<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For transition period from ________ to ________
Commission File Number: 0-29598
-------
MIDWEST BANC HOLDINGS, INC.
-------------------------------------------------------
(Exact name of Registrant as specified in its charter.)
Delaware 36-3252484
------------------------------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
501 W. North Ave., Melrose Park, IL 60160
---------------------------------------- ----------
(Address of principal executive offices) (ZIP code)
(708) 865-1053
---------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by checkmark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 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 _____ No __X___
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the close of the period covered by this report.
Class Outstanding March 31, 1998
---------------------- --------------------------
Common, par value $.01 11,279,392
1
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MIDWEST BANC HOLDINGS, INC.
FORM 10-Q Quarterly Report
Table of Contents
PART I
Page
Number
Item 1. Financial Statements .......................................... 3
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations ................. 11
Item 3. Quantitative and Qualitative Disclosures about Market Risk .... 18
PART II
Item 1. Legal Proceedings ............................................. 21
Item 2. Changes in Securities ......................................... 21
Item 3. Defaults Upon Senior Securities ............................... 21
Item 4. Submission of Matters to a Vote of Security Holders ........... 21
Item 5. Other Information ............................................. 21
Item 6. Exhibits and Reports on Form 8-K .............................. 21
Form 10-Q Signature Page ................................................ 22
2
<PAGE> 3
PART I - Financial Information
MIDWEST BANC HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS (unaudited)
(In thousands, except share data)
<TABLE>
<CAPTION>
Item 1. Financial Statements.
March 31, December 31,
1998 1997
---- ----
<S> <C> <C>
ASSETS
Cash and due from banks $ 30,534 $ 34,471
Securities available-for-sale 365,416 343,115
Trading account securities 7,999 5,008
Securities held-to-maturity 18,801 16,233
Loans 511,226 488,099
Allowance for loan losses (6,353) (6,143)
--------- ----------
Net loans 504,873 481,956
Premises and equipment, net 15,398 14,863
Other real estate owned 765 789
Goodwill, net 2,366 2,424
Accrued interest and other assets 10,981 9,783
--------- ----------
Total assets $ 957,133 $ 908,642
========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Noninterest-bearing $ 95,450 $ 102,080
Interest-bearing 708,090 692,282
--------- ----------
Total deposits 803,540 794,362
Federal funds purchased and securities sold under repurchase
agreements 7,800 12,992
Notes payable 67,225 42,575
Accrued interest and other liabilities 6,811 5,753
--------- ----------
Total liabilities 885,376 855,682
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value; authorized 1,000,000 shares;
none issued
Common stock, $.01 par value; authorized 17,000,000 shares;
11,379,392 and 10,114,392 issued and outstanding as of
March 31, 1998 and December 31, 1997, respectively. 114 101
Surplus 29,704 12,620
Retained earnings 42,128 40,026
Accumulated other comprehensive income 273 675
Treasury stock, at cost, 100,000 shares as of March 31, 1998 and
December 31, 1997 (462) (462)
--------- ----------
Total stockholders' equity 71,757 52,960
--------- ----------
Total liabilities and stockholders' equity $ 957,133 $ 908,642
========= ==========
</TABLE>
(Continued)
3
<PAGE> 4
MIDWEST BANC HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF INCOME (unaudited)
Three Months Ended March 31, 1998 and 1997
(In thousands, except per share data)
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
INTEREST INCOME
Loans, including fees $ 11,635 $ 9,953
Securities
Taxable 5,480 5,443
Tax-exempt 292 166
Trading account securities 97 -
Federal funds sold 167 68
---------- ----------
Total interest income 17,671 15,630
INTEREST EXPENSE
Deposits 8,630 7,448
Other borrowings 998 562
---------- ----------
Total interest expense 9,628 8,010
Net interest income 8,043 7,620
Provision for loan losses 387 501
---------- ----------
Net interest income after provision for loan losses 7,656 7,119
OTHER INCOME
Service charges on deposit accounts 724 615
Gains (losses) on securities transactions 294 (13)
Net trading account profits (losses) (4) 17
Mortgage loan origination fees 212 90
Trust income 151 138
Other income 116 146
---------- ----------
Total other income 1,493 993
OTHER EXPENSE
Salaries and employee benefits 3,272 2,995
Occupancy expense, net 810 779
Professional services 267 247
Marketing 153 157
Office supplies 148 124
FDIC insurance 24 22
Postage and freight 160 152
Other expense 642 526
---------- ----------
Total other expense 5,476 5,002
---------- ----------
Income before income taxes 3,673 3,110
Provision for income taxes 1,342 1,219
---------- ----------
NET INCOME $ 2,331 $ 1,891
========== ==========
Earnings per share $ 0.22 $ 0.19
========== ==========
</TABLE>
(Continued)
4
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MIDWEST BANC HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (unaudited)
(In thousands)
<TABLE>
<CAPTION>
Accumulated
Other Total
Common Retained Comprehensive Treasury Stockholders'
Stock Surplus Earnings Income Stock Equity
------ ------- -------- ------------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1997 3,437 10,489 34,932 (1,377) (4,519) 42,962
Net income - - 1,891 - - 1,891
Unrealized gains (losses) on Securities AFS - - - (2,276) - (2,276)
------- ------- -------- --------- -------- --------
Comprehensive income (385)
Net purchase of treasury stock shares - - - - (50) (50)
Cash dividends - - (229) - - (229)
------- ------- -------- --------- -------- --------
Balance, March 31, 1997 3,437 10,489 36,594 (3,653) (4,569) 42,298
======= ======= ======== ========= ======== ========
Balance, January 1, 1998 101 12,620 40,026 675 (462) 52,960
Net income - - 2,331 - - 2,331
Unrealized gains (losses) on Securities AFS - - - (402) - (402)
------- ------- -------- --------- -------- --------
Comprehensive income - - - - - 1,929
Common stock issuance 13 17,084 - - - 17,097
Cash dividends - - (229) - - (229)
------- ------- -------- --------- -------- --------
Balance, March 31, 1998 114 29,704 42,128 273 (462) 71,757
------- ------- -------- ---------- -------- --------
</TABLE>
(Continued)
5
<PAGE> 6
MIDWEST BANC HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Three Months Ended March 31, 1998 and 1997
(in thousands)
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 2,331 $ 1,891
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation 349 373
Bond premium amortization 745 245
Provision for loan losses 387 501
Purchase of trading account securities (5,088) (7,426)
Proceeds from sale of trading account securities 2,093 7,443
Net loss (gain) on sale of securities (294) 13
Net loss (gain) on sale of trading account securities 4 (17)
Real estate loans originated for sale (17,842) (7,450)
Proceeds from sales of real estate loans originated for sale 15,908 6,607
Increase in other assets (879) (3,134)
Increase in other liabilities 1,055 502
----------- ------------
Net cash used in operating activities (1,231) (452)
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales and maturities of securities
available-for-sale 109,985 34,297
Principal payments on securities available-for-sale 27,649 7,666
Purchase of securities available-for-sale (161,022) (49,969)
Purchase of securities held-to-maturity (3,177) (1,087)
Maturities of securities held-to-maturity 585 310
Net increase in loans (21,370) (16,389)
Proceeds from sale of other real estate 24 3
Property and equipment expenditures (884) (183)
----------- ------------
Net cash used in investing activities (48,210) (25,352)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 9,178 14,288
Issuance of common stock 17,097 -
Bank borrowings 56,770 36,479
Payments on bank borrowings (32,120) (35,360)
Dividends paid (229) (229)
Securities sold under agreements to repurchase
and federal funds purchased (5,192) 2,226
Treasury stock sales (purchases) 0 (50)
----------- ------------
Net cash provided by financing activities 45,504 17,354
----------- ------------
Decrease in cash and cash equivalents (3,937) (8,450)
Cash and cash equivalents at beginning of year 34,471 35,297
----------- ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 30,534 $ 26,847
=========== ============
</TABLE>
(Continued)
6
<PAGE> 7
MIDWEST BANC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table amounts in thousands)
NOTE 1 - BASIS OF PRESENTATION
The financial information of Midwest Banc Holdings, Inc. (the "Company")
included herein is unaudited; however, such information reflects all adjustments
(consisting only of normal recurring adjustments) which are, in the opinion of
management, necessary for a fair presentation for the interim periods. The
financial statements have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulations S-X.
The annualized results of operations for the three months ended March 31, 1998
are not necessarily indicative of the results expected for the full year ending
December 31, 1998.
For purposes of per share calculations, the Company had 11,279,392 shares of
common stock outstanding at March 31, 1998, 10,014,392 shares outstanding at
December 31, 1997 and 10,010,324 shares outstanding at March 31, 1997.
Quarterly weighted average shares of common stock outstanding was 10,524,564
and 10,015,547 for the three months ended March 31, 1998 and 1997,
respectively.
NOTE 2 - SECURITIES
Amortized costs, gross unrealized gains and losses, and fair value of
securities are summarized as follows:
<TABLE>
<CAPTION>
March 31, 1998
------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------- -------- -------- ---------
<S> <C> <C> <C> <C>
Securities available-for-sale
U.S. Treasuries and agencies $ 2,000 $ -- $ (180) $ 1,820
U.S. government agency
mortgage-backed securities 338,636 1,691 (1,208) 339,119
State and political
subdivisions 7,550 83 -- 7,633
Collateralized mortgage
obligations 7,348 -- (72) 7,276
Other equity securities 9,436 132 -- 9,568
-------- -------- -------- ---------
$364,970 $ 1,906 $ (1,460) $365,416
======== ======== ======== ========
Securities held-to-maturity
State and political subdivisions $ 18,801 $ 314 $ (24) $ 19,091
======== ======== ======== ========
</TABLE>
(Continued)
7
<PAGE> 8
MIDWEST BANC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table amounts in thousands)
NOTE 2 - SECURITIES (Continued)
<TABLE>
<CAPTION>
December 31, 1997
------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- --------- --------- ---------
<S> <C> <C> <C>
Securities available for sale
U.S. Treasuries and agencies $ 6,499 $ -- $ (245) $ 6,254
U.S. government agency
mortgage-backed securities 313,152 2,273 (845) 314,580
States and political subdivisions 7,555 47 (6) 7,596
Collateralized mortgage
obligations 7,558 -- (179) 7,379
Other securities 7,245 61 -- 7,306
--------- --------- --------- ---------
$ 342,009 $ 2,381 $ (1,275) $ 343,115
========= ========= ========= =========
Securities held-to-maturity
State and political subdivisions $ 16,233 $ 258 $ (11) $ 16,480
========= ========= ========= =========
</TABLE>
NOTE 3 - LOANS
Major classifications of loans are as follows:
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
---- ----
<S> <C> <C>
Commercial loans $ 145,284 $ 140,815
Commercial real estate loans 220,925 212,184
Agricultural loans 28,029 24,065
Consumer real estate 100,725 93,338
Consumer loans 17,228 18,811
----------- -----------
512,191 489,213
Unearned discount (965) (1,114)
----------- -----------
Total loans $ 511,226 $ 488,099
=========== ===========
</TABLE>
(Continued)
8
<PAGE> 9
MIDWEST BANC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table amounts in thousands)
NOTE 4 - ALLOWANCE FOR LOAN LOSSES
Following is a summary of changes in the allowance for loan losses for the
three months ended March 31:
<TABLE>
<CAPTION>
1998 1997
------ ------
<S> <C> <C>
Balance, January 1 $6,143 $5,343
Provision charged to operations 387 501
Loans charged-off (246) (141)
Recoveries 69 87
------ ------
Balance, March 31 $6,353 $5,790
====== ======
</TABLE>
NOTE 5 - NOTES PAYABLE
Consolidated notes payable at March 31, 1998 and December 31, 1997 are listed
below:
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Federal Home Loan Bank (FHLB)
advances to bank subsidiaries $62,000 $26,000
Revolving line of credit
to Midwest Banc Holdings, Inc. 1,000 12,350
($20,000,000 available)
Revolving warehouse line of credit
to Midwest One Mortgage Services 4,000 4,000
($5,000,000 available)
Mortgage payable 225 225
------- -------
Total notes payable $67,225 $42,575
======= =======
</TABLE>
9
<PAGE> 10
NOTE 6 - NEW ACCOUNTING STANDARDS
Effective for fiscal years beginning after December 15, 1997, under a new
accounting standard (SFAS 130), comprehensive income is now reported for all
periods. Comprehensive income includes both net income and other comprehensive
income. Other comprehensive income includes the change in unrealized gains and
losses on securities available-for-sale. Comprehensive income has been disclosed
in the statement of shareholders' equity.
Effective for fiscal years beginning after December 15, 1997, a new accounting
standard (SFAS 131) establishes standards for the way that public enterprises
report information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports issued to shareholders. This standard will
have no impact on the Company.
10
<PAGE> 11
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS- THREE MONTHS ENDED MARCH 31, 1998 AND 1997
Consolidated net income for the first quarter of 1998 was $2.3 million or $ 0.22
cents per share, a 23.3% increase compared to $1.9 million or $ 0.19 cents per
share earned in the first quarter of 1997. Net interest income increased 5.6%
to $8.0 million in the first quarter of 1998 compared with the first quarter of
1997. Noninterest income increased 50.4% to $1.5 million and noninterest
expenses increased 9.5% to $5.5 million in the first quarter of 1998 compared to
the similar period in 1997.
Net Interest Income
Net interest income was $8.0 million and $7.6 million during the three months
ended March 31, 1998 and 1997 respectively, an increase of about 5.6%. The
Company's net interest margin (tax equivalent net interest income as a
percentage of earning assets) was 3.71% for the three months ended March 31,
1998 and 4.15% a year earlier. Net interest income increased due to the growth
in earning assets from an average of $744.0 million during the first quarter of
1997 to $883.3 million during the first quarter of 1998. In addition, a greater
proportion of earning assets was invested in loans in the first quarter of 1998
than a year earlier. The loan to deposit ratio increased from 61.4% as of March
31, 1997 to 63.6% at March 31, 1998.
Despite the growth of earning assets and the percentage increase in loans, the
decrease in net interest margin was primarily due to a flattening of interest
rate yield curves and the accelerated prepayments under existing
mortgage-backed securities investments. The impact of these circumstances
reduced taxable investment yields from 7.34% for the first quarter in 1997 to
6.40% for the first quarter in 1998. A portion of this decrease in yield was
offset by a $294,000 gain on securities sales as part of management's continuing
program to reposition the investment portfolio. These gains are recorded as
part of other income and are not reflected in the net interest margin
calculations.
Provision for Loan Losses
The Company's provision for loan losses was $387,000 for the first three months
of 1998 compared to $501,000 for the first three months of 1997. Net
charge-offs for the three months ended March 31 were $177,000 and $54,000 in
1998 and 1997, respectively. The allowance for loan losses as a percentage of
total loans was 1.24% as of March 31, 1998 and 1.26% as of December 31, 1997. In
management's judgment, an adequate allowance for loan losses has been
established.
11
<PAGE> 12
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Other Income
Noninterest income, excluding securities gains, was $1.2 million for the three
months ended March 31, 1998 and $1.0 million for the same period in 1997, an
increase of $193,000 or 19.2%. Trust income increased 9.4% or approximately
$13,000 to $151,000 during the first quarter. Mortgage banking fee income
increased $122,000 or 136% to $212,000 during the first quarter of 1998 compared
to the first quarter of 1997. Mortgage banking income is seasonal, with
residential activity tending to decline in the winter months, and is also
sensitive to interest rate levels and expectations. The reduction in long term
interest rates has created a significant demand for refinancing existing
mortgages, as well as financing new home sales, during the past several months.
Most fixed rate mortgages which the Company originates are sold.
Service charges and fees increased 17.7% or $109,000 from $615,000 in the first
quarter of 1997 to $724,000 in the first quarter of 1998. Service charges and
fees include service charges on deposit accounts which may be expected to
increase as deposits grow in the future. Deposits increased 12.3% or $88
million from March 31, 1997 to March 31, 1998.
Sales of securities available-for-sale resulted in net gains of $294,000 in the
first three months of 1998 and a net loss of $13,000 a year earlier. Securities
available for sale are held for indefinite periods of time and include
securities that will be used as a part of the Company's asset/liability
management strategy. Such securities may be sold in response to changes in
interest rates, liquidity needs, or significant prepayment risk.
Other Expense
Salary and benefit expenses increased 9.2% or $277,000 from $3.0 million during
the three months ended March 31, 1997 to $3.3 million for the first quarter of
1998. The full-time equivalent number of employees was 297 as of March 31, 1997
and 294 as of March 31, 1998. The increase in salaries and benefits was
primarily the result of annual merit increases in salaries in December 1997, a
shift in the mix of officer/staff levels and higher commissions related to
mortgage origination volumes. Salaries and benefits were approximately $100,000
higher than the three months ended December 31, 1997.
Occupancy expenses increased $31,000 or 4.0% to $810,000 during the first
quarter of 1998 compared to the first quarter of 1997. Expenses, other than
salary and employee benefits and occupancy, increased $166,000 or 13.5% from
$1.2 million in the first quarter of 1997 to $1.4 million in the first quarter
of 1998. Factors contributing to the increase in other expenses were legal fees
related to corporate activities and to loan workout situations, and increases
in general operating costs.
Income Taxes
The Company recorded income tax expense of $1.3 million and $1.2 million for
the quarters ended March 31, 1998 and 1997, respectively. The increase in
income taxes was due to the growth in income before taxes of $474,000 during
the first quarter of 1998 compared to the first quarter of 1997.
12
<PAGE> 13
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
Loans
Total loans increased $23.1 million or 4.7% from $488.1 million at December 31,
1997 to $511.2 million as of March 31, 1998. Commercial loans increased $4.5
million or 3.2% from $140.8 million as of December 31, 1997 to $145.3 million as
of March 31, 1998. Commercial real estate loans increased 4.1% or $8.7 million
to $220.9 million as of March 31, 1998 from $212.2 million as of December 31,
1997. Agricultural loans increased 16.5% or $4.0 million from $24.1
million at December 31, 1997 to $28.0 million as of March 31, 1998. Residential
real estate loans increased $7.4 million or 7.9% to $100.7 million from $93.3
million as of December 31, 1997. Consumer loans decreased 8.4% to $17.2
million as of March 31, 1998 reflecting the continued amortization of the
indirect car loan portfolio.
Most of the residential mortgage loans originated by the Company's mortgage
banking subsidiary, Midwest One Mortgage Services, Inc., are sold in the
secondary market. At any point in time, loans will be at various stages of the
mortgage banking process. Included as part of residential real estate loans,
loans held for sale were $6.6 million as of December 31, 1997 and $9.6 million
as of March 31, 1998. The carrying value of these loans approximated the market
value at that time.
Allowance for Loan Losses
The adequacy of the allowance for loan losses is determined by management based
on factors that include the overall composition of the loan portfolio, types of
loans, past loss experience, loan delinquencies, potential substandard and
doubtful credits, and other factors that, in management's judgment, deserve
evaluation in estimating loan losses. The adequacy of the allowance for loan
losses is monitored by the loan review staff and reported to management and the
Board of Directors.
The allowance for loan losses as a percentage of total loans was 1.24% as of
March 31, 1998 and 1.26% as of December 31, 1997. In management's judgment, an
adequate allowance for loan losses has been established.
Nonaccrual loans increased to $2.3 million as of March 31, 1998 from $1.9
million as of December 31, 1997. Most of the difference in nonaccrual loans is
related to three commercial loans which were moved to this status. Management
does not believe that the increase in nonaccrual loans represents a decline in
the overall quality of the loan portfolio at this time.
13
<PAGE> 14
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Nonperforming loans include accruing loans which are ninety days or more
delinquent. Typically, these loans have adequate collateral protection or
personal guaranties to provide a source of repayment to the bank. Nonperforming
loans were $4.4 million as of March 31, 1998 compared to $3.2 million at
December 31, 1997 and $3.8 million at March 31, 1997. Nonperforming loans were
.86%, .66% and .87% of total loans as of March 31, 1998, December 31, 1997 and
March 31, 1997 respectively. Nonperforming loans were .46% and .47% of total
assets as of March 31, 1998 and March 31, 1997 respectively.
The increase in nonperforming loans was primarily due to several specific
credits which were subsequently either brought current by the borrowers or
partially paid in April 1998. Seasonal factors also contribute to an increase
in nonperforming loans during the first quarter each year. As such, management
believes there has been no deterioration in portfolio quality despite the modest
increase in total nonperforming loans since December 31, 1997.
Securities
Securities are classified as available-for-sale if they may be sold as part of
the Company's asset/liability management strategy in response to changes in
interest rates, liquidity needs, or significant prepayment risk. Securities
available-for-sale are carried at fair value, with related unrealized net gains
or losses, net of deferred income taxes, recorded as an adjustment to equity
capital. As of March 31, 1998, net unrealized gains of approximately $446,000
reduced by deferred income taxes of approximately $173,000 resulted in an
increase in equity capital of approximately $273,000. This was a decrease of
$402,000 from a net unrealized gain in equity of $675,000 at December 31, 1997.
The fair value of securities available-for-sale increased 6.5% to $365.4 million
as of March 31, 1998, from $343.1 million as of December 31, 1997. U.S.
Treasury and agency securities declined 70.9% from $6.3 million as of December
31, 1997 to $1.8 million as of March 31, 1998. U.S. government agency
mortgage-backed securities increased 7.8% or $24.5 million from $314.6 million
as of December 31, 1997 to $339.1 million as of March 31, 1998. Equity
securities increased $2.3 million from $7.3 million at December 31, 1997 to $9.6
million as of March 31, 1998. The increase in equity securities was due to
additional stock requirements of the Federal Home Loan Bank related to
borrowings and an increase in investments in community bank stocks. Management
does not consider any of these changes to represent a change in the management
philosophy of the investment portfolio.
14
<PAGE> 15
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Deposits and Borrowed Funds
Total deposits of $803.5 million as of March 31, 1998 represented an increase of
$9.2 million or 1.2% from $794.4 million as of December 31, 1997.
Non-interest-bearing deposits were $95.5 million as of March 31, 1998,
approximately $6.6 million lower than the $102.1 million as of December 31,
1997. The decline in non-interest borrowings was due to typical seasonal
factors in the first quarter. At the same time, interest-bearing deposits
increased 2.3% or $15.8 million. The increase in time deposits included $18.7
million in certificates of deposit under $100,000 offset, in part, by a $9.9
million decrease in certificates of deposit above $100,000. There were no
significant changes in deposit structure or management's strategies in acquiring
deposits in the first quarter of 1998.
The Company also utilizes securities sold under repurchase agreements as a
source of funds. Most local municipalities, and some other organizations, must
have funds insured or collateralized as a matter of their own policies.
Repurchase agreements provide a source of funds and do not increase the
Company's reserve requirement. Although the balance of repurchase agreements is
subject to variation, particularly seasonal variation, the account relationships
represented by these balances are principally local and have been maintained for
relatively long periods of time.
Capital Resources
The Company completed an initial public offering of 1,265,000 shares of common
stock on February 23, 1998. The gross proceeds of the stock offering were
$18,975,000 with net proceeds of $17,096,750 after underwriting discounts and
related issuance expenses. The proceeds were used to provide $6 million in
capital contributions to the bank subsidiaries and the remaining amount reduced
outstanding loans under the Company's existing line of credit.
The Company and its four subsidiary banks (the "Banks") are subject to
regulatory capital requirements administered by federal banking agencies.
Capital adequacy guidelines and prompt corrective action regulations involve
quantitative measures of assets, liabilities, and certain off-balance-sheet
items calculated under regulatory accounting practices. Capital amounts and
classifications are also subject to qualitative judgments by regulators about
components, risk weightings, and other factors, and the regulators can lower
classifications in certain areas. Failure to meet various capital requirements
can initiate regulatory action that could have a direct material effect on the
financial statements.
The prompt corrective action regulations provide five classifications, including
well capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized, and critically undercapitalized, although these terms are not
used to represent overall financial condition. If adequately capitalized,
regulatory approval is required to accept brokered deposits. If
undercapitalized, capital distributions are limited, as is asset growth and
expansion, and plans for capital restoration are required.
15
<PAGE> 16
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Capital Resources (continued)
The Company and the Banks were categorized as well capitalized as of March 31,
1998. Management is not aware of any conditions or events since the most recent
regulatory notification that would change the Company's or the Banks'
categories.
Capital levels and minimum required levels (dollars in thousands):
<TABLE>
<CAPTION>
Minimum Required Minimum Required
for Capital to Be
Actual Adequacy Purposes Well Capitalized
------ ----------------- ----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
March 31, 1998
Total capital to risk-
weighted assets $75,457 13.3% $45,494 8.0% $56,867 10.0%
Tier I capital to risk-
weighted assets 69,104 12.2% 22,747 4.0% 34,120 6.0%
Tier I capital to
average assets 69,104 7.4% 37,130 4.0% 46,413 5.0%
<CAPTION>
Minimum Required Minimum Required
for Capital to Be
Actual Adequacy Purposes Well Capitalized
------ ----------------- ----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
December 31, 1997
Total capital to risk-
weighted assets $55,980 10.8% $41,562 8.0% $51,953 10.0%
Tier I capital to risk-
weighted assets
Consolidated 49,842 9.6% 20,781 4.0% 31,172 6.0%
Tier I capital to
average assets
Consolidated 49,842 6.2% 32,418 4.0% 40,522 5.0%
</TABLE>
16
<PAGE> 17
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Liquidity
Liquidity measures the ability of the Company to meet maturing obligations and
its existing commitments, to withstand fluctuations in deposit levels, to fund
its operations, and to provide for customers' credit needs. The liquidity of
the Company principally depends on cash flows from operating activities,
investment in and maturity of assets, changes in balances of deposits and
borrowings, and its ability to borrow funds in the money or capital markets.
Net cash outflows from operations were $1.2 million in the first three months of
1998 compared to $452,000 a year earlier. In the first three months of 1998,
real estate loans originated for sale and net purchases of trading account
securities exceeded the proceeds from the sale of real estate loans and net
income. In the first three months of 1997, real estate loans originated for
sale and an increase in other assets more than offset net income and
depreciation.
Net cash outflows from investing activities were $48.2 million in the first
three months of 1998 compared to $25.4 million a year earlier. In the first
three months of 1998, net principal disbursed on loans accounted for net
outflows of $21.4 million, and securities transactions aggregated a net outflow
of $26.0 million. In the first three months of 1997, net principal disbursed on
loans accounted for a net outflow of $16.4 million, and securities transactions
resulted in net outflows of $8.8 million.
Cash inflows from financing activities in the first three months of 1998
included a $9.2 million increase in deposits. This compares with a net inflow of
$14.3 million for the same period in 1997. Net bank borrowings resulted in net
cash inflows of $24.7 million in the first three months of 1998 and inflows
of $1.1 million in the first three months of 1997. Cash inflows from financing
in 1998 included the $17.1 million net proceeds from the common stock offering
completed in February 1998.
During the first quarter of 1998, the Company repaid $11.4 million in borrowings
under its existing bank line of credit with the proceeds of the common stock
offering in late February. In addition, the bank subsidiaries borrowed
$36,000,000 in advances due at various dates through 2008 with the Federal Home
Loan Bank of Chicago.
In the event of short-term liquidity needs, the Banks may purchase federal funds
from correspondent banks. The Company's membership in the Federal Home Loan
Bank System gives it the ability to borrow funds from the Federal Home Loan
Bank of Chicago for short- or long-term purposes under a variety of programs.
The loans are used to fund growth and permit the bank subsidiaries to extend
term maturities, reduce funding costs and manage interest rate risk exposures
more effectively.
17
<PAGE> 18
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Liquidity
Mortgage lending activity resulted in operating net cash outflows of
approximately $1.9 million during the first three months of 1998 compared to
$800,000 in 1997. Total cash outflows from operating activities exceeded
operating outflows by $1.2 million for the three months ended March 31, 1998.
During the first three months of 1997, net cash outflows from operating
activities were $500,000. Interest received net of interest paid was a
principal source of operating cash inflows in both periods reported. Management
of investing and financing activities and market conditions determine the level
and the stability of net interest cash flows. Management's policy is to
mitigate the impact of changes in market interest rates to the extent possible
so that balance sheet growth is the principal determinant of growth in net
interest cash flows.
RECENT REGULATORY DEVELOPMENTS
Various bills have been introduced in Congress that would allow bank holding
companies to engage in a wider range of nonbanking activities, including greater
authority to engage in securities and insurance activities. Similarly, some of
these bills would allow insurance companies and securities firms to become bank
holding companies. While the scope of permissible nonbanking activities and the
conditions under which the new powers could be exercised varies among the
bills, the expanded power generally would be available to a bank holding
company only if the bank holding company and its bank subsidiaries remain well
capitalized and well managed. The bills also impose various restrictions on
transactions between the depository institution subsidiaries of bank holding
companies and their nonbank affiliates. These restrictions are intended to
protect the depository institutions from the risks of the new nonbanking
activities permitted to such affiliates.
Additionally, legislation has been introduced in Illinois that would generally
allow state chartered banks to engage in any activities which are permissible
for any other financial institution the deposits of which are insured by the
FDIC or any other agency of the federal government. If passed, such a law would
allow the state bank subsidiaries of the Company to engage in new activities,
such as real estate development, but only to the extent a savings and loan was
then authorized to engage in such activity.
At this time, the Company is unable to predict whether any of the pending bills
will be enacted and, therefore, is unable to predict the impact such legislation
may have on the operations of the Company and its bank subsidiaries.
18
<PAGE> 19
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
YEAR 2000 COMPLIANCE
The Company has conducted a review of its computer systems for those that could
be affected by the "year 2000" issue. The Company has developed a preliminary
implementation plan to resolve potential problems in compliance with Federal
Reserve Bank guidelines.
Based upon responses from vendors to date and independent appraisals conducted
on behalf of the Company and selected equipment and software suppliers, the
Company believes its systems are, or will be, fully compliant before the end of
1999. At the present time, one computer system will require a systems
software upgrade estimated to cost less than $200,000 and the cost will be
depreciated over the estimated useful life. No other situations have been
identified at this time which would require material capital expenditures in
order to become fully compliant. The Company maintains continuing contact with
its equipment and software vendors on year 2000 issues and does not anticipate
significant problems at this time.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Sensitivity Analysis
The Company's overall interest rate sensitivity is demonstrated by net interest
income analysis. Net interest income analysis measures the change in net
interest income in the event of hypothetical changes in interest rates. This
analysis assesses the risk of change in net interest income in the event of
sudden and sustained 1.0% to 2.0% increases and decreases in market interest
rates. The table below presents the Company's projected changes in net interest
income for the various rate shock levels at March 31, 1998.
<TABLE>
<CAPTION>
Net Interest Income
-------------------
(Dollars in thousands) Amount Change Change
------ ------ ------
<S> <C> <C> <C>
- -200 bp $32,481 $ (2,530) (7.23)%
- -100 bp 32,884 (2,127) (6.08)
Base 35,011 --- ---
+100 bp 35,890 879 2.51
+200 bp 35,954 943 2.69
</TABLE>
19
<PAGE> 20
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Sensitivity Analysis
As shown above, at March 31, 1998, the effect of an immediate 200 basis point
increase in interest rates would increase the Company's net interest income by
2.69% or approximately $943,000. The effect of an immediate 200 basis point
decrease in rates would reduce the Company's net interest income by 7.23% or
approximately $2.5 million.
Computations of the prospective effects of hypothetical interest rate changes
are based on numerous assumptions, including relative levels of market interest
rates, loan prepayments and deposit decay rates, and should not be relied upon
as indicative of actual results. Actual values may differ from those
projections set forth above, should market conditions vary from assumptions
used in preparing the analyses. Further, the computations do not contemplate
any actions the Company may undertake in response to changes in interest rates.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995
This report contains certain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. The Company intends such
forward-looking statements to be covered by the safe harbor provisions for
forward-looking statements contained in the Private Securities Reform Act of
1995, and is including this statement for purposes of these safe harbor
provisions. Forward-looking statements, which are based on certain assumptions
and describe future plans, strategies, and expectations of the Company, are
generally identifiable by use of the words "believe," "expect," "intend,"
"anticipate," "estimate," "project," or similar expressions. The Company's
ability to predict results or the actual effect of future plans or strategies is
inherently uncertain. Factors which could have a material adverse affect on the
operations and future prospects of the Company and its subsidiaries include, but
are not limited to, changes in interest rates; general economic conditions;
legislative/regulatory changes; monetary and fiscal policies of the U.S.
government, including policies of the U.S. Treasury and the Federal Reserve
Board; the quality or composition of the loan or investment portfolios; demand
for loan products; deposit flows; competition; demand for financial services in
the Company's market area; and accounting principles, policies, and guidelines.
These risks and uncertainties should be considered in evaluating forward-looking
statements and undue reliance should not be placed on such statements. Further
information concerning the Company and its business, including additional
factors that could materially affect the Company's financial results, is
included in the Company's filings with the Securities and Exchange Commission.
20
<PAGE> 21
PART II
MIDWEST BANC HOLDINGS, INC.
Item 1. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Company
or its subsidiaries are a party other than ordinary routine litigation
incidental to their respective businesses.
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
Item 3. DEFAULTS UPON SENIOR SECURITIES
None
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
Item 5. OTHER INFORMATION
None
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 27 Financial Data Schedule
(b) Filings on Form 8-K
None
21
<PAGE> 22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MIDWEST BANC HOLDINGS, INC.
(Registrant)
[SIGNATURE]
By:_______________________________
Robert L. Woods,
President and
Chief Executive Officer
[SIGNATURE]
By:_______________________________
Edward H. Sibbald,
Executive Vice President and
Chief Financial Officer
Date: May 13, 1998
22
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 27,757
<INT-BEARING-DEPOSITS> 82
<FED-FUNDS-SOLD> 2,695
<TRADING-ASSETS> 7,999
<INVESTMENTS-HELD-FOR-SALE> 365,416
<INVESTMENTS-CARRYING> 391,770
<INVESTMENTS-MARKET> 392,506
<LOANS> 511,226
<ALLOWANCE> (6,353)
<TOTAL-ASSETS> 957,133
<DEPOSITS> 803,540
<SHORT-TERM> 17,800
<LIABILITIES-OTHER> 6,811
<LONG-TERM> 57,225
0
0
<COMMON> 114
<OTHER-SE> 71,643
<TOTAL-LIABILITIES-AND-EQUITY> 957,133
<INTEREST-LOAN> 11,635
<INTEREST-INVEST> 5,869
<INTEREST-OTHER> 167
<INTEREST-TOTAL> 0
<INTEREST-DEPOSIT> 8,630
<INTEREST-EXPENSE> 9,628
<INTEREST-INCOME-NET> 8,043
<LOAN-LOSSES> 387
<SECURITIES-GAINS> 290
<EXPENSE-OTHER> 5,476
<INCOME-PRETAX> 3,673
<INCOME-PRE-EXTRAORDINARY> 2,331
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,331
<EPS-PRIMARY> .022
<EPS-DILUTED> .022
<YIELD-ACTUAL> 3.71
<LOANS-NON> 2,271
<LOANS-PAST> 2,115
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 6,143
<CHARGE-OFFS> 246
<RECOVERIES> 69
<ALLOWANCE-CLOSE> 6,353
<ALLOWANCE-DOMESTIC> 6,353
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
