<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 September 30, 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
incorporation or organization) Identification Number)
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 X No
--- ---
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 September 30, 1998
---------------------- -------------------------------
Common, par value $.01 11,279,392
1
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MIDWEST BANC HOLDINGS, INC.
FORM 10-Quarterly Report
Table of Contents
<TABLE>
<CAPTION>
PART I
Page Number
-----------
<S> <C> <C>
Item 1. Financial Statements............................................................... 3
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.................................... 10
Item 3. Quantitative and Qualitative Disclosures about Market Risk......................... 22
PART II
Item 1. Legal Proceedings................................................................. 24
Item 2. Changes in Securities and Use of Proceeds......................................... 24
Item 3. Defaults Upon Senior Securities................................................... 24
Item 4. Submission of Matters to a Vote of Security Holders............................... 24
Item 5. Other Information................................................................. 24
Item 6. Exhibits and Reports on Form 8-K.................................................. 24
Form 10-Q Signature Page.................................................................... 25
</TABLE>
2
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PART I - Financial Information
MIDWEST BANC HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS (unaudited)
(In Thousands, except share and per share data)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1998
------------- ------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 27,956 $ 34,471
Securities available-for-sale 462,640 343,115
Trading account securities -- 5,008
Securities held-to-maturity 21,559 16,233
Loans 501,484 488,099
Allowance for loan losses (6,535) (6,143)
----------- -----------
Net loans 494,949 481,956
Premises and equipment, net 16,660 14,863
Other real estate owned 724 789
Goodwill, net 2,249 2,424
Accrued interest and other assets 12,112 9,783
----------- -----------
Total assets $ 1,038,849 $ 908,642
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Noninterest-bearing $ 104,881 $ 102,080
Interest-bearing 748,793 692,282
----------- -----------
Total deposits 853,674 794,362
Federal funds purchased and securities
sold under agreements to repurchase 13,218 12,992
Notes payable 89,140 42,575
Accrued interest and other liabilities 6,029 5,753
----------- -----------
Total liabilities 962,061 855,682
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
June 30, 1998 and December 31, 1997. 114 101
Surplus 29,704 12,620
Retained earnings 46,898 40,026
Accumulated other comprehensive income 534 675
Treasury stock, at cost, 100,000 shares as of June 30, 1998
and December 31, 1997 (462) (462)
----------- -----------
Total stockholders' equity 76,788 52,960
----------- -----------
Total liabilities and stockholders' equity $ 1,038,849 $ 908,642
=========== ===========
</TABLE>
3
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MIDWEST BANC HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF INCOME (unaudited)
Three Months Ended September 30, 1998 and 1997
(In Thousands, except share and per share data)
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
INTEREST INCOME
Loans, including fees $12,090 $11,512
Securities
Taxable 6,841 5,516
Tax-exempt 316 266
Trading account securities -- --
Federal funds sold 108 51
------- -------
Total interest income 19,355 17,345
INTEREST EXPENSE
Deposits 9,353 8,416
Other borrowings 1,296 687
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Total interest expense 10,649 9,103
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Net interest income 8,706 8,242
Provision for loan losses 195 631
------- -------
Net interest income after provision for loan losses 8,511 7,611
OTHER INCOME
Service charges on deposits 767 743
Gains on securities transactions 42 224
Net trading account profits 1 74
Mortgage loan origination fees 230 180
Trust income 170 145
Other income 244 169
------- -------
Total other income 1,454 1,535
OTHER EXPENSE
Salaries and employee benefits 3,399 2,985
Occupancy expense, net 949 827
Other expenses 1,329 1,357
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Total other expenses 5,677 5,169
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Income before income taxes 4,288 3,977
Provision for income taxes 1,570 1,571
------- -------
NET INCOME $ 2,718 $ 2,406
======= =======
Basic earnings per share $ 0.24 $ 0.24
======= =======
Diluted earnings per share $ 0.24 $ 0.24
======= =======
</TABLE>
4
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MIDWEST BANC HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF INCOME (unaudited)
Nine Months Ended September 30, 1998 and 1997
(In Thousands, except share and per share data)
<TABLE>
<CAPTION>
1998 1997
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<S> <C> <C>
INTEREST INCOME
Loans, including fees $35,903 $32,345
Securities
Taxable 18,329 16,350
Tax-exempt 918 768
Trading account securities 170 37
Federal funds sold and other 399 163
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Total interest income 55,719 49,663
INTEREST EXPENSE
Deposits 26,996 23,839
Other borrowings 3,467 1,974
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Total interest expense 30,463 25,813
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Net interest income 25,256 23,850
Provision for loan losses 1,020 1,829
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Net interest income after provision for loan losses 24,236 22,021
OTHER INCOME
Service charges on deposits 2,261 2,045
Gains on securities transactions 767 239
Net trading account profits 19 114
Mortgage loan origination fees 717 403
Trust income 470 425
Other income 564 489
------- -------
Total other income 4,798 3,715
OTHER EXPENSE
Salaries and employee benefits 10,025 9,082
Occupancy expense, net 2,739 2,379
Other expenses 4,194 3,934
------- -------
Total other expenses 16,958 15,395
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Income before income taxes 12,076 10,341
Provision for income taxes 4,414 4,063
------- -------
NET INCOME $ 7,662 $ 6,278
======= =======
Basic earnings per share $ 0.69 $ 0.63
======= =======
Diluted earnings per share $ 0.69 $ 0.63
======= =======
</TABLE>
5
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MIDWEST BANC HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (unaudited)
(In thousands)
<TABLE>
<CAPTION>
Accumulated
Other Total
Common Retained Comprehensive Treasury Stockholders'
Stock Surplus Earnings Loss 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 -- -- 6,278 -- -- 6,278
Unrealized gains on Securities AFS -- -- -- 2,052 -- 2,052
--------
Comprehensive net income -- -- -- -- -- 8,330
Net purchase of treasury stock shares -- 18 -- -- (18) --
Recapitalization (3,327) 3,327 -- -- -- --
Cash dividends -- -- (301) -- -- (301)
-------- -------- -------- -------- -------- --------
Balance, September 30, 1997 $ 110 $ 13,834 $ 40,909 $ 675 $ (4,537) $ 50,991
======== ======== ======== ======== ======== ========
Balance, January 1, 1998 $ 101 $ 12,620 $ 40,026 $ 675 $ (462) $ 52,960
Net income -- -- 7,662 -- -- 7,662
Unrealized losses on Securities AFS -- -- -- (141) -- (141)
--------
Comprehensive net income -- -- -- -- -- 7,521
Common stock issuance 13 17,804 -- -- -- 17,097
Cash dividends -- -- (790) -- -- (790)
-------- -------- -------- -------- -------- --------
Balance, September 30, 1998 $ 114 $ 29,704 $ 46,898 $ 534 $ (462) $ 76,788
======== ======== ======== ======== ======== ========
</TABLE>
6
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MIDWEST BANC HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF INCOME (unaudited)
Nine Months Ended September 30, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 7,662 $ 6,278
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation 1,557 1,239
Provision for loan losses 1,020 1,829
Net proceeds from sale of trading account securities 5,027 114
Net loss on sale of securities (767) (239)
Net loss on sale of trading account securities (19) (114)
Net proceeds from sales of real estate loans originated for sale 5,826 (2,765)
Increase in other assets (2,156) 1,297
Increase in other liabilities 277 (261)
--------- ---------
Net cash provided by operating activities 18,427 7,378
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales and maturities of securities
available-for-sale 232,848 63,720
Principal payments on securities available-for-sale 93,348 26,736
Purchase of securities available-for-sale (444,950) (113,525)
Purchase of securities held-to-maturity (6,750) (2,236)
Maturities of securities held-to-maturity 1,345 466
Net increase in loans (19,839) (62,795)
Proceeds from sale of other real estate -- 151
Property and equipment expenditures (3,354) (1,336)
--------- ---------
Net cash used in investing activities (147,352) (88,819)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 59,312 74,898
Issuance of common stock 17,097 --
Net bank borrowings 46,565 11,426
Dividends paid (790) (301)
Securities sold under agreements to repurchase
and federal funds purchased 226 (2,621)
--------- ---------
Net cash provided by financing activities 122,410 83,402
--------- ---------
Increase in cash and cash equivalents (6,515) 1,961
Cash and cash equivalents at beginning of year 34,471 35,297
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 27,956 $ 37,258
========= =========
</TABLE>
7
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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 and nine months ended
September 30, 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 September 30, 1998, 10,014,392 shares outstanding at
December 31, 1997 and 10,015,898 shares outstanding at September 30, 1997.
Quarterly weighted average shares of common stock outstanding were 11,279,392
and 10,015,595 for the three months ended September 30, 1998 and 1997,
respectively. Year to date, average shares were 11,028,701 and 10,014,639 for
the nine month periods ended September 30, 1998 and 1997 respectively.
NOTE 2 - 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 stockholders' 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.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". SFAS No. 133 standardizes the accounting
for derivative instruments, including certain derivative instruments embedded in
other contracts. Under the standard, entities are required to carry all
derivative instruments in the statement of financial position at fair value. The
accounting for changes in the fair value (i.e. gains or losses) of a derivative
instrument depends on whether it has been designated and qualifies as part of a
hedging relationship and, if so, on the reason for holding it. If certain
conditions are met, entities may elect to designate a derivative instrument as a
hedge of exposures to changes in fair value, cash flows, or foreign currencies.
8
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NOTE 2 - NEW ACCOUNTING STANDARDS (CONTINUED)
If the hedged exposure is a fair value exposure, the gain or loss on the
derivative instrument is recognized in earnings in the period of change together
with the offsetting loss or gain on the hedged item attributable to the risk
being hedged. If the hedged exposure is a cash flow exposure, the effective
portion of the gain or loss on the derivative instrument is reported initially
as a component of other comprehensive income (outside earnings) and subsequently
reclassified into earnings when the forecasted transaction affects earnings. Any
amounts excluded from the assessment of hedge effectiveness as well as the
ineffective portion of the gain or loss is reported in earnings immediately.
Accounting for foreign currency hedges is similar to accounting for fair value
and cash flow hedges. If the derivative instrument is not designated as a hedge,
the gain or loss is recognized in earnings in the period of change. This
Statement will have no effect on the Company.
9
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ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS- THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND
1997
Consolidated net income for the third quarter of 1998 was $2.7 million or an
increase of 13% over the $2.4 million earned in the third quarter of 1997.
Earnings were $.24 per share for the third quarter in 1998 and $.24 per share
for the third quarter in 1997. Consolidated net income for the nine months ended
September 30, 1998 was $7.7 million or $.69 per share compared to $6.3 million
or $.63 per share for the similar period in 1997. Net interest income increased
5.6% to $8.7 million in the third quarter of 1998 compared to $8.2 million in
the third quarter of 1997. Year to date, net interest income increased 5.9% to
$25.3 million compared to $23.9 million for the nine months ended September 30,
1997. Other income decreased 5.3% to $1.5 million and other expenses increased
9.8% to $5.7 million in the third quarter of 1998 compared to the similar period
in 1997. Year to date, other income increased 29.2% to $4.8 million and other
expenses increased 10.2% to $17.0 million compared to the similar nine month
period in 1997.
Net Interest Income
Net interest income was $8.7 million and $8.2 million during the three months
ended September 30, 1998 and 1997 respectively, an increase of 5.6%. Year to
date, net interest income increased $1.4 million or 5.9% to $25.3 million
compared to $23.9 million for the similar period in 1997. The Company's net
interest margin (tax equivalent net interest income as a percentage of earning
assets) was 3.62% for the three months ended September 30, 1998 and 4.14% a year
earlier. Year to date, the net interest margin was 3.67% in 1998 compared to
4.15% in 1997. Net interest income increased due to the growth in average
earning assets from $810.0 million during the third quarter of 1997 to $978.7
million during the third quarter of 1998. Year to date, average earning assets
increased 20.1% from $779.2 million in 1997 to $935.5 million in 1998.
Securities represented a greater proportion of earning assets during the first
nine months of 1998 than a year earlier. The loan to deposit ratio was 58.7% at
September 30, 1998 compared to 61.4% at December 31, 1997. The average year to
date loan to deposit ratio decreased from 61.4% at September 30, 1997 to 61.3%
at September 30, 1998.
Despite the growth of earning assets, the decrease in net interest margin was
primarily due to the increase of lower yielding securities as a percentage of
earning assets, 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 6.99% for the third
quarter in 1997 to 6.31% for the third quarter in 1998. The year to date taxable
investment yields decreased from 7.23% in 1997 to 6.30% in 1998. A portion of
this decrease in yield was offset by a $767,000 gain on securities sales for the
nine months ended September 30, 1998 as part of management's continuing program
to reposition the securities portfolio. These gains are recorded as part of
other income and are not reflected in the net interest margin calculations.
10
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ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Provision for Loan Losses
The Company's provision for loan losses was $195,000 for the third quarter of
1998 compared to $631,000 for the similar period in 1997. Year to date, the
provision for losses decreased from $1.8 million in 1997 to $1.0 million in
1998. Net charge-offs for the three months ended September 30, 1998 and 1997
were $132,000 and $447,000, respectively. Net charge-offs for the nine months
ended September 30 were $628,000 and $980,000 in 1998 and 1997, respectively.
The allowance for loan losses as a percentage of total loans was 1.30% as of
September 30, 1998 and 1.26% as of December 31, 1997. In management's judgment,
an adequate allowance for loan losses has been established.
Other Income
Other income, excluding securities gains, was $1.4 million for the three months
ended September 30, 1998 and $1.2 million for the same period in 1997, an
increase of $174,000 or 14.1%. Year to date, other income, excluding securities
gains, was $4.0 million for 1998 or 19.3% higher than $3.4 million during the
comparable period in 1997.
Service charges and fees increased 3.2% or $24,000 from $743,000 in the third
quarter of 1997 to $767,000 in the third quarter of 1998. Year to date, service
charges and fees increased 10.6% from $2.0 million in 1997 to $2.3 million in
1998. Service charges and fees include service charges on deposit accounts which
may be expected to increase as deposits grow in the future.
Trust income increased 17.2% or approximately $25,000 to $170,000 during the
third quarter. Year to date, trust income was $470,000 or 10.6% higher than the
comparable period in 1997. Mortgage banking fee income increased $50,000 or
27.8% to $230,000 during the third quarter of 1998 compared to the third quarter
of 1997. Year to date, mortgage fees increased $314,000 to $717,000 or 77.9%
higher than the comparable period in 1997. Mortgage banking income is seasonal,
with residential activity tending to decline in the winter months, and is also
sensitive to interest rate levels. 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 nine months. Most fixed rate mortgages
which the Company originates are sold.
Sales of securities available-for-sale resulted in net gains of $42,000 in the
third quarter of 1998 compared to a net gain of $224,000 for the comparable
period in 1997. Gains on securities available-for-sale were $767,000 and
$239,000 for the nine months ended September 30, 1998 and 1997 respectively.
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. Net trading
account profits were $1,000 and $74,000 for the third quarter of 1998 and 1997
respectively. Net trading account profits were $19,000 and $114,000 for the nine
months ended September 30, 1998 and 1997 respectively.
11
<PAGE> 12
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Other Expense
Salary and benefit expenses increased 13.9% or $414,000 from $3.0 million during
the three months ended September 30, 1997 to approximately $3.4 million for the
third quarter of 1998. Year to date, salary and benefit expenses increased
$943,000 or 10.4% to $10.0 million. The full-time equivalent number of employees
was 305 as of September 30, 1997 and 314 as of September 30, 1998. The increase
in salaries and benefits was primarily the result of 1998 annual merit increases
in salaries, a shift in the mix of officer/staff levels, the initial staffing
costs of a new banking center, increased employee benefit expenses, and higher
commissions related to mortgage origination volumes.
Occupancy expenses increased $122,000 or 14.8% to $949,000 during the third
quarter of 1998 compared to the third quarter of 1997. Year to date, occupancy
expenses increased $360,000 or 15.1% to $2.7 million compared to the nine months
ended September 30, 1997. Specific costs and increased depreciation expense,
related to the renovation of the largest banking center, was a primary factor in
the higher occupancy expense levels in 1998.
Expenses, other than salary and employee benefits and occupancy, decreased
$28,000 or 2.1% from $1.4 million in the third quarter of 1997 to $1.3 million
in the third quarter of 1998. Other expenses increased $260,000 or 6.6% to $4.2
million for the nine months ended September 30, 1998 compared to the similar
period in 1997. Factors contributing to the increase in other expenses were
legal fees related to corporate activities and increases in general operating
costs.
Income Taxes
The Company recorded income tax expense of $1.6 million for both quarters ended
September 30, 1998 and 1997, respectively. Year to date, the provision for
income taxes increased $351,000 or 8.6% compared to the similar period in 1997.
The increase in income taxes was due to the growth in income before taxes of
$1.7 million for the nine months ended September 30, 1998 compared to the
similar periods in 1997.
12
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ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
Loans
Total loans increased $13.4 million or 2.7% from $488.1 million at December 31,
1997 to $501.5 million as of September 30, 1998. Commercial loans increased $5.8
million or 4.1% from $140.8 million as of December 31, 1997 to $146.6 million as
of September 30, 1998. Commercial real estate loans increased 1.1% or $2.4
million to $214.6 million as of September 30, 1998 from $212.2 million as of
December 31, 1997. Agricultural loans increased 36.9% or $8.9 million from $24.1
million at December 31, 1997 to $33.0 million as of September 30, 1998.
Residential real estate loans decreased $1.8 million or 1.9% to $91.5 million
from $93.3 million as of December 31, 1997. Consumer loans decreased 15.4% to
$15.9 million as of September 30, 1998 reflecting the continued amortization of
the indirect car loan portfolio and other installment loans.
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 were
loans held for sale of $6.6 million at December 31, 1997 and $801,000 at
September 30, 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.
Following is a summary of changes in the allowance for loan losses for the nine
months ended September 30:
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Balance, January 1 $ 6,143 $ 5,342
Provision charged to operations 1,020 1,829
Loans charged-off (881) (1,129)
Recoveries 253 149
------- -------
Balance, September 30 $ 6,535 $ 6,191
======= =======
</TABLE>
13
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ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Allowance for Loan Losses
The allowance for loan losses as a percentage of total loans was 1.30% as of
September 30, 1998 and 1.26% as of December 31, 1997. In management's judgment,
an adequate allowance for loan losses has been established.
Nonaccrual and Nonperforming Loans
Nonaccrual loans increased to $2.1 million as of September 30, 1998 from $1.9
million as of December 31, 1997. Most of the difference in nonaccrual loans is
related to two commercial loans which are being addressed by specific workout
plans at this time. Management does not believe that the increase in nonaccrual
loans represents a decline in the overall quality of the loan portfolio at this
time.
Nonperforming loans include nonaccrual loans and 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 $4.2 million as of September 30, 1998 compared to $3.2
million at December 31, 1997 and $4.0 million at September 30, 1997.
Nonperforming loans were .83%, .66% and .82% of total loans as of September 30,
1998, December 31, 1997 and September 30, 1997 respectively. Nonperforming loans
were .40%, .35% and .45% of total assets as of September 30, 1998, December 31,
1997 and September 30, 1997 respectively.
The increase in nonperforming loans was primarily due to several specific
credits which continue to make partial payments or are in process of loan
workout and collection litigation. As such, management believes there has been
no deterioration in portfolio quality despite the increase in total
nonperforming loans since December 31, 1997.
Other real estate owned was $724,000 and $789,000 at September 30, 1998 and
December 31, 1997. Other real estate owned was .07% and .09% of total assets as
of September 30, 1998 and December 31, 1997 respectively.
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 September 30, 1998, net unrealized gains resulted in a $534,000
increase in equity. This was a decrease of $141,000 from a net unrealized gain
of $675,000 recorded as part of equity at December 31, 1997.
14
<PAGE> 15
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Securities
Securities available-for-sale increased 34.8% to $462.6 million as of September
30, 1998, from $343.1 million as of December 31, 1997. U.S. Treasury and agency
securities declined 70.8% from $6.3 million as of December 31, 1997 to $1.8
million as of September 30, 1998. U.S. government agency mortgage-backed
securities and collateralized mortgage obligations increased 40.8% or $128.4
million from $314.6 million as of December 31, 1997 to $442.9 million as of
September 30, 1998. Equity securities increased $2.9 million from $7.3 million
at December 31, 1997 to $10.2 million as of September 30, 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.
Deposits and Borrowed Funds
Total deposits of $853.7 million as of September 30, 1998 represented an
increase of $59.3 million or 7.5% from $794.4 million as of December 31, 1997.
Non-interest-bearing deposits were $104.9 million as of September 30, 1998,
approximately $2.8 million higher than the $102.1 million as of December 31,
1997. At the same time, interest-bearing deposits increased 8.2% or $56.5
million. The higher level of interest-bearing deposits included an increase of
$27.3 million in certificates of deposit under $100,000 and $18.4 million in
certificates of deposit above $100,000. Brokered certificates of deposit
accounted for $15 million of the increase in certificates of deposit greater
than $100,000. There were no significant changes in deposit structure or
management's strategies in acquiring deposits in the third quarter of 1998.
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 were used to fund
growth and permit the bank subsidiaries to extend term maturities, reduce
funding costs and manage interest rate risk exposures more effectively.
Federal Home Loan Bank advances were $85.0 million at September 30, 1998, an
increase of $59.0 million since December 31, 1997. The weighted average rate for
Federal Home Loan Bank advances was 5.29% year to date with a range of
maturities between one and ten years. This rate compares favorably to the
average 1998 year to date rate of 5.58% for certificates of deposit under
$100,000.
15
<PAGE> 16
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Deposits and Borrowed Funds
Consolidated notes payable at September 30, 1998 and December 31, 1997 are
listed below:
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Federal Home Loan Bank (FHLB)
advances to bank subsidiaries $85,000 $26,000
Revolving line of credit
to Midwest Banc Holdings, Inc. 4,000 12,350
($20,000,000 available)
Revolving warehouse line of credit
to Midwest One Mortgage Services 0 4,000
($5,000,000 available)
Mortgage payable 140 225
------- -------
Total notes payable $89,140 $42,575
======= =======
</TABLE>
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.
16
<PAGE> 17
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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.
The Company and the Banks were categorized as well capitalized as of September
30, 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.
17
<PAGE> 18
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Capital Resources
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>
September 30, 1998
Total capital to risk-
weighted assets $80,994 14.9% $43,568 8.0% $54,460 10.0%
Tier I capital to risk-
weighted assets 74,459 13.7% 21,784 4.0% 32,676 6.0%
Tier I capital to
average assets 74,459 7.8% 21,784 4.0% 27,230 5.0%
</TABLE>
<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>
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 49,842 9.6% 20,781 4.0% 31,172 6.0%
Tier I capital to
average assets 49,842 6.2% 32,418 4.0% 40,522 5.0%
</TABLE>
18
<PAGE> 19
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 inflows provided by operations were $18.4 million in the first nine
months of 1998 compared to $7.4 million a year earlier. In the first nine months
of 1998, net proceeds from sales of real estate loans originated for sale and
net proceeds from the sale of trading account securities were $10.9 million
compared to a net outflow of $2.7 million in 1997.
Net cash outflows from investing activities were $147.4 million in the first
nine months of 1998 compared to $88.8 million a year earlier. In the first nine
months of 1998, net principal disbursed on loans accounted for net outflows of
$19.8 million, and securities transactions aggregated a net outflow of $124.2
million. In the first nine months of 1997, net principal disbursed on loans
accounted for a net outflow of $63.0 million, and securities transactions
resulted in net outflows of $24.8 million.
Cash inflows from financing activities in the first nine months of 1998 included
a $59.3 million increase in deposits. This compares with a net inflow of $74.9
million for the same period in 1997. Net bank borrowings resulted in net cash
inflows of $46.6 million in the first nine months of 1998 and inflows of $11.4
million in the first nine 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 nine months 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. New borrowings of $2.0 million under the
existing line of credit in the third quarter were used to provide capital
contributions to two bank subsidiaries. In addition, the bank subsidiaries
borrowed $59,000,000 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.
19
<PAGE> 20
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Liquidity
Mortgage lending activity resulted in operating net cash inflows of
approximately $5.8 million during the first nine months of 1998 compared to a
net outflow of $2.8 million in 1997. Total cash inflows from operating
activities exceeded operating outflows by $18.4 million for the nine months
ended September 30, 1998. During the first nine months of 1997, net cash inflows
from operating activities were $7.4 million. 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
In the last several years, 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 would also
impose various restrictions on transactions between the depository institution
subsidiaries of bank holding companies and their nonbank affiliates. These
restrictions would be intended to protect the depository institutions from the
risks of the new nonbanking activities permitted to such affiliates.
None of these measures has passed Congress, although different provisions have
each passed the House or Senate. It is anticipated that when the new Congress
convenes in January 1999, similar reform measures will be reintroduced. At this
time, the Company is unable to predict whether any of the reform measures being
contemplated at the federal level 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.
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.
20
<PAGE> 21
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
YEAR 2000 COMPLIANCE
Company's State of Readiness
The Company has conducted a comprehensive review of its computer systems for
"year 2000" issues, and has developed an implementation plan to identify and
resolve potential problems in compliance with Federal Reserve Bank guidelines.
The Company estimates its testing and implementation plan is 75% complete at
this time.
The Company is completing tests of our own systems, and each of our tests have
indicated year 2000 compatibility. To date, one computer system required a
systems software upgrade which was completed during the third quarter of 1998.
Subsequent tests on the systems software upgrade indicated year 2000
compatibility. Our main software provider has received certification of their
systems software for year 2000 compliance and the Company is in the process of
completing its own tests of the software. These tests will be concluded by the
end of 1998. The results of testing to date have been documented and reviewed by
regulatory agencies in phase audits. No significant year 2000 issues have been
identified as of this date.
Our implementation plan involves procedures and tests to reduce year 2000 risks
to and by customers, equipment, vendors, and the providers of computer hardware
and software services. We have identified mission critical vendors who have
provided the company with the results of their own tests for year 2000
compliance and we are satisfied with the results to date.
Based upon responses from vendors, our own testing 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.
Costs of Year 2000 Compliance
The Company has spent approximately $180,000 to date in year 2000 upgrades and
estimates total costs should not exceed $250,000. These costs will be
depreciated over the estimated useful life. No 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.
At this time, based upon testing results, the Company does not expect to require
arrangements to provide backup processing as it relates to Year 2000 risks.
Risk Posed by Year 2000 Issues
The Company recognizes potential risks created by depositors and borrowers. The
Company remains alert to any potential year 2000 problems created by customers
and has been obtaining information and data from customers to assess potential
exposures. To date, responses from customers have not indicated significant year
2000 issues to be resolved.
21
<PAGE> 22
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 September 30, 1998.
<TABLE>
<CAPTION>
Net Interest Income
---------------------------------------
(Dollars in thousands) Amount Change Change
-------- -------- --------
<S> <C> <C> <C>
- -200 bp $33,021 $(2,941) (8.13)%
- -100 bp 34,030 (1,913) (5.32)
Base 35,943 -- --
+100 bp 36,204 261 0.73
+200 bp 35,823 (120) (0.33)
</TABLE>
As shown above, at September 30, 1998, the effect of an immediate 200 basis
point increase in interest rates would decrease the Company's net interest
income by .33% or approximately $120,000. The effect of an immediate 200 basis
point decrease in rates would reduce the Company's net interest income by 8.13%
or approximately $2.9 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.
22
<PAGE> 23
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; the effectiveness of the company's compliance review
and implementation plan to identify and resolve year 2000 issues; 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.
23
<PAGE> 24
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
24
<PAGE> 25
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)
By: /s/ Robert L. Woods
-------------------------------
Robert L. Woods,
President and
Chief Executive Officer
By: /s/ Edward H. Sibbald
-------------------------------
Edward H. Sibbald,
Executive Vice President and
Chief Financial Officer
Date: November 12, 1998
25
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 23,744
<INT-BEARING-DEPOSITS> 612
<FED-FUNDS-SOLD> 3,600
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 462,640
<INVESTMENTS-CARRYING> 461,767
<INVESTMENTS-MARKET> 462,640
<LOANS> 501,484
<ALLOWANCE> (6,535)
<TOTAL-ASSETS> 1,038,849
<DEPOSITS> 853,674
<SHORT-TERM> 13,218
<LIABILITIES-OTHER> 6,030
<LONG-TERM> 89,140
0
0
<COMMON> 114
<OTHER-SE> 76,673
<TOTAL-LIABILITIES-AND-EQUITY> 1,038,849
<INTEREST-LOAN> 35,903
<INTEREST-INVEST> 19,417
<INTEREST-OTHER> 399
<INTEREST-TOTAL> 0
<INTEREST-DEPOSIT> 26,996
<INTEREST-EXPENSE> 30,463
<INTEREST-INCOME-NET> 25,256
<LOAN-LOSSES> 1,020
<SECURITIES-GAINS> 786
<EXPENSE-OTHER> 16,958
<INCOME-PRETAX> 12,076
<INCOME-PRE-EXTRAORDINARY> 7,662
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,662
<EPS-PRIMARY> $0.69
<EPS-DILUTED> $0.69
<YIELD-ACTUAL> 3.67
<LOANS-NON> 2,072
<LOANS-PAST> 4,173
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 6,143
<CHARGE-OFFS> 881
<RECOVERIES> 253
<ALLOWANCE-CLOSE> 6,535
<ALLOWANCE-DOMESTIC> 6,535
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
