Range:Passbook
accounts
    
    $
    59,698
    
    
    
    42.51
    %
    
    $
    56,420
    
    
    
    38.25
    %
    
    $
    51,592
    
    
    
    37.27
    %NOW accounts
    
    
    12,983
    
    
    
    9.25
    
    
    
    13,785
    
    
    
    9.35
    
    
    
    14,140
    
    
    
    10.21Money market
account
    
    
    7,497
    
    
    
    5.34
    
    
    
    7,649
    
    
    
    5.19
    
    
    
    7,793
    
    
    
    5.63Non-interest bearing deposits
    
    
    12,097
    
    
    
    8.61
    
    
    
    11,647
    
    
    
    7.90
    
    
    
    9,998
    
    
    
    7.22Total non-certificates
    
    
    92,275
    
    
    
    65.71
    
    
    
    89,501
    
    
    
    60.69
    
    
    
    83,523
    
    
    
    60.33Certificates:Interest rate range:0.75  1.00%
    
    
    3,210
    
    
    
    2.29
    
    
    
    233
    
    
    
    0.16
    
    
    
    
    
    
    
    1.01  2.00%
    
    
    32,083
    
    
    
    22.84
    
    
    
    32,537
    
    
    
    22.06
    
    
    
    
    
    
    
    2.01  3.00%
    
    
    10,075
    
    
    
    7.17
    
    
    
    15,204
    
    
    
    10.31
    
    
    
    40,561
    
    
    
    29.303.01  4.00%
    
    
    2,794
    
    
    
    1.99
    
    
    
    8,615
    
    
    
    5.84
    
    
    
    7,647
    
    
    
    5.524.01  5.00%
    
    
    
    
    
    
    
    
    
    
    1,141
    
    
    
    0.77
    
    
    
    2,670
    
    
    
    1.935.01  6.00%
    
    
    
    
    
    
    
    
    
    
    258
    
    
    
    0.17
    
    
    
    3,943
    
    
    
    2.856.01  7.00%
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    100
    
    
    
    0.07Total certificates
    
    
    48,162
    
    
    
    34.29
    
    
    
    57,988
    
    
    
    39.31
    
    
    
    54,921
    
    
    
    39.67Total deposits
    
    $
    140,437
    
    
    
    100.00
    %
    
    $
    147,489
    
    
    
    100.00
    %
    
    $
    138,444
    
    
    
    100.00
    %
 21




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##### Table of Contents



The following table shows rate and maturity information for Midland
Federals time deposits as of June 30, 2004. 0.75-
    
    1.01-
    
    
    
    
    
    3.01-
    
    
    
    
    
    Percent of1.00%
    
    2.00%
    
    2.01-3.00%
    
    4.00%
    
    Total
    
    Total(Dollars in Thousands)Certificate Accounts Maturing
in Quarter Ending:September 30, 2004
    
    $
    2,331
    
    
    $
    13,042
    
    
    $
    1,162
    
    
    $
    432
    
    
    $
    16,967
    
    
    
    35.23
    %December 31, 2004
    
    
    679
    
    
    
    11,768
    
    
    
    1,610
    
    
    
    265
    
    
    
    14,322
    
    
    
    29.74March 31, 2005
    
    
    200
    
    
    
    4,907
    
    
    
    4,571
    
    
    
    1,875
    
    
    
    11,553
    
    
    
    23.99June 30, 2005
    
    
    
    
    
    
    1,996
    
    
    
    325
    
    
    
    222
    
    
    
    2,543
    
    
    
    5.28September 30, 2005
    
    
    
    
    
    
    113
    
    
    
    750
    
    
    
    
    
    
    
    863
    
    
    
    1.79December 31, 2005
    
    
    
    
    
    
    155
    
    
    
    351
    
    
    
    
    
    
    
    506
    
    
    
    1.05March 31, 2006
    
    
    
    
    
    
    42
    
    
    
    378
    
    
    
    
    
    
    
    420
    
    
    
    0.87June 30, 2006
    
    
    
    
    
    
    60
    
    
    
    272
    
    
    
    
    
    
    
    332
    
    
    
    0.69September 30, 2006
    
    
    
    
    
    
    
    
    
    
    373
    
    
    
    
    
    
    
    373
    
    
    
    0.77December 31, 2006
    
    
    
    
    
    
    
    
    
    
    283
    
    
    
    
    
    
    
    283
    
    
    
    0.59Total
    
    $
    3,210
    
    
    $
    32,083
    
    
    $
    10,075
    
    
    $
    2,794
    
    
    $
    48,162
    
    
    
    100.00
    %Percent of total
    
    
    6.67
    %
    
    
    66.61
    %
    
    
    20.92
    %
    
    
    5.80
    %
    
    
    100.00
    %
 The following table indicates the amount of Midland Federals certificates
of deposit and other deposits by time remaining until maturity as of June 30,
2003. MaturityOver
    
    Over
    
    Over3 Months
    
    3 to 6
    
    6 to 12
    
    12or Less
    
    Months
    
    Months
    
    Months
    
    Total(Dollars in Thousands)Certificates of deposit less than $100,000
    
    $
    14,121
    
    
    $
    11,382
    
    
    $
    13,002
    
    
    $
    1,707
    
    
    $
    40,212Certificate of deposit of $100,000 or more
    
    
    2,846
    
    
    
    2,940
    
    
    
    1,094
    
    
    
    1,070
    
    
    
    7,950Total certificates of deposit
    
    $
    16,967
    
    
    $
    14,322
    
    
    $
    14,096
    
    
    $
    2,777
    
    
    $
    48,162
 Borrowings Midland Federals other available sources of funds include advances from
the Federal Home Loan Bank (FHLB) of Chicago and collateralized borrowings.
As a member of the FHLB of Chicago, Midland Federal is required to own capital
stock in the FHLB of Chicago and is authorized to apply for advances from the
FHLB of Chicago. Each FHLB credit program has its own interest rate, which may
be fixed or variable, and range of maturities. The FHLB of Chicago may
prescribe the acceptable uses for these advances, as well as limitations on the
size of the advances and repayment provisions. Midland Federal has not had
significant borrowings in recent years. 22




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##### Table of Contents



Competition Midland Federal faces strong competition in originating loans and in
attracting deposits. Competition in originating loans comes primarily from
other thrift institutions, commercial banks and mortgage bankers which make
loans secured by real estate located in Midland Federals primary market area.
Midland Federal competes for loans principally on the basis of the interest
rates and loan fees it charges, the types of loans it originates and the
quality of service it provides to borrowers. Midland Federal faces substantial competition in attracting deposits from
other thrift institutions, commercial banks, money market and mutual funds,
credit unions and other investment vehicles. The ability of Midland Federal to
attract and retain deposits depends on its ability to provide an investment
opportunity that satisfies the requirements of investors as to rate of return,
liquidity, risk and other factors. Midland Federal competes for these deposits
by offering a variety of deposit accounts at competitive rates and convenient
business hours. Midland Federal estimates its share of deposits in its primary
market area to be less than 3%. Service Corporation Federal associations generally may invest up to 2% of their assets in
service corporations, plus an additional 1% of assets if for community
purposes. In addition, federal associations may invest up to 50% of their
regulatory capital in conforming loans to their service corporations. In
addition to investments in service corporations, federal associations are
permitted to invest an unlimited amount in operating subsidiaries engaged
solely in activities which a federal association may engage in directly. Midland Federal has one service corporation, Midland Service Corporation,
located in Bridgeview, Illinois, which was organized to act as a holding
company for Midland Federals other subsidiaries. At June 30, 2004, Midland
Federals equity investment in Midland Service Corporation was approximately
$225,000. During fiscal 2004, Midland Service Corporation recorded a profit of
$18,000. Midland Service Corporation owns MS Insurance Agency, an insurance agency
which provides insurance products to customers of Midland Federal and to
members of the general public in Midland Federals market area. Insurance
products offered by this agency, include credit life, health, homeowners and
disability. MS Insurance Agency had a profit of $18,000 for the 2004 fiscal
year, all of which is included in the Midland Service Corporation income
amounts reported above. REGULATION General. Midland Federal is a federally chartered savings and loan
association, the deposits of which are federally insured and backed by the full
faith and credit of the U. S. government. Accordingly, Midland Federal is
subject to broad federal regulation and oversight extending to all its
operations. Midland Federal is a member of the FHLB of Chicago and is subject
to certain limited regulation by the Board of Governors of the Federal Reserve
System (Federal Reserve Board). Midland Federal is a member of the Savings
Association Insurance Fund (SAIF), which together 23




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##### Table of Contents



with the Bank Insurance Fund (the BIF) are the two deposit insurance
funds administered by the FDIC, and the deposits of Midland Federal are insured
by the FDIC. As a result, the FDIC has certain regulatory and examination
authority over Midland Federal. Midland Federals primary federal regulator is
the OTS. Certain of these regulatory requirements and restrictions are discussed
below or elsewhere in this document. Federal Regulation of Savings Associations. The OTS has extensive
authority over the operations of savings associations. As part of this
authority, Midland Federal is required to file periodic reports with the OTS
and is subject to periodic examinations by the OTS. When these examinations
are conducted, the examiners may require Midland Federal to provide for higher
general or specific loan loss reserves. Midland Federal is also subject to
back-up examination by the FDIC. All savings associations are subject to an OTS assessment, based upon the
savings associations total assets which are payable semi-annually. Midland
Federals paid assessment during the fiscal year ended June 30, 2004 was
$46,000. The OTS also has extensive enforcement authority over all savings
institutions. This enforcement authority includes, among other things, the
ability to assess civil money penalties, to issue cease-and-desist or removal
orders and to initiate injunctive actions. In general, these enforcement
actions may be initiated for violations of laws and regulations and unsafe or
unsound banking practices. Other actions or inactions may provide the basis
for enforcement action, including misleading or untimely reports filed with the
OTS. Except under certain circumstances, public disclosure of final
enforcement actions by the OTS is required. In addition, the investment and lending authority of Midland Federal is
prescribed by federal laws and regulations, and it is prohibited from engaging
in any activities not permitted by such laws and regulations. For instance, no
savings association may invest in corporate debt securities not rated in one of
the four highest rating categories by a nationally recognized rating
organization. Further, the permissible level of investment by federal
associations in loans secured by non-residential real property may not exceed
400% of regulatory capital, except with approval of the OTS. Midland Federal
is in compliance with each of these restrictions. Midland Federals permissible lending limit for loans-to-one-borrower is
equal to the greater of $500,000 or 15% of capital and surplus (except for
loans fully secured by certain readily marketable collateral, in which case
this limit is increased to 25% of capital and surplus). At June 30, 2004,
Midland Federals lending limit under this restriction was $1.6 million.
Midland Federal is in compliance with the loans-to-one-borrower limitation. The OTS, as well as the other federal banking agencies, has adopted
guidelines establishing safety and soundness standards on such matters as loan
underwriting and documentation, asset quality, internal controls and audit
systems, interest rate risk exposure and compensation and other employee
benefits. Any institution which fails to comply with these standards must
submit a capital compliance plan. A failure to submit a plan or to comply with
an approved plan will subject the 24




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##### Table of Contents



institution to further enforcement action. Insurance of Accounts and Regulation by the FDIC. Midland Federal is a
member of the SAIF, which is administered by the FDIC. Savings deposits are
insured up to applicable limits by the FDIC and such insurance is backed by the
full faith and credit of the U.S. government. As insurer, the FDIC imposes
deposit insurance premiums and is authorized to conduct examinations of and to
require reporting by FDIC-insured institutions. It also may prohibit any
FDIC-insured institution from engaging in any activity the FDIC determines by
regulation or order to pose a serious risk to the SAIF or the BIF. The FDIC
also has the authority to initiate enforcement actions against savings
associations, after giving the OTS an opportunity to take such action, and may
terminate the deposit insurance if it determines that the institution has
engaged or is engaging in unsafe or unsound banking practices, or is in an
unsafe or unsound condition. The FDICs deposit insurance premiums are assessed through a risk-based
system under which all insured depository institutions are placed into one of
nine categories and assessed insurance premiums based upon their level of
capital and supervisory evaluation. Under the system, institutions classified
as well-capitalized (i.e., a core capital ratio of at least 5%, a ratio of
core capital to risk-weighted assets (Tier 1 Risk-Based Capital) of at least 6%
and a risk-based capital ratio of at least 10%) and considered healthy would
pay the lowest premium while institutions that are less than adequately
capitalized (i.e., a core capital or core capital to risk-based capital ratios
of less than a Tier 1 Risk-Based Capital ratio of 4% or a risk-based capital
ratio of less than 8%) and considered of substantial supervisory concern would
pay the highest premium. Risk classification of all insured institutions will
be made by the FDIC for each semi-annual assessment period. The FDIC is authorized to increase assessment rates, on a semi-annual
basis, if it determines that the reserve ratio of the SAIF will be less than
the designated reserve ratio of 1.25% of SAIF insured deposits. In setting
these increased assessments, the FDIC must seek to restore the reserve ratio to
that designated reserve level, or such higher reserve ratio as established by
the FDIC. The FDIC may also impose special assessments on SAIF members to
repay amounts borrowed from the U. S. Treasury or for any other reason deemed
necessary by the FDIC. At
fiscal year end 2004, the premium schedule for BIF- and SAIF-insured
institutions ranged from 0 to 27 basis points, and both BIF- and SAIF-insured
institutions are required to pay a Financing Corporation (FICO) assessment, in
order to fund the interest on bonds issued to resolve thrift failures in the
1980s, equal to 1.54 basis points for each $100 in domestic deposits. These
assessments, which may be revised based upon the level of BIF and SAIF
deposits, will continue until the bonds mature in the years 2017 through 2019. Regulatory Capital Requirements. Federally insured savings associations,
such as Midland Federal, are required to maintain a minimum level of regulatory
capital. The OTS has established capital standards, including a tangible
capital requirement, a leverage ratio (or core capital) requirement and a
risk-based capital requirement applicable to such savings associations. These
capital requirements must be generally as stringent as the comparable capital
requirements for national banks. The OTS is also authorized to impose capital
requirements in excess of these standards on individual associations on a
case-by-case basis. 25




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##### Table of Contents



The capital regulations require tangible capital of at least 1.5% of
adjusted total assets (as defined by regulation). Tangible capital generally
includes common stockholders equity and retained income, and certain
noncumulative perpetual preferred stock and related income. In addition, all
intangible assets, other than a limited amount of purchased mortgage servicing
rights, must be deducted from tangible capital for calculating compliance with
the requirement. Further, any unrealized holding gains or losses, net of
income taxes, on securities classified as available for sale in accordance with
SFAS No. 115 are excluded from regulatory capital calculations. At June 30,
2004, Midland Federal had deductible retained mortgage servicing assets and an
unrealized gain, net of tax, under SFAS No. 115 in the amount of $172,000. The OTS regulations establish special capitalization requirements for
savings associations that own subsidiaries. In determining compliance with the
capital requirements, all subsidiaries engaged solely in activities permissible
for national banks or engaged in certain other activities solely as agent for
its customers are includable subsidiaries that are consolidated for capital
purposes in proportion to Midland Federals level of ownership. For excludable
subsidiaries the debt and equity investments in such subsidiaries are deducted
from assets and capital. At June 30, 2004, Midland Federal had tangible capital of $10.4 million,
or 6.77% of adjusted total assets, which is approximately $8.1 million above
the minimum requirement of 1.5% of adjusted total assets in effect on that
date. The capital standards also require core capital or Tier 1 Capital equal to
at least 3% of adjusted total assets (as defined by regulation). Core capital
generally consists of tangible capital plus certain intangible assets,
including supervisory goodwill and a limited amount of purchased credit card
relationships and purchased mortgage servicing rights. As a result of the
prompt corrective action provisions, discussed below, a savings association
must maintain a core capital ratio of at least 4% to be considered adequately
capitalized unless its supervisory condition is such so as to allow it to
maintain a 3% ratio. At June 30, 2004, Midland Federal had retained mortgage
servicing assets which were subject to these tests. At June 30, 2004, Midland Federal had core capital equal to $10.4 million,
or 6.77% of adjusted total assets, which is $5.8 million above the minimum
leverage ratio requirement of 3% in effect on that date. In addition, on such
date Midland Federal had Tier 1 Risked-Based Capital equal to $10.4 million or
12.81% of Risk-Weighted Assets, which is $7.2 million above the requirement of
4% on effect on that date. The OTS risk-based requirement requires savings associations to have total
capital of at least 8% of risk-weighted assets. Total capital consists of core
capital, as defined above, and supplementary capital. Supplementary capital
consists of certain permanent and maturing capital instruments that do not
qualify as core capital and general valuation loan and lease loss allowances up
to a maximum of 1.25% of risk-weighted assets. Supplementary capital may be
used to satisfy the risk-based requirement only to the extent of core capital.
At June 30, 2004, Midland Federal had no capital instruments that qualify as
supplementary capital and $460,000 of general loss reserves, which was less
than 1.25% of risk-weighted assets. Certain exclusions from capital and assets are required to be made for the
purpose of 26




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##### Table of Contents



calculating total capital. Such exclusions consist of equity investments
(as defined by regulation) and that portion of land loans and nonresidential
construction loans in excess of an 80% loan-to-value ratio and reciprocal
holdings of qualifying capital instruments. There were $15,000 in equity
investments at June 30, 2004. In determining the amount of risk-weighted assets, all assets, including
certain off-balance sheet items, will be multiplied by a risk weight, ranging
from 0% to 100%, based on the risk inherent in the type of asset. For example,
the OTS has assigned a risk weight of 50% for prudently underwritten permanent
one- to four-family first lien mortgage loans not more than 90 days delinquent
and having a loan-to-value ratio of not more than 80% at origination unless the
loan amount in excess of such ratio is insured by an insurer approved by the
FNMA or FHLMC. OTS regulations also require that every savings association with more than
normal interest rate risk exposure to deduct from its total capital, for
purposes of determining compliance with such requirement, an amount equal to
50% of its interest-rate risk exposure multiplied by the present value of its
assets. This exposure is a measure of the potential decline in the net
portfolio value of a savings association, greater than 2% of the present value
of its assets, based upon a hypothetical 200 basis point increase or decrease
in interest rates (whichever results in a greater decline). Net portfolio
value is the present value of expected cash flows from assets, liabilities and
off-balance sheet contracts. The rule will not become effective until the OTS
evaluates the process by which savings associations may appeal an interest rate
risk deduction determination. It is uncertain as to when this evaluation may
be completed. Any savings association with less than $300 million in assets
and a total capital ratio in excess of 12% is exempt from this requirement
unless the OTS determines otherwise. On June 30, 2004, Midland Federal had total capital of $10.9 million
(including $10.4 million in core capital and $460,000 of qualifying general
loss reserves) and risk-weighted assets of $81.3 million or total capital of
13.35% of risk-weighted assets. This amount was $4.4 million above the 8%
requirement in effect on that date. The OTS and the FDIC are authorized and, under certain circumstances
required, to take certain actions against associations that fail to meet their
capital requirements. The OTS is generally required to take action to restrict
the activities of an undercapitalized association (generally defined to be
one with less than either a 4% core ratio, a 4% Tier 1 risk based capital
ratio, a Tier 1 risked-based capital ratio or an 8% risk-based capital ratio).
Any such association must submit a capital restoration plan and until such plan
is approved by the OTS may not increase its assets, acquire another
institution, establish a branch or engage in any new activities, and generally
may not make capital distributions. The OTS is authorized to impose the
additional restrictions that are applicable to significantly undercapitalized
associations. Any savings association that fails to comply with its capital plan or is
significantly undercapitalized (i.e., Tier 1 or Tier 1 risk-based or core
capital ratios of less than 3% or a risk-based capital ratio of less than 6%)
must be subject to one or more of additional specified actions and operating
restrictions, which may cover all aspects of its operations and include a
forced merger or acquisition of Midland Federal. 27




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An association that becomes critically undercapitalized (i.e., a
tangible capital ratio of 2% or less) is subject to further mandatory
restrictions on its activities in addition to those applicable to significantly
undercapitalized associations. In addition, the OTS must appoint a receiver
(or conservator with the concurrence of the FDIC) for a savings association,
with certain limited exceptions, within 90 days after it becomes critically
undercapitalized. Any undercapitalized association is also subject to the
general enforcement activity of the OTS and the FDIC, including the appointment
of a receiver or conservator. The imposition by the OTS or the FDIC of any of these measures on Midland
Federal may have a substantial adverse effect on Midland Federals operations
and profitability and the value of its stock. If the OTS or the FDIC require
an association such as Midland Federal, to raise additional capital through the
issuance of stock or other capital instruments such issuance may result in the
dilution in the percentage of ownership of Midland Federal. Limitations on Dividends and Other Capital Distributions. OTS regulations
impose various restrictions on savings associations with respect to their
ability to make distributions of capital, which include dividends, stock
redemptions or repurchases, cash-out mergers and other transactions charged to
the capital account. OTS regulations also prohibit a savings association from
declaring or paying any dividends or from repurchasing any of its stock if, as
a result, the regulatory capital of Midland Federal would be reduced below the
amount required to be maintained for the liquidation account established in
connection with its mutual to stock conversion. Generally, savings associations, such as Midland Federal, that before and
after the proposed distribution remain well-capitalized, may make capital
distributions during any calendar year equal to 100% of net income for the
year-to-date plus retained net income for the two preceding years that is
available for dividend. However, an institution deemed to be in need of more
than normal supervision by the OTS may have its dividend authority restricted
by the OTS. Midland Federal may pay dividends in accordance with this general
authority. Any savings association that is a subsidiary of a holding company and
proposes to make any capital distribution need only submit written notice to
the OTS 30 days prior to such distribution. Savings associations that do not,
or would not meet their current minimum capital requirements following a
proposed capital distribution, however, must obtain OTS approval prior to
making such distribution. The OTS may object to the distribution during that
30-day notice period based on supervisory concerns. See  Regulatory Capital
Requirements. Accounting. An OTS policy statement applicable to all savings
associations clarifies and re-emphasizes that the investment activities of a
savings association must be in compliance with approved and documented
investment policies and strategies, and must be accounted for in accordance
with GAAP. Under the policy statement, management must support its
classification of and accounting for loans and securities (i.e., whether held
for investment, sale or trading) with appropriate documentation. OTS accounting regulations, which may be made more stringent than GAAP,
require that transactions be reported in a manner that best reflects their
underlying economic substance and inherent risk and that financial reports must
incorporate any other accounting regulations or orders 28




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##### Table of Contents



prescribed by the OTS. Midland Federal is in compliance with these rules. Qualified Thrift Lender Test. All savings associations, including Midland
Federal, are required to meet a qualified thrift lender test to avoid certain
restrictions on their operations. This test requires a savings association to
have at least 65% of its portfolio assets (as defined by regulation) in
qualified thrift investments for nine out of every 12 months on a rolling
basis. As an alternative, the savings association may maintain 60% of its
assets in those assets specified in Section 7701(a)(19) of the 1986 Internal
Revenue Code, as amended. Under either test, such assets primarily consist of
residential housing related loans and investments. At June 30, 2004 Midland
Federal was in compliance with the test. Any savings association that fails to meet the QTL test must convert to a
national bank charter, unless it re-qualifies as a QTL and thereafter remains a
QTL. If an association that fails the test has not yet re-qualified and has
not converted to a national bank, its new investments and activities are
limited to those permissible for both a savings association and a national
bank, and it is limited to national bank branching rights in its home state.
In addition, Midland Federal is immediately ineligible to receive any new FHLB
borrowings and is subject to national bank limits for payment of dividends. If
such association has not re-qualified or converted to a national bank within
three years after the failure, it must divest all investments and cease all
activities not permissible for a national bank. Community Reinvestment Act. Under the Community Reinvestment Act, every
FDIC insured institution has a continuing and affirmative obligation consistent
with safe and sound banking practices to help meet the credit needs of its
entire community, including low and moderate income neighborhoods. The CRA
does not establish specific lending requirements or programs for financial
institutions nor does it limit an institutions discretion to develop the types
of products and services that it believes are best suited to its particular
community, consistent with the CRA. The CRA requires the OTS, in connection
with the examination of Midland Federal, to assess the institutions record of
meeting the credit needs of its community and to take such record into account
in its evaluation of certain applications, such as a merger or the
establishment of a branch, by Midland Federal. An unsatisfactory rating may be
used as the basis for the denial of an application such as a branch or merger
application by the OTS. Due to the heightened attention being given to the CRA in the past few
years, Midland Federal may be required to devote additional funds for
investment and lending in its local community. Midland Federal was examined for
CRA compliance in 2002 and received a rating of satisfactory. Transactions with Affiliates and Insiders. Generally, transactions
between a savings association or its subsidiaries and its affiliates are
required to be on terms as favorable to Midland Federal as transactions with
non-affiliates. In addition, certain of these transactions are restricted to a
percentage of Midland Federals capital. Affiliates of Midland Federal include
any company which is under common control with Midland Federal as well as
Midland Federals parent holding company. In addition, a savings association
may not lend to any affiliate engaged in activities not permissible for a bank
holding company or acquire the securities of most affiliates. Midland
Federals subsidiaries are not deemed affiliates. However, the OTS has the
discretion to treat 29




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##### Table of Contents



subsidiaries as affiliates on a case-by-case basis. Certain transactions with directors, officers or controlling persons are
also subject to regulations enforced by the OTS. These regulations impose
restrictions on loans to such persons and their related interests. Among other
things, such loans must be made on terms substantially the same as for loans to
unaffiliated persons. Anti-Money Laundering. For years, FDIC insured institutions, such as
Midland Federal, have been required to establish anti-money laundering
programs. In 2001, the USA PATRIOT Act was enacted. This Act significantly
enhanced the powers of the federal government and law enforcement organizations
to combat terrorism, organized crime and money laundering. While the Act
imposed additional anti-money laundering requirements on FDIC insured
institutions, these additional requirements are not material to Midland
Federals operations. Aside from the above, the Act also requires the federal banking regulators
to assess the effectiveness of an institutions anti-money laundering program
in connection with merger and acquisition transactions. Failure to maintain an
effective anti-money laundering program is grounds for the denial of merger or
acquisition transactions. Holding Company Regulation Midland Capital is a unitary savings and loan holding company subject to
regulatory oversight by the OTS. As such, Midland Capital is required to
register and file reports with the OTS and is subject to regulation and
examination by the OTS. In addition, the OTS has enforcement authority over
Midland Capital and its non-savings association subsidiaries which also permits
the OTS to restrict or prohibit activities that are determined to be a serious
risk to the subsidiary savings association. As a unitary savings and loan holding company, Midland Capital generally
is not subject to activity restrictions. If Midland Capital acquires control
of another savings association as a separate subsidiary, it would become a
multiple savings and loan holding company, and the activities of Midland
Capital and any of its subsidiaries (other than Midland Federal or any other
SAIF-insured savings association) would become subject to such restrictions
unless such other associations each qualify as a QTL and were acquired in a
supervisory acquisition. If Midland Federal fails the QTL test, Midland Capital must obtain the
approval of the OTS prior to continuing after such failure, directly or through
its other subsidiaries, any business activity other than those approved for
multiple savings and loan holding companies or their subsidiaries. In
addition, within one year of such failure Midland Capital must register as, and
will become subject to, the restrictions applicable to bank holding companies.
The activities authorized for a bank holding company are more limited than are
the activities authorized for a unitary or multiple savings and loan holding
company. See - Qualified Thrift Lender Test. Midland Capital must obtain approval from the OTS before acquiring control
of any other SAIF-insured association. Such acquisitions are generally
prohibited if they result in a multiple savings and loan holding company
controlling savings associations in more than one state. However, 30




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such interstate acquisitions are permitted based on specific state
authorization or in a supervisory acquisition of a failing savings association. Federal Securities Law. The stock of Midland Capital is registered with
the SEC under the Securities Exchange Act of 1934, as amended. Midland Capital
is subject to the information, proxy solicitation, insider trading restrictions
and other requirements of the SEC under the Exchange Act. Midland Capital stock held by persons who are affiliates (generally
officers, directors and principal stockholders) of Midland Capital may not be
resold without registration or unless sold in accordance with certain resale
restrictions. If Midland Capital meets specified current public information
requirements, each affiliate of Midland Capital is able to sell in the public
market, without registration, a limited number of shares in any three-month
period. Federal Reserve System. The Federal Reserve Board requires all depository
institutions to maintain non-interest bearing reserves at specified levels
against their transaction accounts (primarily checking, NOW and Super NOW
checking accounts) and non-personal time deposits. At June 30, 2004 Midland
Federal was in compliance with these reserve requirements. Savings associations are authorized to borrow from the Federal Reserve
Bank discount window, but Federal Reserve Board regulations require
associations to exhaust other reasonable alternative sources of funds,
including FHLB borrowings, before borrowing from the Federal Reserve Bank. Federal Home Loan Bank System. Midland Federal is a member of the FHLB of
Chicago, which is one of 12 regional FHLBs that administers the home financing
credit function of savings associations. Each FHLB serves as a reserve or
central bank for its members within its assigned region. It is funded
primarily from proceeds derived from the sale of consolidated obligations of
the FHLB System. It makes loans to members (i.e., advances) in accordance with
policies and procedures established by the board of directors of the FHLB.
These policies and procedures are subject to the regulation and oversight of
the Federal Housing Finance Board. All advances from the FHLB are required to
be fully secured by sufficient collateral as determined by the FHLB. In
addition, all long-term advances are required to provide funds for residential
home financing. While a member of the FHLB of Chicago at June 30, 2004,
Midland Federal had not entered into a credit arrangement with the FHLB of
Chicago and, as such, could not obtain funds from the FHLB of Chicago. As a member, Midland Federal is required to purchase and maintain stock in
the FHLB of Chicago. At June 30, 2004 Midland Federal had $1.1 million in FHLB
stock, which was in compliance with this requirement. In past years, Midland
Federal has received substantial dividends on its FHLB stock. Over the past
five calendar years such dividends have averaged 6.40% and was 6.25% for
calendar year 2003. Under federal law, the FHLBs are required to provide funds for the
resolution of troubled savings associations and to contribute to low- and
moderately priced housing programs through direct loans or interest subsidies
on advances targeted for community investment and low- and moderate-income
housing projects. These contributions have affected adversely the level of
FHLB 31




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##### Table of Contents



dividends paid and could continue to do so in the future. These
contributions could also have an adverse effect on the value of FHLB stock in
the future. A reduction in value of Midland Federals FHLB stock may result in
a corresponding reduction in its capital. For the year ended June 30, 2004, dividends paid by the FHLB of Chicago to
Midland Federal totaled $66,000, which was a $15,000 increase from the amount
of dividends received in fiscal year 2003. The $15,000 dividend received for
the quarter ended June 30, 2004 reflects an annualized rate of 6.00%, or 0.25%
below the rate for calendar year 2003. Federal Taxation. Savings institutions that met certain definitional tests
relating to the composition of assets and other conditions prescribed by the
Internal Revenue Code of 1986, as amended, had been permitted to establish
reserves for bad debts and to make annual additions which could, within
specified formula limits, be taken as a deduction in computing taxable income
for federal income tax purposes. As a result of tax legislation enacted in
1996, the amount of the bad debt reserve deduction is now computed under the
experience method. In addition to the regular income tax, corporations, including savings
institutions generally are subject to a minimum tax. An alternative minimum
tax is imposed at a minimum tax rate of 20% on alternative minimum taxable
income, which is the sum of a corporations regular taxable income (with
certain adjustments) and tax preference items, less any available exemption.
The alternative minimum tax is imposed to the extent it exceeds the
corporations regular income tax and net operating losses can offset no more
than 90% of alternative minimum taxable income. To the extent earnings appropriated to a savings institutions bad debt
reserves for qualifying real property loans and deducted for federal income
tax purposes exceed the allowable amount of such reserves computed under the
experience method and to the extent of the institutions supplemental reserves
for losses on loans, such excess may not, without adverse tax consequences, be
utilized for the payment of cash dividends or other distributions to a
shareholder (including distributions on redemption, dissolution or liquidation)
or for any other purpose (except to absorb bad debt losses). As of June 30,
2004, Midland Federals excess for tax purposes totaled approximately $1.1
million. Midland Capital and its subsidiaries file consolidated federal income tax
returns on a fiscal year basis using the accrual method of accounting. Midland Capital and its consolidated subsidiaries have never been audited
by the IRS with respect to federal income tax returns. The statute of
limitations has passed for tax years ending on or prior to June 30, 2001, for
Midland Capital and its consolidated subsidiaries. Illinois Taxation. Midland Capital and its subsidiaries file separate
Illinois income tax returns. For Illinois income tax purposes, Midland Capital
and its subsidiaries are taxed at an effective rate equal to 7.30% of Illinois
taxable income. For these purposes, Illinois Taxable Income generally means
federal taxable income, subject to certain adjustments (including the addition
of interest income on state and municipal obligations and the exclusion of
interest income on United States Treasury obligations). The exclusion of
income on United States Treasury obligations has the effect of reducing
significantly the Illinois taxable income of savings 32




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associations. Employees At June 30, 2004, Midland Federal had a total of 41 full-time employees
and 46 part-time employees. None of Midland Federals employees are
represented by any collective bargaining group. Management considers its
employee relations to be good. 
 Item 2. Description of Property Offices Midland Federal owns the building and land for its main office at 8929
South Harlem Avenue, Bridgeview, Illinois. This office has 18,000 square feet
and a net book value of $823,000 at June 30, 2004. Midland Federal also has a
year easement on land adjacent to its main office which expires in the year
2078. Midland Federal owns the building and land for its two branch offices in
Chicago at 4040 South Archer Avenue in Brighton Park and 2657 West 69th Street
in Marquette Park which have 2,000 and 2,500 square feet and $593,000 and
$36,000 net book values at June 30, 2004, respectively. Midland Federal leases retail office space and land in Homer Glen,
Illinois for a full service branch banking facility that it established in
April 1999. The net book value of remodeling and leasehold improvements cost
at this 32,846 square foot location is approximately $313,000 at June 30, 2004.
Midland Federal also owns a parcel of land contiguous to this office for
parking and future expansion with a net book value of $180,500 at June 30,
2004. Finally, we have an option to purchase a drive up facility we now lease
at the Homer Glen office which we have exercised with a closing scheduled in
September 2004. In addition, Midland Federal owns three ATMs located at its Bridgeview,
Chicago/Brighton Park and Homer Glen offices. Computer Equipment Midland Federals record keeping activities are maintained on an on-line
basis with an independent service bureau. Midland Federals accounting and
loan origination activities are maintained on an in-house computer network.
The net book value of Midland Federals computer equipment at June 30, 2004 was
$31,000. 
 Item 3. Legal Proceedings Midland Federal is, from time to time, a defendant to certain lawsuits
arising in the ordinary course of its business. Midland Federal believes that
there is no litigation pending which, if adversely determined, would have a
material adverse effect on its financial condition. 
 Item 4. Submission of Matters to a Vote of Security Holders No matter was submitted to a vote of security holders, through the
solicitation of proxies or 33




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otherwise, during the three months ended June 30, 2004. 
 PART II 
 Item 5. Market for Common Equity and Related Stockholder Matters Pages 19 and 20 of the 2004 Annual Report to Stockholders are herein
incorporated by reference. 
 Item 6. Managements Discussion and Analysis or Plan of Operation Pages 6 through 19 of the 2004 Annual Report to Stockholders is herein
incorporated by reference. 
 Item 7. Financial Statements Pages 22 through 45 of the 2004 Annual Report to Stockholders are herein
incorporated by reference. 
 Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure There have been no changes in or disagreements with Midland Federals
accountants on accounting and financial disclosure matters. 
 Item 8A. Controls and Procedures The Company has adopted disclosure controls and procedures designed to
facilitate the Companys financial reporting. The disclosure controls
currently consist of periodic communications among the Chief Executive and
Financial Officer and each department head to identify any transactions,
events, trends, risks or contingencies which may be material to the Companys
operations. In addition, the Chief Executive and Financial Officer and the
Companys independent auditors also meet on a quarterly basis and discuss the
Companys material accounting policies. The Companys Chief Executive and
Financial Officer has evaluated the effectiveness of these disclosure controls
as of the end of the period covered by this report and found them to be
adequate. The Company maintains internal control over financial reporting. There
have not been any significant changes in such internal control over financial
reporting in the last quarter that has materially affected, or is reasonably
likely to materially affect, the Companys internal controls over financial
reporting. 
 Item 8B. Other Information None 34




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PART III 
 Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act Information concerning Directors of the Issuer is incorporated herein by
reference from Midland Capitals definitive proxy statement for the Annual
Meeting of Stockholders, a copy of which will be filed not later than 120 days
after the close of the fiscal year. 
 Item 10. Executive Compensation Information concerning executive compensation is incorporated herein by
reference from Midland Capitals definitive proxy statement for the Annual
Meeting of Stockholders, a copy of which will be filed not later than 120 days
after the close of the fiscal year. 
 Item 11. Security Ownership of Certain Beneficial Owners and Management Information concerning security ownership of certain beneficial owners and
management is incorporated herein by reference from Midland Capitals
definitive Proxy Statement for the Annual Meeting of Stockholders, a copy of
which will be filed not later than 120 days after the close of the fiscal year. 35




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The following table sets forth information with respect to securities to
be issued under Midland Capitals equity compensation plans as of June 30,
2004. (c)Number of securitiesremaining available(a)
    
    
    
    
    
    for future issuanceNumber of securities
    
    (b)
    
    under equityto be issued upon
    
    Weighted-average
    
    compensation plansexercise of
    
    exercise price of
    
    [excludingoutstanding
    
    outstanding
    
    securitiesoptions, warrants
    
    options, warrants
    
    reflected in columnPlan Category
    
    and rights
    
    and rights
    
    (a)]Equity
compensation plans approved
by securities holders:1. 1993 Stock Option and Incentive
Plan(1)
    
    
    1. None
    
    
    
    1. N/A

    
    
    
    1. 6,9002. Recognition and Retention Plan
(1)
    
    
    2. N/A
    
    
    
    2. N/A
    (2)
    
    
    2. N/AEquity
compensation plans not
approved by security holders
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/ATotal
    
    
    None
    
    
    
    N/A
    
    
    
    6,900
  (1) Information regarding these plans is set forth under Item 10 to this
Report.  (2) Awards under plan consist of restricted stock. 
 Item 12. Certain Relationships and Related Transactions Information concerning relationships and transactions is incorporated
herein by reference from Midland Capitals definitive proxy statement for the
Annual Meeting of Stockholders, a copy of which will be filed not later than
120 days after the close of the fiscal year. 36




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PART IV 
 Item 13. Exhibits Reference to PriorRegulation
    
    
    
    FilingS-K Exhibit
    
    
    
    or Exhibit NumberNumber
    
    Document
    
    Attached Hereto2
    
    Plan of acquisition, reorganization, arrangement, liquid, or succession
    
    None3
    
    Articles of Incorporation and Bylaws
    
    ***4
    
    Instruments defining the rights of security holders,including indentures:Common Stock Certificate
    
    ***9
    
    Voting trust agreement
    
    None10
    
    Material contracts:Employee Stock Ownership Plan
    
    ***1993 Stock Option and Incentive Plan
    
    **Employment Agreements
    
    ***Recognition and Retention Plan
    
    ***401(k) Retirement/Savings Plan
    
    ***11
    
    Statement re computation of per share earnings
    
    ****13
    
    Annual Report to Security Holders
    
    1314
    
    Code of Ethics
    
    1416
    
    Letter on change in certifying accountant
    
    None18
    
    Letter on change in accounting principles
    
    None21
    
    Subsidiaries of Registrant
    
    2122
    
    Published report regarding matters submitted to vote of security holders
    
    None23
    
    Consent of Experts and Counsel
    
    None24
    
    Power of Attorney
    
    Not required31.1
    
    Certification of Paul M. Zogas pursuant to Rule 13a-14 under theSecurities and Exchange Act of 1934
    
    31.132.1
    
    Certification of Paul M. Zogas pursuant to 18 U.S.C. Section 1350, asadopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
    
    32.1
    **Filed on March 19, 1993 as an exhibit to Midland Federals Pre-Effective
Amendment No. One to the Form AC. ***Filed on June 22, 1998 as exhibits to Midland Capitals Registration
Statement No. 333-57399 on Form S-4. All of such previously filed documents
are hereby incorporated herein by reference in accordance with Item 601 of
Regulation S-B. ****See Note 1 of the Notes to be Consolidated Financial Statements
included in the Annual Report under Exhibit 13. 
 Item 14. Principal Accountant Fees and Services Information concerning principal accountant fees and services is
incorporated herein by reference from the Companys definitive Proxy Statement
for the Annual Meeting of Stockholders to be held in 2004, which will be filed
not later than 120 days following the close of the fiscal year end. 37




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SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized. MIDLAND CAPITAL HOLDINGS CORPORATIONDate: September 28, 2004
    By:
    /s/  Paul M. ZogasPaul M. ZogasChairman, President and Chief Executive
Officer
(Duly Authorized Representative) In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the Registrant and in the capacities and on
the dates indicated. /s/ Paul M. Zogas
    
    /s/ Charles A. ZogasPaul M. Zogas, Chairman, President and
    
    Charles A. Zogas, Director, ExecutiveChief Executive and Financial Officer
    
    Vice President and Secretary(Principal Executive and Financial andAccounting Officer)Date: September 28, 2004
    
    Date: September 28, 2004/s/ Jonas Vaznelis, Director
    
    /s/ Richard TaylorJonas Vaznelis, Director
    
    Richard Taylor, Director and VicePresidentDate: September 28, 2004
    
    Date: September 28, 2004/s/ Michael J. Kukanza
    
    /s/ Algerd BrazisMichael J. Kukanza, Director
    
    Algerd Brazis, DirectorDate: September 28, 2004
    
    Date: September 28, 2004
 38