<PAGE> 1
As filed with the Securities and Exchange Commission on February 6, 1998
Registration No. 333-42827
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
Under
The Securities Act of 1933
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MIDWEST BANC HOLDINGS, INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE
(State or Other Jurisdiction
of Incorporation or Organization)
6712
(Primary Standard Industrial
Classification Code Number)
36-3252484
(I.R.S. Employer
Identification Number)
501 WEST NORTH AVENUE
MELROSE PARK, ILLINOIS 60160
(708) 865-1053
(Address, Including Zip Code, and Telephone Number, Including
Area Code, of Registrant's Principal Executive Offices)
ROBERT L. WOODS
PRESIDENT AND CHIEF EXECUTIVE OFFICER
MIDWEST BANC HOLDINGS, INC.
501 WEST NORTH AVENUE
MELROSE PARK, ILLINOIS 60160
(708) 865-1053
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code,
of Agent For Service)
Copies of communications to:
DOUGLAS M. HAMBLETON, ESQ.
STEVEN J. GRAY, ESQ.
VEDDER, PRICE, KAUFMAN & KAMMHOLZ
222 NORTH LASALLE STREET, SUITE 2600
CHICAGO, ILLINOIS 60601-1003
(312) 609-7500
MATTHEW C. BOBA, ESQ.
STATHY DARCY, ESQ.
CHAPMAN AND CUTLER
111 WEST MONROE STREET
CHICAGO, ILLINOIS 60603-4080
(312) 845-3000
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this registration statement.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of earlier effective
registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
-------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO
SECTION 8(A), MAY DETERMINE.
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<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED FEBRUARY 6, 1998
1,100,000 SHARES
[LOGO] MIDWEST BANC HOLDINGS, INC.
COMMON STOCK
All of the shares of Common Stock, par value $0.01 per share (the "Common
Stock"), offered hereby (the "Offering") are being issued and sold by Midwest
Banc Holdings, Inc. (the "Company").
While the Company's Common Stock has traded occasionally in the
over-the-counter "OTC" market, and bid prices are quoted on the OTC Bulletin
Board, prior to this Offering there has not been an active trading market for
the Company's shares. It is currently estimated that the initial public offering
price per share will be between $13.00 and $15.00. See "Market for Common Stock
and Dividends." For information relating to the determination of the initial
public offering price of the Common Stock, see "Underwriting." The Common Stock
has been approved for quotation on The Nasdaq National Market(SM) under the
symbol "MBHI."
INVESTORS SHOULD CAREFULLY CONSIDER THE FACTORS SET FORTH UNDER "RISK
FACTORS" BEGINNING ON PAGE 6 OF THIS PROSPECTUS.
-------------------------
THE SHARES OF COMMON STOCK OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS OR DEPOSITS
AND ARE NOT INSURED BY THE BANK INSURANCE FUND, THE SAVINGS ASSOCIATION
INSURANCE FUND, THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER
GOVERNMENTAL AGENCY.
-------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
=========================================================================================================
UNDERWRITING PROCEEDS TO
PRICE TO PUBLIC DISCOUNT(1) COMPANY(2)
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share......................... $ $ $
- ---------------------------------------------------------------------------------------------------------
Total(3).......................... $ $ $
=========================================================================================================
</TABLE>
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(1) See "Underwriting" for information concerning indemnification arrangements
with the Underwriters.
(2) Before deducting expenses of the Offering, estimated at $400,000.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
165,000 additional shares of Common Stock solely to cover over-allotments,
if any, on the same terms and conditions as shown above. If such option is
exercised in full, the total Price to Public, Underwriting Discount and
Proceeds to Company will be $ , $ and
$ , respectively.
The shares of Common Stock being offered hereby are being offered severally
by the Underwriters named herein subject to receipt and acceptance by them and
subject to the right to reject any order in whole or in part. See
"Underwriting." It is anticipated that delivery of the certificates for the
shares of Common Stock will be made against payment therefor on or about
, 1998.
-------------------------
HOWE BARNES INVESTMENTS, INC.
, 1998
<PAGE> 3
MIDWEST BANC HOLDINGS, INC.
[MAP OF NORTHERN & WESTERN ILLINOIS AREA DEPICTING LOCATIONS OF COMPANY'S
BANKING CENTERS.]
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK. SUCH
TRANSACTIONS MAY INCLUDE THE PURCHASE OF SHARES OF COMMON STOCK PRIOR TO THE
PRICING OF THE OFFERING FOR THE PURPOSE OF MAINTAINING THE PRICE OF THE COMMON
STOCK, THE PURCHASE OF SHARES OF COMMON STOCK FOLLOWING THE PRICING OF THE
OFFERING TO COVER A SYNDICATE SHORT POSITION IN THE COMMON STOCK OR THE
IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES SEE
"UNDERWRITING."
IN CONNECTION WITH THE OFFERING, CERTAIN PERSONS MAY ENGAGE IN PASSIVE
MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ NATIONAL MARKET IN
ACCORDANCE WITH RULE 103 UNDER REGULATION M.
The Company intends to furnish its stockholders with an annual report
containing financial statements for each fiscal year audited by independent
accountants and with quarterly reports containing unaudited summary information
for the first three quarters of each fiscal year.
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<PAGE> 4
PROSPECTUS SUMMARY
The following summary should be read in conjunction with, and is qualified
in its entirety by, the more detailed information, including "Risk Factors," and
Consolidated Financial Statements and Notes thereto appearing elsewhere in this
Prospectus. Unless otherwise indicated, the information in this Prospectus (i)
gives effect to the two-for-one stock split effected on December 17, 1997 and
(ii) assumes no exercise of the Underwriters' over-allotment option.
THE COMPANY
Midwest Banc Holdings, Inc. (the "Company") is a community-based bank
holding company headquartered in Melrose Park, Illinois. The Company provides a
wide range of banking services, personal and corporate trust services,
residential mortgage services and limited securities brokerage services. The
Company's principal operating subsidiaries are four Illinois community banks:
Midwest Bank and Trust Company, Midwest Bank, Midwest Bank of McHenry County and
The National Bank of Monmouth (collectively, the "Banks"). In addition, the
Company has three consolidated nonbank subsidiaries that provide trust, mortgage
and data processing services.
The Banks are community-oriented, full-service commercial banks, providing
a wide range of banking services to individuals, small-to-medium-sized
businesses, government and public entities and not-for-profit organizations. The
Banks operate out of 13 locations with nine banking centers in the greater
Chicago metropolitan area and four banking centers in Western Illinois. Midwest
One Mortgage Services, Inc., a subsidiary of Midwest Bank, is a residential
mortgage brokerage business offering mortgage services throughout the Chicago
metropolitan area. Midwest Trust Services, Inc., a subsidiary of Midwest Bank
and Trust Company, provides trust services for individuals and corporations.
First Midwest Data Corp., a subsidiary of the Company, provides data processing
services to the Company and the Banks except The National Bank of Monmouth.
The Company functions as a network of autonomous banks with centralized
planning and staff support functions. Each Bank has full responsibility for
day-to-day banking operations, while supported by accounting, auditing,
financial and strategic planning, marketing, human resources, loan review and
regulatory compliance services located at the holding company level. The Company
focuses on establishing and maintaining long-term relationships with customers
and is committed to meeting the financial services needs of the communities it
serves. In particular, the Company has emphasized in the past and intends to
continue to emphasize its relationships with individual customers and
small-to-medium-sized businesses. The Company actively evaluates the credit
needs of its markets, including low-and moderate-income areas, and offers
products that are responsive to the needs of its customer base. The markets
served by the Company provide a mix of real estate, commercial and consumer
lending opportunities, as well as a stable core deposit base.
As of December 31, 1997, the Company had consolidated total assets of
$908.6 million, total loans of $488.1 million, total deposits of $794.4 million
and stockholders' equity of $53.0 million. The Company achieved a return on
average equity of 18.36% and a return on average assets of 1.01% for the year
ended December 31, 1997. As of December 31, 1997, Midwest Trust Services, Inc.
maintained trust assets with an aggregate market value of $147.5 million.
Midwest One Mortgage Services, Inc. originated mortgage loans totaling $40.5
million for the year ended December 31, 1997.
The Company has achieved significant profitable growth within its markets
measured from the end of 1992. For the five-year period ended December 31, 1997,
the average annual rate of increase for total assets, total deposits and net
income was 28.7%, 26.9% and 37.6%, respectively. The Company considers its
recent growth a result of its strategy to become a low-cost provider of premium
rate deposits and competitively priced loan products within its core markets.
The Company believes that its continued success is dependent on its ability
to provide to its customers value-added retail and commercial banking programs
and other financial services. The growth strategy of the Company is to increase
its core banking business, further develop its mortgage, trust and securities
brokerage
3
<PAGE> 5
activities, and expand into other financial services. Key aspects of the
Company's strategy include the following:
- Maintain high levels of customer service through a decentralized
operating structure.
- Increase market share within existing markets and expand into new markets
through branch openings and selected acquisitions.
- Cross-sell value-added products and services.
- Maintain a leadership position in product development and marketing.
- Increase the revenue base of nonbank financial service subsidiaries.
- Increase the loan-to-deposit ratios of the Banks.
- Expand usage of supplemental funding sources for incremental growth,
liquidity and interest rate risk management.
Management believes that its strategy will support the continued profitable
growth of the Company and allow it to maintain consistent high performance and
leadership positions in its markets.
The Company, formerly known as First Midwest Corporation of Delaware,
adopted its present name effective December 17, 1997. The Company's offices are
located at 501 West North Avenue, Melrose Park, Illinois 60160, and its
telephone number is (708) 865-1053.
THE OFFERING
Common Stock offered.......... 1,100,000 shares
Common Stock to be outstanding
after the Offering (1)........ 11,114,392 shares
Use of Proceeds............... The Company will use approximately $6.0 million
of the net proceeds from the Offering for
capital contributions to the Banks to fund
anticipated growth and expansion and will apply
the remaining net proceeds from the Offering to
reduce short-term borrowings under the
Company's revolving line of credit. See "Use of
Proceeds" and "Capitalization."
Nasdaq symbol................. MBHI
- -------------------------
(1) Under the Company's 1996 Stock Option Plan, 500,000 shares of Common Stock
have been reserved for issuance. As of January 31, 1998, options to purchase
111,000 shares of Common Stock were outstanding under the plan, of which
options for 15,500 shares were exercisable.
4
<PAGE> 6
SUMMARY CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Total interest income................................... $ 67,326 $ 57,298 $ 47,603 $ 36,406 $ 31,400
Total interest expense.................................. 35,311 28,918 22,619 14,557 12,890
-------- -------- -------- -------- --------
Net interest income..................................... 32,015 28,380 24,984 21,849 18,510
Provision for loan losses............................... 2,454 1,718 1,542 1,966 1,680
Other income (loss)..................................... 5,439 4,325 3,427 (253) 4,383
Other expenses.......................................... 20,952 19,082 17,686 17,219 15,217
-------- -------- -------- -------- --------
Income before income tax expense........................ 14,048 11,905 9,183 2,411 5,996
Income tax expense...................................... 5,537 4,597 3,151 509 1,989
-------- -------- -------- -------- --------
Net income.............................................. $ 8,511 $ 7,308 $ 6,032 $ 1,902 $ 4,007
======== ======== ======== ======== ========
PER SHARE DATA:(1)
Net income.............................................. $ 0.85 $ 0.73 $ 0.60 $ 0.19 $ 0.38
Cash dividends declared................................. 0.055 0.055 0.055 0.055 0.055
Book value at end of period............................. 5.29 4.29 3.83 2.55 3.20
Tangible book value at end of period.................... 5.05 4.03 3.55 2.26 2.89
SELECTED FINANCIAL RATIOS:
Return on average assets................................ 1.01% 1.01% 1.02% 0.38% 0.89%
Return on average equity................................ 18.36 19.36 18.65 6.24 12.33
Dividend payout ratio................................... 6.47 7.53 9.17 28.95 14.47
Average equity to average assets........................ 5.51 5.20 5.49 6.05 7.21
Net interest margin (tax equivalent).................... 4.11 4.27 4.67 4.83 4.74
Allowance for loan losses to total loans at the end of
period................................................ 1.26 1.27 1.28 1.31 1.23
Nonperforming loans to total loans at the end of
period(2)............................................. 0.66 1.03 0.60 1.08 1.08
Net loans charged off (recoveries) to average total
loans................................................. 0.36 0.26 0.28 0.46 0.50
Tier 1 risk-based capital............................... 9.60 9.57 7.64 9.27 8.94
Total risk-based capital................................ 10.78 10.76 8.66 10.44 9.92
<CAPTION>
DECEMBER 31,
----------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets............................................ $908,642 $786,070 $660,315 $533,157 $468,395
Total earning assets.................................... 855,675 737,338 611,597 480,171 427,393
Average assets(3)....................................... 841,707 725,420 589,102 503,834 450,927
Total loans............................................. 488,099 420,655 359,639 304,242 268,360
Allowance for loan losses............................... 6,143 5,342 4,603 3,979 3,309
Total deposits.......................................... 794,362 701,205 590,671 482,892 408,395
Borrowings.............................................. 42,575 27,495 16,077 13,490 10,843
Shareholders' equity.................................... 52,960 42,962 38,387 26,605 33,552
Tangible book value..................................... 50,536 40,344 35,554 23,557 30,329
</TABLE>
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(1) All per share amounts have been adjusted to reflect two-for-one stock splits
effective on December 17, 1997 and in April 1996.
(2) Includes total nonaccrual, impaired and all other loans 90 days past due.
(3) Average for the year ended.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
Statements contained in this Prospectus that relate to the Company's
beliefs or expectations as to future events relating to, among other things, the
success of the Company's growth strategy, the sufficiency of the Company's
allowance for loan losses, changes in economic conditions including interest
rates, management's ability to manage interest rate and credit risks and the
impact of future regulations, are not statements of historical fact and are
forward-looking statements. Although the Company believes that the assumptions
upon which such forward-looking statements are based are reasonable within the
bounds of its knowledge of its business and operations, it can give no assurance
that the assumptions will prove to have been correct. Reference to sections in
this Prospectus which contain forward-looking statements and important factors
that could cause actual results to differ materially and adversely from the
Company's expectations and beliefs are set out under "Risk Factors" and
"Management's Discussion and Analysis of Results of Operations and Financial
Condition." These factors should be carefully considered by potential investors.
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<PAGE> 7
RISK FACTORS
Prospective purchasers of the Common Stock should carefully consider the
following risk factors, as well as the other information contained in this
Prospectus, in evaluating the Company and its business and in deciding whether
to purchase any of the Common Stock offered hereby.
MANAGEMENT OF GROWTH
The Company's past and expected growth involves a variety of risks
including maintaining loan quality in the context of significant portfolio
growth, maintaining adequate management personnel and systems to oversee such
growth, maintaining adequate internal audit, loan review and compliance
functions, and implementing additional policies, procedures and operating
systems required to support such growth. Failure of the Company to successfully
address these issues could have a material adverse effect on the Company's
results of operations and financial condition.
The Company's growth strategy also includes increasing revenues generated
from trust, mortgage and securities brokerage services, as well as the
introduction of other financial services. There can be no assurance that the
Company will be successful in developing, introducing or managing new product or
service offerings in the trust, mortgage, securities brokerage or other
financial service areas or that the Banks' customers will be receptive to such
offerings.
ALLOWANCE FOR LOAN LOSSES
The Company's allowance for loan losses is maintained at levels considered
adequate by management to absorb anticipated losses in its loan portfolio. The
amount of future losses is susceptible to changes in economic, operating and
other conditions, including changes in interest rates, beyond the control of the
Company. Such losses may exceed current estimates. Although management believes
that the Company's allowance for loan losses is adequate to absorb identifiable
losses on existing loans, there can be no assurance that the allowance will
prove sufficient to cover actual loan losses in the future. See "Management's
Discussion and Analysis of Results of Operations and Financial Condition --
Financial Condition."
INTEREST RATE EFFECTS
The Banks' primary source of income is the spread between interest earned
on loans and investments and the interest paid on deposits and borrowings. From
time to time, it is expected that the Banks will experience "gaps" in the
interest rate sensitivities of their assets and liabilities, meaning that either
their interest bearing assets will be more sensitive to changes in market
interest rates than their interest-earning liabilities, or vice versa. Under
either circumstance, if market interest rates move contrary to the Banks'
position, the "gap" will work against the Banks and their earnings may be
negatively affected. See "Management's Discussion and Analysis of Results of
Operations and Financial Condition -- Interest Rate Sensitivity Analysis."
ECONOMIC CONDITIONS AND GEOGRAPHIC CONCENTRATION
Economic conditions beyond the Company's control may have a significant
impact on the Company's operations, including changes in net interest income.
Examples of such conditions include: (i) the strength of credit demand by
customers; (ii) the introduction and growth of new investment instruments and
transaction accounts by nonbank financial competitors; and (iii) changes in the
general levels of interest rates, including changes resulting from the monetary
activities of the Board of Governors of the Federal Reserve System (the "Federal
Reserve").
The Company's lending and deposit gathering activities are concentrated
primarily in selected communities in greater Chicago and Western Illinois.
Adverse changes in the economy of the Chicago metropolitan area and Western
Illinois would likely reduce the Company's growth rate and could otherwise have
a negative effect on its business, including the demand for new loans, the
ability of customers to repay loans and the value of the collateral pledged as
security therefor. See "Business -- Markets."
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<PAGE> 8
COMPETITION
The Company and the Banks face strong direct competition for deposits,
loans and other financial services from other commercial banks, thrifts, credit
unions, stockbrokers and finance divisions of auto and farm equipment companies.
Some of the competitors are local, while others are statewide or nationwide.
Several major multibank holding companies currently operate in the Chicago
metropolitan market. These financial institutions are generally much larger than
the Company and have greater access to capital and other resources. Some of the
financial institutions and financial services organizations with which the
Company competes are not subject to the same degree of regulation as that
imposed on bank holding companies, and federally insured, state-chartered banks
and national banks. As a result, such nonbank competitors have advantages over
the Company in providing certain services. See "Business -- Competition."
The banking industry is undergoing rapid technological changes with
frequent introductions of new technology-driven products and services. In
addition to better serving customers, the effective use of technology increases
efficiency and enables financial institutions to reduce costs. The Company's
future success will depend in part on its ability to address the needs of its
customers by using technology to provide products and services that will satisfy
customer demands for convenience as well as to create additional efficiencies in
the Company's operations. Many of the Company's competitors have substantially
greater resources to invest in technological improvements. There can be no
assurance that the Company will be able to effectively implement such products
and services or be successful in marketing such products and services to its
customers.
NO ASSURANCE OF EXPANSION OR ACQUISITIONS
The Company may expand its markets by establishing new banks or additional
branches. To the extent the Company undertakes expansion in this manner, the
Company is likely to experience the effects of higher operating expenses
relative to operating income, which may limit increases in short-term
profitability. The Company's ability to expand by establishing new banks or
branch offices is dependent on its ability to identify advantageous office
locations and generate new deposits and loans from those locations that will
create an acceptable level of net income for the Company. Though successful in
the past, there can be no assurance the Company will be able to successfully
establish additional banks or branches on a profitable basis in the future.
The Company's expansion strategy also may involve acquiring existing
institutions. Acquisition candidates may not be available on terms favorable to
the Company in the future. The Company must compete with a variety of
institutions and individuals for suitable acquisition candidates. Competition
from other institutions could affect the Company's ability to make acquisitions,
increase the price that the Company pays for certain acquisitions and increase
the Company's resources devoted to analyzing possible acquisitions. Furthermore,
acquisitions of financial institutions are subject to regulatory approval. There
can be no assurance that potential acquisitions that meet the Company's
investment criteria will be available on terms acceptable to the Company or that
sufficient financing for or the required regulatory approval of any proposed
acquisitions will be obtained. There can be no assurance that the Company will
be able to successfully operate and manage any business it does acquire so as to
establish, maintain or increase profitability. At present, the Company is not a
party to any understanding, letter of intent or binding agreement with respect
to the acquisition of the stock or assets of an existing entity. See
"Supervision and Regulation."
RELIANCE ON KEY PERSONNEL
The Company's success has been and will be greatly influenced by its
continuing ability to retain the services of its existing senior management and,
as it expands, to attract and retain qualified additional senior and middle
management. The unexpected loss of the services of any of the key management
personnel, or the inability to recruit and retain qualified personnel in the
future, could have an adverse effect on the Company's business and financial
results. Currently, the Company or the Banks are beneficiaries under key-man
life insurance policies on four key members of management each in the amount of
$1.0 million. See "Management."
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<PAGE> 9
DILUTION
Purchasers of shares of Common Stock offered hereby will suffer an
immediate and substantial dilution in net tangible book value per share of
Common Stock. The net tangible book value of the Company at December 31, 1997
was approximately $50.5 million or $5.05 per share of Common Stock. Based upon
an assumed initial public offering price of $14.00 per share, the dilution per
share to new stockholders would be $8.20. See "Dilution."
GOVERNMENT REGULATION
The Company and the Banks are subject to extensive federal and state
legislation, regulation and supervision. Recently enacted, proposed and future
legislation and regulations have had, will continue to have or may have
significant impact on the financial services industry. Some of the legislative
and regulatory changes may benefit the Company and the Banks; others, however,
may increase their costs of doing business and assist competitors of the Company
and the Banks. There can be no assurance that state or federal regulators will
not, in the future, impose further restriction or limits on the Company's
activities. See "Supervision and Regulation."
YEAR 2000 COMPLIANCE
A critical issue has emerged in the banking industry and for the economy
overall regarding how existing application software programs and operating
systems can accommodate the date value for the year 2000. Many existing
application software products in the marketplace were designed only to
accommodate a two digit date position which represents the year (e.g., '95' is
stored on the system and represents the year 1995). As a result, the year 1999
(i.e., '99') could be the maximum date value these systems will be able to
accurately process. Management is in the process of working with its software
vendors to assure that the Company is prepared for the year 2000. Management
does not anticipate that the Company will incur material operating expenses or
be required to invest heavily in computer system improvements to be year 2000
compliant. Nevertheless, the inability of the Company to successfully address
year 2000 issues could result in interruptions in the Company's business and
have a material adverse effect on the Company's results of operations.
RESTRICTIONS ON DIVIDENDS
The Company has previously paid regular quarterly dividends. Although the
Company anticipates paying dividends on a quarterly basis in the future, there
can be no assurance that the Company will be able to do so. The Company's source
of funds for dividend payment is the income earned by the Banks, a portion of
which is paid to the Company in the form of monthly or quarterly dividends. The
Banks are subject to certain restrictions on the amount of dividends they may
pay without regulatory approval. The Company is also subject to restrictions on
the payment of dividends under its agreements with its principal lender.
SUBSTANTIAL CONTROL BY DIRECTORS, EXECUTIVE OFFICERS AND OTHER AFFILIATED
STOCKHOLDERS
After the Offering, the directors of the Company (the "Directors"), the
executive officers of the Company and certain members of their families will
beneficially own approximately 41.8% of the outstanding shares of Common Stock
(41.2% if the Underwriters' over-allotment option is exercised in full) and are
likely to continue to exercise substantial control over the Company's affairs.
As a result, management of the Company will, if acting together, be able to
control most matters requiring approval by the stockholders of the Company,
including the election of directors. The voting control of management would also
have the effect of delaying or preventing a change in control of the Company
that was not approved by management. See "Principal Stockholders" and
"Description of Capital Stock."
LIMITED PUBLIC MARKET FOR COMMON STOCK
Prior to the Offering, there has been a limited public market for the
Common Stock in the over-the-counter market. See "Market for Common Stock and
Dividends." While the Company's Common Stock has
8
<PAGE> 10
been approved for quotation on The Nasdaq National Market(SM), there can be no
assurance that following the Offering an active public market for the Common
Stock will develop or be sustained. The Company and Howe Barnes Investments,
Inc. have had discussions with other investment firms regarding market making
activity and such firms indicated a willingness to act as market makers with
respect to the Common Stock. The initial public offering price of the Common
Stock will be determined by negotiations between the Company and the
Underwriters and may not be indicative of the market price of the Common Stock
after the Offering. See "Underwriting." Additionally, the stock market has from
time to time experienced extreme price and volume volatility. These fluctuations
may be unrelated to the operating performance of particular companies whose
shares are traded. Market fluctuations may adversely affect the market price of
the Common Stock. A variety of events, including regulatory developments,
quarterly variations in operating results, news announcements, trading volume,
general market trends and other factors could result in fluctuations in the
price of the Common Stock, and there can be no assurance that the market price
of the Common Stock will not decline below the initial public offering price.
CERTAIN ANTI-TAKEOVER PROVISIONS
Certain provisions of the Company's Restated Certificate of Incorporation,
as amended (the "Certificate of Incorporation"), the Company's By-Laws (the
"By-Laws"), and the Delaware General Corporation Law ("DGCL") may have the
effect of impeding the acquisition or control of the Company by means of a
tender offer, a proxy fight, open-market purchases or otherwise in a transaction
not approved by the Board of Directors of the Company (the "Board of
Directors"). Certain provisions will also render the removal of the current
Board of Directors or management of the Company more difficult. Among other
provisions, the Company's Certificate of Incorporation and By-Laws include
provisions authorizing "blank check" preferred stock, limiting the ability to
fill vacancies to the Board of Directors, requiring advance notice with respect
to stockholder proposals and director nominations, eliminating the power of
stockholders to act by written consent and requiring the vote of the holders of
66 2/3% of the outstanding shares to amend certain anti-takeover provisions in
the Certificate of Incorporation. The Board of Directors has also adopted,
subject to approval of stockholders at the Company's next annual or special
meeting of stockholders, provisions to be included in the By-Laws to implement a
classified Board of Directors with staggered terms. See "Description of Capital
Stock."
SHARES ELIGIBLE FOR FUTURE SALE
Following completion of the Offering, the Company will have 11,114,392
shares of Common Stock outstanding (11,279,392 if the Underwriters'
over-allotment option is exercised in full), assuming no exercise of any
outstanding options to purchase shares of Common Stock. The 1,100,000 shares
offered hereby (1,265,000 shares if the Underwriters' over-allotment option is
exercised in full) will be freely tradeable without restriction under the
Securities Act of 1933, as amended (the "Securities Act"), except for any shares
which are purchased by affiliates of the Company. The Directors and executive
officers of the Company, who own an aggregate of 4,637,858 shares, have agreed
not to offer, sell, or contract to sell any Common Stock for a period of 180
days after the date of the Company's issuance of the Common Stock sold in the
Offering without the prior written consent of the Representatives. See
"Underwriting." Upon expiration of this 180-day period however, all of these
shares (representing 41.8% of the total number of shares which will be
outstanding following completion of the Offering) could be resold by these and
other persons who are affiliates of the Company, subject to certain requirements
of Rule 144 under the Securities Act, including a limit on the number of shares
that may be sold in any three-month period equal to the greater of (a) 1% of the
shares outstanding (approximately 111,200 shares following completion of the
offering or approximately 112,800 if the over-allotment option is exercised in
full) or (b) the average weekly trading volume of shares of Common Stock for the
four-week period prior to the time of such resale. Sales of a significant number
of shares of Common Stock in the public market following the Offering, or the
perception that such sales could occur, could adversely affect the market price
of the Common Stock. See "Shares Eligible for Future Sale."
9
<PAGE> 11
USE OF PROCEEDS
The net proceeds to the Company from the sale of 1,100,000 shares of Common
Stock in the Offering, assuming an initial offering price of $14.00 per share
and after deducting the underwriting discount and estimated offering expenses,
are estimated to be $13,922,000 ($16,070,300 if the over-allotment option is
exercised in full).
The Company will use approximately $6.0 million of the net proceeds from
the Offering for capital contributions to the Banks to fund anticipated
continued growth and expansion and will apply the balance of the net proceeds
from the Offering to reduce borrowings under the Company's revolving line of
credit. The Company's existing revolving line of credit provides for a maximum
outstanding amount of $25.0 million and is due on January 30, 2000. Interest
accrues under the revolving line of credit, at the option of the Company, at the
90- or 180-day London Inter-Bank Offered Rate plus 95 basis points or the prime
rate less 25 basis points. As of January 31, 1998, the Company and its
subsidiary, Midwest One Mortgage Services, Inc., had borrowings of approximately
$16.4 million outstanding under the credit agreement that provides for the
Company's line of credit. See "Business -- Strategy." The timing of the
expenditure of such net proceeds will depend on the funding requirements of the
Company and the availability of other capital resources. Pending application of
the net proceeds as described above, the Company intends to invest such proceeds
in marketable securities. See "Management's Discussion and Analysis of Results
of Operations and Financial Condition -- Liquidity."
10
<PAGE> 12
MARKET FOR COMMON STOCK AND DIVIDENDS
LIMITED PRIOR TRADING MARKET
The Company's Common Stock trades occasionally in the over-the-counter
market and the bid price is quoted on the OTC Bulletin Board. Accordingly,
although a limited market for the Company's Common Stock exists, quotations of
the bid and ask prices may not be indicative of the fair value of the Common
Stock.
It is expected that the Common Stock will trade in the over-the-counter
market. The Common Stock has been approved for quotation on The Nasdaq National
Market System(SM) under the symbol "MBHI." There can be no assurance, however,
that an active or liquid trading market will develop in the Common Stock.
On February 2, 1998, the last reported bid price for the Common Stock as
quoted by Howe Barnes Investments, Inc. was $14.00. The table below sets forth
the high and low bid prices quoted for the Common Stock during the periods
indicated. Such over-the-counter market quotations reflect interdealer prices,
without retail markup, markdown or commission and may not necessarily represent
actual transactions.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
1995
First Quarter............................................. $ 6.31 $ 6.25
Second Quarter............................................ 6.50 6.31
Third Quarter............................................. 6.63 6.50
Fourth Quarter............................................ 6.75 6.63
1996
First Quarter............................................. $ 7.00 $ 6.75
Second Quarter............................................ 7.31 7.00
Third Quarter............................................. 7.50 7.31
Fourth Quarter............................................ 8.50 7.50
1997
First Quarter............................................. $ 9.00 $ 8.50
Second Quarter............................................ 9.50 9.00
Third Quarter............................................. 11.00 9.50
Fourth Quarter............................................ 14.00 10.25
</TABLE>
As of the close of business on December 31, 1997, the Company had
approximately 439 holders of record of its Common Stock.
11
<PAGE> 13
DIVIDENDS
The Company has paid quarterly cash dividends on the Common Stock since
1984. Since January 1, 1996, the Company has declared per share cash dividends
with respect to its Common Stock as follows:
<TABLE>
<S> <C>
1996
First Quarter............................................. $0.010
Second Quarter............................................ 0.010
Third Quarter............................................. 0.010
Fourth Quarter............................................ 0.025
1997
First Quarter............................................. $0.010
Second Quarter............................................ 0.010
Third Quarter............................................. 0.010
Fourth Quarter............................................ 0.025
</TABLE>
Holders of Common Stock are entitled to receive such dividends as may be
declared by the Board of Directors from time to time and paid out of funds
legally available therefor. Because the Company's consolidated net income
consists largely of net income of the Banks, the Company's ability to pay
dividends depends, in part, upon its receipt of dividends from the Banks. The
Banks' ability to pay dividends is regulated by banking statutes. See
"Supervision and Regulation -- Dividend Limitations." The declaration of
dividends by the Company is discretionary and will depend on the Company's
earnings and financial condition, regulatory limitations, tax considerations,
and other factors including limitations imposed by the terms of the Company's
revolving lines of credit. See "Management's Discussion and Analysis of Results
of Operations and Financial Condition--Liquidity." While the Board of Directors
expects to continue to declare dividends quarterly, there can be no assurance
that dividends will be paid in the future.
12
<PAGE> 14
CAPITALIZATION
The following table sets forth the indebtedness and capitalization of the
Company as of December 31, 1997, and as adjusted to reflect the issuance and
sale by the Company of 1,100,000 shares of Common Stock offered hereby at an
assumed initial public offering price of $14.00 per share and the application of
the estimated net proceeds as set forth under "Use of Proceeds."
<TABLE>
<CAPTION>
DECEMBER 31, 1997
---------------------
ACTUAL AS ADJUSTED
------ -----------
(IN THOUSANDS)
<S> <C> <C>
SHORT-TERM BORROWINGS:
Federal funds purchased and securities sold under
agreements to repurchase............................... $12,992 $12,992
FHLB advances............................................. 5,000 5,000
Lines of credit........................................... 16,350 8,428
------- -------
Total short-term borrowings............................ $34,342 $26,420
======= =======
LONG-TERM BORROWINGS........................................ $21,225 $21,225
STOCKHOLDERS' EQUITY:
Common stock, par value $0.01 per share, 17,000,000 shares
authorized; 10,114,392 shares issued; 10,014,392 shares
outstanding; 11,114,392 shares outstanding as adjusted
(1).................................................... $ 101 $ 111
Capital surplus........................................... 12,620 26,532
Retained earnings......................................... 40,026 40,026
Unrealized gain on securities............................. 675 675
Treasury stock, at cost................................... (462) (462)
------- -------
Total stockholders' equity............................. 52,960 66,882
------- -------
Total capitalization................................. $74,185 $88,107
======= =======
</TABLE>
- -------------------------
(1) Under the Company's 1996 Stock Option Plan, 500,000 shares of Common Stock
have been reserved for issuance. As of January 31, 1998, options to purchase
111,000 shares of Common Stock were outstanding under the plan, of which
options for 15,500 shares were exercisable.
13
<PAGE> 15
DILUTION
The net tangible book value of the Company as of December 31, 1997 was
$50.5 million or $5.05 per share of Common Stock. "Net tangible book value" is
defined as the total stockholders' equity of the Company less intangible assets.
"Net tangible book value per share" is determined by dividing the net tangible
book value of the Company by the number of outstanding shares of Common Stock.
After giving effect to the sale of the Common Stock offered hereby at an
assumed initial public offering price of $14.00 per share (after deducting the
underwriting discount and estimated offering expenses), the Company's pro forma
net tangible book value as of December 31, 1997 would have been $64.5 million or
$5.80 per share of Common Stock. This represents an immediate increase in net
tangible book value of $0.75 per share to the existing stockholders, and an
immediate dilution of $8.20 per share to investors who purchase shares of Common
Stock in the Offering. "Dilution" is the difference between the offering price
per share and the pro forma net tangible book value per share as adjusted for
the Offering.
The following table illustrates this per share dilution as of December 31,
1997, which is determined by subtracting the net tangible book value per share
after the Offering from the price paid by a new investor.
<TABLE>
<S> <C> <C>
Initial public offering price per share(1).................. $14.00
Net tangible book value per share as of December 31,
1997................................................... $5.05
Increase in net tangible book value per share attributable
to payments by new investors(2)........................ .75
-----
Pro forma net tangible book value per share after
Offering.................................................. 5.80
------
Dilution of net tangible book value per share to new
investors(3).............................................. $ 8.20
======
</TABLE>
- -------------------------
(1) Before deducting the underwriting discount and estimated offering expenses.
(2) After deducting the underwriting discount and estimated offering expenses.
(3) After giving effect to the exercise of outstanding options to purchase
111,000 shares of Common Stock, the pro forma net tangible book value per
share after the Offering would be $5.85 and the dilution of net tangible
book value per share to new investors would be $8.15.
The following table summarizes as of December 31, 1997, the number of
shares purchased from the Company, the total consideration paid and the average
price per share paid by: (i) the Directors, executive officers, and affiliated
persons of the Company who acquired such shares since December 31, 1992 and (ii)
investors in the Offering assuming an initial public offering price of $14.00
per share (before deducting the underwriting discount and estimated offering
expenses):
<TABLE>
<CAPTION>
NUMBER OF SHARES TOTAL AVERAGE PRICE
PURCHASED CONSIDERATION PER SHARE
---------------- ------------- -------------
<S> <C> <C> <C>
Directors, executive officers and affiliated
persons............................................ 115,318 $ 930,780 $ 8.07
New investors........................................ 1,100,000 15,400,000 14.00
</TABLE>
14
<PAGE> 16
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data of the Company shown below should
be read in conjunction with the consolidated financial statements, including the
related notes thereto, included elsewhere in this Prospectus and with
"Management's Discussion and Analysis of Results of Operations and Financial
Condition." The income statement data for each of the three years in the period
ended December 31, 1997 and the balance sheet data as of December 31, 1997 and
1996 have been derived from the audited financial statements appearing elsewhere
in this Prospectus. The selected income statement data for the years ended
December 31, 1994 and 1993 and the balance sheet data as of December 31, 1995,
1994 and 1993 have been derived from audited financial statements of the Company
not included herein.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Total interest income................................. $ 67,326 $ 57,298 $ 47,603 $ 36,406 $ 31,400
Total interest expense................................ 35,311 28,918 22,619 14,557 12,890
-------- -------- -------- -------- --------
Net interest income................................... 32,015 28,380 24,984 21,849 18,510
Provision for loan losses............................. 2,454 1,718 1,542 1,966 1,680
Other income (loss)................................... 5,439 4,325 3,427 (253) 4,383
Other expenses........................................ 20,952 19,082 17,686 17,219 15,217
-------- -------- -------- -------- --------
Income before income tax expense...................... 14,048 11,905 9,183 2,411 5,996
Income tax expense.................................... 5,537 4,597 3,151 509 1,989
-------- -------- -------- -------- --------
Net income............................................ $ 8,511 $ 7,308 $ 6,032 $ 1,902 $ 4,007
======== ======== ======== ======== ========
PER SHARE DATA:(1)
Net income............................................ $ 0.85 $ 0.73 $ 0.60 $ 0.19 $ 0.38
Cash dividends declared............................... 0.055 0.055 0.055 0.055 0.055
Book value at end of period........................... 5.29 4.29 3.83 2.55 3.20
Tangible book value at end of period.................. 5.05 4.03 3.55 2.26 2.89
SELECTED FINANCIAL RATIOS:
Return on average assets.............................. 1.01% 1.01% 1.02% 0.38% 0.89%
Return on average equity.............................. 18.36 19.36 18.65 6.24 12.33
Dividend payout ratio................................. 6.47 7.53 9.70 28.91 14.47
Average equity to average assets...................... 5.51 5.20 5.49 6.05 7.21
Net interest margin (tax equivalent).................. 4.11 4.27 4.67 4.83 4.74
Allowance for loan losses to total loans at the end of
period.............................................. 1.26 1.27 1.28 1.31 1.23
Nonperforming loans to total loans at the end of
period(2)........................................... 0.66 1.03 0.60 1.08 1.08
Net loans charged off (recoveries) to average total
loans............................................... 0.36 0.26 0.28 0.46 0.50
Tier 1 risk-based capital............................. 9.60 9.57 7.64 9.27 8.94
Total risk-based capital.............................. 10.78 10.76 8.66 10.44 9.92
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets.......................................... $908,642 $786,070 $660,315 $533,157 $468,395
Total earning assets.................................. 855,675 737,338 611,597 480,171 427,393
Average assets(3)..................................... 841,707 725,420 589,102 503,834 450,927
Total loans........................................... 488,099 420,655 359,639 304,242 268,360
Allowance for loan losses............................. 6,143 5,342 4,603 3,979 3,309
Total deposits........................................ 794,362 701,205 590,671 482,892 408,395
Borrowings............................................ 42,575 27,495 16,077 13,490 10,843
Shareholders' equity.................................. 52,960 42,962 38,387 26,605 33,552
Tangible book value................................... 50,536 40,344 35,554 23,557 30,329
</TABLE>
- -------------------------
(1) All per share amounts have been adjusted to reflect two-for-one stock splits
effective on December 17, 1997 and in April 1996.
(2) Includes total nonaccrual, impaired and all other loans 90 days past due.
(3) Average for the year ended.
15
<PAGE> 17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The following discussion and analysis is intended as a review of
significant factors affecting the financial condition and results of operations
of the Company for the periods indicated. The discussion should be read in
conjunction with the Consolidated Financial Statements and the Notes thereto and
the Selected Consolidated Financial Data presented herein. In addition to
historical information, the following Management's Discussion and Analysis of
Results of Operations and Financial Condition contains forward-looking
statements that involve risks and uncertainties. The Company's actual results
could differ significantly from those anticipated in these forward-looking
statements as a result of certain factors, including those discussed in "Risk
Factors" and elsewhere in this Prospectus.
OVERVIEW
The Company's principal business is conducted by the Banks and consists of
full service community-based financial services. The profitability of the
Company's operations depends primarily on its net interest income, provision for
loan losses, other income and other expenses. Net interest income is the
difference between the income the Company receives on its loan and investment
portfolios and its cost of funds, which consists of interest paid on deposits
and borrowings. The provision for loan losses reflects the cost of credit risk
in the Company's loan portfolio. Other income consists of service charges on
deposit accounts, securities gains, gains on sale of loans and fees and
commissions. Other expenses include salaries and employee benefits as well as
occupancy and equipment expenses, and other noninterest expenses.
Net interest income is dependent on the amounts and yields of
interest-earning assets as compared to the amounts of and rates on
interest-bearing liabilities. Net interest income is sensitive to changes in
market rates of interest and the Company's asset/liability management procedures
in coping with such changes. The provision for loan losses is dependent on
increases in the loan portfolio and management's assessment of the
collectibility of the loan portfolio under current economic conditions. Other
expenses are heavily influenced by the growth of operations, with additional
employees necessary to staff and open new banking centers and marketing expenses
necessary to promote them. Growth in the number of account relationships
directly affects such expenses as data processing costs, supplies, postage and
other miscellaneous expenses.
The Company has achieved significant profitable growth within its markets
measured from the end of 1992. In each of the last five years, the Company has
generated high double-digit growth rates in earning assets and total deposits.
The Company has also sustained record levels of net income for each of the last
five years, with the exception of 1994. In 1994, net income was negatively
impacted by losses realized by the Company upon the mark-to-market adjustment of
certain securities in the Company's trading account. Growth rates for the years
ended December 31, 1997 and 1996, and the average annual rate for the five-year
period ended December 31, 1997, are included below for total assets, earning
assets, total deposits and net income:
<TABLE>
<CAPTION>
YEAR ENDED AVERAGE ANNUAL RATE
DECEMBER 31, OVER THE FIVE-YEAR
------------- PERIOD ENDED
1997 1996 DECEMBER 31, 1997
---- ---- -------------------
<S> <C> <C> <C>
Total assets.................................. 15.6% 19.0% 28.7%
Earning assets................................ 16.0% 20.2% 30.6%
Total deposits................................ 13.3% 18.7% 26.9%
Net income.................................... 16.5% 21.2% 37.6%
</TABLE>
The increase in total assets, earning assets and total deposits over the
five-year period ended December 31, 1997 was due primarily to growth both in
existing markets and in new markets as a result of the opening of new banking
centers and, to a lesser extent, bank acquisitions. The Company believes that
its recent growth is a result of its strategy to become a low-cost provider of
premium rate deposits and competitively priced loan products within its core
markets.
16
<PAGE> 18
CONSOLIDATED RESULTS OF OPERATIONS
Total assets increased $122.6 million or 15.6% to $908.6 million as of
December 31, 1997 from $786.1 million as of December 31, 1996. Net income
increased $1.2 million or 16.5% to $8.5 million for the year ended December 31,
1997 compared to $7.3 million for the year ended December 31, 1996. The return
on average assets was 1.01% in 1997 and 1996 while the return on average equity
decreased slightly to 18.36% in 1997 from 19.36% in 1996.
Total assets increased $125.8 million or 19.0% to $786.1 million as of
December 31, 1996 from $660.3 million as of December 31, 1995. Net income
increased $1.3 million or 21.2% to $7.3 million for the year ended December 31,
1996 compared to the year ended December 31, 1995. The return on average assets
was 1.02% with a return on average equity of 18.65% for 1995.
1997 COMPARED TO 1996
Net Interest Income. Net interest income on a tax-equivalent basis
increased $3.7 million or 12.8% to $32.6 million in 1997 from $28.9 million in
1996. Interest income on total earning assets increased $10.1 million in 1997
from 1996. Interest income on loans increased $7.4 million in 1997 from 1996 due
to a $79.3 million increase in average loans outstanding, offsetting a slight
decrease in average loan rates from 9.60% to 9.56%. Interest expense on
interest-bearing liabilities increased $6.4 million in 1997 from 1996, as a
result of a $5.8 million increase in interest expense on deposits and a $572,000
increase in interest expense on other borrowings. The increase in interest
expense was due primarily to a combination of a $92.7 million increase in
average deposits and an increase in the average rate paid on deposits to 4.92%
from 4.70%. The increase in interest expense on other borrowings was due
primarily to a $15.4 million increase in average FHLB advances and a $1.1
million increase in average loans under existing lines of credit. The increase
was offset, in part, by a $7.1 million decrease in the average amount of Federal
funds and repurchase agreements, and a decrease in overall interest rates on
borrowings from 6.29% in 1996 to 6.24% in 1997. The net interest margin on a tax
equivalent basis decreased to 4.11% in 1997 from 4.27% for 1996.
Provision for Loan Losses. The provision for loan losses increased $736,000
or 42.8% to $2.5 million in 1997 from $1.7 million in 1996. The increase in the
provision for loan losses was due to the overall growth in loans. As of December
31, 1997, the allowance for loan losses totaled $6.1 million, or 1.26% of total
loans, and was equal to 191% of nonperforming loans. The amount of the provision
and allowance for loan losses are influenced by current economic conditions,
actual loss experience, industry trends and management's assessment of current
collection risks within its loan portfolio.
Other Income. The Company's total other income increased $1.1 million or
25.8% to $5.4 million in 1997 from $4.3 million in 1996. Other income as a
percentage of average assets was 0.65% for the year ended 1997 compared to 0.60%
for the year ended 1996. The $1.1 million increase in total other income in 1997
from 1996 was primarily due to a $342,000 increase in service charges on deposit
accounts due to increased volume and pricing, a $548,000 increase in gains from
securities transactions, a $201,000 increase in mortgage origination fees, and a
$54,000 increase in trust service fees.
Other Expenses. The Company's total other expenses increased $1.9 million
or 9.8% to $21.0 million in 1997 from $19.1 million in 1996. Other expenses as a
percentage of average assets were 2.49% for the year ended 1997 compared to
2.63% for the year ended 1996. Net overhead expenses were 1.84% and 2.03% as a
percentage of average assets in 1997 and 1996, respectively. The increase in
total other expenses in 1997 was primarily due to the following factors.
Salaries increased $1.0 million in 1997 compared to 1996 due to additional
staffing to support new banking centers in Northwest Chicago, Downers Grove and
Galesburg. Other expenses also rose $837,000 as a result of increases in legal
costs related to loan collection and workout activities, occupancy and equipment
expense due to depreciation for new banking centers, telephone costs to support
new banking centers, employee training expenses and general increases in other
categories.
Federal and State Income Tax. The Company's consolidated income tax rate
varies from statutory rates principally due to interest income from tax-exempt
securities and loans. The Company recorded income tax expense of $5.5 million in
1997 compared to $4.6 million in 1996 due to changes in income.
17
<PAGE> 19
1996 COMPARED TO 1995
Net Interest Income. Net interest income on a tax-equivalent basis
increased $3.5 million or 13.6% in 1996 from $25.4 million in 1995. Interest
income on total earning assets increased $9.8 million in 1996 from 1995.
Interest income on loans increased $3.8 million in 1996 from 1995 due to a $52.3
million increase in average loans outstanding while average loan rates decreased
from 9.98% to 9.60%. The most significant portion of the increase in interest
income was due to an $83.8 million increase in securities and an improvement in
average yields to 7.19% in 1996 from 7.10% in 1995. Interest expense on
interest-bearing liabilities increased $6.3 million in 1996 from 1995 as a
result of a $5.9 million increase in interest expense on deposits and a $414,000
increase in interest expense on other borrowings. The increase in interest
expense on deposits was due to a combination of a $116.4 million increase in
average deposits and an increase in the average rate paid to 4.70% from 4.61%.
The increase in the average rate on deposits was due to the increasing market
rates experienced over the period plus premium rate certificate of deposit
promotions to introduce the Company's new banking centers in Northwest Chicago,
Downers Grove and Galesburg. The $414,000 increase in interest expense on other
borrowings from 1995 to 1996 is attributable to an increase of $8.1 million for
a combination of Federal funds purchased, Federal Home Loan Bank (FHLB) advances
and bank borrowings to fund loan and investment portfolio growth. The average
rate on other borrowings was 6.29% in 1996 compared to 6.65% in 1995. Net
interest margin decreased 0.40% to 4.27% in 1996 from 4.67% in 1995 as a result
of the above factors.
Provision for Loan Losses. The provision for loan losses increased $176,000
or 11.4% to $1.7 million in 1996 from $1.5 million in 1995. The increase in the
provision for loan losses was due to the overall growth in loans.
Other Income. The Company's total other income increased $898,000 or 26.2%
in 1996 from $3.4 million in 1995. Other income as a percentage of average
assets was 0.60% for the year ended 1996 compared to 0.58% for the year ended
1995. The $898,000 increase in 1996 from 1995 is primarily attributable to a
$303,000 increase in service charges on deposit accounts, a $927,000 increase in
gains on securities transactions, a $373,000 decrease in net trading account
profits, a $101,000 increase in trust service fees and a $108,000 decrease in
mortgage origination fees.
Other Expenses. The Company's total other expenses increased $1.4 million
to $19.1 million in 1996 from $17.7 million in 1995. Other expenses as a
percentage of average assets were 2.63% for the year ended 1996 compared to
3.00% for the year ended 1995. Net overhead expenses were 2.03% and 2.42% as a
percentage of average assets in 1996 and 1995, respectively. The increase of
$1.4 million in total other expenses in 1996 from 1995 was attributable to
increases in salaries and employee benefits, occupancy costs, and marketing and
promotion expenses related to new banking centers, offset in part by a $541,000
decrease in FDIC insurance premiums.
Federal and State Income Tax. The Company recorded income tax expense of
$4.6 million in 1996, compared to $3.2 million in 1995, reflecting changes in
income and payments for state taxes resulting from the settlement of a dispute
without penalty with the Illinois Department of Revenue concerning income on
certain securities.
1995 COMPARED TO 1994
Net Interest Income. Net interest income on a tax-equivalent basis in 1995
increased $3.2 million or 14.4% in 1995 from $22.2 million in 1994. Interest
income on total earning assets increased $11.3 million in 1995 from 1994.
Interest income on loans increased $7.3 million in 1995 from 1994 primarily due
to a combination of a $44.4 million increase in loans and an increase in the
average yield to 9.98% from 8.99%. Interest income on investment securities
increased $3.7 million in 1995 from 1994 with an increase in average yield to
7.10% from 6.40%. Interest expense on interest-bearing deposits increased $7.7
million in 1995 from 1994 due to growth of $77.2 million in deposits and an
increase in the average rate paid to 4.61% from 3.51%.
18
<PAGE> 20
Interest on securities sold under agreements to repurchase and funds purchased
increased $74,000 due to an increase in average rates to 5.86% in 1995 from
4.05% in 1994, offset in part by a $2.3 million decrease in the average balance.
Interest expense on short-term bank borrowings increased $287,000 in 1995 from
1994 attributable to an increase of $3.9 million in the average balance of those
borrowings. Net interest margin decreased 0.16% to 4.67% in 1995 from 4.83% in
1994 as a result of the above factors.
Provision for Loan Losses. The provision for loan losses decreased $424,000
or 21.6% to $1.5 million in 1995 from $2.0 million in 1994. The decrease in the
provision for loan losses was due to a decrease in nonperforming and impaired
loans, offset in part by a growth in loans.
Other Income. The Company's total other income increased $3.7 million to
$3.2 million in 1995 from a loss of $253,000 in 1994. Other income as a
percentage of average assets was 0.58% for the year ended 1995 compared to
(0.05)% for the year ended 1994. The $3.7 million increase in 1995 compared to
1994 is primarily attributable to a $132,000 increase in losses on securities
transactions, a $3.4 million increase in net trading account profits and a
$382,000 increase in mortgage origination fees. Other income in 1994 was
negatively impacted by losses realized by the Company upon the mark-to-market
adjustment of certain securities held in the Company's trading account.
Other Expenses. The Company's total other expenses increased $467,000 to
$17.6 million in 1995 from $17.2 million in 1994. Other expenses as a percentage
of average assets were 3.00% for the year ended 1995 compared to 3.42% for the
year ended 1994. Net overhead expenses were 2.42% and 3.47% as a percent of
average assets in 1995 and 1994, respectively. The $467,000 increase in total
other expenses in 1995 compared to 1994 was attributable to increased staffing
and occupancy costs due to banking center expansion and the establishment of two
new subsidiaries (Midwest One Mortgage Services, Inc. and Midwest Trust
Services, Inc.), offset in part by a reduction in FDIC insurance fees.
Federal and State Income Tax. The Company recorded income tax expenses of
$3.2 million in 1995 compared to $509,000 in 1994 due to increased income.
19
<PAGE> 21
INTEREST-EARNING ASSETS AND INTEREST-BEARING LIABILITIES
The following table sets forth the average balances, net interest income
and expense and average yields and rates for the Company's interest-earning
assets and interest-bearing liabilities for the indicated periods on a
tax-equivalent basis assuming a 34% tax rate.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------------------------
1997 1996 1995
----------------------------- ----------------------------- -----------------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
------- -------- ------- ------- -------- ------- ------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Federal funds sold............. $ 8,014 $ 444 5.54% $ 3,242 $ 177 5.46% $ 6,747 $ 400 5.93%
Securities:
Taxable...................... 300,684 21,792 7.25 271,878 19,575 7.20 189,555 13,535 7.14
Exempt from federal income
taxes (1).................. 22,496 1,579 7.02 20,078 1,423 7.09 18,642 1,238 6.64
-------- ------- -------- ------- -------- -------
Total securities........... 323,180 23,371 7.23 291,956 20,998 7.19 208,197 14,773 7.10
-------- ------- -------- ------- -------- -------
Loans:
Commercial loans............. 129,678 12,125 9.35 109,907 10,331 9.40 97,608 9,985 10.23
Commercial real estate
loans...................... 205,852 20,368 9.89 152,714 15,183 9.94 132,131 13,402 10.14
Agricultural loans........... 19,292 1,739 9.01 18,695 1,712 9.16 14,578 1,388 9.52
Consumer real estate loans... 86,206 7,732 8.97 78,602 7,189 9.15 67,383 6,337 9.40
Consumer installment loans... 19,504 2,084 10.68 21,345 2,192 10.27 17,332 1,739 10.03
-------- ------- -------- ------- -------- -------
Total loans................ 460,532 44,048 9.56 381,263 36,607 9.60 329,032 32,851 9.98
-------- ------- -------- ------- -------- -------
Total interest-earning
assets................ $791,726 $67,863 8.57 $676,461 $57,782 8.54 $543,976 $48,024 8.83
======== ======= ======== ======= ======== =======
INTEREST-BEARING LIABILITIES:
Deposits:
Interest-bearing demand
deposits................... $ 70,047 $ 2,108 3.01 $ 63,169 $ 1,720 2.72 $ 53,699 $ 1,428 2.66
Money-market demand
accounts/savings
accounts................. 199,364 7,444 3.73 183,005 6,910 3.78 164,284 6,433 3.92
Time deposits of less than
$100,000................. 315,763 18,589 5.89 269,538 15,162 5.63 195,848 10,736 5.48
Time deposits of $100,000
or more.................. 47,714 2,857 5.99 35,454 2,009 5.67 28,095 1,649 5.87
Public funds............... 29,667 1,619 5.46 18,663 995 5.33 11,530 665 5.77
-------- ------- -------- ------- -------- -------
Total interest-bearing
deposits.............. 662,555 32,617 4.92 569,829 26,796 4.70 453,456 20,911 4.61
-------- ------- -------- ------- -------- -------
Borrowings:
Federal funds and repurchase
agreements................. 7,821 443 5.66 14,912 820 5.50 9,931 571 5.75
FHLB advances................ 18,836 1,085 5.76 3,378 211 6.25 -- -- 0.00
Notes and mortgages.......... 16,514 1,166 7.06 15,439 1,091 7.07 15,741 1,137 7.22
-------- ------- -------- ------- -------- -------
Total borrowings........... 43,171 2,694 6.24 33,729 2,122 6.29 25,672 1,708 6.65
-------- ------- -------- ------- -------- -------
Total interest-bearing
liabilities........... $705,726 $35,311 5.00 $603,558 $28,918 4.79 $479,128 $22,619 4.72
======== ======= ======== ======= ======== =======
Net interest income (tax
equivalent).................. $32,552 $28,864 $25,405
======= ======= =======
Net interest margin............ 4.11% 4.27% 4.67%
</TABLE>
- -------------------------
(1) Adjusted for 34% tax rate.
CHANGES IN INTEREST INCOME AND EXPENSE
The changes in net interest income from period to period are reflective of
changes in the rate environment, changes in the composition of assets and
liabilities as to type and maturity (and the inherent rate
20
<PAGE> 22
differences related thereto), and volume changes. Later sections of this
discussion and analysis address the changes in maturity composition of loans and
investments, and in the asset and liability repricing gaps associated with
interest rate risk, all of which contribute to changes in net interest margin.
The following table sets forth an analysis of volume and rate changes in
interest income and interest expense of the Company's average interest-earning
assets and average interest-bearing liabilities for the indicated periods on a
tax-equivalent basis assuming a 34% tax rate. The table distinguishes between
the changes related to average outstanding balances (changes in volume holding
the initial interest rate constant) and the changes related to average interest
rates (changes in average rate holding the initial outstanding balance
constant). The change in interest due to both volume and rate has been allocated
to volume and rate changes in proportion to the relationship of the absolute
dollar amounts of the change in each.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------------------
1997 COMPARED TO 1996 1996 COMPARED TO 1995
------------------------ --------------------------
CHANGE DUE TO CHANGE DUE TO
------------------------ --------------------------
NET VOLUME RATE NET VOLUME RATE
--- ------ ---- --- ------ ----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Federal funds sold........................ $ 267 $ 264 $ 3 $ (223) $ (194) $ (29)
Securities taxable........................ 2,217 1,905 312 6,040 5,926 114
Securities exempt from federal income
taxes................................... 156 170 (14) 185 99 86
Commercial loans.......................... 1,794 1,849 (55) 346 1,196 (850)
Commercial real estate loans.............. 5,185 5,258 (73) 1,781 2,051 (270)
Agricultural loans........................ 27 54 (27) 324 379 (55)
Consumer real estate loans................ 543 684 (141) 852 1,030 (178)
Consumer installment loans................ (108) (194) 86 453 411 42
------- ------ ----- ------ ------- -------
Total interest-earning assets........ $10,081 $9,990 $ 91 $9,758 $10,898 $(1,140)
======= ====== ===== ====== ======= =======
INTEREST-BEARING LIABILITIES:
Interest-bearing demand deposits.......... $ 388 $ 197 $ 191 $ 292 $ 257 $ 35
Money market demand accounts/savings
accounts................................ 534 612 (78) 477 713 (236)
Time deposits of less than $100,000....... 3,427 2,695 732 4,426 4,036 390
Time deposits of $100,000 or more......... 848 729 119 360 419 (59)
Public funds.............................. 624 600 24 330 384 (54)
Federal funds and repurchase agreements... (377) (401) 24 249 275 (26)
FHLB advances............................. 874 892 (18) 211 211 --
Notes and mortgages....................... 75 76 (1) (46) (22) (24)
------- ------ ----- ------ ------- -------
Total interest-bearing liabilities... $ 6,393 $5,400 $ 993 $6,299 $ 6,273 $ 26
======= ====== ===== ====== ======= =======
Net interest.............................. $ 3,688 $4,590 $(902) $3,459 $ 4,625 $(1,166)
======= ====== ===== ====== ======= =======
</TABLE>
21
<PAGE> 23
OTHER INCOME AND EXPENSES
The following table sets forth the Company's other income for the indicated
periods.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
------------------------------
1997 1996 1995
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Other Income:
Service charges on deposit accounts....................... $2,782 $2,440 $2,137
Gains (losses) on security transactions................... 729 181 (746)
Net trading account profits............................... 159 174 547
Mortgage loan origination fees............................ 564 363 471
Trust income.............................................. 579 525 424
Other income.............................................. 626 642 594
------ ------ ------
Total other income..................................... $5,439 $4,325 $3,427
====== ====== ======
</TABLE>
The following table sets forth the Company's other expenses for the
indicated periods.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------
1997 1996 1995
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Other Expenses:
Salaries and employee benefits............................ $12,213 $11,180 $ 9,961
Occupancy and equipment expense........................... 3,164 3,151 2,957
Professional services..................................... 1,124 866 316
Marketing................................................. 721 713 694
Office supplies........................................... 530 474 408
FDIC insurance............................................ 86 8 549
Postage and freight....................................... 571 515 451
Other expenses............................................ 2,543 2,175 2,350
------- ------- -------
Total other expenses................................... $20,952 $19,082 $17,686
======= ======= =======
</TABLE>
FINANCIAL CONDITION
Loans
The Company's loan portfolio largely reflects the profile of the
communities in which it operates. The following table sets forth the composition
of the Company's loan portfolio as of the indicated dates.
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Commercial................................ $140,815 $118,475 $107,590 $ 84,421 $ 78,296
Commercial real estate.................. 212,184 180,519 144,346 127,117 96,405
Agricultural............................ 24,065 20,079 15,875 15,404 13,061
Consumer real estate.................... 93,338 81,007 73,336 61,013 66,007
Consumer installment.................... 18,811 21,542 20,051 17,441 15,405
-------- -------- -------- -------- --------
Total loans, gross................... 489,213 421,622 361,198 305,396 269,174
Unearned discount....................... (1,114) (967) (1,559) (1,154) (814)
-------- -------- -------- -------- --------
Total loans.......................... 488,099 420,655 359,639 304,242 268,360
Allowance for loan losses............... (6,143) (5,342) (4,603) (3,979) (3,309)
-------- -------- -------- -------- --------
Net loans............................ $481,956 $415,313 $355,036 $300,263 $265,051
======== ======== ======== ======== ========
Loans held for sale:
Consumer real estate.................... $ 6,627 $ 1,555 $ 1,137 $ 290 --
</TABLE>
22
<PAGE> 24
Total loans increased $67.4 million to $488.1 million as of December 31,
1997 from $420.7 million as of December 31, 1996. Total loans increased $61.0
million to $420.7 million as of December 31, 1996 from $359.6 million as of
December 31, 1995. The increase in total loans in each year was principally due
to increased commercial, commercial real estate loans and consumer real estate
loans.
Commercial loans increased $22.3 million to $140.8 million as of December
31, 1997 from $118.5 million as of December 31, 1996. Commercial loans increased
$10.9 million to $118.5 million as of December 31, 1996 from $107.6 million as
of December 31, 1995. The increases during these periods reflect increased
demand due to a stronger economy, increased working capital and equipment
requirements by existing borrowers and new customer relationships.
Commercial real estate loans increased $31.7 million to $212.2 million as
of December 31, 1997 from $180.5 million as of December 31, 1996. Commercial
real estate loans increased $36.2 million as of December 31, 1996 from $144.3
million as of December 31, 1995. These increases in commercial real estate loans
reflect the stronger economy, the overall improvement in the commercial real
estate market, increased commitments with existing borrowers and the initial
market penetration and market share growth of new banking centers.
Agricultural loans increased $4.0 million to $24.1 million as of December
31, 1997 from $20.1 million as of December 31, 1996. Agricultural loans
increased $4.2 million as of December 31, 1996 from $15.9 million as of December
31, 1995. These increases in agricultural loans reflect increased market share
in West Central Illinois.
Consumer real estate loans increased $12.3 million to $93.3 million as of
December 31, 1997 from $81.0 million as of December 31, 1996. Consumer real
estate loans increased $7.7 million to $81.0 million as of December 31, 1996
from $73.3 million as of December 31, 1995. The Company originates medium-term
fixed-rate and adjustable rate residential loans for its own portfolio. Most
long-term fixed-rate residential loan requests are referred to Midwest One
Mortgage Services, Inc. for sale into the secondary market, with servicing
rights released. A small percentage of long-term fixed-rate consumer real estate
loans are held by the Banks. See "Business -- Products and Services." The
increase in consumer real estate loans has been limited since 1995, and
represented a decreasing percentage of total loans. Consumer real estate loans
were 19.1%, 19.2% and 20.3% of total loans as of December 31, 1997, 1996 and
1995, respectively.
Consumer installment loans decreased $2.7 million to $18.8 million as of
December 31, 1997 from $21.5 million as of December 31, 1996. Consumer loans
increased $1.5 million and $2.6 million in 1996 and 1995, respectively. The
decrease in 1997 was due to the runoff of other installment loans, including
indirect auto loans by The National Bank of Monmouth. Management discontinued
indirect auto loan programs beginning in 1993, and the Company presently only
considers auto loans originated by a dealer if the borrower is a customer of one
of the Banks. As of December 31, 1997 and 1996, the Company's consumer loan
portfolio included $4.4 million and $7.7 million, respectively, of indirect auto
loans.
Although the risk of nonpayment for any reason exists with respect to all
loans, certain other more specific risks are associated with each type of loan.
The primary risks associated with commercial loans are quality of the borrower's
management and the impact of local economic factors. Risks associated with real
estate loans include concentrations of loans in a loan type such as commercial
or residential and fluctuating land values. Consumer loans also have risks
associated with concentrations of loans in a single type of loan. Consumer loans
additionally face the risk of a borrower's unemployment as a result of
deteriorating economic conditions.
The Company attempts to balance the types of loans in its portfolio with
the objective of reducing risk. While the Company has a sizable portion of its
loan portfolio secured by real estate in one form or another, a significant
portion of those loans have fixed or adjustable or floating interest rates. The
Company believes that its philosophy in extending credit is conservative in
nature, with a presumption that most credit should have both a primary and a
secondary source of repayment, and that the primary source should generally be
supported by operating cash flows, while the secondary source should generally
be disposition of collateral. The Company engages in very little unsecured
lending, and generally requires personal guarantees of
23
<PAGE> 25
principals for business obligations. The Company practices a system of
concurrence in the approval of commercial credit whereby the documented
concurrence of an officer's credit committee (or approval by the board or a
board committee, where applicable) is obtained in addition to that of the
recommending officer. This system is intended to assure that commercial credit
is subjected to an independent objective review on at least two different
levels.
Loan Maturities
The following table sets forth the remaining maturities, based upon
contractual dates, for selected loan categories as of December 31, 1997.
<TABLE>
<CAPTION>
1-5 YEARS OVER 5 YEARS
ONE YEAR -------------------- -------------------
OR LESS FIXED VARIABLE FIXED VARIABLE TOTAL
-------- ----- -------- ----- -------- -----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Commercial......................... $ 97,106 $ 14,050 $25,242 $ 2,023 $ 2,394 $140,815
Commercial real estate............. 96,724 67,534 33,636 5,743 8,547 212,184
Agricultural....................... 10,431 2,146 2,851 2,905 5,732 24,065
Consumer real estate............... 25,549 32,542 15,125 12,699 7,423 93,338
Consumer installment............... 8,767 9,524 -- 520 -- 18,811
-------- -------- ------- ------- ------- --------
Total loans, gross............... 238,577 125,796 76,854 23,890 24,096 489,213
Unearned discount.................. (1,114) -- -- -- -- (1,114)
-------- -------- ------- ------- ------- --------
Total loans...................... $237,463 $125,796 $76,854 $23,890 $24,096 $488,099
======== ======== ======= ======= ======= ========
</TABLE>
Nonperforming Loans
The Company discontinues the accrual of interest income on any loan when,
in the opinion of management, there is reasonable doubt as to the timely
collectibility of interest or principal. On a case-by-case basis, the Company
discontinues the accrual of interest on a loan once it becomes 90 days past due.
All accrued and uncollected interest is charged against income at the time a
loan is placed on nonaccrual status. Nonaccrual loans are returned to an accrual
status when, in the opinion of management, the financial position of the
borrower indicates that there is no longer any reasonable doubt as to the timely
payment of principal and interest. There are no potential problem loans as to
which management has serious doubts as to collectibility that are not included
in the following table.
The following table sets forth information on the Company's nonperforming
loans and other assets as of the indicated dates.
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Nonaccrual and impaired loans not accruing.......... $1,400 $2,375 $1,138 $2,441 $2,071
Impaired and other loans 90 days past due and
accruing....................................... 1,823 1,972 1,015 835 827
------ ------ ------ ------ ------
Total nonperforming loans...................... 3,223 4,347 2,153 3,276 2,898
Other real estate................................. 789 925 937 807 1,395
------ ------ ------ ------ ------
Total nonperforming assets..................... $4,012 $5,272 $3,090 $4,083 $4,293
====== ====== ====== ====== ======
Total nonperforming loans to total loans.......... 0.66% 1.03% 0.60% 1.08% 1.08%
Total nonperforming assets to total loans and
other real estate.............................. 0.82 1.25 0.86 1.34 1.59
Total nonperforming assets to total assets........ 0.44 0.67 0.47 0.77 0.92
</TABLE>
For 1997, gross interest income that would have been recorded if the
nonaccrual loans had been current and outstanding throughout the period was
approximately $208,000. During 1997, the Company recognized interest income on
such nonaccrual loans of $206,000.
24
<PAGE> 26
Nonperforming assets have decreased as a percentage of total assets during
the past five years. Nonperforming assets were 0.44% of total assets as of
December 31, 1997 compared to 0.67% of total assets as of December 31, 1996 and
0.92% as of December 31, 1993. Despite the significant growth in loans during
the period, management believes that the improvement in the level of
nonperforming assets is due to an increase in charge-offs in 1997, increased
collection efforts and improved economic conditions.
Analysis of Allowance for Loan Losses
An allowance for loan losses has been established to provide for those
loans that may not be repaid in their entirety. The allowance for loan losses is
maintained at a level considered by management to be adequate to provide for
potential loan losses. The allowance is increased by provisions charged to
earnings and is reduced by charge-offs, net of recoveries. The provision for
loan losses is based on past loan loss experience and management's evaluation of
the loan portfolio under current economic conditions. Loans are charged to the
allowance for loan losses when, and to the extent, they are deemed by management
to be uncollectible. The allowance for loan losses is composed of allocations
for specific loans and an unallocated portion for all other loans.
The following table sets forth loans charged off and recovered by type of
loan and an analysis of the allowance for loan losses for the indicated periods.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Average total loans....................... $460,532 $381,263 $329,032 $284,658 $262,318
======== ======== ======== ======== ========
Total loans at end of period.............. $488,099 $420,655 $359,639 $304,242 $268,360
======== ======== ======== ======== ========
Total nonperforming and impaired loans.... $ 3,223 $ 4,347 $ 2,153 $ 3,276 $ 2,898
======== ======== ======== ======== ========
Allowance at beginning of year............ 5,342 4,603 3,979 3,309 2,414
Allowance for acquired bank............... -- -- -- -- 521
Charge-offs:
Commercial loans........................ 1,547 950 633 1,235 1,299
Consumer real estate loans.............. 53 19 15 71 229
Commercial real estate.................. 51 169 271 40 --
Agricultural loans...................... -- -- 11 -- 19
Consumer installment loans.............. 207 160 145 215 179
-------- -------- -------- -------- --------
Total charge-offs.................... 1,858 1,298 1,075 1,561 1,726
-------- -------- -------- -------- --------
Recoveries:
Commercial loans........................ 100 95 64 188 27
Consumer real estate loans.............. 2 33 31 6 18
Commercial real estate loans............ 10 107 8 20 --
Agricultural loans...................... 30 32 11 -- 306
Consumer installment loans.............. 63 52 43 51 69
-------- -------- -------- -------- --------
Total recoveries..................... 205 319 157 265 420
-------- -------- -------- -------- --------
Net charge-offs (recoveries).............. 1,653 979 918 1,296 1,306
-------- -------- -------- -------- --------
Provision for loan losses................. 2,454 1,718 1,542 1,966 1,680
-------- -------- -------- -------- --------
Allowance at ending of the period......... $ 6,143 $ 5,342 $ 4,603 $ 3,979 $ 3,309
======== ======== ======== ======== ========
Net charge-off (recoveries) to average
total loans............................. 0.36% 0.26% 0.28% 0.46% 0.50%
Allowance to total loans at end of
period.................................. 1.26% 1.27% 1.28% 1.31% 1.23%
Allowance to nonperforming loans.......... 1.91x 1.23x 2.14x 1.21x 1.14x
</TABLE>
25
<PAGE> 27
The allowance for loan losses was $6.1 million at December 31, 1997, $5.3
million at December 31, 1996, $4.6 million as of December 31, 1995 and $4.0
million as of December 31, 1994. Net recoveries on loans previously charged off
were $205,000 for the year ended December 31, 1997 and $319,000 for the year
ended December 31, 1996. These recoveries were due primarily to payments from
customers' bankruptcy proceedings or payment plans on charged off loans, which
were negotiated subsequently with customers.
Net charge-offs increased $674,000 to $1.7 million or 0.36% of average
loans in 1997 compared to 1996. The increase in net charge-offs was concentrated
in commercial loans with five loans accounting for $1.2 million or approximately
70.6% of the total amount. Workout plans for several specific large credits were
unsuccessful and anticipated recoveries expected in late 1996 failed to
materialize in 1997. As a result, management elected to writedown these loans in
1997 and, in doing so, reduced the level of nonperforming loans by a similar
amount. Net charge-offs increased $61,000 to $979,000 or 0.26% of average loans
in 1996 from $918,000 or 0.28% of average loans in 1995. Management considers
the allowance for loan losses to be adequate to meet potential losses in the
loan portfolio as of December 31, 1997. See "-- Nonperforming Loans."
The provision for loan losses increased $736,000 or 42.8% to $2.5 million
for the year ended December 31, 1997. The increase in the provision for loan
losses was due to the overall growth in loans.
The amount of net charge-offs, combined with the increase in the provision
for loan losses, improved the Company's coverage ratio of the allowance for loan
losses to nonperforming loans to 191% in 1997 compared to a coverage ratio of
123% in 1996.
Allocation of Allowance for Loan Loss
The following table sets forth the Company's allocation of the allowance
for loan losses by types of loans as of the indicated dates.
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
----------------- ----------------- ----------------- ----------------- -----------------
LOAN LOAN LOAN LOAN LOAN
CATEGORY CATEGORY CATEGORY CATEGORY CATEGORY
TO GROSS TO GROSS TO GROSS TO GROSS TO GROSS
AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS
------ -------- ------ -------- ------ -------- ------ -------- ------ --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ALLOCATED:
Commercial loans........ $2,972 28.78% $3,339 28.10% $2,896 29.79% $1,843 27.64% $1,424 29.09%
Commercial real estate
loans................. 1,026 43.37 247 42.81 226 39.96 702 41.62 618 35.82
Agriculture loans....... 331 4.92 35 4.76 35 4.40 35 5.04 35 4.85
Consumer real estate
loans................. 56 19.08 67 19.21 55 20.30 110 19.98 88 24.52
Consumer installment
loans................. 223 3.85 319 5.12 241 5.55 294 5.72 274 5.72
Unallocated............. 1,535 -- 1,335 -- 1,150 -- 995 -- 870 --
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total allowance for loan
losses................ $6,143 100.00% $5,342 100.00% $4,603 100.00% $3,979 100.00% $3,309 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
A significant portion of the Company's allowance for loan losses has been
allocated to commercial loans, which is consistent with the Company's
experience.
Securities
The Company manages its investment portfolio to provide a source of both
liquidity and earnings. Each of the Banks has its own asset/liability committee
which develops current investment policies based upon its operating needs and
market circumstances. The investment policy is reviewed by senior financial
management of the Company in terms of its objectives, investment guidelines and
consistency with overall Company performance and risk management goals. Each of
the Banks' investment policy is formally reviewed and approved annually by its
board of directors. The asset/liability committees of each Bank are responsible
for
26
<PAGE> 28
monthly reporting, and monitoring compliance with the investment policy. Monthly
reports are provided to each Bank's board of directors and the Board of
Directors of the Company.
Existing investment policies at each of the Banks set limits on amounts,
maximum term and average life for each class and grade of investment security.
Investment policies do not require ratings for U. S. Treasury bonds or notes;
agency issues or agency guaranteed mortgage-backed securities. In addition,
ratings are not required for municipal investments of limited maturities within
the Company's existing market areas. Derivative investment products are
permitted as part of the investment trading policy approved by each of the
Banks' board of directors, and generally represent less than 1.00% of the
Company's total assets at any point in time.
The investment portfolio represented approximately 40.1% of the Company's
assets as of December 31, 1997. During the past three years, the investment
portfolio ranged between 30-50% of each of the Bank's assets, depending upon
liquidity requirements, deposit growth and loan demand in each market.
The total fair value of the securities portfolio was $364.6 million as of
December 31, 1997 or 100.4% of stated book value. The fair value of the
securities portfolio was $307.2 million and $245.9 million as of December 31,
1996 and December 31, 1995 respectively.
Effective December 31, 1993, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" ("SFAS No. 115"). SFAS No. 115
requires that all debt and equity securities be classified either as
held-to-maturity, available-for-sale or trading. Held-to-maturity securities are
classified as such only when the Company has the ability and management has the
positive intent to hold those securities to maturity. Held-to-maturity
securities are carried at cost, adjusted for amortization of premiums and
accretion of discounts. Available-for-sale securities and trading securities are
carried at market value. Net unrealized gains and losses on available-for-sale
securities are excluded from earnings and reported as a separate component of
stockholders' equity, net of tax. Unrealized gains and losses on trading
securities are included in earnings. The Company has classified a minimal amount
of securities as trading. Gains or losses on the sale of investment securities
are determined based on the amortized cost of the specific securities sold.
27
<PAGE> 29
The following tables set forth the composition of the Company's investment
portfolio by major category as of the indicated dates. The investment securities
portfolio as of December 31, 1997, 1996 and 1995 have been categorized as either
available-for-sale or held-to-maturity in accordance with SFAS No. 115.
<TABLE>
<CAPTION>
DECEMBER 31, 1997
------------------------------------------------------------------------------------
HELD-TO-MATURITY AVAILABLE FOR SALE TOTAL
---------------------- ---------------------- ----------------------------------
AMORTIZED ESTIMATED AMORTIZED ESTIMATED AMORTIZED ESTIMATED % OF
COST FAIR VALUE COST FAIR VALUE COST FAIR VALUE PORTFOLIO
--------- ---------- --------- ---------- --------- ---------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury............... $ -- $ -- $ 1,499 $ 1,493 $ 1,499 $ 1,493 0.42%
U.S. government agencies.... -- -- 5,000 4,761 5,000 4,761 1.40
Obligations of state and
political subdivisions.... 16,233 16,490 7,555 7,596 23,788 24,086 6.64
Mortgage-backed securities:
Pass-through securities... -- -- 313,152 314,580 313,152 313,580 87.41
Collateralized mortgage
obligations............. -- -- 7,558 7,379 7,558 7,379 2.11
Federal Reserve stock and
other securities.......... -- -- 7,245 7,306 7,245 7,306 2.02
------- ------- -------- -------- -------- -------- ------
Total....................... $16,233 $16,490 $342,009 $343,115 $358,242 $359,605 100.00%
======= ======= ======== ======== ======== ======== ======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
------------------------------------------------------------------------------------
HELD-TO-MATURITY AVAILABLE FOR SALE TOTAL
---------------------- ---------------------- ----------------------------------
AMORTIZED ESTIMATED AMORTIZED ESTIMATED AMORTIZED ESTIMATED % OF
COST FAIR VALUE COST FAIR VALUE COST FAIR VALUE PORTFOLIO
--------- ---------- --------- ---------- --------- ---------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury............... $ -- $ -- $ 3,516 $ 3,483 $ 3,516 $ 3,483 1.14%
U.S. government agencies.... -- -- 7,500 7,081 7,500 7,081 2.42
Obligations of state and
political subdivisions.... 13,741 13,939 7,184 7,175 20,925 21,114 6.77
Mortgage-backed securities:
Pass-through securities... -- -- 258,537 257,184 258,537 257,184 83.58
Collateralized mortgage
obligations............. -- -- 13,036 12,586 13,036 12,586 4.21
Federal Reserve stock and
other securities.......... -- -- 5,803 5,790 5,803 5,790 1.88
------- ------- -------- -------- -------- -------- ------
Total....................... $13,741 $13,939 $295,576 $293,299 $309,317 $307,238 100.00%
======= ======= ======== ======== ======== ======== ======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1995
------------------------------------------------------------------------------------
HELD-TO-MATURITY AVAILABLE FOR SALE TOTAL
---------------------- ---------------------- ----------------------------------
AMORTIZED ESTIMATED AMORTIZED ESTIMATED AMORTIZED ESTIMATED % OF
COST FAIR VALUE COST FAIR VALUE COST FAIR VALUE PORTFOLIO
--------- ---------- --------- ---------- --------- ---------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury............... $ -- $ -- $ 3,501 $ 3,515 $ 3,501 $ 3,515 1.43%
U.S. government agencies.... -- -- 7,500 7,146 7,500 7,146 3.07
Obligations of state and
political subdivisions.... 11,877 12,131 6,796 6,828 18,673 18,959 7.64
Mortgage-backed securities:
Pass-through securities... -- -- 170,010 172,612 170,010 172,612 69.57
Collateralized mortgage
obligations............. -- -- 43,339 42,364 43,339 42,364 17.74
Federal Reserve stock and
other securities.......... -- -- 1,340 1,340 1,340 1,340 0.55
------- ------- -------- -------- -------- -------- ------
Total....................... $11,877 $12,131 $232,486 $233,805 $244,363 $245,936 100.00%
======= ======= ======== ======== ======== ======== ======
</TABLE>
As of December 31, 1997, the Company did not hold any off-balance sheet
derivative financial instruments such as futures, forwards, or swaps. An option
contract related to U.S. Treasury securities in the amount of $5.0 million was
outstanding with an expiration date of less than 180 days. The total amount of
28
<PAGE> 30
option contracts outstanding at any one time during 1997 and 1996 did not exceed
$10 million, and represented less than 1.5% of total assets of the Company.
As of December 31, 1997, the Company held no securities with a book value
exceeding 10% of stockholders' equity of a single issuer other than the U.S.
Treasury or other U.S. government agencies.
The Company's securities portfolio increased $48.9 million or 15.8% in 1997
compared to 1996. The growth in the investment securities portfolio was $61.4
million and $73.9 million for 1996 and 1995, respectively. The growth was
attributed to the generation of new deposits in excess of the loan funding and
operational requirements of the Banks.
Most of the investment securities are agency-guaranteed, mortgage-backed
securities. Mortgage-backed securities represented 87.4%, 83.6% and 69.6% of the
total investment securities as of December 31, 1997, 1996 and 1995,
respectively. Based upon the Company's evaluation, mortgage-backed securities
are a superior investment vehicle for the Banks. Mortgage-backed securities
offer the best combination of yield and liquidity within the Company's planning
periods. Mortgage-backed securities offer attractive yields, provide monthly
cash flows, serve as acceptable collateral and have most of the liquidity
characteristics of U.S. Treasury notes and bonds.
The Banks' investment strategy during the past two years has been focused
on seasoned mortgage-backed securities of moderate average lives (5-8 years)
which have been purchased at a premium to par. Historically, these securities
are more predictable in terms of price volatility, prepayment speeds and monthly
cash flows than new production issues.
Collateralized mortgage obligations have been a decreasing percentage of
the total investment securities portfolio during the past three years.
Collateralized mortgage-backed securities were $7.6 million or 2.1% of the total
investment securities portfolio as of December 31, 1997. Collateralized mortgage
obligations were $13.0 million and $43.3 million as of December 31, 1996 and
1995, respectively, and represented 4.2% and 17.7% of the total investment
portfolio as of December 31, 1996 and 1995, respectively. Management's decision
to reduce collateralized mortgage-backed obligations was consistent with overall
regulatory concerns regarding this type of investment for community banks.
All fixed and adjustable rate mortgage pools and collateralized mortgage
obligations contain a certain amount of risk related to the uncertainty of
prepayments of the underlying mortgages. Interest rate changes have a direct
impact upon prepayment rates. The Company uses computer simulation models to
test the average life and yield volatility of adjustable rate mortgage pools and
collateralized mortgage obligations under various interest rate assumptions to
monitor volatility. Stress tests are performed quarterly.
29
<PAGE> 31
INVESTMENT MATURITIES AND YIELDS
The following tables set forth the contractual or estimated maturities of
investment securities as of December 31, 1997, and the weighted average yields
of such securities on a tax-equivalent basis assuming a 34% tax rate.
<TABLE>
<CAPTION>
MATURING
----------------------------------------------------------------------------------------
AFTER ONE BUT AFTER FIVE BUT
WITHIN ONE WITHIN FIVE WITHIN TEN
YEAR YEARS YEARS AFTER TEN YEARS TOTAL
-------------- --------------- ---------------- --------------- ----------------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Available-for-Sale
Securities:
U.S. Treasury.............. $ 500 5.38% $ 993 5.03% $ -- 0.00% $ -- 0.00% $ 1,493 5.15%
U.S. government agencies... 992 5.41 2,776 5.69 993 4.24 -- 0.00 4,761 5.33
Obligations of state and
political subdivisions... 1,293 4.76 6,145 4.66 158 4.56 -- 0.00 7,596 4.68
Mortgage-backed securities:
Pass-through
securities............. -- 0.00 28,406 7.62 274,506 7.77 11,668 6.76 314,580 7.71
Collateralized mortgage
obligations............ -- 0.00 7,379 6.64 -- 0.00 -- 0.00 7,379 6.64
Federal Reserve stock and
other securities......... -- 0.00 -- 3.11 -- 0.00 7,306 5.66 7,306 5.30
------ ---- ------- ---- -------- ---- ------- ---- -------- ----
Total...................... $2,785 $45,699 $275,657 $18,974 $343,115
====== ======= ======== ======= ========
6.28% 6.89% 7.76% 6.28% 7.52%
==== ==== ==== ==== ====
</TABLE>
<TABLE>
<CAPTION>
MATURING
----------------------------------------------------------------------------------------
AFTER ONE BUT AFTER FIVE BUT
WITHIN ONE WITHIN FIVE WITHIN TEN
YEAR YEARS YEARS AFTER TEN YEARS TOTAL
-------------- --------------- ---------------- --------------- ----------------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Held-to-Maturity
Securities:
Obligations of state and
political subdivisions... $ 786 5.79% $14,385 5.42% $ 1,062 4.67% $ -- 0.00% $ 16,233 5.39%
====== ==== ======= ==== ======== ==== ======= ==== ======== ====
</TABLE>
Deposits
The Company has experienced significant growth in total deposits in recent
years. Total deposits were $794.4 million at December 31, 1997, $701.2 million
at December 31, 1996 and $590.7 million at December 31, 1995. Average total
deposits were $753.0 million for the year ended December 31, 1997, $653.6
million for the year ended December 31, 1996, and $531.8 million for the year
ended December 31, 1995. These increases in deposits are the result of increased
marketing activity in the last three years in connection with the opening of new
banking centers in Algonquin, Northwest Chicago, Downers Grove and Galesburg, as
well as normal growth in the Banks' core market areas.
30
<PAGE> 32
The following table sets forth the average amount of and the average rate
paid on deposits by category for the indicated periods.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------------------------------------------------------
1997 1996 1995
-------------------------- -------------------------- --------------------------
PERCENT PERCENT PERCENT
AVERAGE OF AVERAGE OF AVERAGE OF
BALANCE DEPOSITS RATE BALANCE DEPOSITS RATE BALANCE DEPOSITS RATE
------- -------- ---- ------- -------- ---- ------- -------- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Noninterest-bearing demand
deposits.......................... $ 90,455 12.01% -- $ 83,743 12.81% -- $ 78,326 14.73% --
Interest-bearing demand deposits.... 70,047 9.30 3.01% 63,169 9.67 2.72% 53,699 10.10 2.66%
Savings and money market accounts... 199,364 26.48 3.73 183,005 28.00 3.78 164,284 30.89 3.92
Time Deposits:
Certificates of deposit, under
$100,000(1)..................... 315,763 41.93 5.89 269,538 41.24 5.63 195,848 36.82 5.48
Certificates of deposit, over
$100,000(1)..................... 47,714 6.34 5.99 35,454 5.42 5.67 28,095 5.29 5.87
Public funds...................... 29,667 3.94 5.46 18,663 2.86 5.33 11,530 2.17 5.77
-------- ------ ---- -------- ------ ---- -------- ------ ----
Total time deposits........... 393,144 52.21 5.87 323,655 49.52 5.61 235,473 44.28 5.54
-------- ------ ---- -------- ------ ---- -------- ------ ----
Total......................... $753,010 100.00% 4.33% $653,572 100.00% 4.10% $531,782 100.00% 3.95%
======== ====== ======== ====== ======== ======
</TABLE>
- -------------------------
(1) Certificates of deposit exclusive of public funds.
The following table summarizes the maturity distribution of certificates of
deposit in amounts of $100,000 or more as of December 31, 1997. These deposits
have been made by individuals, businesses and public and other not-for-profit
entities, most of which are located within the Company's market area.
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-----------------
(IN THOUSANDS)
<S> <C>
Three months or less........................................ $27,243
Over three months through twelve months..................... 34,408
Over one year through three years........................... 5,606
Over three years............................................ 252
-------
Total..................................................... $67,509
=======
</TABLE>
Borrowings
The following table summarizes the Company's borrowings by short- and
long-term debt.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1997 1996 1995
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Short-term borrowings:
Federal funds purchased and securities sold under
agreements to repurchase............................... $12,992 $ 9,991 $12,165
FHLB advances............................................. 5,000 6,300 --
Lines of credit........................................... 16,350 15,895 15,702
------- ------- -------
Total short-term borrowings............................ 34,342 32,186 27,867
Long-term borrowings:
Mortgage payable.......................................... 225 300 375
FHLB advances............................................. 21,000 5,000 --
------- ------- -------
Total long-term borrowings............................. 21,225 5,300 375
------- ------- -------
Total....................................................... $55,567 $37,486 $28,242
======= ======= =======
</TABLE>
31
<PAGE> 33
The Company uses short-term borrowings on a limited basis. These borrowings
include overnight funds purchased, securities sold under agreements to
repurchase, FHLB advances and commercial bank lines of credit. The following
table sets forth categories of short-term borrowings of the Company as of the
indicated dates or for the indicated periods.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1997 1996 1995
---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Funds Purchased and Securities Sold Under Repurchase
Agreements:
Balance at end of period.................................. $12,992 $ 9,991 $12,165
Weighted average interest rate at end of period........... 6.14% 7.22% 6.99%
Maximum amount outstanding(1)............................. $24,524 $35,667 $19,136
Average amount outstanding................................ $ 7,821 $14,912 $ 9,931
Weighted average interest rate during period.............. 5.66% 5.50% 5.75%
</TABLE>
- -------------------------
(1) Based on amount outstanding at month-end during each period.
The Banks have FHLB advances outstanding which come due at various dates
through June 18, 2002. These advances are used as a supplemental source of funds
to manage interest rate risks. The following table sets forth categories of FHLB
advances of the Company as of the indicated dates or for the indicated periods.
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1997 1996 1995
---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
FHLB advances:
Balance at end of period.................................. $26,000 $11,300 $ --
Weighted average interest rate at end of period........... 5.63% 5.67% 0.00%
Maximum amount outstanding(1)............................. $26,000 $11,300 $ --
Average amount outstanding................................ $18,836 $ 3,378 $ --
Weighted average interest rate during period.............. 5.76% 6.25% 0.00%
</TABLE>
- -------------------------
(1) Based on amount outstanding at month-end during each period.
The Banks became members of the FHLB of Chicago during 1996. Membership
requirements include common stock ownership in the FHLB.
The Company entered into a new credit agreement with a correspondent bank
on January 30, 1998 (the "Credit Agreement"), which provides for borrowings both
by the Company and Midwest One Mortgage Services, Inc. Under the Credit
Agreement, the Company has a revolving line of credit that provides for a
maximum outstanding principal amount of $25.0 million (subject to reduction to
the extent that Midwest One Mortgage Services, Inc., borrows under its $5
million line of credit described below). Amounts outstanding under the Company's
revolving line of credit represent borrowings incurred to acquire The National
Bank of Monmouth and to provide capital contributions to the Banks to support
their growth. The Company makes interest payments, at its option, at the 90- or
180-day London Inter-Bank Offered Rate ("LIBOR") plus 95 basis points or the
prime rate less 25 basis points. The principal balance under the line was
approximately $12.4 million as of January 31, 1998, and is due and payable on
January 30, 2000, unless the line is renewed prior to that time. The Company
intends to use a portion of the net proceeds from the Offering to reduce the
outstanding balance under the Company's revolving line of credit. See "Use of
Proceeds."
Midwest One Mortgage Services, Inc. has a warehouse line of credit under
the Credit Agreement. The warehouse line provides for a maximum outstanding
principal amount of $5.0 million and is guaranteed by the Company. The line is
used for working capital. Midwest One Mortgage Services, Inc. makes quarterly
interest payments, at its option, at the 90- or 180-day LIBOR plus 95 basis
points or the prime rate less 25 basis points, under the warehouse line. The
principal balance was $4.0 million as of January 31, 1998, and is due and
payable on January 30, 2000, unless the line is renewed prior to that time.
32
<PAGE> 34
The following table sets forth categories of short-term correspondent bank
borrowings of the Company as of the indicated dates or for the indicated
periods.
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1997 1996 1995
---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Lines of Credit:
Balance at end of period.................................. $16,350 $15,895 $15,702
Weighted average interest rate at end of period........... 6.90% 6.51% 6.85%
Maximum amount outstanding(1)............................. $17,275 $17,042 $16,250
Average amount outstanding................................ $16,040 $15,061 $15,289
Weighted average interest rate during period.............. 6.90% 6.95% 7.18%
</TABLE>
- -------------------------
(1) Based on amount outstanding at month-end during each period.
The Company has a mortgage outstanding in the principal amount of $225,000
as of December 31, 1997. Principal payments of $75,000 are due annually through
the year 2000.
CAPITAL RESOURCES
The Company monitors compliance with bank and bank-holding company
regulatory capital requirements, focusing primarily on risk-based capital
guidelines. Under the risk-based capital method of capital measurement, the
ratio computed is dependent upon the amount and composition of assets recorded
on the balance sheet, and the amount and composition of off-balance sheet items,
in addition to the level of capital. Included in the risk-based capital method
are two measures of capital adequacy, Tier 1, or core, capital, and Total
capital, which consists of Tier 1 plus Tier 2 capital. See "Business --
Supervision and Regulation -- Bank Holding Company Regulation" for definitions
of Tier 1 and Tier 2 capital.
The following tables set forth the Company's capital ratios as of the
indicated dates.
RISK-BASED CAPITAL RATIOS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------------
1997 1996 1995
---------------- ---------------- ----------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------ ----- ------ ----- ------ -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Tier 1 capital to risk-weighted assets..... $ 49,842 9.60% $ 41,691 9.57% $ 34,689 7.64%
Tier 1 capital minimum requirement......... 20,781 4.00 17,426 4.00 18,155 4.00
Total capital to risk-weighted assets...... 55,980 10.78 47,033 10.76 39,292 8.66
Total capital minimum requirements......... 41,562 8.00 34,840 8.00 36,310 8.00
Total risk-weighted assets................. $519,187 $435,642 $453,873
</TABLE>
LIQUIDITY
The Company manages its liquidity position with the objective of
maintaining sufficient funds to respond to the needs of depositors and borrowers
and to take advantage of earnings enhancement opportunities. In addition to the
normal inflow of funds from core-deposit growth, together with repayments and
maturities of loans and investments, the Company utilizes other short-term
funding sources such as securities sold under agreements to repurchase,
overnight funds purchased from correspondent banks and the acceptance of short-
term deposits from public entities. In the third quarter of 1996, the Banks
received approval for membership in the FHLB, which provides an additional
source of liquidity. The Banks also have various funding arrangements with
commercial and investment banks providing up to $262.8 million of available
funding sources in the form of federal funds lines, repurchase agreements and
brokered certificate of deposit programs. The Banks maintain these funding
arrangements to achieve favorable costs of funds and to enhance liquidity in the
event of deposits withdrawals.
33
<PAGE> 35
The Company monitors and manages its position on several bases, which vary
depending upon the time period. As the time period is expanded, other data is
factored in, including estimated loan funding requirements, estimated loan
payoffs, investment portfolio maturities or calls, and anticipated depository
buildups or runoffs.
The Company classifies the majority of its investment securities as
available-for-sale, thereby maintaining significant liquidity. The Company's
liquidity position is further enhanced by structuring the majority of its loan
portfolio interest payments as monthly, and also by the significant
representation of retail credit and residential mortgage loans in the Company's
loan portfolio.
The Company's cash flows are composed of three classifications: cash flows
from operating activities, cash flows from investing activities, and cash flows
from financing activities. Net cash provided by operating activities, consisting
primarily of earnings, was $5.0 million, $10.5 million and $13.1 million for the
years ended December 31, 1997, 1996 and 1995, respectively. A significant
component in the fluctuation of net cash provided by or used in operating
activities is the timing of the proceeds from real estate loans held for sale to
permanent investors. Net cash used in investing activities, consisting primarily
of loan and investment funding, was $116.5 million, $130.8 million and $118.8
million for the years ended December 31, 1997, 1996 and 1995, respectively. Net
cash provided by financing activities, consisting principally of deposit growth
and net bank borrowings, was $110.7 million, $119.2 million and $111.9 million
for the years ended December 31, 1997, 1996 and 1995, respectively.
ASSET/LIABILITY MANAGEMENT
The business of the Company and the composition of its balance sheet
consists of investment in interest-earning assets (primarily loans,
mortgage-backed securities and other securities) which are primarily funded by
interest-bearing liabilities (deposits and borrowings). Other than the $5.0
million of trading account securities and loans held for sale, all of the
financial instruments of the Company are for other than trading purposes. Such
financial instruments have varying levels of sensitivity to changes in market
rates of interest. The Company's net interest income is dependent on the amounts
and yields of its interest-earning assets as compared to the amounts of and
rates on its interest bearing liabilities. Net interest income is therefore
sensitive to changes in market rates of interest.
The Company's asset/liability management strategy is to maximize net
interest income while limiting exposure to risks associated with a volatile
interest rate environment. This strategy is implemented by the Company's ongoing
analysis and management of its interest rate risk. A principal function of
asset/liability management is to coordinate the levels of interest-sensitive
assets and liabilities to minimize net interest income fluctuations in times of
fluctuating market interest rates.
Interest rate risk results when the maturity or repricing intervals and
interest rate indices of the interest-earning assets, interest-bearing
liabilities and off-balance sheet financial instruments are different, creating
a risk that changes in the level of market interest rates will result in
disproportionate changes in the value of, and the net earnings generated from,
the Company's interest-earning assets, interest-bearing liabilities and off-
balance sheet financial instruments. The Company's exposure to interest rate
risk is managed primarily through the Company's strategy of selecting the types
and terms of interest-earning assets and interest-bearing liabilities which
generate favorable earnings, while limiting the potential negative effects of
changes in market interest rates. Since the Company's primary source of
interest-bearing liabilities is customer deposits, the Company's ability to
manage the types and terms of such deposits may be somewhat limited by customer
maturity preferences in the market areas in which the Company operates.
Borrowings, which include FHLB advances, short-term borrowings and long-term
borrowings, are generally structured with specific terms which in management's
judgment, when aggregated with the terms for outstanding deposits and matched
with interest-earning assets, reduce the Company's exposure to interest rate
risk. The rates, terms and interest rate indices of the Company's
interest-earning assets result primarily from the Company's strategy of
investing in loans and securities (a substantial portion of which have
adjustable rate terms) which permit the Company to limit its exposure to
interest rate risk, together with credit risk, while at the same time achieving
a positive
34
<PAGE> 36
interest rate spread from the difference between the income earned on
interest-earning assets and the cost of interest-bearing liabilities.
Management uses a duration model for each Bank's internal asset/liability
management. The model uses cash flows and repricing information from each
individual loan and certificate of deposit, plus repricing assumptions on
products without specific repricing dates (e.g., savings and interest-bearing
demand deposits) to calculate the durations of each Bank's assets and
liabilities. Investment securities are stress tested and the theoretical changes
in cash flow are key elements of the Company's model. The model also projects
the effect on the Company's earnings and theoretical value for a change in
interest rates. The model computes the duration of each Bank's rate sensitive
assets and liabilities, a theoretical market value of each Bank and the effects
of rate changes on each Bank's earnings and market value. The Banks' exposure to
interest rates is reviewed on a monthly basis by senior management and the Board
of Directors.
Each Bank also maintains specific interest rate risk management policy
limits. Based upon simulation modeling, these guidelines include: (i) a +/- 20%
change in net income upon an immediate 200 basis point change in interest rates;
and (ii) a +/- 10% change in net income upon a gradual 200 basis point change in
interest rates during a twelve-month period.
INTEREST RATE SENSITIVITY ANALYSIS
The Company's overall interest rate sensitivity is demonstrated by net
interest income analysis and "gap" 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 December 31,
1997.
<TABLE>
<CAPTION>
NET INTEREST INCOME
--------------------------
AMOUNT CHANGE CHANGE
------ ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
+200 bp............................................. $33,586 $ 524 1.59%
+100 bp............................................. 33,514 453 1.37
Base................................................ 33,061 -- --
- -100 bp............................................. 31,423 (1,638) (4.95)
- -200 bp............................................. 29,886 (3,175) (9.60)
</TABLE>
As shown above, at December 31, 1997, the effect of an immediate 200 basis point
increase in interest rates would increase the Company's net interest income by
1.59% or approximately $524,000. The effect of an immediate 200 basis point
decrease in rates would reduce the Company's net interest income by 9.60% or
approximately $3.2 million.
"Gap" analysis is used to determine the repricing characteristics of the
Company's assets and liabilities. The following table sets forth the interest
rate sensitivity of the Company's assets and liabilities as of
35
<PAGE> 37
December 31, 1997, and sets forth the repricing dates of the Company's
interest-earning assets and interest-bearing liabilities as of that date, as
well as the Company's interest rate sensitivity gap percentages for the periods
presented.
<TABLE>
<CAPTION>
0-3 4-12 1-5 OVER 5
MONTHS MONTHS YEARS YEARS TOTAL
------ ------ ----- ------ -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Funds sold............................ $ 2,800 $ -- $ -- $ -- $ 2,800
Interest-bearing due from banks....... 420 -- -- -- 420
Securities............................ 17,148 36,392 248,184 62,632 364,356
Loans................................. 285,511 37,996 140,203 24,389 488,099
--------- --------- -------- -------- --------
Total interest-earning assets.... $ 305,879 $ 74,388 $388,387 $ 87,021 $855,675
========= ========= ======== ======== ========
INTEREST-BEARING LIABILITIES:
Interest-bearing demand deposits...... $ 78,426 $ -- $ -- $ -- $ 78,426
Money markets......................... 119,245 -- -- -- 119,245
Savings deposits...................... 68,668 -- -- -- 68,668
Time deposits......................... 118,304 253,614 53,963 62 425,943
--------- --------- -------- -------- --------
Total interest-bearing deposits....... $ 384,643 $ 253,614 $ 53,963 $ 62 $692,282
========= ========= ======== ======== ========
SHORT-TERM BORROWINGS:
Securities sold under agreements to
repurchase, funds purchased, and
treasury tax deposits............... $ 12,992 $ -- $ -- $ -- $ 12,992
Note payable, mortgage payable........ 16,350 75 150 -- 16,575
FHLB advances......................... -- 5,000 16,000 5,000 26,000
--------- --------- -------- -------- --------
Total borrowings...................... 29,342 5,075 16,150 5,000 55,567
--------- --------- -------- -------- --------
Total interest-bearing liabilities.... $ 413,985 $ 258,689 $ 70,113 $ 5,062 $747,849
========= ========= ======== ======== ========
Interest sensitivity gap.............. $(108,106) $(184,301) $318,274 $ 81,959 $107,826
Cumulative gap........................ $(108,106) $(292,407) $ 25,867 $107,826
Interest sensitivity gap to total
assets.............................. (11.90)% (20.28)% 35.03% 9.02%
Cumulative sensitivity gap to total
assets.............................. (11.90)% (32.18)% 2.85% 11.87%
</TABLE>
Mortgage-backed securities, including adjustable rate mortgage pools and
collateralized mortgage obligations, are included in the above table based on
their estimated weighted average lives obtained from outside analytical sources.
Loans are included in the above table based on contractual maturity or
contractual repricing dates. Interest-bearing demand and savings deposits are
included in the above table based on the proposed policy statement issued by
bank regulators on August 4, 1995. The table uses short-term repricing (one to
three months) assumptions for all interest-bearing core deposits. Management
believes this is a very conservative approach, which is not consistent with the
Company's actual historical experience.
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. The
"gap" analysis is based upon assumptions as to when assets and liabilities will
reprice in a changing interest rate environment. Since such assumptions can be
no more than estimates, certain assets and liabilities indicated as maturing or
otherwise repricing within a stated period may, in fact, mature or reprice at
different times and at different volumes than those estimated. Also, the renewal
or repricing of certain assets and liabilities can be discretionary and subject
to competitive and other pressures. Therefore, the gap table included above does
not and cannot necessarily indicate the actual future impact of general interest
rate movements on the Company's net interest income.
36
<PAGE> 38
EFFECTS OF INFLATION
Inflation can have a significant effect on the operating results of all
industries. However, management believes that inflationary factors are not as
critical to the banking industry as they are to other industries, due to the
high concentration of relatively short-duration monetary assets in the banking
industry. Inflation does, however, have some impact on the Company's growth,
earnings and total assets and on its need to closely monitor its equity capital
levels.
Interest rates are significantly affected by inflation, but it is difficult
to assess the impact, since neither the timing nor the magnitude of the changes
in the various inflation indices coincides with changes in interest rates.
Inflation does impact the economic value of longer term, interest-bearing assets
and liabilities, but the Company attempts to limit its long-term assets and
liabilities, as indicated in the tables set forth under "-- Financial Condition"
and "-- Asset/Liability Management."
IMPACT OF NEW ACCOUNTING STANDARDS
Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information" ("SFAS No. 131"), requires
that public business enterprises report financial and descriptive information
about reportable operating segments and report selected information about
operative segments in interim financial reports issued to shareholders. SFAS No.
131 is effective for financial statements for periods beginning after December
15, 1997. In the initial year of application, comparative information for
earlier years is to be restated.
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" ("SFAS No. 130"), establishes standards for the reporting
and display of comprehensive income and its components (revenues, expenses,
gains and losses) in a full set of general-purpose financial statements with the
same prominence as other financial statements. SFAS No. 130 does not require a
specific format for the financial statement but requires that an enterprise
display an amount representing total comprehensive income for the period in that
financial statement. SFAS No. 130 is effective for fiscal years beginning after
December 15, 1997. Reclassification of financial statements for earlier periods
provided for comparative purposes is required.
Statement of Financial Accounting Standards No. 129, "Disclosure of
Information about Capital Structure" ("SFAS No. 129"), clarifies standards for
disclosing information about an entity's capital structure. SFAS No. 129
continues the previous requirements to disclose certain information about an
entity's capital structure found in APB Opinions No. 10, Omnibus Opinion-1966,
and No. 15, Earnings per Share, and FASB Statement No. 47, Disclosure of
Long-Term Obligations, for entities that were subject to the requirements of
those standards. SFAS No. 129 eliminates the exemption for nonpublic entities
from certain disclosure requirements of Opinion 15. SFAS No. 129 is effective
for financial statements for periods ending after December 15, 1997.
Statement of Financial Accounting Standards No. 128, "Earnings per Share"
("SFAS No. 128"), simplifies existing computational guidelines, revises
disclosure requirements and increases the comparability of earnings per share on
an international basis. SFAS No. 128 is effective for financial statements
issued for periods ending after December 15, 1997. The impact of adoption of
SFAS No. 128 on the Company's financial statement is not expected to be
significant.
Statement of Financial Accounting Standards No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of Liabilities"
("SFAS No. 125"), as amended by Statement of Financial Accounting Standards No.
127 ("SFAS No. 127"), provides accounting and reporting standards for loan
securitization based on control of the underlying financial assets. It also
provides accounting and implementation guidance for other transfers including
partial transfers of loans, servicing of financial assets, repurchase
agreements, securities lending and extinguishing of liabilities. SFAS No. 125
provides consistent standards for distinguishing transfers of financial assets
that are sales from transfers that are secured borrowings. SFAS No. 125 is
effective for transfers and servicing of financial assets and extinguishments of
liabilities occurring after December 31, 1996, and is to be applied
prospectively. SFAS No. 127 defers the effective date of certain provisions,
primarily relating to collateral, repurchase agreements, dollar-rolls,
securities lending, and similar transactions, until January 1, 1998. Earlier or
retroactive application is not permitted. The impact of adopting this statement
is not expected to be material to the Company's financial statements.
37
<PAGE> 39
BUSINESS
THE COMPANY
The Company is a community-based bank holding company headquartered in
Melrose Park, Illinois. The Company provides a wide range of banking services,
personal and corporate trust services, residential mortgage services and limited
securities brokerage services. The Company's principal operating subsidiaries
are four Illinois community banks: Midwest Bank and Trust Company, Midwest Bank,
Midwest Bank of McHenry County and The National Bank of Monmouth. Midwest Bank
and Trust Company, Midwest Bank and Midwest Bank of McHenry County are chartered
as Illinois state banks and The National Bank of Monmouth has a national bank
charter. In addition, the Company has three consolidated nonbank subsidiaries
that provide trust, mortgage and data processing services.
The Banks are community-oriented, full-service commercial banks, providing
a wide range of banking services to individuals, small-to-medium-sized
businesses, government and public entities and not-for-profit organizations. The
Banks operate out of 13 locations with nine banking centers in the greater
Chicago metropolitan area and four banking centers in Western Illinois. Midwest
One Mortgage Services, Inc., a subsidiary of Midwest Bank, is a residential
mortgage brokerage business offering mortgage services throughout the Chicago
metropolitan area. Midwest Trust Services, Inc., a subsidiary of Midwest Bank
and Trust Company, provides trust services for individuals and corporations.
First Midwest Data Corp., a subsidiary of the Company, provides data processing
services to the Company and the Banks except The National Bank of Monmouth.
The Company focuses on establishing and maintaining long-term relationships
with customers and is committed to serving the financial services needs of the
communities it serves. In particular, the Company has emphasized in the past and
intends to continue to emphasize its relationships with individual customers and
small-to-medium-sized businesses. The Company actively evaluates the credit
needs of its markets, including low- and moderate-income areas, and offers
products that are responsive to the needs of its customer base. The markets
served by the Company provide a mix of real estate, commercial and consumer
lending opportunities, as well as a stable core deposit base.
The Company, formerly known as First Midwest Corporation of Delaware, is a
Delaware corporation. The Company was founded as a bank holding company in 1983
for Midwest Bank and Trust Company.
38
<PAGE> 40
Certain information with respect to the Banks and the Company's nonbank
consolidated subsidiaries as of December 31, 1997, is set forth below:
<TABLE>
<CAPTION>
NUMBER OF BANKING
COMPANY SUBSIDIARIES HEADQUARTERS MARKET AREA CENTERS OR OFFICES
-------------------- ------------ ----------- ------------------
<S> <C> <C> <C>
Banks:
Midwest Bank and Trust
Company................... Elmwood Park, IL Chicago, Elmwood Park, 5
Melrose Park, Oak Park,
River Forest, Franklin Park
Midwest Bank................ Hinsdale, IL Hinsdale, Downers Grove, 2
Burr Ridge, Westmont, Oak
Brook, Clarendon Hills
Midwest Bank of McHenry
County.................... Union, IL Union, Algonquin, Marengo, 2
Crystal Lake, East Dundee,
Lake In the Hills, Huntley,
Carpentersville
The National Bank of
Monmouth.................. Monmouth, IL Monmouth, Galesburg, 4
Oquawka, Kirkwood
Nonbank Subsidiaries:
Midwest Trust Services,
Inc....................... Elmwood Park, IL Chicago metropolitan area 1
Midwest One Mortgage
Services, Inc............. Melrose Park, IL Chicago metropolitan area 3
First Midwest Data Corp..... Melrose Park, IL * 1
</TABLE>
- -------------------------
*Performs data processing services for the Company and the Banks except The
National Bank of Monmouth.
HISTORY
The Banks
Midwest Bank and Trust Company was established in 1959 in Elmwood Park to
provide community and commercial banking services to individuals and businesses
in the contiguous and neighboring western suburbs of Chicago. Midwest Bank and
Trust Company grew in the 1960s and 1970s with the economic development and
population expansion of Elmwood Park, Melrose Park, Forest Park, River Grove,
Franklin Park and, to a lesser extent, River Forest and Oak Park.
Midwest Bank and Trust Company's original facility was located at the
corner of North and Harlem Avenues in Elmwood Park, a central focus point for
residential traffic and commercial business throughout the 1970s. As state
banking regulations permitted, Midwest Bank and Trust Company established a
drive-up facility at the corner of North and Fifth Avenues in Melrose Park in
1978. This facility provided a convenient location to serve business customers,
which were an increasingly important part of the economic development of Melrose
Park at that time. This location and surrounding acreage were developed into
Midwest Centre in 1987, a commercial office building with a full-service banking
center of Midwest Bank and Trust Company located on its main floor. Midwest
Centre is the Company's current headquarters.
The Company pursued growth opportunities through acquisitions beginning in
the mid-to-late 1980s. Illinois State Bank of Chicago was acquired in 1986,
providing the Company with a prime downtown Chicago location on South Michigan
Avenue. Illinois State Bank of Chicago was merged into Midwest Bank and Trust
Company in 1991 and is operated as a full-service banking center at the South
Michigan Avenue location.
39
<PAGE> 41
Midwest Bank and Trust Company added two additional banking centers in
Northwest Chicago on Pulaski Road in 1993 and Addison Street in 1996. Midwest
Bank and Trust Company currently has a network of five full-service banking
centers in diverse markets within Cook County, Illinois.
The Company acquired the State Bank of Union in McHenry County in 1987 and,
in 1991 changed its name to Midwest Bank of Union. This acquisition represented
the first bank location for the Company outside of Cook County. The bank was
renamed Midwest Bank of McHenry County in 1994 and opened a full-service banking
center in Algonquin in southeastern McHenry County in August 1994. During the
past three years, assets at Midwest Bank of McHenry County have increased from
$36 million to $153 million as of December 31, 1997. As a result of this growth,
Midwest Bank of McHenry County ranked as the fifth largest among 20 banks
operating within McHenry County as of September 30, 1997.
The Company established a "de novo" bank, Midwest Bank of DuPage County, in
Hinsdale in 1991. Midwest Bank of DuPage County was created to develop markets
through the opening of a new banking center. The bank was subsequently renamed
Midwest Bank of Hinsdale in 1991, and Midwest Bank in 1996. Midwest Bank opened
a convenience banking center in 1996 in Downers Grove, within DuPage County,
which has been expanded into a full-service banking center.
In an effort to diversify the Company's core deposit base and develop
profitable growth opportunities at a reasonable cost of market entry, the
Company began an expansion program in West Central Illinois in the early 1990s.
The Company acquired the Bank of Oquawka in Henderson County in 1991 and The
National Bank of Monmouth via a merger with West Central Illinois Bancorp in
1993. Subsequently, the Bank of Oquawka was merged into The National Bank of
Monmouth in 1994. A new full-service banking center was opened in Galesburg in
Knox County in 1996. The National Bank of Monmouth currently has a network of
four banking centers in Monmouth, Galesburg, Oquawka and Kirkwood.
Nonbank Subsidiaries
The Company's nonbank subsidiaries were created in the 1990s to support the
core retail and commercial banking activities of the Company and the Banks.
First Midwest Data Corp. was established in 1991 to replace third party data
processing services and provide competitive advantages in terms of service and
delivery for the Banks. First Midwest Data Corp. provides a variety of services
to the Company and the Banks except The National Bank of Monmouth, including
processing of demand deposits, savings accounts, time deposits, loans and
general ledgers and manages telephone banking and on-line computer services for
retail and commercial customers. The National Bank of Monmouth provides its own
data processing services.
Midwest Trust Services, Inc. and Midwest One Mortgage Services, Inc. were
established to provide specialized financial services to support the additional
needs of banking customers on a value-added basis. These subsidiaries also
maintain independent customer bases that can serve as referral leads for
prospective retail and commercial relationships for the Banks.
Midwest Trust Services, Inc. was a spin-off of the trust department of
Midwest Bank and Trust Company in 1994 and was initially formed as a
wholly-owned subsidiary of the Company to provide trust services and related
specialized programs supporting each of the Banks. The Company transferred
ownership of the subsidiary back to Midwest Bank and Trust Company as a capital
contribution in 1995.
Midwest One Mortgage Services, Inc. was formed by the Company in 1994 to
provide secondary market mortgage origination for the Banks and independent
customers. Mortgages originated by Midwest One Mortgage Services, Inc. are
generally sold with servicing rights released to a large, diversified group of
qualified secondary market investors. The Company transferred ownership of the
subsidiary to Midwest Bank as a capital contribution in 1997.
THE BANKS
The Company functions as a network of autonomous banks with centralized
planning and staff support functions performed at the holding company level.
Each Bank faces different levels and varied types of competition, which are
addressed by the local, decentralized nature of each Bank. The Banks maintain
full
40
<PAGE> 42
responsibility for the day-to-day operations of each banking center, including
lending practices and decision-making, pricing, sales and customer service. The
Banks are supported by centralized staff services provided by the Company for
accounting, auditing, financial and strategic planning, marketing, human
resources, loan review and regulatory compliance.
Set forth below is selected financial and other information for each Bank
for the years ended December 31, 1997, 1996 and 1995.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1997 1996 1995
---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
MIDWEST BANK AND TRUST COMPANY(1)
Net income............................................... $ 5,792 $ 5,971 $ 5,312
Return on average assets................................. 1.47% 1.56% 1.61%
Return on average equity................................. 22.22% 22.70% 22.06%
Total assets............................................. $452,277 $406,045 $363,523
Total loans.............................................. $239,356 $217,422 $203,006
Total deposits........................................... $407,707 $369,459 $332,257
Number of banking centers................................ 5 5 4
MIDWEST BANK(2)
Net income............................................... $ 1,758 $ 1,471 $ 1,095
Return on average assets................................. 1.24% 1.19% 1.19%
Return on average equity................................. 18.95% 16.77% 15.47%
Total assets............................................. $173,776 $146,269 $104,787
Total loans.............................................. $ 99,611 $ 80,538 $ 61,105
Total deposits........................................... $158,746 $132,237 $ 95,558
Number of banking centers................................ 2 2 1
MIDWEST BANK OF MCHENRY COUNTY
Net income............................................... $ 1,680 $ 1,128 $ 633
Return on average assets................................. 1.32% 1.04% 0.88%
Return on average equity................................. 19.58% 15.51% 13.28%
Total assets............................................. $153,355 $122,774 $ 95,111
Total loans.............................................. $ 79,501 $ 56,943 $ 40,110
Total deposits........................................... $129,391 $106,910 $ 87,602
Number of banking centers................................ 2 2 2
THE NATIONAL BANK OF MONMOUTH
Net income............................................... $ 1,006 $ 847 $ 769
Return on average assets................................. 0.98% 0.82% 0.85%
Return on average equity................................. 9.97% 7.88% 7.28%
Total assets............................................. $121,930 $108,218 $ 94,728
Total loans.............................................. $ 64,752 $ 64,196 $ 54,280
Total deposits........................................... $ 99,333 $ 94,457 $ 76,109
Number of banking centers................................ 4 4 3
</TABLE>
- -------------------------
(1) Does not include financial information for Midwest Trust Services, Inc.
(2) Does not include financial information for Midwest One Mortgage Services,
Inc.
The Banks accounted for nearly 99.0% of assets and virtually all net income
of the Company as of and for the years ended 1997, 1996 and 1995.
MARKETS
The Banks operate in broadly diverse markets, with varying levels of growth
rates of economic development and activity. Population trends, geographic
density and the demographic mix vary by market.
41
<PAGE> 43
The largest segments of the Company's customer base live and work in relatively
mature markets in Cook County and West Central Illinois. The market in Hinsdale
is a more affluent and upwardly mobile segment with a higher percentage of white
collar professionals. The southern portion of McHenry County is a high growth
market characterized by a core middle class base, augmented by a rapid influx of
young families and professional couples.
The Company considers its primary market areas to be those areas
immediately surrounding its offices for retail customers and, generally, within
a 10-20 mile radius of each Bank for commercial relationships. The Banks operate
out of 13 full-service locations in the Chicago metropolitan area and in Western
Illinois from offices in Monmouth, Galesburg, Oquawka and Kirkwood. Accordingly,
the Company's business extends throughout the Chicago metropolitan area and
Western Illinois, but is highly concentrated in the areas in which the Company's
offices are located. The communities in which the Company's offices are located
have a broad spectrum of demographic characteristics. These communities include
a number of densely populated areas as well as rural areas, and some extremely
high-income areas as well as many middle-income and some low- to moderate-income
areas.
The following table sets forth certain information with respect to each of
the Banks' primary markets:
<TABLE>
<CAPTION>
MEDIAN POPULATION
MARKET AREAS HOUSEHOLD OF AREA OR
BANK (ALL ARE ILLINOIS COMMUNITIES) INCOME CITY
---- ------------------------------ --------- ----------
<S> <C> <C> <C>
Midwest Bank and Trust Company..... Chicago-Michigan Ave $60,000(1) Commuter
Chicago-Addison Office(2) $34,669 69,035
Chicago-Pulaski Office(2) $30,059 59,672
Elmwood Park, Melrose Park, Oak Park,
River Forest, Franklin Park(3) $50,330 127,867
Midwest Bank....................... Hinsdale, Downers Grove, Burr Ridge,
Westmont, Oak Brook, Clarendon
Hills(3) $73,992 107,966
Midwest Bank of McHenry County..... Union, Algonquin, Marengo, Crystal
Lake, East Dundee, Lake In The Hills,
Carpentersville, Huntley(3) $46,035 75,619
National Bank of Monmouth.......... Monmouth, Galesburg, Oquawka,
Kirkwood(3) $26,186 45,338
</TABLE>
- -------------------------
(1) Management estimate.
(2) Information from 1990 U.S. Census data for zip code of bank location.
(3) Reflects 1994 estimates published by Bureau of the Census, U.S. Department
of Commerce.
According to the 1990 census, the Chicago metropolitan area is the third
largest metropolitan area in the United States with a population of
approximately 7.1 million. With approximately 600,000 manufacturing jobs, 1.1
million service jobs, 1.1 million jobs in retail/wholesale trade, transportation
and public utilities, and 300,000 jobs in finance, insurance and real estate,
the Chicago metropolitan area followed only the New York and Los Angeles
metropolitan areas in total nonagricultural wage and salary employment.
STRATEGY
The Company believes that its continued success is dependent on its ability
to provide to its customers value-added retail and commercial banking programs
and other financial products and services which are delivered by experienced,
committed banking professionals operating under the highest standards of
customer service. The growth strategy of the Company is to increase its core
banking business, further develop its
42
<PAGE> 44
mortgage, trust and securities brokerage activities, and expand into other
financial services. Key aspects of the Company's strategy include the following:
- Maintain high levels of customer service through decentralized operating
structure. The Company believes that its independent banking and service
operations, supported by a professional centralized staff, will continue
to enable the Company to remain a low cost provider of premium rate
deposits and competitively priced loan products.
- Increase market share within existing markets and expand into new
markets. The Company intends to continue to increase its core banking
business in existing markets through its commercial banking program and
retail sales and distribution system. As opportunities arise, the Company
intends to augment its internal growth and broaden its community banking
presence within the six-county Chicago metropolitan area, Northern and
Central Illinois and neighboring states through branch build-outs and
selective acquisitions. The Company may also pursue joint ventures with
strategic partners in nonbanking specialized financial services.
- Enhance cross-selling of value-added products and services. The Company
serves in excess of 40,000 customers with more than 70,000 accounts. The
Company plans to generate additional business from its existing customer
base. The Company has recently installed an automated marketing central
information system that should enable it to focus its efforts on desirable
target segments within its base, offering additional customized and
personalized value-added services.
- Maintain a leadership position in product development and marketing. The
Company intends to continue to develop innovative and highly competitive
retail banking products, designed to build a strong, growing customer base
within existing and potential new markets. The Company has developed a
wide range of customized products and services targeted for specific
groups within its markets. Management intends to support product
developments with comprehensive, innovative and creative marketing and
merchandising campaigns, primarily through newsprint, direct mail and
community special events.
- Increase the revenue base of nonbank financial service subsidiaries. The
Company will seek to increase the revenues generated from trust, mortgage
and securities brokerage services and also develop and offer other
financial products and services as additional future revenue sources. A
primary focus of management's efforts will be to substantially increase
the number of value-added trust service relationships through a broad
expansion of products and service programs, combined with an incentive-
based, comprehensive cross-selling effort targeted at qualified commercial
and retail customer accounts. The Company also intends to materially
increase secondary market origination levels through officer calling
efforts, cross-selling to the existing customer base and a more aggressive
expansion of product lines. Management intends to expand existing
securities brokerage capabilities to the Banks and, as competitive
circumstances permit, broaden them to include customized annuity and
mutual funds programs. The Company is also exploring opportunities to
develop products, programs and services in whole, term and universal life
insurance lines, as well as selected well-defined casualty areas through
joint venture agreements or agency acquisitions.
- Increase existing loan-to-deposit ratios of the Banks. The Company will
attempt to increase the Banks' loan-to-deposit ratios in order to improve
and expand its interest rate margins. Management intends to seek quality
loan relationships through comprehensive and consistent calling efforts by
experienced relationship managers and senior officers. Conservative
lending practices will continue to be applied throughout the banking
network by each Bank's weekly credit committee meeting and the Company's
loan review function.
- Expand funding sources for liquidity and interest rate risk
management. The Company will seek to expand its use of non-traditional
funding sources, including FHLB facilities, state deposits, brokered
deposit relationships and agency repurchase lines, to support its
anticipated growth. These sources will supplement the existing core
deposit base, provide greater flexibility in managing funding costs and
minimize potential risks of disintermediation and rate exposure at varying
points in the economic cycle.
43
<PAGE> 45
Management believes that these strategies, which are subject to change at any
time, will support the continued profitable growth of the Company and allow it
to maintain consistent high performance and leadership positions in its markets.
PRODUCTS AND SERVICES
Deposit Products
Management believes the Company and the Banks are leaders in developing and
marketing innovative deposit products and programs which address the needs of
customers in each of the local markets served. These products include:
Checking Accounts. The Company has developed a range of different checking
account products designed and priced to meet specific target segments (e.g., age
and industry groups) of the local markets served by each Bank.
NOW/Money Market Accounts. The Company offers several types of premium rate
NOW accounts and money market accounts with interest rates indexed to the prime
rate or the 91-day U.S. Treasury bill rate. The Banks were one of the first to
offer these products in their respective local markets.
Time Deposits. The Company offers a wide range of innovative time deposits,
usually offered at premium rates with special features to protect the customer's
interest-earnings in changing interest rate environments. For example, specific
products include the FlexRate CD, which permit interest rate adjustments at the
customer's option, the Customer Choice CD, that has limited or reduced
prepayment penalties, and the ADDvantage CD where customers can add additional
amounts to an existing certificate at any time through maturity.
Lending Services
The Company aggressively seeks quality loan relationships. The Company's
loan portfolio consists of commercial loans, commercial real estate loans,
agricultural loans, consumer real estate loans (including home equity lines of
credit) and consumer loans. Management of the Company emphasizes sound credit
analysis and loan documentation. Management also seeks to avoid undue
concentrations of loans to a single industry or based on a single class of
collateral. The Company has concentrated its efforts on building its lending
business in the following areas:
Commercial Loans. Commercial and individual loans are made to small- to
medium-sized businesses that are sole proprietorships, partnerships, and
corporations. Generally, these loans are secured with collateral including
accounts receivable, inventory and equipment, and require personal guarantees of
the principals. Frequently, these loans are further secured with real estate
equities.
Commercial Real Estate Loans. Commercial real estate loans include loans
for acquisition, development, and construction of real estate which are secured
by the real estate involved, and other loans secured by farmland, commercial
real estate, multifamily residential properties, and other nonfarm,
nonresidential properties. Loans retained by the Company for its portfolio are
generally short-term balloon loans and adjustable rate mortgages with initial
fixed terms of one to five years.
Agricultural Loans. A relatively small but important segment of the loan
portfolio are farm crop production loans on a seasonal basis, machinery and
equipment loans of a medium term nature and longer term real estate loans to
purchase acreage. Farm production loans are concentrated primarily in corn and
bean crops, with only a small portion tied to livestock. The National Bank of
Monmouth is a major agribusiness lender in West Central Illinois and Midwest
Bank of McHenry County has a small agricultural loan portfolio in Northern
Illinois.
Consumer Real Estate Loans. Consumer real estate loans are made to finance
residential units that will house from one to four families. While the Company
originates both fixed and adjustable rate consumer real estate loans, virtually
all one- to five-year adjustable rate loans originated pursuant to Fannie Mae
and FHLMC guidelines are sold in the secondary market. In the normal course of
business, the Company retains
44
<PAGE> 46
medium-term fixed-rate loans. See "Management's Discussion and Analysis of
Results of Operations and Financial Condition -- Financial Condition."
Home equity lines of credit, included within the Company's consumer real
estate loan portfolio, are secured by the borrower's home and can be drawn on at
the discretion of the borrower. These lines of credit are generally at variable
interest rates. When made, home equity lines, combined with the outstanding loan
balance of prior mortgage loans, generally do not exceed 80% of the appraised
value of the underlying real estate collateral.
Consumer Loans. Consumer loans (other than consumer real estate loans) are
collateralized loans to individuals for various personal reasons such as
automobile financing and home improvements.
Lending officers are assigned various levels of loan approval authority
based upon their respective levels of experience and expertise. Loan approval is
also subject to the Company's formal loan policy, as established by each Bank's
board of directors, and to the concurrence of an officers' credit committee (or
the Bank's board of directors or a committee of the board) in addition to the
recommendation of the lending officer. This system is intended to assure that
commercial credit requests are subjected to independent objective review on at
least two different levels, and is believed to be a key element of the Company's
low level of loan losses.
Management believes that the effectiveness of the Company's loan
administration is evidenced in its low delinquency rate and its low loss
experience in recent periods. See "Management's Discussion and Analysis of
Results of Operations and Financial Condition--Financial Condition."
ATMs
The Banks maintain a network of 18 ATM sites generally located within the
Banks' local markets. All ATM equipment is owned by the Banks. Thirteen of the
ATM sites are located at various banking centers, and five are maintained
off-site at hotels, supermarkets and schools.
Trust Activities
Midwest Trust Services, Inc. is a full-service Illinois trust company
offering land trusts, personal trusts, custody accounts, retirement plan
services and corporate trust services. As of December 31, 1997, Midwest Trust
Services, Inc. maintained relationships representing an aggregate market value
of $147.5 million in assets with an aggregate book value of $118.2 million. In
addition, Midwest Trust Services, Inc. administered 2,029 land trust accounts as
of December 31, 1997. The service approach of Midwest Trust Services, Inc. is
personalized, reflecting client relationships and cost-effective pricing for
services rendered.
The National Bank of Monmouth also provides trust services to its customers
and maintained trust accounts with an aggregate market value of $38.3 million
and an aggregate book value of $20.1 million as of December 31, 1997.
Mortgage Services
Midwest One Mortgage Services, Inc. serves customers, residents and
realtors in local markets within the Chicago metropolitan area through loan
originators located at banking centers in Elmwood Park, Melrose Park, Hinsdale
and Algonquin. The primary services offered by Midwest One Mortgage Services,
Inc. include conventional first and second mortgages on one- to four-family
housing on a new issue or refinancing basis, as well as special programs for
first-time homebuyers, reverse mortgages, and loans for individuals with a
history of credit problems, generally classified or described as "B", "C", and
"D" paper within the mortgage industry. Midwest One Mortgage Services, Inc.
offers a range of products with varied terms, rates and maturities to meet the
needs of customers within local markets. Fixed rate mortgages are offered from
three to thirty years, and adjustable rate mortgages are available with
different options and rate adjustment dates. The majority of mortgage loans are
sold in the secondary market to a range of investors that offer a complementary
mix of conventional and specialty loan programs.
45
<PAGE> 47
Securities Brokerage
Securities brokerage services are provided through arrangements with an
independent regional brokerage firm. Licensed brokers are located at three
banking centers and provide services with respect to stocks and securities
trading, financial planning, mutual funds sales, fixed and variable rate
annuities and tax-exempt and conventional unit trusts.
COMPETITION
The Company competes in the financial services industry through the Banks,
Midwest One Mortgage Services, Inc. and Midwest Trust Services, Inc. The
financial services business is highly competitive. The Company encounters strong
direct competition for deposits, loans and other financial services. The
Company's principal competitors include other commercial banks, savings banks,
savings and loan associations, mutual funds, money market funds, finance
companies, credit unions, mortgage companies, private issuers of debt
obligations and suppliers of other investment alternatives, such as securities
firms.
In addition, in recent years, several major multibank holding companies
have entered or expanded in the Chicago metropolitan market. Generally, these
financial institutions are significantly larger than the Company and have access
to greater capital and other resources. In addition, many of the Company's
nonbank competitors are not subject to the same degree of regulation as that
imposed on bank holding companies, federally insured banks and national or
Illinois chartered banks. As a result, such nonbank competitors have advantages
over the Company in providing certain services.
The Company addresses these competitive challenges by creating market
differentiation and by maintaining an independent community bank presence with
local decision-making within its markets. The Bank competes for deposits
principally by offering depositors a variety of deposit programs, convenient
office locations, hours and other services. The Banks compete for loan
originations primarily through the interest rates and loan fees they charge, the
efficiency and quality of services they provide to borrowers, the variety of
their loan products and their trained staff of professional bankers.
The Company competes for qualified personnel by offering competitive levels
of compensation, management and employee cash incentive programs, and by
augmenting compensation with stock options pursuant to its stock option plan.
Attracting and retaining high quality employees is important in enabling the
Company to compete effectively for market share with both the Company's large
and small competitors.
PROPERTIES
The principal office of the Company is located in Midwest Centre at 501
West North Avenue, Melrose Park, Illinois. This four-story building is owned by
Midwest Bank and Trust Company and comprises approximately 48,000 square feet.
This location also houses the Melrose Park banking center of Midwest Bank and
Trust Company, a Midwest One Mortgage Services, Inc. office and a number of
nonaffiliated professional offices.
Midwest Bank and Trust Company maintains three full-service banking
facilities in Chicago at 300 South Michigan Avenue, 4012 North Pulaski Road and
7227 West Addison Street. Its main office is at 1606 North Harlem Avenue,
Elmwood Park. This facility is also the office of Midwest Trust Services, Inc.
Midwest Bank and Trust Company also occupies a lending facility adjacent to the
main bank building. Midwest Bank and Trust Company occupies a total of 56,100
square feet at these locations. Midwest Bank and Trust Company owns all of these
facilities, except the Michigan Avenue facility and a portion of the Elmwood
Park facility, both of which are leased.
Midwest Bank is located at 500 West Chestnut Street in Hinsdale. This
facility is owned by Midwest Bank and comprises 12,863 square feet. Midwest Bank
also maintains a full-service banking facility in Downers Grove, Illinois. This
leased facility totals 4,100 square feet.
Midwest Bank of McHenry County is located at 17622 Depot Street, Union,
Illinois. This facility is owned by Midwest Bank of McHenry County and comprises
approximately 4,000 square feet. Midwest Bank
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<PAGE> 48
of McHenry County also maintains a full-service banking facility in Algonquin,
Illinois. Midwest Bank of McHenry County owns the facility, which consists of
12,000 square feet.
The National Bank of Monmouth is located at 100 East Broadway, Monmouth,
Illinois and maintains full-service banking facilities in Galesburg, Oquawka and
Kirkwood, Illinois. The bank occupies a total of 42,900 square feet at these
locations. All of these facilities are owned by The National Bank of Monmouth.
LEGAL PROCEEDINGS
The Company and its subsidiaries are from time to time parties to various
legal actions arising in the normal course of business. Management believes that
there is no proceeding threatened or pending against the Company or any of its
subsidiaries which, if determined adversely, would have a material adverse
effect on the financial condition or results of operations of the Company.
EMPLOYEES
As of December 31, 1997, the Company and its subsidiaries had 248 full-time
employees and 132 part-time employees. Management considers its relationship
with its employees to be good.
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<PAGE> 49
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The name, age and position of each of the Directors and executive officers
of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
E.V. Silveri.............................. 67 Chairman of the Board
Robert L. Woods........................... 68 President, Chief Executive Officer and
Director
Angelo DiPaolo............................ 59 Director
Daniel Nagle.............................. 64 Director
Joseph Rizza.............................. 55 Director
LeRoy Rosasco............................. 65 Director
Robert D. Small........................... 67 Director
Leon Wolin................................ 71 Director
Edward H. Sibbald......................... 49 Executive Vice President and Chief
Financial Officer
Brad A. Luecke............................ 47 President, Midwest Bank and Trust Company
James I. McMahon.......................... 44 President, Midwest Bank
Stephen M. Karaba......................... 40 President, Midwest Bank of McHenry County
Roger C. Davis............................ 64 President, The National Bank of Monmouth
</TABLE>
E.V. Silveri has served as Chairman of the Board of the Company since 1983.
Mr. Silveri was elected a director of Midwest Bank and Trust Company in 1972 and
has been Chairman of the Board of Midwest Bank and Trust Company since 1975. He
is also a member of the board of directors of Midwest Bank, First Midwest Data
Corp., Midwest Trust Services, Inc. and Midwest One Mortgage Services, Inc.
Since 1984, Mr. Silveri has been the President and also a director of Go-Tane
Service Stations, Inc., a firm he co-founded in 1966.
Robert L. Woods has served as President and Chief Executive Officer and as
a Director of the Company since 1983. Previously, he was the President of
Midwest Bank and Trust Company from 1967 to 1992. Mr. Woods also serves as
Chairman of the Board of Directors of Midwest Bank. In addition, he is a
director of The National Bank of Monmouth, Midwest One Mortgage Services, Inc.
and First Midwest Data Corp.
Angelo DiPaolo has served as a Director of the Company since 1983. He has
also served as a director of Midwest Bank and Trust Company since 1982. He has
served as President of DiPaolo Company, a heavy construction company, and
DiPaolo Center, a commercial complex in Glenview, Illinois, since 1963.
Daniel Nagle has served as a Director of the Company and as a director of
Midwest Bank and Trust Company since 1983 and 1975, respectively. He also has
served as a director of Midwest Bank since 1991 and Midwest Trust Services, Inc.
since 1994. Mr. Nagle is an attorney with the law firm of Nagle & Nagle.
Joseph Rizza has served as a Director of the Company since April 1997. He
was elected a director of Midwest Bank in 1994. Mr. Rizza is the owner of Joe
Rizza Enterprises which owns several automobile dealerships and financial
service companies in the Chicago metropolitan area.
LeRoy Rosasco has served as a Director of the Company since 1983. He has
also served as a director of Midwest Bank and Trust Company since 1969. Mr.
Rosasco has been the owner and President of ProTacTic Golf, Inc. since 1996.
Prior thereto, Mr. Rosasco was a private investor with LPR Enterprises, Inc., a
real estate investment firm, for 10 years.
Robert D. Small has served as a Director of the Company since 1983. He was
originally elected to serve as a director of Midwest Bank and Trust Company in
1974. He has previously served as President and director of Midwest Bank of
McHenry County from 1989 to 1993. Mr. Small has been President of Small's
Furniture City since 1980.
Leon Wolin has served as a Director of the Company since 1991. He was
elected a director of Midwest Bank and Trust Company in 1989. Mr. Wolin has
served as a director of Midwest Bank since 1996. Mr. Wolin
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<PAGE> 50
has been President of both Wolin-Levin, Inc., a real property management and
consulting firm, and Price Associates, Inc., a real estate appraisal and
consulting firm, since 1950.
Edward H. Sibbald was named Executive Vice President and Chief Financial
Officer of the Company in October 1997. Previously, Mr. Sibbald served as Senior
Vice President-Administration since 1991. Mr. Sibbald also serves as Chairman of
the Executive Committee and director of The National Bank of Monmouth and as a
director of Midwest Bank of McHenry County. In addition, he is a Vice President
and a director of Midwest One Mortgage Services, Inc., and serves as a director
of First Midwest Data Corp.
Brad A. Luecke has served as President and Chief Executive Officer of
Midwest Bank and Trust Company since 1991. Mr. Luecke also serves as Trust
Officer and director of Midwest Trust Services, Inc. and as a director of
Midwest One Mortgage Services, Inc.
James I. McMahon has served as President and Chief Executive Officer and a
director of Midwest Bank since 1991. Mr. McMahon has been a Vice President of
the Company since 1987. He was elected President of Midwest One Mortgage
Services, Inc. in 1997. He has served as director of Midwest One Mortgage
Services, Inc. and Midwest Trust Services, Inc. since 1994.
Stephen M. Karaba has served as President of Midwest Bank of McHenry County
since 1994. Previously, Mr. Karaba was an Executive Vice President of Midwest
Bank of McHenry County and served as Vice President-Commercial Lending of
Illinois State Bank, and subsequently, Midwest Bank and Trust Company beginning
in 1989. Mr. Karaba has been a director of Midwest Bank of McHenry County,
Midwest Trust Services, Inc. and Midwest One Mortgage Services, Inc. since 1994.
Roger C. Davis has served as President and Chief Executive Officer of The
National Bank of Monmouth since 1994. He also has been a director of The
National Bank of Monmouth since 1994. Mr. Davis was Executive Vice President of
The National Bank of Monmouth from 1991 to 1994 and served as Chairman of the
Board of Midwest Bank of Oquawka from 1993 to 1994.
BOARD OF DIRECTORS
The Board of Directors of the Company consists of eight members each
serving one-year terms that expire at the next annual meeting of stockholders.
Upon approval by the Company's stockholders at the next annual or special
meeting, the Company will implement staggered terms for the Board as described
under "Description of Capital Stock -- Certain Anti-Takeover Effects of the
Company's Certificate of Incorporation, By-Laws and Delaware Law." The Board of
Directors has established an Audit Committee that recommends the annual
appointment of the Company's auditors and reviews the scope and results of the
audit and other services provided by the Company's independent auditors. Messrs.
Nagle, Rosasco, Small and Wolin presently serve on the Audit Committee. The
Board of Directors also acts as a Compensation Committee for the purpose of
administering the Company's 1996 Stock Option Plan.
BOARD OF DIRECTORS' COMPENSATION
All Directors of the Company receive fees of $12,000 per year for serving
on the Board. Except for Joseph Rizza and Robert Small, all Directors of the
Company are also members of the board of directors of Midwest Bank and Trust
Company. Five Directors of the Company also serve on the board of directors of
Midwest Bank, and Robert L. Woods also serves on the board of directors of The
National Bank of Monmouth.
Each director of the Company's subsidiaries received between $4,200-10,400
per year in base directors' fees. Each subsidiary maintains its own fee
structure for director compensation.
Certain subsidiaries also provide fees for director participation in
specific board of directors committees (such as loan committees, audit
committees and executive committees) which range between $420-4,200 annually.
One Director of the Company, Daniel Nagle, also serves as Corporate
Secretary and receives an annual fee not exceeding $12,000 for legal services
rendered to the board of directors of Midwest Bank and Trust Company and Midwest
Bank.
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<PAGE> 51
EXECUTIVE COMPENSATION
The following table summarizes the compensation paid by the Company to the
President and Chief Executive Officer and the four other most highly paid
executive officers (the "Named Executive Officers") during 1997, 1996 and 1995.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
--------------------------------------------- SECURITIES
NAME AND PRINCIPAL OTHER ANNUAL UNDERLYING ALL OTHER
POSITION YEAR SALARY($) BONUS($) COMPENSATION($) OPTIONS(#) COMPENSATION($)
------------------ ---- --------- -------- --------------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Robert L. Woods............. 1997 325,000 150,000 39,550(1) 0 12,072(2)
President and Chief 1996 300,000 150,000 31,350(1) 0 11,575(2)
Executive Officer 1995 250,000 100,000 27,575(1) 0 11,358(2)
Edward H. Sibbald........... 1997 133,500 29,931 13,650(3) 7,000 6,160(4)
Executive Vice President 1996 126,000 25,313 13,300(3) 6,000 5,815(4)
and Chief Financial
Officer 1995 119,000 24,487 6,125(3) 0 4,262(4)
Brad A. Luecke.............. 1997 165,000 23,967 19,350(5) 7,000 6,029(4)
President, Midwest Bank 1996 155,000 31,140 15,325(5) 10,000 5,938(4)
and Trust Company 1995 145,000 35,000 16,237(5) 0 5,775(4)
James I. McMahon............ 1997 150,000 29,462 15,667(6) 7,000 4,327(4)
President, Midwest Bank 1996 140,000 28,584 10,566(6) 10,000 4,318(4)
1995 130,000 30,500 5,869(6) 0 4,200(4)
Stephen M. Karaba........... 1997 100,000 29,082 9,000(7) 7,000 4,231(8)
President, Midwest Bank 1996 90,000 18,325 7,400(7) 10,000 4,214(4)
of McHenry County 1995 80,000 16,000 3,425(7) 0 3,080(4)
</TABLE>
- -------------------------
(1) Consists of directors' fees of $34,150, $26,150 and $22,375 in 1997, 1996
and 1995, respectively, and an automobile allowance of $5,400 in 1997 and
$4,800 in each of 1996 and 1995.
(2) Consists of a matching contribution made by the Company pursuant to the
Company's 401(k) Plan of $8,414, $7,917 and $7,700 in 1997, 1996 and 1995,
respectively, and life insurance premiums paid by the Company on behalf of
Mr. Woods in the amount of $3,658 in 1997, $3,545 in 1996 and $3,294 in
1995.
(3) Consists of directors' fees of $8,850, $8,500 and $6,125 in 1997, 1996 and
1995, respectively, and an automobile allowance of $4,800 in each of 1997
and 1996.
(4) Consists of a matching contribution made by the Company pursuant to the
Company's 401(k) Plan.
(5) Consists of directors' fees of $13,900, $11,900 and $11,000 in 1997, 1996
and 1995 and membership fees of $5,630, $3,425 and $5,137 in 1997, 1996 and
1995, respectively.
(6) Consists of directors' fees of $4,200 in 1997 and $3,600 in each of 1996 and
1995, membership fees of $2,885, $2,220 and $275 in 1997, 1996 and 1995,
respectively, and tuition reimbursement of $8,835, $4,746 and $1,994 in
1997, 1996 and 1995, respectively.
(7) Consists of directors' fees of $4,200, $3,800 and $3,425 in 1997, 1996 and
1995 respectively, and an automobile allowance of $4,800 and $3,500 in 1997
and 1996, respectively.
(8) Consists of a matching contribution of $3,611 made by Company pursuant to
the Company's 401(k) Plan and $620 in life insurance premiums paid by
Company.
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<PAGE> 52
The information presented below summarizes certain information about the
Common Stock underlying options which were granted in 1997 by the Company to the
Named Executive Officers.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-------------------------------------------------------- POTENTIAL REALIZABLE VALUE AT
NUMBER OF PERCENT OF ASSUMED ANNUAL RATES OF
SECURITIES TOTAL OPTIONS STOCK PRICE APPRECIATION
UNDERLYING GRANTED TO EXERCISE OF FOR OPTION TERM
OPTION EMPLOYEES IN BASE PRICE EXPIRATION ------------------------------
NAME GRANTED(#) FISCAL YEAR ($/SH) DATE 5%($) 10%($)
---- ---------- ------------- ----------- ---------- ----- ------
<S> <C> <C> <C> <C> <C> <C>
Edward H. Sibbald........ 7,000 14.3% $12.75 12/31/07 $56,129 $142,242
Brad A. Luecke........... 7,000 14.3 12.75 12/31/07 56,129 142,242
James I. McMahon......... 7,000 14.3 12.75 12/31/07 56,129 142,242
Stephen M. Karaba........ 7,000 14.3 12.75 12/31/07 56,129 142,242
</TABLE>
The following table summarizes the number and value of stock options
relating to Common Stock that were unexercised at December 31, 1997. No stock
options were exercised by the Named Executive Officers during 1997.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END
OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
SHARES VALUE OPTIONS AT FISCAL IN-THE-MONEY OPTIONS AT
ACQUIRED ON REALIZED YEAR-END(#) FISCAL YEAR-END($)
NAME EXERCISE(#) ($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
---- ----------- -------- ------------------------- -------------------------
<S> <C> <C> <C> <C>
Edward H. Sibbald............... 0 0 1,500/11,500 7,313/23,688
Brad A. Luecke.................. 0 0 2,500/14,500 12,188/38,313
James I. McMahon................ 0 0 2,500/14,500 12,188/38,313
Stephen M. Karaba............... 0 0 2,500/14,500 12,188/38,313
</TABLE>
TRANSITIONAL EMPLOYMENT AGREEMENTS
The Company and certain subsidiaries of the Company have entered into
separate Transitional Employment Agreements with each of the Named Executive
Officers and certain other officers of the Company's subsidiaries. The
Transitional Employment Agreements are designed to minimize the impact of change
in control transactions on the performance of key officers and executives. In
the event of a "change in control" (generally, the acquisition of 50% or more of
the voting power or the sale of more than 40% of the assets of the Company or
the relevant subsidiary); the agreements require the Company, the relevant
subsidiary or any successor, as the case may be, to continue the employment of
the affected officers for either 12 or 24 months in their respective positions
and at their respective salaries (including directors' fees, if any) with the
right to participate in new or continuing bonus, incentive, benefit and other
plans. In the event the employment of an officer is terminated by (i) the
officer for any reason during the first year following the change in control
(subject to the requirement that certain officers must wait 90 days following
the change of control to exercise such right of termination), (ii) by an
acquiror for any reason other than death, disability or cause, or (iii) due to
constructive discharge (e.g., a reduction in salary or benefits, a material
diminution in title, duties or responsibilities, or a significant change in
hours worked or location), the acquiror is obligated to continue the affected
officer's salary (including directors' fees, if any) for 12 or 24 months after
the termination of employment.
1996 STOCK OPTION PLAN
In November 1996, the Company adopted the 1996 Stock Option Plan (the
"Plan") pursuant to which incentive stock options and nonqualified stock options
may be granted to executives, key personnel,
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<PAGE> 53
consultants and nonemployee directors of the Company. The incentive stock
options granted under the Plan will be qualified as such under the Internal
Revenue Code of 1986, as amended (the "Code").
The purpose of the Plan is to allow the Company to offer executives, key
personnel, consultants and nonemployee directors stock-based incentives in the
Company, thereby giving them a stake in the Company's growth and prosperity and
encouraging them to continue their services with the Company, its subsidiaries
or affiliated companies.
The Plan permits the grant of options to purchase up to 500,000 shares of
Common Stock. Authorized but unissued shares and treasury shares may be made
available for issuance under the Plan. In the event of corporate changes
affecting the Common Stock such as stock splits, stock dividends,
reorganizations, mergers or consolidations, appropriate adjustments will be made
in the number of shares for which options may thereafter be granted under the
Plan and the option price and the number of shares subject to outstanding
options granted pursuant to the Plan.
Incentive stock options may be granted only to employees of the Company.
Nonqualified stock options may be granted to all employees of, and consultants
who provide services to, the Company or its Subsidiaries. Options may be granted
to employees or consultants at any time and from time to time in the sole
discretion of the Compensation Committee of the Board of Directors (the
"Compensation Committee"). The full Board of Directors currently serves as the
Compensation Committee. No employee or consultant may receive options covering
more than 100,000 shares in any single fiscal year.
The price to be paid for shares upon the exercise of each option pursuant
to the Plan may not be less than the fair market value of such shares on the
date on which the option is granted, as determined by the Board or the
Compensation Committee. The exercise price of any incentive stock option granted
to a person owning more than 10% of the total combined voting power of all
classes of stock of the Company or any of its subsidiaries must not be less than
110% of the fair market value of the option shares on the date of grant. The
fair market value of the option shares shall be the most recent closing sales
price for shares of the Common Stock traded in the over-the-counter market as
reported by the market makers for the Common Stock. Upon exercise, the option
price shall be paid either in cash or, if lawful and permitted, (a) by the
exchange of a number of previously acquired shares of the Company with a fair
market value at the time of exercise equal to the total exercise purchase price;
or (b) by any other means which the Board or the Compensation Committee, in its
sole discretion, determines to be legal consideration for the shares and to be
consistent with the Plan's purposes. The Plan also permits optionees who
exercise options to elect to have the Company withhold a portion of the option
shares purchased in order to satisfy any federal, state or local tax liability
imposed on the optionee by virtue of the exercise of the option.
Each option granted shall be effective until the termination date set forth
in the written award agreement. If no date is set forth in the award agreement,
each option granted under the Plan shall be effective for a period of ten years
from the date of grant thereof, unless the period is reduced because of death or
termination of the optionee's employment, except that any incentive stock option
granted to a person owning more than 10% of the outstanding shares of the
Company must terminate not later than five years from the date of the grant.
Options granted under the Plan shall be exercisable as prescribed in the
award agreement. If the award agreement does not set forth times with respect to
the exercisability of the options, then each option may be exercised up to 25%
in the first year following the grant thereof, up to 50% in the second year, up
to 75% in the third year, and after the third year up to 100%. This limitation
shall not be effective in the event of the death of an optionee while in the
employ of the Company or its subsidiaries. Upon termination of employment for a
reason other than death, disability or for cause, the optionee may exercise any
nonqualified stock option or any incentive stock option within three months of
the date of termination, to the extent such optionee was otherwise entitled to
exercise such options. The Plan provides that the aggregate fair market value
(determined as of the time the option is granted) of the shares for which
incentive stock options may be exercised for the first time by any optionee
during any calendar year may not exceed $100,000.
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<PAGE> 54
Options (other than incentive stock options) may not be transferred except
to immediate family members, a trust for the benefit of immediate family members
or a partnership of sole immediate family members. So long as there is no
consideration given for the transfer, the award agreement expressly permits the
transfer and subsequent transfers are prohibited.
The Plan will be administered, construed and interpreted by either the
Board of Directors, the Compensation Committee or such other committee to whom
the Board may delegate this function. Consistent with the terms of the Plan, the
Board of Directors or the Compensation Committee will select the individuals who
shall participate in the Plan, will determine the sizes, types, terms and
conditions of stock options granted and establish and amend the rules and
regulations for the Plan's administration. The Board of Directors may at any
time alter, amend, suspend or terminate the Plan. Unless earlier terminated by
the Board of Directors, the Plan will terminate on November 19, 2006.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Board of Directors functions as the Compensation Committee for purposes
of administering the Company's 1996 Stock Option Plan, and otherwise is
responsible for determining the compensation of the Company's executive
officers. Robert L. Woods, President and Chief Executive Officer of the Company,
serves on the Board of Directors.
Angelo DiPaolo, a Director of the Company, and four companies controlled by
Mr. DiPaolo received loans and lines of credit from the Banks which had an
aggregate outstanding loan balance of $8.9 million as of December 31, 1997. Each
loan was made in the ordinary course of business on terms substantially the same
as those prevailing at the time for comparable transactions with unaffiliated
persons and did not involve more than the normal risk of collectibility or
present other unfavorable features. Midwest Bank and Trust Company has
contracted with a general construction contractor for renovations at its Elmwood
Park location. A company controlled by Angelo DiPaolo is a subcontractor for the
renovation project. The work to be performed by Mr. DiPaolo's company has an
estimated value of $90,000.
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<PAGE> 55
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of January 31, 1998, and as adjusted
to reflect the sale of the Common Stock offered hereby, by (i) each person who
is known by the Company to own beneficially more than 5% of the Company's
outstanding Common Stock; (ii) each of the Company's Directors; (iii) each of
the Named Executive Officers; and (iv) all Directors and executive officers of
the Company as a group.
<TABLE>
<CAPTION>
PERCENTAGE OF
OUTSTANDING
SHARES
-------------------
NUMBER OF SHARES PRIOR TO AFTER
NAME (1) BENEFICIALLY OWNED(2) OFFERING OFFERING
-------- --------------------- -------- --------
<S> <C> <C> <C>
E.V. Silveri............................................ 1,666,946(3) 16.6% 15.0%
Robert L. Woods......................................... 383,416(4) 3.8 3.4
Angelo DiPaolo.......................................... 495,422(5) 4.9 4.5
Daniel Nagle............................................ 322,000 3.2 2.9
Joseph Rizza............................................ 175,280(6) 1.8 1.6
LeRoy Rosasco........................................... 1,000,450(7) 10.0 9.0
Robert D. Small......................................... 158,544(8) 1.6 1.4
Leon Wolin.............................................. 306,082(9) 3.1 2.8
Edward H. Sibbald....................................... 12,600(10) * *
Brad A. Luecke.......................................... 108,152(11) 1.1 1.0
James I. McMahon........................................ 7,426(11)(12) * *
Stephen M. Karaba....................................... 10,540(11)(13) * *
Directors and executive officers as a group (12
persons).............................................. 4,646,858(14) 46.4% 41.8%
</TABLE>
- -------------------------
* Less than one percent.
(1) The address of each principal stockholder is 501 West North Avenue, Melrose
Park, Illinois 60160.
(2) Unless otherwise stated below, each person has sole voting and investment
power with respect to all such shares.
(3) Includes 115,680 shares held by trusts for which Mr. Silveri acts as
trustee; 34,832 shares held directly by Mr. Silveri's spouse; 2,100 shares
held by trusts for which Mr. Silveri's spouse acts as trustee; and 956,494
shares held by Go-Tane Service Stations, Inc., a company controlled by Mr.
Silveri, and the Go-Tane Pension Plan.
(4) Represents shares held by trusts for which Mr. Woods or his spouse acts as
trustee.
(5) Includes 600 shares held by Mr. DiPaolo's minor grandchild.
(6) Includes 84,480 shares held by a trust for which Mr. Rizza acts as trustee.
(7) Includes 220,880 shares held by trusts for which Mr. Rosasco acts as
trustee and 168,000 shares held directly by Mr. Rosasco's spouse.
(8) Includes the indirect ownership of 122,400 shares held in a retirement
trust account for the benefit of Mr. Small.
(9) Includes 305,282 shares held by a trust for which Mr. Wolin acts as
trustee.
(10) Includes 1,500 shares subject to currently exercisable options and the
indirect ownership of 3,300 shares held in a retirement trust account for
the benefit of Mr. Sibbald.
(11) Includes 2,500 shares subject to currently exercisable options.
(12) Includes 4,126 shares held directly by Mr. McMahon's spouse.
(13) Includes 2,000 shares held directly by Mr. Karaba's spouse.
(14) Includes an aggregate of 9,000 shares subject to currently exercisable
options.
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CERTAIN TRANSACTIONS
Some of the Directors and executive officers of the Company are, and have
been during the preceding three fiscal years, customers of the Banks, and some
of the Directors and executive officers of the Company are direct or indirect
owners of 10% or more of the stock of corporations which are, or have been in
the past, customers of the Banks. As such customers, they have engaged in
transactions in the ordinary course of business of the Banks, including
borrowings, all of which transactions are or were on substantially the same
terms (including interest rates and collateral on loans) as those prevailing at
the time for comparable transactions with nonaffiliated persons. In the opinion
of management of the Company, none of the transactions involved more than the
normal risk of collectibility or presented any other unfavorable features. As of
December 31, 1997, the Banks had $10.3 million in loans outstanding to the
Directors and executive officers of the Company, which amount represented 19.4%
of total stockholders' equity as of that date. See also "Management --
Compensation Committee Interlocks and Insider Participation."
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SUPERVISION AND REGULATION
Bank holding companies and banks are extensively regulated under federal
and state law. References under this heading to applicable statutes or
regulations are brief summaries of portions thereof which do not purport to be
complete and which are qualified in their entirety by reference to those
statutes and regulations. Any change in applicable laws or regulations may have
a material adverse effect on the business of commercial banks and bank holding
companies, including the Company and the Banks. However, management is not aware
of any current recommendations by any regulatory authority which, if
implemented, would have or would be reasonably likely to have a material effect
on the liquidity, capital resources or operations of the Company or the Banks.
BANK HOLDING COMPANY REGULATION
The Company is registered as a "bank holding company" with the Federal
Reserve and, accordingly, is subject to supervision by the Federal Reserve under
the Bank Holding Company Act (the Bank Holding Company Act and the regulations
issued thereunder are collectively the "BHC Act"). The Company is required to
file with the Federal Reserve periodic reports and such additional information
as the Federal Reserve may require pursuant to the BHC Act. The Federal Reserve
examines the Company and the Banks, and may examine Midwest One Mortgage
Services, Inc., Midwest Trust Services, Inc. and First Midwest Data Corp.
The BHC Act requires prior Federal Reserve approval for, among other
things, the acquisition by a bank holding company of direct or indirect
ownership or control of more than five percent of the voting shares or
substantially all the assets of any bank or bank holding company, or for a
merger or consolidation of a bank holding company with another bank holding
company. With certain exceptions, the BHC Act prohibits a bank holding company
from acquiring direct or indirect ownership or control of voting shares of any
company which is not a bank or bank holding company and from engaging directly
or indirectly in any activity other than banking or managing or controlling
banks or performing services for its authorized subsidiaries. A bank holding
company may, however, engage in or acquire an interest in a company that engages
in activities which the Federal Reserve has determined, by regulation or order,
to be so closely related to banking or managing or controlling banks as to be a
proper incident thereto, such as owning and operating the trust business of
Midwest Trust Services, Inc., the mortgage lending business of Midwest One
Mortgage Services, Inc. and the data processing operations of First Midwest Data
Corp. Under the BHC Act and Federal Reserve regulations, the Company and the
Banks are prohibited from engaging in certain tie-in arrangements in connection
with an extension of credit, lease, sale of property, or furnishing of services.
Any company, including associates and affiliates of and groups acting in
concert with such company, which purchases or subscribes for five percent or
more of the Company's Common Stock may be required to obtain prior approval of
the Illinois Office of Banks and Real Estate (the "Illinois Commissioner") and
the Federal Reserve. Prior regulatory notice and approval requirements under the
Change in Bank Control Act and the Illinois Banking Act may also apply with
respect to any person who acquires stock of the Company such that its interest
exceeds ten percent of the Company. In addition, any corporation, partnership,
trust or organized group that acquires a controlling interest in the Company or
the Banks may have to obtain approval of the Federal Reserve to become a bank
holding company and thereafter be subject to regulation as such.
It is the policy of the Federal Reserve that the Company is expected to act
as a source of financial strength to the Banks and to commit resources to
support the Banks. The Federal Reserve takes the position that in implementing
this policy, it may require the Company to provide such support when the Company
otherwise would not consider itself able to do so.
The Federal Reserve has adopted risk-based capital requirements for
assessing bank holding company capital adequacy. These standards define
regulatory capital and establish minimum capital standards in relation to assets
and off-balance sheet exposures, as adjusted for credit risks. The Federal
Reserve's risk-based guidelines apply on a consolidated basis for bank holding
companies with consolidated assets of $150 million or more and on a "bank-only"
basis for bank holding companies with consolidated assets of less than $150
million, subject to certain terms and conditions. Under the Federal Reserve's
risk-based guidelines,
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capital is classified into two categories. For bank holding companies, Tier 1 or
"core" capital consists of common stockholders' equity, noncumulative perpetual
preferred stock (including related surplus), cumulative perpetual preferred
stock (including related surplus) (subject to certain limitations) and minority
interests in the common equity accounts of consolidated subsidiaries, and is
reduced by goodwill, certain other intangible assets and certain investments in
other corporations ("Tier 1 Capital"). Tier 2 capital consists of the allowance
for loan and lease losses (subject to certain limitations), perpetual preferred
stock and related surplus (subject to certain conditions), "hybrid capital
instruments," perpetual debt, mandatory convertible debt securities, term
subordinated debt and intermediate-term preferred stock (including related
surplus) (subject to certain limitations).
Under the Federal Reserve's capital guidelines, bank holding companies are
required to maintain a minimum ratio of qualifying total capital to
risk-weighted assets of eight percent, of which at least four percent must be in
the form of Tier 1 Capital. The Federal Reserve also requires a minimum leverage
ratio of Tier 1 Capital to total assets of three percent, except that bank
holding companies not rated in the highest category under the regulatory rating
system are required to maintain a leverage ratio of one percent to two percent
above such minimum. The three percent Tier 1 Capital to total assets ratio
constitutes the minimum leverage standard for bank holding companies, and will
be used in conjunction with the risk-based ratio in determining the overall
capital adequacy of banking organizations. In addition, the Federal Reserve
continues to consider the Tier 1 leverage ratio in evaluating proposals for
expansion or new activities.
In its capital adequacy guidelines, the Federal Reserve emphasizes that the
foregoing standards are supervisory minimums and that banking organizations
generally are expected to operate well above the minimum ratios. These
guidelines also provide that banking organizations experiencing internal growth
or making acquisitions will be expected to maintain strong capital positions
substantially above the minimum levels.
As of December 31, 1997, the Company had regulatory capital in excess of
the Federal Reserve's minimum requirements. The Company had a total capital to
risk-weighted assets ratio of 10.78% and a Tier 1 capital to risk-weighted
assets ratio of 9.60% as of December 31, 1997.
BANK REGULATION
Under Illinois law, each of Midwest Bank and Trust Company, Midwest Bank,
Midwest Bank of McHenry County and Midwest Trust Services, Inc. is subject to
supervision and examination by the Illinois Commissioner. As an affiliate of
these Banks, the Company is also subject to examination by the Illinois
Commissioner. The National Bank of Monmouth is subject to supervision and
examination by the OCC pursuant to the National Bank Act and regulations
promulgated thereunder. Each of the Banks is a member of the Federal Reserve
System and as such is also subject to examination by the Federal Reserve. Each
of the Banks is also a member of the FHLB of Chicago and may be subject to
examination by the FHLB of Chicago.
The deposits of the Banks are insured by the Bank Insurance Fund ("BIF")
under the provisions of the Federal Deposit Insurance Act (the "FDIA"), and the
Banks are, therefore, also subject to supervision and examination by the FDIC.
The FDIA requires that the appropriate federal regulatory authority approve any
merger and/or consolidation by or with an insured bank, as well as the
establishment or relocation of any bank or branch office. The FDIC also
supervises compliance with the provisions of federal law and regulations which
place restrictions on loans by FDIC-insured banks to their directors, executive
officers and other controlling persons.
Furthermore, banks are affected by the credit policies of other monetary
authorities, including the Federal Reserve, which regulate the national supply
of bank credit. Such regulation influences overall growth of bank loans,
investments, and deposits and may also affect interest rates charged on loans
and paid on deposits. The monetary policies of the Federal Reserve have had a
significant effect on the operating results of commercial banks in the past and
are expected to continue to do so in the future.
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All banks located in Illinois have traditionally been restricted as to the
number and geographic location of branches which they may establish. The
Illinois Banking Act was amended in June 1993, however, to eliminate such
branching restrictions. Accordingly, banks located in Illinois are now permitted
to establish branches anywhere in Illinois without regard to the location of
other banks' main offices or the number of branches previously maintained by the
bank establishing the branch.
Midwest Trust Services, Inc. is a trust company subject to the Illinois
Corporate Fiduciary Act and is regulated by the Illinois Commissioner. In
addition, as subsidiaries of a bank holding company, each of Midwest One
Mortgage Services, Inc., Midwest Trust Services, Inc. and First Midwest Data
Corp. may be examined by the Federal Reserve.
FINANCIAL INSTITUTION REGULATION GENERALLY
Transactions with Affiliates. Transactions between a bank and its holding
company or other affiliates are subject to various restrictions imposed by state
and federal regulatory agencies. Such transactions include loans and other
extensions of credit, purchases of securities and other assets, and payments of
fees or other distributions. In general, these restrictions limit the amount of
transactions between an institution and an affiliate of such institution, as
well as the aggregate amount of transactions between an institution and all of
its affiliates, impose collateral requirements in some cases, and require
transactions with affiliates to be on terms comparable to those for transactions
with unaffiliated entities.
Dividend Limitations. As a holding company, the Company is primarily
dependent upon dividend distributions from its operating subsidiaries for its
income. Federal and state statutes and regulations impose restrictions on the
payment of dividends by the Company and the Banks.
Federal Reserve policy provides that a bank holding company should not pay
dividends unless (i) the bank holding company's net income over the prior year
is sufficient to fully fund the dividends and (ii) the prospective rate of
earnings retention appears consistent with the capital needs, asset quality and
overall financial condition of the bank holding company and its subsidiaries.
Delaware law also places certain limitations on the ability of the Company
to pay dividends. For example, the Company may not pay dividends to its
stockholders if, after giving effect to the dividend, the Company would not be
able to pay its debts as they become due. Because a major source of the
Company's revenue is dividends the Company receives and expects to receive from
the Banks, the Company's ability to pay dividends is likely to be dependent on
the amount of dividends paid by the Banks. No assurance can be given that the
Banks will, in any circumstances, pay such dividends to the Company on their
stock.
As Illinois state-chartered banks, none of Midwest Bank and Trust Company,
Midwest Bank or Midwest Bank of McHenry County may pay dividends in an amount
greater than its current net profits after deducting losses and bad debts out of
undivided profits provided that its surplus equals or exceeds its capital. For
the purpose of determining the amount of dividends that an Illinois bank may
pay, bad debts are defined as debts upon which interest is past due and unpaid
for a period of six months or more unless such debts are well-secured and in the
process of collection. Without the prior approval of the OCC, The National Bank
of Monmouth may not declare dividends in any calendar year in excess of its net
profit for the year plus the retained net profits for the preceding two years.
In addition to the foregoing, the ability of the Company and the Banks to
pay dividends may be affected by the various minimum capital requirements and
the capital and noncapital standards established under the Federal Deposit
Insurance Corporation Improvements Act of 1991 ("FDICIA"), as described below.
Furthermore, the OCC may, after notice and opportunity for hearing, prohibit the
payment of a dividend by a national bank if it determines that such payment
would constitute an unsafe or unsound practice. The right of the Company, its
stockholders and its creditors to participate in any distribution of the assets
or earnings of its subsidiaries is further subject to the prior claims of
creditors of the respective subsidiaries.
Standards for Safety and Soundness. The FDIA, as amended by FDICIA and the
Riegle Community Development and Regulatory Improvement Act of 1994 requires the
Federal Reserve, together with the other federal bank regulatory agencies, to
prescribe standards of safety and soundness, by regulations or guidelines,
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relating generally to operations and management, asset growth, asset quality,
earnings, stock valuation, and compensation. The Federal Reserve, the OCC and
the other federal bank regulatory agencies adopted, effective August 9, 1995, a
set of guidelines prescribing safety and soundness standards pursuant to FDICIA,
as amended. The guidelines establish general standards relating to internal
controls and information systems, internal audit systems, loan documentation,
credit underwriting, interest rate exposure, asset growth, and compensation,
fees and benefits. In general, the guidelines require, among other things,
appropriate systems and practices to identify and manage the risks and exposures
specified in the guidelines. The guidelines prohibit excessive compensation as
an unsafe and unsound practice and describe compensation as excessive when the
amounts paid are unreasonable or disproportionate to the services performed by
an executive officer, employee, director or principal shareholder. In addition,
each of the Federal Reserve and the OCC adopted regulations that authorize, but
do not require, the Federal Reserve or the OCC, as the case may be, to order an
institution that has been given notice by the Federal Reserve or the OCC, as the
case may be, that it is not satisfying any of such safety and soundness
standards to submit a compliance plan. If, after being so notified, an
institution fails to submit an acceptable compliance plan or fails in any
material respect to implement an accepted compliance plan, the Federal Reserve
or the OCC, as the case may be, must issue an order directing action to correct
the deficiency and may issue an order directing other actions of the types to
which an undercapitalized association is subject under the "prompt corrective
action" provisions of FDICIA. If an institution fails to comply with such an
order, the Federal Reserve or the OCC, as the case may be, may seek to enforce
such order in judicial proceedings and to impose civil money penalties. The
Federal Reserve, the OCC and the other federal bank regulatory agencies also
adopted guidelines for asset quality and earnings standards.
A range of other provisions in FDICIA include requirements applicable to:
closure of branches; additional disclosures to depositors with respect to terms
and interest rates applicable to deposit accounts; uniform regulations for
extensions of credit secured by real estate; restrictions on activities of and
investments by state-chartered banks; modification of accounting standards to
conform to generally accepted accounting principles including the reporting of
off-balance sheet items and supplemental disclosure of estimated fair market
value of assets and liabilities in financial statements filed with the banking
regulators; increased penalties in making or failing to file assessment reports
with the FDIC; greater restrictions on extensions of credit to directors,
officers and principal stockholders; and increased reporting requirements on
agricultural loans and loans to small businesses.
In August 1995, the Federal Reserve, OCC, FDIC and other federal banking
agencies published a final rule modifying their existing risk-based capital
standards to provide for consideration of interest rate risk when assessing the
capital adequacy of a bank. Under the final rule, the Federal Reserve, the OCC
and the FDIC must explicitly include a bank's exposure to declines in the
economic value of its capital due to changes in interest rates as a factor in
evaluating a bank's capital adequacy. The Federal Reserve, the FDIC, the OCC and
other federal banking agencies also have adopted a joint agency policy statement
providing guidance to banks for managing interest rate risk. The policy
statement emphasizes the importance of adequate oversight by management and a
sound risk management process. The assessment of interest rate risk management
made by the banks' examiners will be incorporated into the banks' overall risk
management rating and used to determine the effectiveness of management.
Prompt Corrective Action. FDICIA requires the federal banking regulators,
including the Federal Reserve, the OCC and the FDIC, to take prompt corrective
action with respect to depository institutions that fall below certain capital
standards and prohibits any depository institution from making any capital
distribution that would cause it to be undercapitalized. Institutions that are
not adequately capitalized may be subject to a variety of supervisory actions
including, but not limited to, restrictions on growth, investment activities,
capital distributions and affiliate transactions and will be required to submit
a capital restoration plan which, to be accepted by the regulators, must be
guaranteed in part by any company having control of the institution (such as the
Company). In other respects, FDICIA provides for enhanced supervisory authority,
including greater authority for the appointment of a conservator or receiver for
undercapitalized institutions. The capital-based prompt corrective action
provisions of FDICIA and their implementing regulations apply to FDIC-insured
depository institutions. However, federal banking agencies have indicated that,
in regulating
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bank holding companies, the agencies may take appropriate action at the holding
company level based on their assessment of the effectiveness of supervisory
actions imposed upon subsidiary insured depository institutions pursuant to the
prompt corrective action provisions of FDICIA.
Insurance of Deposit Accounts. Under FDICIA, as an FDIC-insured
institution, each of the Banks is required to pay deposit insurance premiums
based on the risk it poses to the insurance fund. The FDIC has authority to
raise or lower assessment rates on insured deposits in order to achieve certain
designated reserve ratios in the insurance funds and to impose special
additional assessments. The FDIC recently amended the risk-based assessment
system and on December 11, 1995, adopted a new assessment rate schedule for BIF-
insured deposits. The new assessment rate schedule, effective with respect to
the semiannual premium assessment beginning January 1, 1996, provides for an
assessment range of zero to 0.27% (subject to a $2,000 minimum) of deposits
depending on capital and supervisory factors. Each depository institution is
assigned to one of three capital groups: "well capitalized," "adequately
capitalized" or "less than adequately capitalized." Within each capital group,
institutions are assigned to one of three supervisory subgroups: "healthy,"
"supervisory concern" or "substantial supervisory concern." Accordingly, there
are nine combinations of capital groups and supervisory subgroups to which
varying assessment rates would be applicable. An institution's assessment rate
depends on the capital category and supervisory category to which it is
assigned.
During 1997, the Banks were assessed deposit insurance in the aggregate
amount of $86,000. Deposit insurance may be terminated by the FDIC upon a
finding that an institution has engaged in unsafe or unsound practices, is in an
unsafe or unsound condition to continue operations or has violated any
applicable law, regulation, rule, order or condition imposed by the FDIC. The
management of each of the Banks does not know any practice, condition or
violation that might lead to termination of deposit insurance.
The Economic Growth and Regulatory Paperwork Reduction Act of 1996 enacted
on September 30, 1996 provides that beginning with semi-annual periods after
December 31, 1996, Bank Insurance Fund deposits will also be assessed to pay
interest on the bonds issued in the late 1980s by the Financing Corporation (the
"FICO Bonds") to recapitalize the now defunct Federal Savings & Loan Insurance
Corporation. For purposes of the assessments to pay interest on the FICO Bonds,
BIF deposits will be assessed at a rate of 20% of the assessment rate applicable
to SAIF deposits until December 31, 1999. After the earlier of December 31, 1999
or the date on which the last savings association ceases to exist, full pro rata
sharing of FICO assessments will begin. It has been estimated that the rates of
assessment for the payment of interest on the FICO Bonds will be approximately
1.3 basis points for BIF-assessable deposits and approximately 6.4 basis points
for SAIF-assessable deposits. The payment of the assessment to pay interest on
the FICO Bonds should not materially affect the Banks.
Federal Reserve System. The Banks are subject to Federal Reserve
regulations requiring depository institutions to maintain non-interest-earning
reserves against their transaction accounts (primarily NOW and regular checking
accounts). The Federal Reserve regulations generally require three percent
reserves on the first $51.9 million of transaction accounts and $1.6 million
plus ten percent on the remainder. The first $4.0 million of otherwise
reservable balances (subject to adjustments by the Federal Reserve) are exempted
from the reserve requirements. The Banks are in compliance with the foregoing
requirements.
Community Reinvestment. Under the Community Reinvestment Act ("CRA"), a
financial institution has a continuing and affirmative obligation, consistent
with the safe and sound operation of such institution, to help meet the credit
needs of its entire community, including low- and moderate-income neighborhoods.
The CRA does not establish specific lending requirements or programs for
financial institutions nor does it limit an institution's discretion to develop
the types of products and services that it believes are best suited to its
particular community, consistent with the CRA. The CRA requires each federal
banking agency, in connection with its examination of a financial institution,
to assess and assign one of four ratings to the institution's record of meeting
the credit needs of its community and to take such record into account in its
evaluation of certain applications by the institution, including applications
for charters, branches and other deposit facilities, relocations, mergers,
consolidations, acquisitions of assets or assumptions of liabilities, and
savings and loan holding company acquisitions. The CRA also requires that all
institutions make public
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disclosure of their CRA ratings. Each of the Banks received "satisfactory"
ratings on its most recent CRA performance evaluation.
In April 1995, the Federal Reserve, the OCC and other federal banking
agencies adopted amendments revising their CRA regulations. Among other things,
the amended CRA regulations substitute for the prior process-based assessment
factors a new evaluation system that would rate an institution based on its
actual performance in meeting community needs. In particular, the proposed
system would focus on three tests: (i) a lending test, to evaluate the
institution's record of making loans in its assessment areas; (ii) an investment
test, to evaluate the institution's record of investing in community development
projects, affordable housing, and programs benefiting low or moderate income
individuals and businesses; and (iii) a service test, to evaluate the
institution's delivery of services through its branches, ATMs and other offices.
The amended CRA regulations also clarify how an institution's CRA performance
would be considered in the application process.
Consumer Compliance. Midwest Bank has been made aware of certain
deficiencies in its consumer compliance program. Management believes that any
deficiencies have already been corrected. In the event that such deficiencies
were to continue over time, enforcement or administrative actions by the
appropriate federal banking regulators may impact the Company's ability to
implement its growth strategy.
Brokered Deposits. Well-capitalized institutions are not subject to
limitations on brokered deposits, while an adequately capitalized institution is
able to accept, renew or rollover brokered deposits only with a waiver from the
FDIC and subject to certain restrictions on the yield paid on such deposits.
Undercapitalized institutions are not permitted to accept brokered deposits.
Enforcement Actions. Federal and state statutes and regulations provide
financial institution regulatory agencies with great flexibility to undertake
enforcement action against an institution that fails to comply with regulatory
requirements, particularly capital requirements. Possible enforcement actions
range from the imposition of a capital plan and capital directive to
receivership, conservatorship or the termination of deposit insurance.
Interstate Banking and Branching Legislation. On September 29, 1994, the
Riegle-Neal Interstate Banking and Efficiency Act of 1994 (the "Interstate
Banking Act") was enacted. Under the Interstate Banking Act, adequately
capitalized and adequately managed bank holding companies will be allowed to
acquire banks across state lines subject to certain limitations. In addition,
under the Interstate Banking Act, since June 1, 1997, banks have been permitted,
under some circumstances, to merge with one another across state lines and
thereby create a main bank with branches in separate states. After establishing
branches in a state through an interstate merger transaction, a bank may
establish and acquire additional branches at any location in the state where any
bank involved in the interstate merger could have established or acquired
branches under applicable federal and state law.
Under the Interstate Banking Act, states could adopt legislation permitting
interstate mergers before June 1, 1997. Alternatively, states could adopt
legislation before June 1, 1997, subject to certain conditions, opting out of
interstate branching. Illinois adopted legislation, effective September 29,
1995, permitting interstate mergers beginning on June 1, 1997. It is anticipated
that this interstate merger and branching ability will increase competition and
further consolidate the financial institutions industry.
MONETARY POLICY AND ECONOMIC CONDITIONS
The earnings of banks and bank holding companies are affected by general
economic conditions and also by the fiscal and monetary policies of federal
regulatory agencies, including the Federal Reserve. Through open market
transactions, variations in the discount rate and the establishment of reserve
requirements, the Federal Reserve exerts considerable influence over the cost
and availability of funds obtainable for lending or investing.
The above monetary and fiscal policies and resulting changes in interest
rates have affected the operating results of all commercial banks in the past
and are expected to do so in the future. The Banks and their respective holding
companies cannot fully predict the nature or the extent of any effects which
fiscal or monetary policies may have on their business and earnings.
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DESCRIPTION OF CAPITAL STOCK
COMMON STOCK
The Company is authorized to issue 17,000,000 shares of Common Stock, $0.01
par value, of which 10,014,392 shares were outstanding prior to the Offering.
The outstanding shares of Common Stock currently are, and the shares of Common
Stock to be issued in the Offering will be (when issued and delivered in
accordance with the terms and conditions of the Offering), fully paid and
nonassessable. Each holder of record of Common Stock is entitled to one vote per
share on all matters voted upon by the Company's stockholders. Upon completion
of the public offering, holders of shares of Common Stock will have no
preemptive, redemption or cumulative voting rights. In the event of liquidation,
the holders of shares of Common Stock are entitled to share ratably in any
assets of the Company retained after payment in full of creditors and, if any
preferred stock is then authorized, issued and outstanding, after payment to
holders of such preferred stock but only to the extent of any liquidation
preference.
Dividends. The holders of Common Stock are entitled to receive and share
equally in such dividends, if any, declared by the Board of Directors out of
funds legally available therefor. The Company may pay dividends if, as and when
declared by its Board of Directors. See "Market for Common Stock and Dividends
- -- Dividends." If the Company issues Preferred Stock, the holders thereof may
have a priority over the holders of the Common Stock with respect to dividends.
Voting Rights. The holders of Common Stock possess voting rights in the
Company. Stockholders elect the Company's Board of Directors and act on such
other matters as are required to be presented to them under the DGCL or the
Company's Certificate of Incorporation or as are otherwise presented to them by
the Board of Directors. Each holder of Common Stock will be entitled to one vote
per share and will not have any right to cumulate votes in the election of
directors. Accordingly, holders of more than fifty percent of the outstanding
shares of Common Stock will be able to elect all of the Directors to be elected
each year. Although there are no present plans to do so, if the Company issues
Preferred Stock, holders of the Preferred Stock may also possess voting rights.
See "Certain Anti-Takeover Effects of the Company's Certificate of Incorporation
and By-Laws and Delaware Law."
Liquidation. In the event of any liquidation, dissolution or winding up of
the Company, the holders of its Common Stock would be entitled to receive, after
payment or provision for payment of all debts and liabilities of the Company,
all assets of the Company available for distribution. If Preferred Stock is
issued, the holders thereof may have a priority over the holders of the Common
Stock in the event of any liquidation or dissolution.
Preemptive Rights and Redemption. Holders of the Common Stock will not be
entitled to preemptive rights with respect to any shares which may be issued by
the Company in the future. The Common Stock is not subject to mandatory
redemption by the Company.
PREFERRED STOCK
The Board of Directors is authorized, pursuant to the Certificate of
Incorporation, to issue 1,000,000 shares of Preferred Stock, $0.01 par value, in
one or more series with respect to which the Board, without stockholder
approval, may determine voting, conversion and other rights which could
adversely affect the rights of the holders of Common Stock. The rights of the
holders of the Common Stock would generally be subject to the prior rights of
the Preferred Stock with respect to dividends, liquidation preferences and other
matters. Among other things, Preferred Stock could be issued by the Company to
raise capital or to finance acquisitions. The issuance of Preferred Stock under
certain circumstances could have the effect of delaying or preventing a change
in control of the Company. The Company has no present plans to issue any shares
of Preferred Stock.
CERTAIN ANTI-TAKEOVER EFFECTS OF THE CERTIFICATE OF INCORPORATION, BY-LAWS AND
DELAWARE LAW
General. Certain provisions of the Certificate of Incorporation, By-Laws
and the DGCL may have the effect of impeding the acquisition of control of the
Company by means of a tender offer, a proxy fight, open-
62
<PAGE> 64
market purchase or otherwise in a transaction not approved by the Board of
Directors. These provisions may have the effect of discouraging a future
takeover attempt which is not approved by the Board of Directors but which
individual stockholders may deem to be in their best interests or in which
stockholders may receive a substantial premium for their shares over then
current market prices. As a result, stockholders who might desire to participate
in such a transaction may not have an opportunity to do so. Such provisions will
also render the removal of the current Board of Directors or management of the
Company more difficult.
The provisions of the Certificate of Incorporation and By-Laws described
below are designed to reduce, or have the effect of reducing, the vulnerability
of the Company to an unsolicited proposal for the restructuring or sale of all
or substantially all of the assets of the Company or an unsolicited takeover
attempt which is unfair to stockholders. The following description of certain of
the provisions of the Certificate of Incorporation and By-Laws of the Company is
necessarily general and is qualified in its entirety by reference to the
Certificate of Incorporation and By-Laws of the Company.
Authorized Shares. The Certificate of Incorporation authorizes the issuance
of 17,000,000 shares of Common Stock and 1,000,000 shares of Preferred Stock.
The shares of Common Stock and Preferred Stock have been authorized in an amount
which provides the Board of Directors with flexibility to effect, among other
things, transactions, financings, acquisitions, stock dividends, stock splits
and employee stock options. However, these authorized shares may also be used by
the Board of Directors consistent with its fiduciary duty to deter future
attempts to gain control of the Company. The Board of Directors also has sole
authority to determine the terms of any one or more series of Preferred Stock,
including voting rights, conversion rates, and liquidation preferences. As a
result of the ability to fix voting rights for a series of Preferred Stock, the
Board of Directors has the power to the extent consistent with its fiduciary
duty to issue a series of Preferred Stock to persons friendly to management in
order to attempt to block a merger or other transaction by which a third party
seeks control, and thereby assist the incumbent Board of Directors and
management to retain their respective positions.
Classified Board of Directors; Filling of Board Vacancies and Qualifying
Shares. The Board of Directors has approved, subject to stockholder approval at
the next annual or special meeting of stockholders, amendments to the By-Laws to
implement a classified Board of Directors with staggered terms. Upon adoption of
these amendments, the Board of Directors will be divided into three classes,
each of which will contain approximately one-third of the whole number of the
members of the Board of Directors. Each class will serve a staggered three-year
term, with approximately one-third of the total number of Directors being
elected each year. Under the DGCL, members of a staggered board may only be
removed for cause unless the Certificate of Incorporation provides otherwise.
The Certificate of Incorporation does not provide for removal of directors
without cause. The staggered board is intended to provide for continuity of the
Board of Directors and to make it more difficult and time consuming for a
stockholder group to fully use to its voting power to gain control of the Board
of Directors without the consent of the incumbent Board of Directors.
The By-Laws provide that the number of the Directors shall be eight. The
By-Laws also provide that any vacancy occurring on the Board of Directors,
including a vacancy created by an increase in the number of Directors, will be
filled for the remainder of the unexpired term by a majority vote of the
Directors then in office.
The By-Laws also provide that each person, in order to be eligible to serve
as a Director, must own, of record or beneficially, at least 120,000 shares of
Common Stock.
Cumulative Voting; Action by Written Consent and Stockholder Meetings. The
Certificate of Incorporation does not provide for cumulative voting for any
purpose. The Certificate of Incorporation and By-Laws also provide that any
action required or permitted to be taken by the stockholders must be effected at
an annual or special meeting and may not be effected by written consent in lieu
of a meeting. The By-Laws provide that special meetings of the stockholders may
only be called by the Chairman or the President of the Company or a majority of
the Board of Directors.
Delaware Business Combination Statute. Section 203 of the DGCL provides
that, subject to certain exceptions specified therein, an "interested
stockholder" of a Delaware corporation shall not engage in any
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<PAGE> 65
business combination, including mergers or consolidations or acquisitions of
additional shares of the corporation, with the corporation for a three-year
period following the time that such stockholder becomes an interested
stockholder unless (i) prior to such time, the board of directors of the
corporation approved either the business combination or the transaction which
resulted in the stockholder becoming an interested stockholder, (ii) upon
consummation of the transaction which resulted in the stockholder becoming an
interested stockholder, the interested stockholder owned at least 85% of the
voting stock of the corporation outstanding at the time the transaction
commenced (excluding certain shares), or (iii) at or subsequent to such time the
business combination is approved by the board of directors of the corporation
and authorized at an annual or special meeting of stockholders, by the
affirmative vote of at least 66 2/3% of the outstanding voting stock which is
not owned by the interested stockholder. Except as otherwise specified in
Section 203, an interested stockholder is defined to include any person that is
(x) the owner of 15% or more of the outstanding voting stock of the corporation,
or (y) is an affiliate or associate of the corporation and was the owner of 15%
or more of the outstanding voting stock of the corporation at any time within
the three-year period immediately prior to the date of determination; and the
affiliates and associates of any such person.
Under certain circumstances, Section 203 makes it more difficult for a
person who would be an interested stockholder to effect various business
combinations with a corporation for a three-year period. The Company has not
elected to be exempt from the restrictions imposed under Section 203. The
provisions of Section 203 may encourage persons interested in acquiring the
Company to negotiate in advance with the Board of Directors of the Company since
the stockholder approval requirement would be avoided if a majority of the
directors then in office approves either the business combination or the
transaction which results in any such person becoming an interested stockholder.
Such provisions also may have the effect of preventing changes in the management
of the Company. It is possible that such provisions could make it more difficult
to accomplish transactions which the Company's stockholders may otherwise deem
to be in their best interests.
Amendment of the Certificate of Incorporation and By-Laws. The Certificate
of Incorporation provides that the affirmative vote of the holders of at least
66 2/3% of the voting stock, voting together as a single class, is required to
amend provisions of the Certificate of Incorporation prohibiting stockholder
action without a meeting or specifying the vote required to amend such
provisions. By-Laws may be amended by the stockholders or the Board of
Directors.
Certain By-Law Provisions. The By-Laws of the Company also require a
stockholder who intends to nominate a candidate for election to the Board of
Directors, or to raise new business at an annual stockholder meeting, to provide
advance notice of at least 120 days to the Company. The notice provision
requires a stockholder who desires to raise new business at an annual
stockholder meeting to provide certain information to the Company concerning the
nature of the new business, the stockholder and such stockholder's interest in
the business matter. Similarly, a stockholder wishing to nominate any person for
election as a director must provide the Company with certain information
concerning the nominee and such proposing stockholder.
The provisions described above are intended to reduce the Company's
vulnerability to takeover attempts and certain other transactions which have not
been negotiated with and approved by members of its Board of Directors.
Attempts to take over corporations have become increasingly common. An
unsolicited, nonnegotiated proposal can seriously disrupt the business and
management of a corporation and cause it great expense. Accordingly, the Board
of Directors believes it is in the best interests of the Company and its
stockholders to encourage potential acquirors to negotiate directly with
management and that these provisions will encourage such negotiations and
discourage nonnegotiated takeover attempts. It is also the view of the Board of
Directors that these provisions should not discourage persons from proposing a
merger or other transaction at a price that reflects the true value of the
Company and that otherwise is in the best interest of all stockholders.
LIMITATION OF DIRECTOR LIABILITY AND INDEMNIFICATION
The Certificate of Incorporation provides that no Director of the Company
will be personally liable to the Company or its stockholders for monetary
damages for breach of fiduciary duty as a Director; provided, however, that
Directors will have liability (i) for any breach of a Director's duty of loyalty
to the Company or
64
<PAGE> 66
its stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) under Section 174 of
the DGCL, or (iv) for any transaction from which the Director derived an
improper personal benefit.
The By-Laws provide that the Company will indemnify, to the full extent
permitted under the DGCL, any person made or threatened to be made a party to
any threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative, by reason of the fact that he is or
was a Director, officer, employee or agent of the Company, or is or was serving
at the Company's request as a Director, officer, employee or agent of another
corporation or other enterprise against liabilities and expenses reasonably
incurred or paid by such person in connection with such action, suit or
proceeding. Expenses incurred in defending a civil, criminal, administrative,
investigative or other action, suit or proceeding may be paid by the Company in
advance of a final disposition in accordance with the DGCL. The indemnification
and advancement of expenses provided by the By-Laws are not to be deemed
exclusive of any other rights to which any person indemnified may be entitled
under any by-law, statute, agreement, vote of stockholders, or disinterested
directors or otherwise, both as to action in his official capacity and as to
action in another capacity while holding such office, and will continue as to a
person who has ceased to be such Director, officer, employee or agent and shall
inure to the benefit of the heirs, executors and administrators of such person.
The Company may purchase and maintain insurance on behalf of any indemnified
person against any liability asserted against him and incurred by him in any
such capacity, or arising out of his status as such, whether or not the Company
would have the power to indemnify him against such liability under the By-Laws.
The provisions of the By-Laws are deemed a contract between the Company and each
Director, officer, employee and agent who serves in any such capacity at any
time while the By-Laws and relevant provisions of the DGCL, or other applicable
law, if any, are in effect, and any repeal or modification of any such law or of
the By-Laws will not affect any right or obligations then existing with respect
to any state of facts then or theretofore existing or any action, suit or
proceeding theretofore or thereafter brought or threatened based in whole or in
part upon such state of facts.
TRANSFER AGENT AND REGISTRAR
Harris Trust and Savings Bank, Chicago, Illinois, serves as the transfer
agent and registrar for the Common Stock.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have 11,114,392 shares of
Common Stock outstanding (11,279,392 if the Underwriters' over-allotment option
is exercised in full). Of these shares, the 1,100,000 shares sold in the
Offering will be freely tradeable by persons other than "affiliates" of the
Company without restriction or registration under the Securities Act. The
10,014,392 remaining shares (the "Restricted Shares") were issued and sold by
the Company in reliance upon exemptions from registration under the Securities
Act and may not be sold in the absence of registration thereunder unless an
exemption from registration is available.
All of the 10,014,392 Restricted Shares will be eligible for sale, pursuant
to the exemption set forth in Rule 144 under the Securities Act, if the
conditions of that rule have been met. In general, under Rule 144, as currently
in effect, a person (or persons whose shares are aggregated) who, together with
any prior holder who was not an affiliate of the Company, has beneficially owned
Restricted Shares for at least one year is entitled to sell within any
three-month period a number of shares that does not exceed the greater of one
percent of the then-outstanding shares of Common Stock (approximately 111,200
shares immediately after the Offering or approximately 112,800 if the
over-allotment option is exercised in full) or the average weekly trading volume
in the Common Stock during the four calendar weeks preceding such sale. Sales
under Rule 144 are also subject to certain manner-of-sale provisions, notice
requirements and the availability of current public information about the
Company. However, a person who is deemed not to have been an "affiliate" of the
Company at any time during the three months preceding a sale and who, together
with any prior holder who was not an affiliate of the Company, has beneficially
owned Restricted Shares for at least two years, would be
65
<PAGE> 67
entitled to sell such shares under Rule 144 without regard to volume
limitations, manner-of-sale provisions, notice requirements or the availability
of current public information about the Company. The Company estimates that all
of the Restricted Shares can be sold in accordance with Rule 144 upon expiration
of the lockup agreements described below. The Company, its Directors and
executive officers and directors have agreed not to sell, grant any option to
sell, transfer or otherwise dispose of, any shares of the Company's Common
Stock, for a period of 180 days from the date of this Prospectus without the
prior written consent of the Representative.
The Company intends to file a registration statement on Form S-8 under the
Securities Act to register 500,000 shares of Common Stock reserved for issuance
under the Company's 1996 Stock Option Plan. See "Management -- 1996 Stock Option
Plan." Accordingly, shares registered under such registration statement will,
subject to Rule 144 volume limitations applicable to affiliates, be available
for sale in the open market, unless such shares are subject to vesting
restrictions under the stock option plan or the lock-up agreements described
above.
Prior to the Offering, there has been a limited public market for the
Common Stock, and no predictions can be made as to the effect, if any, that
market sales of shares or the availability of shares for sale will have on the
market price prevailing from time to time. Nevertheless, sales of substantial
amounts of Common Stock in the public market could adversely affect prevailing
market prices.
UNDERWRITING
The Company has entered into an Underwriting Agreement (the "Underwriting
Agreement") with the underwriters listed in the table below (referred to
individually as an "Underwriter" and collectively as the "Underwriters"), for
whom Howe Barnes Investments, Inc. is acting as representative (the
"Representative"). Subject to the terms and conditions set forth in the
Underwriting Agreement, the Company has agreed to sell to each of the
Underwriters, and each of the Underwriters has severally agreed to purchase from
the Company, the number of shares of Common Stock set forth opposite each
Underwriter's name in the table below.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
------------ ---------
<S> <C>
Howe Barnes Investments, Inc.............................
---------
Total.................................................. 1,100,000
=========
</TABLE>
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters have agreed to purchase all of the Common Stock being sold pursuant
to the Underwriting Agreement if any is purchased (excluding shares covered by
the over-allotment option granted therein). In the event of a default by any
Underwriter, the Underwriting Agreement provides that, in certain circumstances,
purchase commitments of the nondefaulting Underwriters may be increased or the
Underwriting Agreement may be terminated.
The Representative has advised the Company that the Underwriters propose to
offer the Common Stock to the public initially at the public offering price set
forth in the cover page of this Prospectus and to selected dealers at such price
less a concession of not more than $ per share. Additionally, the
Underwriters may allow, and such dealers may reallow, a concession not in excess
of $ per share to certain other dealers. After the initial public
offering, the public offering price and other selling terms may be changed by
the Underwriters.
The Company has granted to the Underwriters an option, exercisable within
30 days after the date of this Prospectus, to purchase up to an additional
165,000 shares of Common Stock at the same price per share to be
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<PAGE> 68
paid by the Underwriters for the other shares offered hereby. If the
Underwriters purchase any of such additional shares pursuant to this option,
each Underwriter will be committed to purchase such additional shares in
approximately the same proportion as set forth in the table above. The
Underwriters may exercise the option only for the purpose of covering
over-allotments, if any, made in connection with the distribution of the Common
Stock offered hereby.
The Company, and the executive officers and directors of the Company who in
the aggregate own 4,637,858 shares of Common Stock as of the date hereof, have
agreed not to offer, sell, contract to sell or otherwise dispose of any capital
stock of the Company or any security convertible into or exchangeable for such
capital stock for a period of 180 days after the date of the Prospectus without
the written consent of the Representative.
The initial public offering price of the shares of Common Stock will be
determined by negotiation between the Company and the Representative. Among the
factors to be considered in determining the initial public offering price are
prevailing market and economic conditions, revenues and earnings of the Company,
estimates of the business potential and prospects of the Company, the present
state of the Company's business operations, an assessment of the Company's
management and the consideration of the above factors in relation to market
valuations of companies in related businesses.
The Representatives have informed the Company that the Underwriters will
not, without customer authority, confirm sales to any accounts over which they
exercise discretionary authority.
The Company has agreed to indemnify the Underwriters and their controlling
persons against certain liabilities, including civil liabilities under the
Securities Act, or to contribute to payments the Underwriters may be required to
make in respect thereof.
Until the distribution of the Common Stock is completed, rules of the
Securities and Exchange Commission may limit the ability of the Underwriters and
certain selling group members to bid for and purchase shares of Common Stock. As
an exception to these rules, the Representative is permitted to engage in
certain transactions that stabilize the price of the Common Stock. Such
transactions may consist of bids or purchases for the purpose of pegging, fixing
or maintaining the price of the Common Stock.
In addition, if the Representative over-allots (i.e., if it sells more
shares of Common Stock than are set forth on the cover page of this Prospectus),
and thereby creates a short position in the Common Stock in connection with the
offering, the Representative may reduce that short position by purchasing Common
Stock in the open market. The Representative also may elect to reduce any short
position by exercising all or part of the over-allotment option described
herein.
The Representative also may impose a penalty bid on certain Underwriters
and selling group members. This means that if the Representative purchases
shares of Common Stock in the open market to reduce the Underwriters' short
position or to stabilize the price of the Common Stock, it may reclaim the
amount of the selling concession from the Underwriters and selling group members
who sold those shares as part of the offering.
In general, purchases of a security for the purpose of stabilization or to
reduce a syndicate short position could cause the price of the security to be
higher than it might otherwise be in the absence of such purchases. The
imposition of a penalty bid might have an effect on the price of a security to
the extent that it were to discourage resales of the security by purchasers in
the offering.
Certain of the Underwriters that currently act as market makers for the
Common Stock may engage in "passive market making" in the Common Stock on The
Nasdaq National Market(SM) in accordance with Rule 103 of Regulation M under the
Securities Exchange Act of 1934, as amended. Subject to certain conditions, Rule
103 permits underwriters participating in a distribution to engage in limited
market making transactions during the period when Regulation M would otherwise
prohibit such activity. Rule 103 generally prohibits underwriters engaged in
passive market making activities from entering a bid or effecting a purchase at
a price which exceeds the highest bid by a market maker not participating in the
distribution. Rule 103 also limits the volume of purchases which may be made by
an underwriter in passive market making activities.
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<PAGE> 69
Subject to these limitations, certain Underwriters and other members of the
selling group intend to engage in passive market making in the Common Stock.
Neither the Company nor any of the Underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the Common Stock. In addition, neither
the Company nor any of the Underwriters makes any representation that the
Representative will engage in such transactions or that such transactions, once
commenced, will not be discontinued without notice.
LEGAL MATTERS
Certain legal matters in connection with this offering are being passed
upon for the Company by Vedder, Price, Kaufman & Kammholz, Chicago, Illinois,
and for the Underwriters by Chapman and Cutler, Chicago, Illinois.
EXPERTS
The consolidated financial statements of the Company as of December 31,
1997 and 1996 and for each of the years in the three-year period ended December
31, 1997, included in this Prospectus have been audited by Crowe, Chizek and
Company LLP, independent auditors. These consolidated financial statements are
included herein in reliance on their report given upon the authority of that
firm as experts in accounting and auditing.
AVAILABLE INFORMATION
The Company has filed a Registration Statement on Form S-1 under the
Securities Act with the Securities and Exchange Commission (the "Commission") in
connection with the Common Stock offered by this Prospectus. This Prospectus
omits certain information, exhibits and undertakings set forth in the
Registration Statement which the Company has filed with the Commission. Such
materials may be inspected and copied upon payment of prescribed rates at the
public reference facilities of the Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549 and at the Regional Office of the Commission at the
following locations: Seven World Trade Center, Suite 1300, New York, New York
10048 and 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. This
information is also available on the Internet at the Commission's web site. The
address for the web site is: http://www.sec.gov. For further information with
respect to the Company, reference is hereby made to the Registration Statement
and the exhibits thereto. Statements contained in this Prospectus concerning the
provisions of any contract, agreement or other document are not necessarily
complete, and in each instance reference is made to the copy of such contract,
agreement or other document filed as an exhibit to the Registration Statement
for a full statement of the provisions thereof. Each such statement in this
Prospectus is qualified in all respects by such reference.
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<PAGE> 70
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
MIDWEST BANC HOLDINGS, INC.
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Crowe, Chizek and Company LLP, Independent
Auditors.................................................. F-2
Consolidated Balance Sheets as of December 31, 1997 and
1996...................................................... F-3
Consolidated Statements of Income for the years ended
December 31, 1997, 1996 and 1995.......................... F-4
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1997, 1996 and 1995.............. F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995.......................... F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<PAGE> 71
REPORT OF INDEPENDENT AUDITORS
To the Shareholders and Board of Directors
Midwest Banc Holdings, Inc.
We have audited the accompanying consolidated balance sheets of Midwest
Banc Holdings, Inc. (formerly First Midwest Corporation of Delaware) and
Subsidiaries as of December 31, 1997 and 1996, and the related consolidated
statements of income, stockholders' equity, and cash flows for each of the three
years in the period ended December 31, 1997. These financial statements are the
responsibility of the Corporation's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Midwest Banc
Holdings, Inc. and Subsidiaries at December 31, 1997 and 1996, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1997, in conformity with generally accepted accounting
principles.
Crowe, Chizek and Company LLP
Oak Brook, Illinois
January 16, 1998, except for Note 9
as to which the date is January 30, 1998
F-2
<PAGE> 72
MIDWEST BANC HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1997 1996
---- ----
<S> <C> <C>
ASSETS
Cash and cash equivalents................................... $ 34,471 $ 35,297
Securities available-for-sale............................... 343,115 293,299
Trading account securities.................................. 5,008 --
Securities held-to-maturity (fair value: 1997 -- $16,490,
1996 -- $13,939).......................................... 16,233 13,741
Loans....................................................... 488,099 420,655
Allowance for loan losses................................... (6,143) (5,342)
-------- --------
Net loans................................................. 481,956 415,313
Other real estate........................................... 789 925
Bank premises and equipment, net............................ 14,863 14,372
Goodwill.................................................... 2,424 2,618
Other assets................................................ 9,783 10,505
-------- --------
Total assets......................................... $908,642 $786,070
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits
Noninterest-bearing.................................... $102,080 $ 93,288
Interest-bearing....................................... 692,282 607,917
-------- --------
Total deposits....................................... 794,362 701,205
Securities sold under agreements to repurchase and federal
funds purchased........................................ 12,992 9,991
Borrowings................................................ 42,575 27,495
Other liabilities......................................... 5,753 4,417
-------- --------
Total liabilities.................................... 855,682 743,108
Stockholders' equity
Preferred stock; par value $.01 per share; authorized
1,000,000 shares; none issued
Common stock.............................................. 101 3,437
Surplus................................................... 12,620 10,489
Retained earnings......................................... 40,026 34,932
Unrealized gain (loss) on securities available-for-sale
net of income taxes.................................... 675 (1,377)
Treasury stock, at cost (100,000 shares in 1997, and
984,136 shares in 1996)................................ (462) (4,519)
-------- --------
Total stockholders' equity........................... 52,960 42,962
-------- --------
Total liabilities and stockholders' equity........... $908,642 $786,070
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 73
MIDWEST BANC HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Interest income
Loans..................................................... $44,048 $36,607 $32,851
Securities
Taxable................................................ 21,719 19,554 13,391
Exempt from federal income taxes....................... 1,042 939 817
Trading account securities................................ 73 21 144
Federal funds sold and other short-term investments....... 444 177 400
------- ------- -------
Total interest income................................ 67,326 57,298 47,603
Interest expense
Deposits.................................................. 32,617 26,796 20,911
Other borrowings.......................................... 2,694 2,122 1,708
------- ------- -------
Total interest expense............................... 35,311 28,918 22,619
------- ------- -------
NET INTEREST INCOME......................................... 32,015 28,380 24,984
Provision for loan losses................................... 2,454 1,718 1,542
------- ------- -------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES......... 29,561 26,662 23,442
Other income
Service charges on deposit accounts....................... 2,782 2,440 2,137
Gains (losses) on securities transactions................. 729 181 (746)
Net trading account profits............................... 159 174 547
Mortgage loan origination fees............................ 564 363 471
Trust income.............................................. 579 525 424
Other income.............................................. 626 642 594
------- ------- -------
Total other income................................... 5,439 4,325 3,427
Other expenses
Salaries and employee benefits............................ 12,213 11,180 9,961
Occupancy and equipment expense........................... 3,164 3,151 2,957
Professional services..................................... 1,124 866 316
Marketing................................................. 721 713 694
Office supplies........................................... 530 474 408
FDIC insurance............................................ 86 8 549
Postage and freight....................................... 571 515 451
Other expenses............................................ 2,543 2,175 2,350
------- ------- -------
Total other expenses................................. 20,952 19,082 17,686
------- ------- -------
INCOME BEFORE INCOME TAXES.................................. 14,048 11,905 9,183
Provision for income taxes.................................. 5,537 4,597 3,151
------- ------- -------
NET INCOME.................................................. $ 8,511 $ 7,308 $ 6,032
======= ======= =======
Earnings per share (Note 1)................................. $ .85 $ .73 $ .60
======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 74
MIDWEST BANC HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
UNREALIZED
GAIN (LOSS) TOTAL
COMMON RETAINED ON SECURITIES TREASURY STOCKHOLDERS'
STOCK SURPLUS EARNINGS AVAILABLE-FOR-SALE STOCK EQUITY
------ ------- -------- ------------------ -------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1995........... $ 3,437 $10,414 $22,697 $(8,248) $(1,696) $26,604
Net income......................... -- -- 6,032 -- -- 6,032
Cash dividends declared ($0.055 per
share)........................... -- -- (555) -- -- (555)
Purchase 216,104 shares of treasury
stock............................ -- -- -- -- (2,809) (2,809)
Sale of 4,600 shares of treasury
stock............................ -- 9 -- -- 51 60
Net increase in fair value of
securities classified as
available-for-sale, net of income
taxes of $5,756.................. -- -- -- 9,055 -- 9,055
------- ------- ------- ------- ------- -------
Balance, December 31, 1995......... 3,437 10,423 28,174 807 (4,454) 38,387
Net income......................... -- -- 7,308 -- -- 7,308
Cash dividends declared ($0.055 per
share)........................... -- -- (550) -- -- (550)
Purchase 151,880 shares of treasury
stock............................ -- -- -- -- (1,117) (1,117)
Sale of 150,308 shares of treasury
stock............................ -- 66 -- -- 1,052 1,118
Net decrease in fair value of
securities classified as
available-for-sale, net of income
taxes of $1,388.................. -- -- -- (2,184) -- (2,184)
------- ------- ------- ------- ------- -------
Balance, December 31, 1996......... 3,437 10,489 34,932 (1,377) (4,519) 42,962
Net income......................... -- -- 8,511 -- -- 8,511
Cash dividends declared ($0.055 per
share)........................... -- -- (551) -- -- (551)
Recapitalization (Note 15)......... (3,327) 3,327 -- -- -- --
Purchase 226,212 shares of treasury
stock............................ -- -- -- -- (2,062) (2,062)
Sale of 224,740 shares of treasury
stock............................ -- 18 -- -- 2,030 2,048
Retirement of 885,608 shares of
common stock held in treasury.... (9) (1,214) (2,866) -- 4,089 --
Net increase in fair value of
securities classified as
available-for-sale, net of income
taxes of $1,306.................. -- -- -- 2,052 -- 2,052
------- ------- ------- ------- ------- -------
Balance, December 31, 1997......... $ 101 $12,620 $40,026 $ 675 $ (462) $52,960
======= ======= ======= ======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 75
MIDWEST BANC HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income............................................... $ 8,511 $ 7,308 $ 6,032
Adjustments to reconcile net income to net cash provided
by operating activities
Depreciation.......................................... 1,645 1,692 1,632
Bond premium amortization............................. 1,289 1,153 396
Amortization of goodwill and other purchase accounting
adjustments......................................... 214 215 233
Provision for loan losses............................. 2,454 1,718 1,542
Purchase of trading account securities................ (54,955) (55,782) (51,998)
Proceeds from sale of trading account securities...... 50,038 55,957 54,401
Net loss (gain) on sale of securities................. (729) (181) 746
Net gain on sale of trading account securities........ (159) (174) (547)
Real estate loans originated for sale................. (40,457) (28,572) (33,996)
Proceeds from sales of real estate loans originated
for sale............................................ 38,009 28,154 33,149
Deferred income taxes................................. (474) 35 652
Increase in other assets.............................. (1,718) (2,420) (142)
Increase in other liabilities......................... 1,336 1,400 966
--------- --------- ---------
Net cash provided by operating activities........... 5,004 10,503 13,066
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales and maturities of securities
available-for-sale.................................... 98,928 68,079 88,903
Principal payments on securities......................... 39,739 39,019 16,104
Purchase of securities available-for-sale................ (185,595) (171,086) (164,182)
Purchase of securities held-to-maturity.................. (3,631) (3,114) (3,256)
Maturities of securities held-to-maturity................ 1,052 1,172 601
Net increase in loans.................................... (64,996) (61,717) (55,686)
Proceeds from sale of other real estate.................. 136 143 88
Property and equipment expenditures...................... (2,136) (3,323) (1,356)
--------- --------- ---------
Net cash used in investing activities............... (116,503) (130,827) (118,784)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits................................. 93,157 110,534 107,831
Bank borrowings.......................................... 65,704 20,608 19,797
Payments on bank borrowings.............................. (50,624) (9,190) (17,210)
Dividends paid........................................... (551) (550) (566)
Securities sold under agreements to repurchase and
federal funds purchased............................... 3,001 (2,174) 4,813
Treasury stock sales (purchases), net.................... (14) 1 (2,749)
--------- --------- ---------
Net cash provided by financing activities........... 110,673 119,229 111,916
--------- --------- ---------
Increase (decrease) in cash and cash equivalents........... (826) (1,095) 6,198
Cash and cash equivalents at beginning of period........... 35,297 36,392 30,194
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD................. $ 34,471 $ 35,297 $ 36,392
========= ========= =========
Supplemental disclosures of cash flow information
Cash paid during the period for
Interest.............................................. $ 35,126 $ 28,291 $ 22,297
Income taxes.......................................... 4,516 4,352 2,420
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 76
MIDWEST BANC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 1 -- NATURE OF OPERATIONS
Midwest Banc Holdings, Inc., formerly First Midwest Corporation of
Delaware, (Midwest Banc or the Corporation) is a bank holding company organized
under the laws of the State of Delaware. Through its commercial bank and nonbank
subsidiaries, the Corporation provides a full line of financial services to
corporate and individual customers in the greater Chicago metropolitan area and
in Warren and Henderson Counties in western Illinois.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation: The consolidated financial statements of Midwest
Banc include the accounts of Midwest Banc and its wholly-owned subsidiaries,
Midwest Bank and Trust Company, The National Bank of Monmouth, Midwest Bank of
McHenry County, Midwest Bank, and First Midwest Data Corporation, Inc.
Significant intercompany balances and transactions have been eliminated.
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles and with general practice in the
banking industry. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Securities: Securities are classified as held-to-maturity when the
Corporation has the ability and management has the positive intent to hold those
securities to maturity. Accordingly, they are stated at cost adjusted for
amortization of premiums and accretion of discounts. Securities are classified
as available-for-sale when the Corporation may decide to sell those securities
for changes in market interest rates, liquidity needs, changes in yields or
alternative investments, and for other reasons. They are carried at fair value.
Unrealized gains and losses on securities available-for-sale are charged or
credited to a valuation allowance which is included as a separate component of
shareholders' equity, net of income taxes. Interest income is reported net of
amortization of premium and accretion of discount. Realized gains and losses on
disposition of securities available-for-sale are based on the net proceeds and
the adjusted carrying amount of the securities sold, using the specific
identification method. Trading account securities are carried at fair value.
Realized and unrealized gains and losses on trading account securities are
recognized in the statement of income as they occur.
Loans: Loans are stated net of the allowance for loan losses and unearned
discount. Impaired loans are carried at the present value of expected future
cash flows or the fair value of the related collateral, if the loan is
considered to be collateral dependent. Interest on loans is included in interest
income over the term of the loan based upon the principal balance outstanding.
Where serious doubt exists as to the collectibility of a loan, the accrual of
interest is discontinued. Loan fees and direct loan origination costs are
deferred and amortized over the term of the loan as a yield adjustment.
Mortgage loans originated and intended for sale in the secondary market are
carried at the lower of cost, net of deferred loan fees, or estimated fair value
in the aggregate. Cost approximates market value as of December 31, 1997 and
1996.
Allowance for Loan Losses: An allowance for loan losses has been
established to provide for the probability that some loans may not be repaid in
their entirety. The allowance is increased by provisions for loan losses charged
to expense and decreased by charge-offs, net of recoveries. Although a loan is
charged off by management when deemed uncollectible, collection efforts may
continue and future recoveries may occur.
The allowance is maintained by management at a level considered adequate to
cover losses that are currently anticipated based on past loss experience,
general economic conditions, information about specific
F-7
<PAGE> 77
MIDWEST BANC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
borrower situations (including their financial position and collateral values),
and other factors and estimates which are subject to change over time.
Estimating the risk of loss and the amount of loss on any loan is necessarily
subjective and ultimate losses may vary from current estimates. These estimates
are reviewed periodically and as adjustments become necessary they are reported
in earnings in the periods in which they become known.
Loans are considered impaired if full principal or interest payments are
not anticipated. Each impaired loan is carried at the present value of expected
cash flows discounted at the loan's effective interest rate or at the fair value
of the collateral if the loan is collateral dependent. A portion of the
allowance for loan losses is allocated to an impaired loan if the present value
of cash flows or collateral value indicate the need for an allowance.
Smaller balance homogeneous loans are evaluated for impairment in total.
Such loans include residential first mortgage loans secured by
one-to-four-family residences; residential construction loans; and automobile,
home equity, and second mortgage loans. Commercial loans and mortgage loans
secured by other properties are evaluated individually for impairment.
Other Real Estate: Other real estate represents property obtained through
foreclosure or in settlement of borrower obligations and is carried at the lower
of cost, which is generally the fair value at date of foreclosure, or fair value
less estimated selling expenses.
Bank Premises and Equipment: Bank premises and equipment are stated at
cost, less accumulated depreciation and amortization. Provisions for
depreciation and amortization, included in operating expenses, are computed on
the straight-line method over the estimated useful lives of the assets. The cost
of maintenance and repairs is charged to income as incurred; significant repairs
are capitalized.
Goodwill and Core Deposit Base Intangibles: Goodwill and the core deposit
base intangibles, included in other assets, result from the application of
purchase accounting principles to the acquisition of subsidiary banks. Goodwill
represents the excess of acquisition cost over the fair value of net assets of
subsidiary banks and is amortized over periods ranging from 15 to 25 years using
the straight-line method. The premium paid to acquire core deposits is being
amortized over the estimated benefit life using accelerated methods.
Income Taxes: Deferred tax assets and liabilities are recognized for
temporary differences between the financial reporting basis and the tax basis of
the Corporation's assets and liabilities and expected benefits of operating loss
carryforwards and credit carryforwards. Deferred taxes are recognized for the
estimated taxes ultimately payable or recoverable based on enacted tax laws.
Changes in enacted tax rates and laws will be reflected in the financial
statements in the periods they occur.
Earnings Per Common Share: Earnings per Common Share (EPS) is computed
under the provisions of Statement of Financial Accounting Standards No. 128,
"Earnings Per Share," which was adopted retroactively by the Corporation at
December 31, 1997. Amounts reported as EPS for each of the three years in the
period ended December 31, 1997 reflect the earnings available to common
shareholders for the year divided by the weighted average number of common
shares outstanding during the year. The weighted average number of common shares
outstanding for the years ended December 31, 1997, 1996, and 1995 was
10,017,025, 10,006,438, and 10,137,302, respectively. Stock options granted
during 1997 and 1996 had no effect on earnings per share.
Statement of Cash Flows: Amounts due from banks, federal funds sold, and
all highly liquid debt instruments purchased with a maturity of three months or
less are considered to be cash equivalents. Loan disbursements and collections,
repurchase agreements and transactions in deposit accounts are reported net.
F-8
<PAGE> 78
MIDWEST BANC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 3 -- SECURITIES
The amortized cost and fair value of securities available-for-sale and
held-to-maturity are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1997
----------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- -----
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Securities available-for-sale
U.S. Treasury securities and obligations of U.S.
government agencies............................ $ 6,499 $ -- $ (245) $ 6,254
Obligations of states and political
subdivisions................................... 7,555 47 (6) 7,596
Mortgage-backed securities........................ 313,152 2,273 (845) 314,580
Collateralized mortgage obligations............... 7,558 -- (179) 7,379
Equity securities................................. 7,245 61 -- 7,306
-------- ------ ------- --------
Total securities available-for-sale.......... $342,009 $2,381 $(1,275) $343,115
======== ====== ======= ========
Securities held-to-maturity
Obligations of states and political
subdivisions................................... $ 16,233 $ 258 $ (1) $ 16,490
======== ====== ======= ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
----------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- -----
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Securities available-for-sale
U.S. Treasury securities and obligations of U.S.
government agencies............................ $ 11,016 $ -- $ (452) $ 10,564
Obligations of states and political
subdivisions................................... 7,184 29 (38) 7,175
Mortgage-backed securities........................ 258,537 1,552 (2,905) 257,184
Collateralized mortgage obligations............... 13,036 -- (450) 12,586
Equity securities................................. 5,803 -- (13) 5,790
-------- ------ ------- --------
Total securities available-for-sale.......... $295,576 $1,581 $(3,858) $293,299
======== ====== ======= ========
Securities held-to-maturity
Obligations of states and political
subdivisions................................... $ 13,741 $ 228 $ (30) $ 13,939
======== ====== ======= ========
</TABLE>
F-9
<PAGE> 79
MIDWEST BANC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 3 -- SECURITIES -- (CONTINUED)
The amortized cost and fair value of debt securities by contractual
maturity are shown below. Expected maturities will differ from contractual
maturities because borrowers may have the right to call or prepay obligations
with or without call or prepayment penalties.
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-----------------------
AMORTIZED FAIR
COST VALUE
--------- -----
(IN THOUSANDS)
<S> <C> <C>
Securities available-for-sale
Due in one year or less................................... $ 2,785 $ 2,787
Due after one year through five years..................... 10,114 9,914
Due after five years through ten years.................... 1,155 1,149
-------- --------
14,054 13,850
Mortgage-backed securities and collateralized mortgage
obligations............................................... 320,710 321,959
-------- --------
Total debt securities................................ 334,764 335,809
Equity securities......................................... 7,245 7,306
-------- --------
Total securities available-for-sale.................. $342,009 $343,115
======== ========
Securities held-to-maturity
Due in one year or less................................... $ 786 $ 789
Due after one year through five years..................... 14,385 14,626
Due after five years through ten years.................... 1,062 1,065
-------- --------
Total securities held-to-maturity.................... $ 16,233 $ 16,480
======== ========
</TABLE>
Proceeds from sales of securities available-for-sale and the realized gross
gains and losses are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1997 1996 1995
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Proceeds from sales.............................. $98,383 $68,079 $88,903
Gross realized gains............................. 1,010 536 508
Gross realized losses............................ (281) (355) (1,254)
</TABLE>
Securities with an approximate carrying value of $94,209,000 and
$86,117,000 at December 31, 1997 and 1996, respectively, were pledged to secure
public deposits and borrowings and for other purposes as required or permitted
by law. Included in securities pledged at December 31, 1997 are $29,705,000
which have been pledged for FHLB borrowings.
NOTE 4 -- FAIR VALUE OF FINANCIAL INSTRUMENTS
Corporations are required to disclose fair value information about their
financial instruments. Statement of Financial Accounting Standards No. 107
defines the fair value of a financial instrument as the amount at which the
instrument could be exchanged in a current transaction between willing parties,
other than in a forced or liquidation sale. The methods and assumptions used to
determine fair values for each class of financial instruments are presented
below.
Cash and Cash Equivalents: Cash and cash equivalents are reported in the
balance sheet at amounts which approximate their fair value.
F-10
<PAGE> 80
MIDWEST BANC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 4 -- FAIR VALUE OF FINANCIAL INSTRUMENTS -- (CONTINUED)
Securities: Fair values for securities are determined from quoted
market prices if available. For unquoted securities, the reported fair
value is estimated on the basis of financial and other information.
Loans: Fair values of loans have been determined by calculating the
present value of future cash flows at current rates for similar loans which
would be made to borrowers with similar credit ratings and the same
remaining maturities. Loan prepayments are assumed to occur at the same
rate as in previous periods in which interest rates were at levels similar
to current levels.
Deposit Liabilities: Deposit liabilities with stated maturities have
been calculated at the present value of future cash flows using rates which
approximate current market rates for similar instruments. Fair values of
demand deposits are equal to the respective amounts due on demand. The
carrying amount for variable rate instruments approximates fair value.
Securities Sold Under Agreements to Repurchase, Federal Funds
Purchased, Other Borrowings, and Long-Term and Short-Term Debt: Liabilities
with stated maturities have been calculated at present values of future
cash flows using rates which approximate market rates for similar
instruments. The carrying amount for liabilities with no stated maturities
approximates estimated fair value.
Accrued Interest Receivable and Payable: Fair value for accrued
interest receivable and payable approximates the carrying amount.
Commitments to Extend Credit and Standby Letters of Credit: The fair
value of commitments is estimated using the fees currently charged to enter
into similar agreements, taking into account the remaining terms of the
agreement and the present creditworthiness of the counterparties. For
fixed-rate loan commitments, fair value also considers the difference
between current levels of interest rates and the committed rates. The fair
value of letters of credit is based on fees currently charged for similar
agreements or on the estimated cost to terminate them or otherwise settle
the obligations with the counterparties at the reporting date. The fair
value of these commitments is not material.
The estimated fair values of the Corporation's financial instruments were
as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------
1997 1996
----------------------- -----------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------- ---------- -------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Financial assets
Cash and cash equivalents..................... $ 34,471 $ 34,471 $ 35,297 $ 35,297
Securities available-for-sale................. 343,115 343,115 293,299 293,299
Trading account securities.................... 5,008 5,008 -- --
Securities held-to-maturity................... 16,233 16,480 13,741 13,939
Loans, net of allowance for loan losses....... 481,956 480,035 415,313 420,351
Accrued interest receivable................... 6,018 6,018 5,472 5,472
Financial liabilities
Deposits
Noninterest-bearing........................ (102,080) (102,080) (93,288) (93,288)
Interest-bearing........................... (692,282) (692,698) (607,917) (608,264)
Securities sold under agreements to repurchase
and federal funds purchased................ (12,992) (12,992) (9,991) (9,991)
Notes payable................................. (42,575) (42,470) (27,495) (27,526)
Accrued interest payable...................... (2,196) (2,196) (2,010) (2,010)
</TABLE>
F-11
<PAGE> 81
MIDWEST BANC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 4 -- FAIR VALUE OF FINANCIAL INSTRUMENTS -- (CONTINUED)
Other assets and liabilities of the Corporation not defined as financial
instruments, such as property and equipment, are not included in the above
disclosures. Also not included are nonfinancial instruments typically not
recognized in financial statements such as the value of core deposits, loan
servicing rights, customer goodwill, and similar items.
There is no ready market for a significant portion of the Corporation's
financial instruments. Accordingly, fair values are based on various factors
relative to expected loss experience, current economic conditions, risk
characteristics, and other factors. The assumptions and estimates used in the
fair value determination process are subjective in nature and involve
uncertainties and significant judgment, and therefore, fair values cannot be
determined with precision. Changes in assumptions could significantly affect
these estimated values.
NOTE 5 -- LOANS
Major classifications of loans are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1997 1996
---- ----
(IN THOUSANDS)
<S> <C> <C>
Commercial............................................... $140,815 $118,475
Commercial real estate................................... 212,184 180,519
Agricultural............................................. 24,065 20,079
Consumer real estate..................................... 93,338 81,007
Consumer installment..................................... 18,811 21,542
-------- --------
Total loans, gross..................................... 489,213 421,622
Unearned discount........................................ (1,114) (967)
-------- --------
Total loans............................................ $488,099 $420,655
======== ========
</TABLE>
Included in consumer real estate are $6,627,000 and $1,555,000 of loans
held for sale at December 31, 1997 and 1996, respectively.
NOTE 6 -- ALLOWANCE FOR LOAN LOSSES
The following is a summary of changes in the allowance for loan losses:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1997 1996 1995
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Balance at beginning of period..................... $ 5,342 $ 4,603 $ 3,979
Provision for loan losses.......................... 2,454 1,718 1,542
Loans charged off.................................. (1,858) (1,298) (1,075)
Recoveries on loans previously charged off......... 205 319 157
------- ------- -------
Balance at end of period......................... $ 6,143 $ 5,342 $ 4,603
======= ======= =======
</TABLE>
F-12
<PAGE> 82
MIDWEST BANC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 6 -- ALLOWANCE FOR LOAN LOSSES -- (CONTINUED)
A portion of the allowance for loan losses is allocated to impaired loans.
Information with respect to impaired loans and the related allowance for loan
losses determined in accordance with SFAS No. 114 is as follows.
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1997 1996
---- ----
(IN THOUSANDS)
<S> <C> <C>
Impaired loans for which no allowance for loan losses is
allocated................................................. $1,346 $1,397
Impaired loans with an allocation of the allowance for loan
losses.................................................... 775 2,841
------ ------
Total impaired loans................................. $2,121 $4,238
====== ======
Allowance for loan losses allocated to impaired loans....... $ 642 $1,263
====== ======
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------
1997 1996
---- ----
<S> <C> <C>
Average impaired loans...................................... $3,172 $3,988
Interest income recognized on impaired loans................ 208 391
Interest income recognized on impaired loans on a cash
basis..................................................... 206 380
</TABLE>
Interest payments on impaired loans are generally applied to principal,
unless the loan principal is considered to be fully collectible, in which case
interest is recognized on the cash basis.
NOTE 7 -- BANK PREMISES AND EQUIPMENT
Bank premises and equipment are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1997 1996
---- ----
(IN THOUSANDS)
<S> <C> <C>
Land and improvements.................................... $ 4,035 $ 4,022
Building and improvements................................ 13,978 14,251
Furniture and equipment.................................. 10,325 8,683
-------- --------
Total cost............................................. 28,338 26,956
Accumulated depreciation............................... (13,475) (12,584)
-------- --------
Bank premises and equipment, net.................... $ 14,863 $ 14,372
======== ========
</TABLE>
Depreciation and amortization charged to expense for the years ended
December 31, 1997, 1996, and 1995 approximated $1,645,000, $1,692,000, and
$1,632,000, respectively. Occupancy expense has been reduced by approximately
$855,000, $808,000, and $609,000 for the years ended December 31, 1997, 1996,
and 1995, respectively, for rental income from leased premises.
F-13
<PAGE> 83
MIDWEST BANC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 8 -- INCOME TAXES
The provision for income taxes, included in the statements of income,
consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1997 1996 1995
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Current
Federal................................................... $4,941 $3,700 $2,390
State..................................................... 1,070 862 109
Deferred.................................................... (474) 35 652
------ ------ ------
Total provision for income taxes....................... $5,537 $4,597 $3,151
====== ====== ======
</TABLE>
The difference between the provision for income taxes in the financial
statements and amounts computed by applying the current federal income tax rate
of 34% to income before income taxes is reconciled as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1997 1996 1995
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Income taxes computed at the statutory rate................. $4,793 $4,048 $3,122
Tax-exempt interest income on securities and loans.......... (377) (375) (395)
Non-deductible purchase accounting adjustments.............. 81 68 85
State income taxes, net of federal tax benefit.............. 1,035 833 365
Other....................................................... 5 23 (26)
------ ------ ------
Total provision for income taxes....................... $5,537 $4,597 $3,151
====== ====== ======
</TABLE>
The net deferred tax asset, included in other assets in the accompanying
balance sheets, consisted of the following components:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1997 1996
---- ----
(IN THOUSANDS)
<S> <C> <C>
Gross deferred tax assets
Unrealized loss on securities available-for-sale.......... $ -- $ 875
Allowance for loan losses................................. 2,380 1,752
State operating loss carryforwards........................ 125 234
Other real estate......................................... 35 35
------- -------
Total gross deferred tax assets........................ 2,540 2,896
Gross deferred tax liabilities
Depreciation.............................................. (120) (109)
Unrealized gain on securities available-for-sale.......... (431) --
Purchase accounting adjustments........................... (2) (6)
Deferred loan fees........................................ (148) (110)
------- -------
Total gross deferred tax liabilities................... 701 (225)
------- -------
Net deferred tax asset............................... $ 1,839 $ 2,671
======= =======
</TABLE>
F-14
<PAGE> 84
MIDWEST BANC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 9 -- BORROWINGS
Borrowings consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1997 1996
---- ----
(IN THOUSANDS)
<S> <C> <C>
Short-term
Federal Home Loan Bank (FHLB) advances to subsidiary banks
due January 3, 1997 to September 27, 1998, interest due
monthly at rates ranging from 5.55% to 6.60%........... $ 5,000 $ 6,300
Revolving line of credit ($18,000,000); principal payments
of $500,000 due quarterly plus interest at the 30, 60,
or 90 day LIBOR plus 100 basis points or prime rate;
remaining balance due on May 1, 1998. Secured by all
common stock of the subsidiary banks................... 12,350 14,350
Revolving warehouse line of credit ($4,000,000); interest
payable quarterly at the 30, 60, or 90 day LIBOR plus
100 basis points or prime rate; secured by common stock
of all subsidiary banks; remaining balance due on May
1, 1998................................................ 4,000 1,545
------- -------
21,350 22,195
------- -------
Long-term
FHLB advances to subsidiary banks due at various dates
through October 30, 2002, interest due monthly at rates
ranging from 5.26% to 5.73%............................ 21,000 5,000
Note payable issued to purchase property for Midwest Bank
of Hinsdale; recorded at an imputed interest rate of
11.61%; principal payments of $75,000 due August 31 of
each year through the year 2000........................ 225 300
------- -------
21,225 5,300
------- -------
Total borrowings..................................... $42,575 $27,495
======= =======
</TABLE>
Where required, the FHLB advances are secured by mortgage-backed securities
held by the respective banks (Note 3).
The $18,000,000 revolving line of credit is secured by the common stock of
all subsidiary banks of the Corporation and includes the following covenants:
(1) maintain tangible equity capital of at least $28,000,000; (2) maintain a
minimum ratio of equity capital to total assets of 5%; (3) the banks must not
have nonperforming loans in excess of 25% of their primary capital; (4) earn a
minimum consolidated net income of $2,700,000; and (5) not declare dividends on
an annual basis in excess of 25% of consolidated net income or $700,000. The
Corporation had complied with these covenants at December 31, 1997 and 1996.
Total borrowings outstanding at December 31, 1997 mature as follows:
$21,425,000 in 1998, $2,075,000 in 1999, $7,075,000 in 2000, and $12,000,000 in
2002.
Effective January 30, 1998, the Corporation negotiated new lines of credit
to replace those existing at December 31, 1997. The new lines increased maximum
borrowings to $20 million under the revolving line of credit and to $5 million
under the warehouse line of credit. Interest under both lines is payable
quarterly at rates which are slightly lower than those in effect at December 31,
1997. There are also no scheduled periodic principal reductions under the new
lines.
F-15
<PAGE> 85
MIDWEST BANC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 10 -- EMPLOYEE BENEFIT PLANS
The Corporation maintains a 401(k) salary reduction plan covering
substantially all employees. Eligible employees may elect to make tax deferred
contributions within a specified range of their compensation as defined in the
plan. The Bank contributes 1% more than the employee's contribution up to a 5%
contribution. Contributions to the plan are expensed currently and approximated
$301,000, $288,000, and $233,000 for the years ended December 31, 1997, 1996,
and 1995, respectively
NOTE 11 -- TIME DEPOSITS
Interest-bearing deposits in denominations of $100,000 and over
approximated $90,509,000 as of December 31, 1997 and $79,354,000 as of December
31, 1996. Interest expense related to deposits in denominations of $100,000 and
over approximated $4,476,000 for 1997, $3,004,000 for 1996, and $2,314,000 for
1995.
Certificates of deposit have scheduled maturities for the years 1998
through 2003 and thereafter as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
1998..................................................... $371,918
1999..................................................... 41,217
2000..................................................... 11,819
2001..................................................... 462
2002..................................................... 465
2003 and thereafter...................................... 62
--------
$425,943
========
</TABLE>
NOTE 12 -- LEASES
The subsidiary banks lease a portion of their banking premises and
equipment. The leases expire in various years through the year 2009. Future
rental commitments under these noncancelable operating leases for the years 1998
through 2002 and thereafter are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
1998................................................... $ 313
1999................................................... 313
2000................................................... 313
2001................................................... 268
2002................................................... 253
Thereafter............................................. 1,658
------
$3,118
======
</TABLE>
Rental expense included in occupancy and equipment expense was $295,000,
$277,000, and $234,000 for the years ended December 31, 1997, 1996, and 1995,
respectively.
F-16
<PAGE> 86
MIDWEST BANC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 13 -- RELATED PARTY TRANSACTIONS
Certain executive officers, directors, and their related interests are loan
customers of the Corporation's subsidiary banks. A summary of loans made by the
subsidiary banks in the ordinary course of business to or for the benefit of
directors and executive officers is as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Balance at December 31, 1995........................... $ 9,225
New loans.............................................. 5,270
Repayments............................................. (4,463)
-------
Balance at December 31, 1996........................... 10,032
New loans.............................................. 5,896
Repayments............................................. (5,656)
-------
Balance at December 31, 1997........................... $10,272
=======
</TABLE>
NOTE 14 -- CAPITAL MATTERS
The Corporation and its subsidiary banks are subject to regulatory capital
requirements administered by the federal banking agencies. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
banks must meet specific capital guidelines that involve quantitative measures
of assets, liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices.
Quantitative measures established by regulation to ensure capital adequacy
require banks and bank holding companies to maintain minimum amounts and ratios
of total and Tier 1 capital to risk-weighted assets and Tier 1 capital to
average assets. If banks do not meet these minimum capital requirements, as
defined, bank regulators can initiate certain actions that could have a direct
material effect on a bank's financial statements. Management believes, as of
December 31, 1997 and December 31, 1996, that the Corporation and its subsidiary
banks meet all capital adequacy requirements to which they are subject.
As of December 31, 1997 and 1996, the most recent Federal Deposit Insurance
Corporation notification categorized the Corporation and its subsidiary banks as
well capitalized under the regulatory framework for prompt corrective action.
There are no conditions or events since that notification that management
believes have changed the institutions' categories. To be categorized as well
capitalized, banks must maintain minimum total risk-based, Tier 1 risk-based and
Tier 1 leverage ratios. The actual capital amounts and ratios
F-17
<PAGE> 87
MIDWEST BANC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 14 -- CAPITAL MATTERS -- (CONTINUED)
for the Corporation and Midwest Bank and Trust Company, its largest subsidiary,
are presented in the following table.
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED UNDER
TO BE ADEQUATELY PROMPT CORRECTIVE
ACTUAL CAPITALIZED ACTION PROVISIONS
---------------- ---------------- ------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
AS OF DECEMBER 31, 1997
Total Capital
(to risk-weighted assets)
Corporation............................... $55,980 10.8% $41,562 8.0% $51,953 10.0%
Midwest Bank.............................. 32,438 12.6 20,607 8.0 25,758 10.0
Tier 1 Capital
(to risk-weighted assets)
Corporation............................... 49,842 9.6 20,781 4.0 31,172 6.0
Midwest Bank.............................. 29,422 11.4 10,303 4.0 15,455 6.0
Tier 1 Capital
(to average assets)
Corporation............................... 49,842 6.2 32,418 4.0 40,522 5.0
Midwest Bank.............................. 29,422 7.1 16,506 4.0 20,633 5.0
AS OF DECEMBER 31, 1996
Total capital
(to risk-weighted assets)
Corporation............................... 47,033 10.8 34,840 8.0 43,549 10.0
Midwest Bank.............................. 30,659 13.0 18,896 8.0 23,620 10.0
Tier 1 capital
(to risk-weighted assets)
Corporation............................... 41,691 9.6 17,426 4.0 26,139 6.0
Midwest Bank.............................. 27,817 11.8 9,445 4.0 14,168 6.0
Tier 1 capital
(to average assets)
Corporation............................... 41,691 5.8 29,016 4.0 36,271 5.0
Midwest Bank.............................. 27,817 7.5 14,875 4.0 18,594 5.0
</TABLE>
NOTE 15 -- RECAPITALIZATION
Effective December 17, 1997, the Corporation's Board of Directors increased
the number of authorized common shares by 11,000,000 shares, changed the par
value to $.01 per share and approved a two-for-one stock split effected in the
form of a 100% stock dividend in contemplation of an initial public offering of
the Corporation's common stock. All share and per share amounts included in the
financial statements have been restated to reflect the stock split.
F-18
<PAGE> 88
MIDWEST BANC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 15 -- RECAPITALIZATION -- (CONTINUED)
A summary of common stock at December 31, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Authorized shares..................................... 17,000,000 6,000,000
Par value............................................. $.01 $.625
Shares issued......................................... 10,114,392 5,500,000
</TABLE>
NOTE 16 -- OFF-BALANCE-SHEET RISK AND CONCENTRATIONS OF CREDIT RISK
The Corporation is a party to financial instruments with off-balance-sheet
risk in the normal course of business to meet financing needs of customers.
Since many commitments to extend credit expire without being used, the amounts
below do not necessarily represent future cash commitments. These financial
instruments include commitments to extend credit, standby letters of credit, and
unused lines of credit and are summarized as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
(IN THOUSANDS)
<S> <C> <C>
Financial instruments whose contract amounts represent
credit risk
Unused lines of credit.................................. $117,295 $92,931
Commitments to extend credit............................ 24,547 15,949
Standby letters of credit............................... 7,210 6,047
</TABLE>
At December 31, 1997 and 1996, commitments to extend credit consisted of
$6,242,000 and $1,062,000 of fixed rate loan commitments. These commitments are
due to expire within 30 to 60 days of issuance and have rates ranging from 5.83%
to 10.00%.
The credit risk amounts represent the maximum accounting loss that would be
recognized at the reporting date if counterparties failed completely to perform
as contracted and any collateral or security proved to be of no value. Midwest
Banc has experienced little difficulty in accessing collateral when necessary.
The amounts of credit risk shown, therefore, greatly exceed expected losses.
The Corporation also had outstanding firm commitments to originate mortgage
loans and sell these loans to the secondary market approximating $1,358,000 at
December 31, 1997 and $2,553,000 at December 31, 1996.
NOTE 17 -- STOCK OPTION PLAN
During 1996, the Corporation's Board of Directors approved an incentive
stock compensation plan. The 1996 Stock Option Plan (the Plan) became effective
on November 19, 1996. Under the plan, officers, directors, and key employees may
be granted incentive stock options to purchase the Corporation's common stock at
no less than 100% of the market price on the date the option is granted. Options
generally become excercisable in installments of 25% a year on each of the first
through the fourth anniversaries of the grant date and have a maximum term of
ten years. The Plan also permits non qualified stock options to be issued. The
Corporation has authorized 500,000 shares for issuance under the Plan. A total
of 49,000 shares were granted in 1997 and 62,000 options were granted in 1996.
The exercise price is $8.125 and $12.75, respectively, a share. No options were
exercised during 1997 or 1996.
The Corporation accounts for its stock option plan under Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees".
Accordingly, no compensation expense has been recognized for the 1996 stock
option plan in the financial statements. Statement of Financial Accounting
Standards No. 123,
F-19
<PAGE> 89
MIDWEST BANC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 17 -- STOCK OPTION PLAN -- (CONTINUED)
"Accounting for Stock Based Compensation", became effective for the first time
in 1996. This statement prescribes new methods for determining compensation
expense under stock option plans, but allows corporations to use APBO No. 25 if
they provide pro forma information computed under the new standard. Had
compensation cost been computed under the methodology contained in SFAS No. 123,
net income would have been reduced by approximately $63,000 for the year ended
December 31, 1997 and $27,000 for the year ended December 31, 1996, with no
effect on earnings per share. The fair value of the options granted during 1997
and 1996 is estimated at $2.92 and $2.22 on the date of grant using the
Black-Scholes options value model with the following assumptions: dividend yield
of 1.0% and 1.6%, respectively; a risk free interest rate of 6.5%; an assumed
forfeiture rate of 0; and an average life of 5 years.
NOTE 18 -- PARENT COMPANY FINANCIAL STATEMENTS
The following are condensed balance sheets and statements of income and
cash flows for Midwest Banc Holdings, Inc., without subsidiaries:
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1996
---- ----
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Cash...................................................... $ 328 $ 736
Investment in subsidiaries................................ 63,582 56,117
Bank premises and equipment............................... 326 258
Other assets.............................................. 1,927 1,054
------- -------
Total assets........................................... $66,163 $58,165
======= =======
LIABILITIES
Borrowings................................................ $12,575 $14,650
Other liabilities......................................... 628 553
------- -------
Total liabilities...................................... $13,203 $15,203
======= =======
STOCKHOLDERS' EQUITY
Common stock.............................................. $ 101 $ 3,437
Surplus................................................... 12,620 10,489
Retained earnings......................................... 40,026 34,932
Unrealized gain (loss) on securities available-for-sale... 675 (1,377)
Treasury stock, at cost................................... (462) (4,519)
------- -------
Total stockholders' equity............................. 52,960 42,962
------- -------
Total liabilities and stockholders' equity........... $66,163 $58,165
======= =======
</TABLE>
F-20
<PAGE> 90
MIDWEST BANC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 18 -- PARENT COMPANY FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1997 1996 1995
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Operating income
Dividends from subsidiary banks........................... $ 6,387 $5,585 $5,379
Fees from subsidiaries.................................... 1,077 1,005 809
Other income.............................................. 3 2 4
------- ------ ------
Total operating income................................. 7,467 6,592 6,192
Operating expenses
Interest expense.......................................... 975 1,048 1,117
Other expense............................................. 3,232 2,769 2,217
------- ------ ------
Total operating expenses............................... 4,207 3,817 3,334
------- ------ ------
INCOME BEFORE INCOME TAXES AND EQUITY IN UNDISTRIBUTED
INCOME OF SUBSIDIARIES.................................... 3,260 2,775 2,858
Income tax benefit.......................................... (1,219) (760) (917)
------- ------ ------
INCOME BEFORE EQUITY IN UNDISTRIBUTED INCOME OF
SUBSIDIARIES.............................................. 4,479 3,535 3,775
Equity in undistributed income of subsidiaries.............. 4,032 3,773 2,257
------- ------ ------
NET INCOME.................................................. $ 8,511 $7,308 $6,032
======= ====== ======
</TABLE>
F-21
<PAGE> 91
MIDWEST BANC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 18 -- PARENT COMPANY FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------
1997 1996 1995
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income................................................ $ 8,511 $ 7,308 $ 6,032
Adjustments to reconcile net income to net cash provided
by operating activities
Equity in undistributed income of subsidiaries......... (4,032) (3,773) (2,257)
Depreciation........................................... 75 81 45
Decrease (increase) in other assets.................... (873) 169 186
Increase (decrease) in other liabilities............... 44 195 (140)
------- ------- -------
Net cash provided by operating activities............ 3,725 3,980 3,866
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in subsidiaries................................ (1,350) (2,000) (3,100)
Property and equipment expenditures....................... (143) (82) (182)
------- ------- -------
Net cash used in investing activities................ (1,493) (2,082) (3,282)
CASH FLOWS FROM FINANCING ACTIVITIES
Bank borrowings........................................... -- 250 11,175
Payments on bank borrowings............................... (2,075) (1,325) (8,650)
Dividends paid............................................ (551) (550) (566)
Treasury stock sales (purchases), net..................... (14) 1 (2,749)
------- ------- -------
Net cash used in financing activities................ (2,640) (1,624) (790)
------- ------- -------
Increase (decrease) in cash and cash equivalents............ (408) 274 (206)
Cash and cash equivalents at beginning of period............ 736 462 668
------- ------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $ 328 $ 736 $ 462
======= ======= =======
</TABLE>
F-22
<PAGE> 92
======================================================
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFER CONTAINED HEREIN AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR ANY UNDERWRITERS. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION
THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE AS OF
WHICH INFORMATION IS SET FORTH HEREIN. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED
HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH
OFFER OR SOLICITATION.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary..................... 3
Risk Factors........................... 6
Use of Proceeds........................ 10
Market for Common Stock and
Dividends............................ 11
Capitalization......................... 13
Dilution............................... 14
Selected Consolidated Financial Data... 15
Management's Discussion and Analysis of
Results of Operations and Financial
Condition............................ 16
Business............................... 38
Management............................. 48
Principal Stockholders................. 54
Certain Transactions................... 55
Supervision and Regulation............. 56
Description of Capital Stock........... 62
Shares Eligible for Future Sale........ 65
Underwriting........................... 66
Legal Matters.......................... 68
Experts................................ 68
Available Information.................. 68
Index to Consolidated Financial
Statements........................... F-1
</TABLE>
-------------------------
UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS),
ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATIONS OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
======================================================
======================================================
1,100,000 SHARES
[LOGO]
MIDWEST BANC
HOLDINGS, INC.
COMMON STOCK
------------------------------------
PROSPECTUS
------------------------------------
HOWE BARNES INVESTMENTS, INC.
, 1998
======================================================
<PAGE> 93
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits:
<TABLE>
<S> <C>
1.1 Form of Underwriting Agreement.*
3.1 Restated Certificate of Incorporation, as amended.*
3.2 By-Laws, as amended.*
4.1 Specimen Common Stock Certificate.*
5.1 Opinion of Vedder, Price, Kaufman & Kammholz.*
10.1 $18.0 million Revolving Loan Agreement dated as of May 1,
1995, between the Company and LaSalle National Bank, as
amended.*
10.2 $4.0 million Revolving Loan Agreement dated as of May 1,
1995, between Midwest One Mortgage Services, Inc. and
LaSalle National Bank.*
10.3 Midwest Banc Holdings, Inc. 1996 Stock Option Plan.*
10.4 Form of Transitional Employment Agreements.
10.5 Lease dated as of December 24, 1958, between Western
National Bank of Cicero and Midwest Bank and Trust Company,
as amended.*
10.6 Britannica Centre Lease dated as of May 1, 1994, between
Chicago Title and Trust Company, as Trustee under Trust
Agreement dated November 2, 1977, and known as Trust No.
1070932, and Midwest Bank & Trust Company.*
10.7 Lease dated as of March 20, 1996, between Grove Lodge No.
824 Ancient Free and Accepted Masons and Midwest Bank of
Hinsdale.*
10.8 Office Lease undated between Grove Lodge No. 824 Ancient
Free and Accepted Masons and Midwest Bank of Hinsdale.*
10.9 Credit Agreement as of January 30, 1998, between the
Company, Midwest One Mortgage Services, Inc. and Harris
Trust & Savings Bank.
21.1 Subsidiaries.*
23.1 Consent of Vedder, Price, Kaufman & Kammholz (included in
their opinion filed as Exhibit 5.1).
23.2 Consent of Crowe, Chizek and Company LLP.
24.1 Power of Attorney.*
</TABLE>
(b) Financial Statement Schedules:
None
- -------------------------
*Previously filed.
II-1
<PAGE> 94
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 1 to Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized in the City of Melrose
Park, State of Illinois on the 6th day of February, 1998.
MIDWEST BANC HOLDINGS, INC.
By: /s/ ROBERT L. WOODS
------------------------------------
Robert L. Woods
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, Amendment No. 1
to this Registration Statement has been signed below by the following persons in
the capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<C> <S> <C>
* Chairman of the Board 2-6-98
---------------------------------------------
E. V. Silveri
/s/ ROBERT L. WOODS Director, President and Chief Executive 2-6-98
--------------------------------------------- Officer
Robert L. Woods
* Director 2-6-98
---------------------------------------------
Angelo A. DiPaolo
* Director 2-6-98
---------------------------------------------
Daniel Nagle
* Director 2-6-98
---------------------------------------------
Joseph Rizza
* Director 2-6-98
---------------------------------------------
LeRoy Rosasco
* Director 2-6-98
---------------------------------------------
Robert D. Small
* Director 2-6-98
---------------------------------------------
Leon Wolin
/s/ EDWARD H. SIBBALD Executive Vice President and Chief 2-6-98
--------------------------------------------- Financial Officer
Edward H. Sibbald
/s/ DANIEL R. KADOLPH Vice President and Comptroller 2-6-98
---------------------------------------------
Daniel R. Kadolph
*By: /s/ ROBERT L. WOODS 2-6-98
---------------------------------------
Robert L. Woods,
Attorney-in-Fact
</TABLE>
<PAGE> 95
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
- ------- --------------------
<C> <S>
1.1 Form of Underwriting Agreement.*
3.1 Restated Certificate of Incorporation, as amended.*
3.2 By-Laws, as amended.*
4.1 Specimen Common Stock Certificate.*
5.1 Opinion of Vedder, Price, Kaufman & Kammholz.*
10.1 $18.0 million Revolving Loan Agreement dated as of May 1,
1995, between the Company and LaSalle National Bank, as
amended.*
10.2 $4.0 million Revolving Loan Agreement dated as of May 1,
1995, between Midwest One Mortgage Services, Inc. and
LaSalle National Bank.*
10.3 Midwest Banc Holdings, Inc. 1996 Stock Option Plan.*
10.4 Form of Transitional Employment Agreements.
10.5 Lease dated as of December 24, 1958, between Western
National Bank of Cicero and Midwest Bank and Trust Company,
as amended.*
10.6 Britannica Centre Lease dated as of May 1, 1994, between
Chicago Title and Trust Company, as Trustee under Trust
Agreement dated November 2, 1977, and known as Trust No.
1070932, and Midwest Bank & Trust Company.*
10.7 Lease dated as of March 20, 1996, between Grove Lodge No.
824 Ancient Free and Accepted Masons and Midwest Bank of
Hinsdale.*
10.8 Office Lease undated between Grove Lodge No. 824 Ancient
Free and Accepted Masons and Midwest Bank of Hinsdale.*
10.9 Credit Agreement as of January 30, 1998, between the
Company, Midwest One Mortgage Services, Inc. and Harris
Trust & Savings Bank.
21.1 Subsidiaries.*
23.1 Consent of Vedder, Price, Kaufman & Kammholz (included in
their opinion filed as Exhibit 5.1).
23.2 Consent of Crowe, Chizek and Company LLP.
24.1 Power of Attorney*
</TABLE>
- -------------------------
* Previously filed.
<PAGE> 1
EXHIBIT 10.4
TRANSITIONAL EMPLOYMENT AGREEMENT
This Transitional Employment Agreement ("Agreement") is made as of this
___ day of January, 1998, by and between _________________________________ (the
"Employer") and the undersigned executive officer (the "Executive").
W I T N E S S E T H:
WHEREAS, the Executive has been employed for some years by the
Employer; and
WHEREAS, the Employer wishes to assure both itself and the Executive of
continuity of management in the event of any actual Change in Control (as
defined in Paragraph 2) of the Employer on the terms and conditions set forth
herein; and
WHEREAS, the Executive desires to provide such services and continuity;
and
WHEREAS, to achieve this purpose, the Board of Directors of the
Employer considered and approved this Agreement to be entered into with the
Executive as being in the best interests of the Employer and its stockholders;
NOW, THEREFORE, in consideration of the premises and mutual covenants
set forth herein, the parties hereto agree as follows:
1. OPERATION OF AGREEMENT. The "Effective Date of this Agreement" shall
be the date on which a Change in Control occurs, and this Agreement shall not
have any force or effect whatsoever prior to that date.
2. CHANGE IN CONTROL. For the purposes of this Agreement, a "Change in
Control" shall be deemed to occur when and only when: (a) any "person" or
"group" (as such terms are used in Sections 3(a), 13(d) and 14(d) of the
Securities Exchange Act of 1934, as amended, and regulations promulgated
thereunder), is or becomes the beneficial owner of more than fifty percent (50%)
of the total voting power of the Voting Stock (as defined below) of the Employer
or any direct or indirect parent ("Parent") of the Employer, if applicable,
other than (i) a trustee or other fiduciary holding securities under any
employee benefit plan of the Employer, its successors or any of their Parents or
subsidiaries, (ii) an entity owned directly or indirectly by the stockholders of
the Employer, its successors or their Parents in substantially the same
proportions as their ownership of stock in said entity prior to attaining such
beneficial interest, or (iii) any person or group who, as of December 1, 1997 is
the "beneficial owner" (as defined in Rule 13d-3 under said Act), directly or
indirectly, of securities of the Employer or its Parent, if applicable,
representing more than fifty percent (50%) of the total voting power of the then
outstanding securities of said entity entitled to vote generally in the election
of directors (or similar positions) (each a "Controlled Entity"); (b) there
shall occur the sale of a division(s) or assets constituting more than forty
percent (40%) in value of the assets of the Employer to any person or entity
other than a Controlled Entity and such sale results in a material change in the
nature or amount of the business of the Employer as it was conducted immediately
prior to such sale.
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<PAGE> 2
3. EMPLOYMENT. The Employer hereby agrees to continue the Executive in
its employ for a period of [twelve (12)/twenty-four (24)] months commencing on
the Effective Date of this Agreement (the "Employment Period"), with the same
director and officer titles, duties and responsibilities as in effect
immediately prior to the Effective Date of this Agreement. The Executive agrees
that during the Employment Period he or she shall continue to devote such time
to his or her executive duties as devoted prior to the Effective Date of the
Agreement and shall perform such duties faithfully; provided, however, that
Executive's continued service for other corporations and entities, and on any
other corporate, civic, charity or foundation board shall not be deemed to
breach Executive's obligations hereunder.
4. COMPENSATION, COMPENSATION PLANS, BENEFITS AND PERQUISITES. During
the Employment Period, the Executive shall:
(a) Receive an annual salary and director's fees at a rate which
is not less than his or her rate of annual salary and
director's fees immediately prior to the Effective Date of
this Agreement, with the opportunity for increases from time
to time thereafter which are in accordance with the regular
practices of the Employer or its affiliates (which for
purposes of this Agreement, shall mean any corporation or
enterprise which, as of a given date, is a member of the same
controlled group of entities, the same group of trades or
businesses under common control or the same affiliated service
group, determined in accordance with Section 414(b), (c), (m)
or (o) of the Code (as defined in Paragraph 7 hereof), as is
the Employer) with respect to executives with comparable
duties;
(b) Be eligible to participate on a comparable basis, in each
calendar year during which the Employment Period runs, in an
annual bonus program maintained by the Employer or its
affiliates in which executives with comparable duties are
eligible to participate;
(c) Be eligible to participate on a comparable basis in the stock
option or other equity incentive plans and any other bonus
incentive compensation plans (collectively, the "Incentive
Plans"), maintained from time to time by the Employer or its
affiliates during the Employment Period and in which
executives with comparable duties are eligible to participate,
and the Executive's benefits, if any, in any Incentive Plans
existing on the date hereof shall not be reduced or
eliminated;
(d) Be entitled to participate (i) in any group or executive
medical, dental, disability, life insurance, retirement,
profit sharing, thrift and other plans and programs, including
nonqualified and deferred compensation plans and programs,
maintained from time to time by the Employer or its affiliates
during the Employment Period and in which similarly situated
executives (with comparable duties) are eligible to
participate and (ii) in special medical
3
<PAGE> 3
or life insurance arrangements, and profit sharing
contributions to any deferred compensation plan maintained by
the Employer to the same extent the Executive participated in
such benefits before the Effective Date of the Agreement; and
(e) Be entitled to receive vacation and perquisites which are
provided by the Employer or its affiliates from time to time
during the Employment Period to executives with comparable
duties, but in no event less favorable than the vacation and
perquisites to which he or she was entitled immediately prior
to the Effective Date of this Agreement (including, but not
limited to, company car and allowances, club memberships and
dues, subscriptions and travel).
5. TERMINATION DURING EMPLOYMENT PERIOD.
(a) For purposes of this Agreement, the term "termination" shall
mean (i) termination by the Employer of the employment of the
Executive with the Employer and all of its affiliates during
the Employment Period for any reason other than death,
disability or "cause" (as defined below), or (ii) resignation
of the Executive for "constructive discharge" (as defined
below).
(b) The term "constructive discharge" shall mean the Executive's
resignation from the Employer and all of its affiliates upon
any one of the following:
(i) the failure of the Employer to pay or provide the
compensation, benefits and perquisites contemplated
by Paragraph 4;
(ii) there shall have occurred a material diminution in
the Executive's title, duties or responsibilities
from those in effect prior to the Effective Date of
this Agreement;
(iii) the Employer changes the Executive's (A) primary
employment location to a place that is more than 35
miles from Executive's primary employment location as
of the Effective Date of the Agreement and/or (B)
regularly scheduled work hours significantly from
such hours as of the Effective Date of the Agreement;
and/or
(iv) [commencing ninety days after the Effective Date of
the Agreement,] at any time for any reason prior to
the first anniversary of the Effective Date of the
Agreement.
(c) The term "cause" means (i) felony indictment or conviction,
other than a felony predicated upon the Executive's vicarious
liability or (ii) the Executive's continued and willful
failure to substantially perform his or her
4
<PAGE> 4
duties under this Agreement. For purposes of this Paragraph,
no act or failure to act on the Executive's part will be
considered "willful" unless done, or omitted to be done, by
him or her not in good faith and without reasonable belief
that his or her action or omission was in the interests of the
Employer or its affiliates or not opposed to the interests of
the Employer or its affiliates.
6. TERMINATION BENEFITS. In the event of a termination of the Executive
during the Employment Period, the Employer shall provide and the Executive shall
be entitled to receive the following benefits (the "Termination Benefits") upon
execution by Executive of a release, in substantially the form attached hereto
as Exhibit A, of all claims (other than claims for benefits granted under this
Agreement) against Employer, the Resulting Entity and their affiliates and
successors:
(a) The Executive shall, notwithstanding his or her termination,
be entitled to receive salary payments and director's fees
from the date of his termination and continuing until the
[first/second] anniversary of said termination date (the
"Salary Continuation Period"); which period shall be treated
hereunder as a continuation of the Employment Period. These
sums shall be paid at the greater of the rate required by
Paragraph 4(a) and that in effect immediately prior to
termination.
(b) In addition to the payments under (a) above, the Executive
shall receive a bonus payment with respect to each calendar
year ending during Salary Continuation Period equal to the
annual cash bonus paid (including, for this purpose, bonus
amounts declared but deferred pursuant to the Executive's
election) during the year immediately preceding the Effective
Date of the Agreement, or if greater, the date of termination,
plus a pro rata payment for the calendar year in
which such Salary Continuation Period ends based on such
average annual cash bonus. The bonus payments for each
calendar year shall be made at such times and in such manner
as they would have been paid had the Executive's employment
not been terminated.
(c) Upon the expiration of the Employment Period, including,
without limitation the Salary Continuation Period, the
Executive (and, if applicable, his or her dependents) shall be
entitled to maintain group medical and dental coverage under
the continuation coverage provisions of such plans ("COBRA
Coverage"), which entitlement shall, notwithstanding any other
provisions of the group plan to the contrary, be subject to
termination only in the event of the failure of the Executive
or the dependent to timely pay the appropriate premium for
such coverage (which, in this case, shall be the premium that
would be paid on the same cost-sharing basis as if the
Executive continued to be actively employed by the Employer),
provided that such coverage shall be secondary to any group
coverage (including Medicare or any government- sponsored or
mandated program) subsequently obtained or covering the
Executive or dependent.
5
<PAGE> 5
7. ADJUSTMENT DUE TO EXCISE TAX.
(a) If it is determined (in the reasonable opinion of independent
public accountants then regularly retained by the Employer in
consultation with tax counsel acceptable to Executive), that
any amount payable to Executive by Employer under this
Agreement or any other plan, program or agreement under which
Executive participates or is a party would constitute an
"Excess Parachute Payment" within the meaning of Section 280G
(or any similar provision) of the Internal Revenue Code of
1986, as amended from time to time (the "Code"), subject to
the excise tax imposed by Section 4999 of the Code, as amended
from time to time (the "Excise Tax"), then the Termination
Benefits payable to the Executive shall be reduced to the
extent necessary so that no portion of the amounts payable to
the Executive is subject to the Excise Tax. Executive shall be
responsible for any and all Excise Tax (or similar taxes
imposed upon such payments).
(b) The determination of the amount of reduction, if any, in the
amounts payable to the Executive shall be made in good faith
by the Employer's chief financial officer after consultation
with the advisors then regularly retained by the Employer and
tax counsel acceptable to the Executive, and a written
statement setting forth the calculation thereof shall be
provided to the Executive. If amounts payable to the Executive
are to be reduced pursuant to this Paragraph 7, the Executive,
in consultation with the chief financial officer, shall
determine the compensation and benefits to be so reduced.
8. NO OBLIGATION TO MITIGATE DAMAGES. The Executive shall not be
obligated to seek other employment in mitigation of amounts payable or
arrangements made under the provisions of this Agreement and the obtaining of
any such other employment shall in no event effect any reduction of the
Employer's obligations under this Agreement.
9. ENFORCEMENT; ARBITRATION.
(a) Both the Employer and the Executive (or any successor) shall
have the right and option to elect to have any dispute or
controversy arising under or in connection with this
Agreement, or any plan, program or arrangement referred to
herein, or any breach thereof, settled exclusively by
arbitration, conducted before an arbitrator in accordance with
rules of the American Arbitration Association then in effect.
Judgment may be entered on the award of the arbitrator in any
court having jurisdiction. Any such arbitration shall be held
in Chicago, Illinois.
(b) The Employer shall pay all reasonable legal fees, costs of
litigation, and other reasonable expenses incurred by the
Executive or any successor who is successful pursuant to legal
judgment, arbitration or settlement in a challenge
6
<PAGE> 6
resulting from the Employer's refusal to pay any amounts due
under this Agreement or any plan, program or arrangement
referred to herein to which it is determined that the
Executive or successor is entitled, or as a result of the
Employer's contesting the validity, enforceability or
interpretation of this Agreement or any such plan, program or
arrangement.
(c) Each of the Employer or the Executive or any successor shall
provide written notice ("initial notice") at least fifteen
(15) business days prior to the commencement of any legal
action or claim under this Agreement or any plan, program or
arrangement referred to herein, which initial notice shall
indicate whether such party is invoking arbitration pursuant
to Paragraph 9(a) above. If such party is not electing to
invoke arbitration, then the other party may by written notice
within ten (10) business days following receipt of the initial
notice elect to invoke arbitration pursuant to said Paragraph
9(a).
10. INDEMNIFICATION. In the event that legal action is instituted
against the Executive during or after the term of his or her employment by a
third party (or parties) based on the performance or nonperformance by Executive
of his or her duties as an officer or director of the Employer or any of its
affiliates or a fiduciary of any benefit plan maintained by the Employer or any
of its affiliates during his or her employment with the Employer, the Resulting
Entity, their successors (collectively, the "Indemnifying Party") or their
affiliates, the Indemnifying Party will assume the defense of such action by its
attorney or attorneys selected by the Indemnifying Party and will advance the
costs and expenses thereof (including reasonable attorneys' fees) and will
indemnify the Executive against any judgment or amounts paid in settlement of
said actions in accordance with its charter, by-laws, insurance and applicable
law, without prejudice to or waiver by the Indemnifying Party of its rights and
remedies against Executive. In the event that there is a settlement or final
judgment entered against Executive in any such litigation, and the Indemnifying
Party's Board of Directors determines that Executive should, in accordance with
the Indemnifying Party's charter, by-laws, insurance and applicable law,
reimburse the Indemnifying Party, Executive shall be liable to the Indemnifying
Party for all such costs, expenses, damages and other amounts paid or incurred
by the Indemnifying Party in the defense, settlement or other resolution of any
such litigation (the "Reimbursement Amount"). The Reimbursement Amount shall be
paid by Executive within thirty (30) days after rendition of the final judgment.
The Indemnifying Party shall be entitled to set off the reimbursement amount
against all sums which may be owed or payable by the Indemnifying Party to
Executive hereunder or otherwise. The parties shall cooperate in the defense of
any asserted claim, demand or liability against Executive or the Indemnifying
Party or its subsidiaries or affiliates. The term "final judgment" as used
herein shall be defined to mean the decision of a court of competent
jurisdiction, and in the event of an appeal, then the decision of the appellate
court, after petition for rehearing has been denied, or the time for filing the
same (or the filing of further appeal) has expired.
The rights to indemnification under this Paragraph 10 shall be in
addition to any rights which Executive may now or hereafter have under the
charter or By-Laws of the Indemnifying Party or any of its affiliates, under any
insurance contract maintained by the Indemnifying Party or any of its affiliates
or any agreement between Executive and the Indemnifying Party or any of its
affiliates.
7
<PAGE> 7
11. PAYMENT IN THE EVENT OF DEATH. Upon the death of the Executive
prior to a termination, any payment due and owing by the Employer to Executive
under this Agreement shall be made to such beneficiary as Executive may
designate in writing, or failing such designation, the executor of his or her
estate. Upon the death of the Executive after a termination has occurred, then
the beneficiary designated by the Executive or, if no beneficiary has been
designated, his or her executor shall be entitled to a lump sum death benefit
equal to the present value of the payments that were remaining to be paid under
Paragraph 6(a) as of the date of death. Such lump sum present value payment
shall be determined using an interest rate per annum equal to the prime rate of
interest as published in The Wall Street Journal (Midwest Edition) on the first
business day of the month in which the Executive's death occurred and shall be
paid within 30 days of the date of death. Such payments shall be in addition to
the amount of the bonus payment, if any, which may thereafter be due under
Paragraph 6(b), any other death benefits provided by the Employer or under any
plan, program or arrangement maintained by the Employer.
12. NOTICES. Any notices, requests, demands and other communications
provided for by this Agreement shall be sufficient if in writing and if sent by
registered or certified mail to the Executive at the last address he or she has
filed in writing with the Employer or, in the case of the Employer, at its
principal executive offices.
13. CONFIDENTIAL INFORMATION. Executive acknowledges that during the
course of his or her employment he or she has learned or will learn or develop
Confidential Information (as that term is defined in this Paragraph 13).
Executive further acknowledges that unauthorized disclosure or use of such
Confidential Information, other than in discharge of Executive's duties, will
cause Employer or its affiliates irreparable harm.
For purposes of this Paragraph, Confidential Information means trade
secrets (such as technical and non-technical data, a program, method, technique
or process) and other proprietary information concerning the products, processes
or services of Employer or its affiliates, including but not limited to:
computer programs; marketing, or organizational research and development;
business plans; revenue forecasts; personnel information, including the identity
of other employees of Employer, its successors or their affiliates, their
responsibilities, competence, abilities, and compensation; pricing and financial
information; current and prospective customer lists and information on customers
or their employees; information concerning planned or pending acquisitions or
divestitures; and information concerning purchases of major equipment or
property, which information: (a) has not been made generally available to the
public in violation of a confidentiality agreement, fiduciary duty or similar
obligation; and (b) is useful or of value to the current or anticipated
business, or research or development activities of Employer or its affiliates;
or (c) has been identified as confidential by: (i) Executive, or (ii) to
Executive's knowledge, by Employer, its successors or their affiliates, either
orally or in writing.
Except in the course of his or her employment and in the pursuit of the
business of Employer, its successor or their affiliates, Executive shall not,
during the course of his or her employment, including, without limitation the
Salary Continuation Period, for any reason, directly or indirectly, disclose,
publish, communicate or use on his or her behalf or another's behalf, any
confidential information, proprietary information or other data of Employer, its
successors or their affiliates.
8
<PAGE> 8
14. RETURN OF EMPLOYER'S PROPERTY.
All notes, reports, plans, memoranda or other documents created,
developed, generated or held by Executive during his or her employment
concerning or related to Employer's, its successors or their affiliates'
business, and whether containing or relating to Confidential Information or not,
are the property of Employer, its successors or their affiliates, as applicable,
and will be promptly delivered to Employer, its successors or their affiliates
upon termination of Executive's employment for any reason whatsoever.
15. NON-SOLICITATION.
(a) Customers. Executive shall not for any reason during his or
her employment or the Salary Continuation Period
(collectively, the "Non- Solicitation Period"), either as an
individual, on his or her own account, or as an agent,
employee, director, shareholder or otherwise, directly or
indirectly, solicit, induce or encourage, or attempt to
solicit, induce or encourage any customer of the Employer, the
Resulting Entity, their affiliates or their successors not to
do business with the Employer, the Resulting Entity, their
affiliates or their successors. For purposes of this Paragraph
15, such customers and such affiliates shall be limited to
those persons or entities which are customers or affiliates as
of the date immediately preceding the date of the Executive's
termination of employment. Nothing in this Agreement shall be
deemed to limit or otherwise prohibit Executive from
continuing or commencing service with any other corporations
and entities or on any corporate or other board, so long as
Executive does not violate his or her obligations under this
Paragraph 15 or any other provision of this Agreement.
(b) Inducement of Other Employees. During the Non-Solicitation
Period, Executive will not directly or indirectly solicit,
induce or encourage any person who, as of the date immediately
preceding the date of the termination of Executive's
employment, is an employee of Employer, the Resulting Entity,
their affiliates or their successors to terminate his
relationship with Employer, the Resulting Entity, their
affiliates or their successors.
16. REMEDIES.
Executive warrants and represents that: (i) Executive has read and
understands this Agreement; (ii) Executive has had an opportunity to consult
with legal counsel in connection herewith; (iii) the restraints and agreements
herein provided are fair and reasonable; (iv) enforcement of the provisions of
Paragraphs 13, 14 and 15 will not cause him undue hardship; and (v) that the
above restrictions are reasonable in scope and duration and are the least
restrictive means to protect the Employer's, the Resulting Entity's, their
affiliates' and their successors' legitimate and proprietary business interests
and property from irreparable harm.
9
<PAGE> 9
Executive acknowledges that failure to comply with the terms of this
Agreement will cause irreparable damage to Employer or its affiliates.
Therefore, Executive agrees that, notwithstanding Paragraph 9 (Enforcement;
Arbitration) above, Employer, the Resulting Entity and their successors shall
have the right to seek specific performance, injunctive relief (without bond)
and other equitable relief, as well as maintain an action for damages in any
court of competent jurisdiction (in addition to any other remedies available at
law or in equity) for Executive's breach or threatened breach of the
restrictions contained in Paragraphs 13, 14 and 15 and the existence of any
claim or cause of action Executive may have against Employer will not constitute
a defense thereto. Executive further agrees to pay reasonable attorney fees and
costs of litigation incurred by Employer, the Resulting Entity, their affiliates
or their successors in any proceeding relating to the enforcement of said
provisions or to any alleged breach thereof in which Employer, the Resulting
Entity, their affiliates or their successors prevail.
In the event of a breach or a violation by Executive of any of the
covenants and provisions of this Agreement, the running of the Non-Solicitation
Period (but not of Executive's obligation thereunder), shall be tolled during
the period of the continuance of any actual breach or violation.
17. NON-ALIENATION. The Executive shall not have any right to pledge,
hypothecate, anticipate or in any way create a lien upon any amounts provided
under this Agreement, and no benefits payable hereunder shall be assignable in
anticipation of payment either by voluntary or involuntary acts, or by operation
of law, except by will or the laws of descent and distribution.
18. GOVERNING LAW. The provisions of this Agreement shall be construed
in accordance with the laws of the State of Illinois.
19. AMENDMENT. This Agreement may be amended or canceled by mutual
agreement of the parties in writing (which, with respect to the Employer in the
case of an amendment prior to the Effective Date of the Agreement, shall have
been approved by resolution of a majority of the non-employee members of the
Board of Directors of the Employer) without the consent of any other person and,
so long as the Executive lives, no person, other than the parties hereto, shall
have any rights under or interest in this Agreement or the subject matter
hereof.
20. BINDING EFFECT; SUCCESSORS. Except as otherwise provided herein,
this Agreement shall be binding upon and inure to the benefit of the Employer
and any successors of the Employer or the Resulting Entity and to the benefit of
Executive's executors, administrators, legal representatives, heirs and
legatees. The Employer shall require any successor or assignee, whether direct
or indirect, by purchase, merger, consolidation or otherwise, expressly and
unconditionally to assume and agree to perform the Employer's obligations under
this Agreement, whereupon such successor or assignee shall become the Employer
hereunder.
21. SEVERABILITY. In the event that any provision or portion of this
Agreement shall be determined to be invalid or unenforceable for any reason, it
is the intent of the parties that this Agreement be construed or reformed to the
fullest extent possible so as to be enforceable and be in conformance with the
manner in which it was originally intended to operate, including, without
limitation, the deletion or modification of any invalid or unenforceable
provision.
10
<PAGE> 10
IN WITNESS WHEREOF, the Executive has hereunto set his or her hand and,
pursuant to the authorization from its Board of Directors, the Employer has
caused this Agreement to be executed in its name on its behalf all as of the day
and year first above written.
EXECUTIVE:
--------------------------------------------
----------------------
EMPLOYER:
--------------------------------------------
By:
-----------------------------------------
Its:
-----------------------------------------
WITNESS:
- -----------------------------------
A Director of
---------------------
11
<PAGE> 11
OFFICERS EXECUTING
TRANSITIONAL EMPLOYMENT AGREEMENTS
A. EXECUTIVE OFFICER GROUP (term of agreement is 24 months; ability to
resign for one year from the effective date
of the agreement)
1. Robert L. Woods
2. Edward H. Sibbald
3. Brad A. Luecke
4. James I. McMahon
5. Stephen M. Karaba
6. Bruno Costa
B. SENIOR OFFICER GROUP (term of agreement is
12 months; ability to resign
limited to period between 90 days and one
year after the effective date of the
agreement)
1. Sheldon Bernstein
2. Mary Henthorn
<PAGE> 1
EXHIBIT 10.9
================================================================================
CREDIT AGREEMENT
DATED AS OF
JANUARY 30, 1998,
BETWEEN
MIDWEST BANC HOLDINGS, INC.,
MIDWEST ONE MORTGAGE SERVICES, INC.,
AND
HARRIS TRUST AND SAVINGS BANK
================================================================================
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
SECTION DESCRIPTION PAGE
<S> <C> <C>
SECTION 1. THE CREDITS......................................................1
Section 1.1. Revolving Credit.............................................1
Section 1.2. Manner and Disbursement of Loans.............................2
Section 1.3. Extension of Termination Date................................2
Section 1.4. Appointment of the Company as Agent for the Borrowing
Subsidiary; Reliance by Bank.................................2
SECTION 2. INTEREST AND CHANGE IN CIRCUMSTANCES.............................3
Section 2.1. Interest Rate Options........................................3
Section 2.2. Minimum Amounts..............................................4
Section 2.3. Computation of Interest......................................4
Section 2.4. Manner of Rate Selection.....................................4
Section 2.5. Change of Law................................................4
Section 2.6. Unavailability of Deposits or Inability to Ascertain
Adjusted LIBOR...............................................5
Section 2.7. Taxes and Increased Costs....................................5
Section 2.8. Funding Indemnity............................................6
Section 2.9. Lending Branch...............................................7
Section 2.10. Discretion of Bank as to Manner of Funding...................7
SECTION 3. FEES, PREPAYMENTS, TERMINATIONS AND APPLICATIONS.................7
Section 3.1. Fees.........................................................7
Section 3.2. Mandatory Prepayments........................................7
Section 3.3. Voluntary Prepayments........................................7
Section 3.4. Mandatory Termination........................................8
Section 3.5. Voluntary Terminations.......................................8
Section 3.6. Place and Application of Payments............................8
Section 3.7. Notations....................................................9
SECTION 4. COLLATERAL.......................................................9
Section 4.1. Collateral...................................................9
Section 4.2. Further Assurances...........................................9
SECTION 5. DEFINITIONS; INTERPRETATION......................................9
Section 5.1. Definitions..................................................9
Section 5.2. Interpretation..............................................16
SECTION 6. REPRESENTATIONS AND WARRANTIES..................................17
Section 6.1. Organization and Qualification..............................17
</TABLE>
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<PAGE> 3
<TABLE>
<S> <C> <C>
Section 6.2. Subsidiaries................................................17
Section 6.3. Authority and Validity of Obligations.......................17
Section 6.4. Use of Proceeds; Margin Stock...............................18
Section 6.5. Financial Reports...........................................18
Section 6.6. No Material Adverse Change..................................19
Section 6.7. Full Disclosure.............................................19
Section 6.8. Good Title..................................................19
Section 6.9. Litigation and Other Controversies..........................19
Section 6.10. Taxes.......................................................19
Section 6.11. Approvals...................................................19
Section 6.12. Investment Company..........................................20
Section 6.13. ERISA.......................................................20
Section 6.14. Compliance with Laws........................................20
Section 6.15. Other Agreements............................................20
Section 6.16. No Default..................................................21
SECTION 7. CONDITIONS PRECEDENT............................................21
Section 7.1. All Advances................................................21
Section 7.2. Initial Advance.............................................21
SECTION 8. COVENANTS.......................................................22
Section 8.1. Maintenance of Business.....................................22
Section 8.2. Maintenance of Properties...................................23
Section 8.3. Taxes and Assessments.......................................23
Section 8.4. Insurance...................................................23
Section 8.5. Financial Reports...........................................23
Section 8.6. Inspection..................................................25
Section 8.7. Non-Performing Assets.......................................26
Section 8.8. Regulatory Capital Requirements.............................26
Section 8.9. Minimum Consolidated Net Income.............................27
Section 8.10. Minimum Consolidated Tangible Net Worth.....................27
Section 8.11. Indebtedness for Borrowed Money.............................27
Section 8.12. Liens.......................................................27
Section 8.13. Investments, Loans, Advances and Acquisitions...............29
Section 8.14. Mergers, Consolidations, Leases and Sales...................29
Section 8.15. Maintenance of Subsidiaries.................................30
Section 8.16. Dividends and Certain Other Restricted Payments.............30
Section 8.17. ERISA.......................................................30
Section 8.18. Compliance with Laws........................................31
Section 8.19. Formation of Subsidiaries...................................31
Section 8.20. Change in the Nature of Business............................31
Section 8.21. Use of Proceeds.............................................31
SECTION 9. EVENTS OF DEFAULT AND REMEDIES..................................31
</TABLE>
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<PAGE> 4
<TABLE>
<S> <C> <C>
Section 9.1. Events of Default...........................................31
Section 9.2. Non-Bankruptcy Defaults.....................................33
Section 9.3. Bankruptcy Defaults.........................................34
SECTION 10. THE GUARANTEE...................................................34
Section 10.1. The Guarantee...............................................34
Section 10.2. Guarantee Unconditional.....................................34
Section 10.3. Discharge Only Upon Payment in Full; Reinstatement in
Certain Circumstances.......................................35
Section 10.4. Waivers.....................................................36
Section 10.5. Subrogation and Contribution................................36
Section 10.6. Stay of Acceleration........................................36
SECTION 11. MISCELLANEOUS...................................................36
Section 11.1. Non-Business Day............................................36
Section 11.2. No Waiver, Cumulative Remedies..............................36
Section 11.3. Amendments, Etc.............................................37
Section 11.4. Costs and Expenses..........................................37
Section 11.5. Documentary Taxes...........................................37
Section 11.6. Survival of Representations.................................37
Section 11.7. Notices.....................................................37
Section 11.8. Confidentiality.............................................38
Section 11.9. Headings....................................................38
Section 11.10. Severability of Provisions..................................38
Section 11.11. Construction................................................38
Section 11.12. Counterparts................................................39
Section 11.13. Binding Nature, Governing Law, Etc..........................39
Section 11.14. Submission to Jurisdiction; Waiver of Jury Trial...........39
Signature.......................................................................40
</TABLE>
EXHIBIT A - Revolving Note One
EXHIBIT B - Revolving Note Two
EXHIBIT C - Compliance Certificate
SCHEDULE 6.2 - Subsidiaries
SCHEDULE 6.9 - Pending Litigation
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<PAGE> 5
CREDIT AGREEMENT
Harris Trust and Savings Bank
Chicago, Illinois
Ladies and Gentlemen:
The undersigned, Midwest Banc Holdings, Inc., a Delaware corporation
(the "Company") and Midwest One Mortgage Services, Inc., an Illinois corporation
(the "Borrowing Subsidiary") (the Company and the Borrowing Subsidiary are
hereinafter referred to collectively as the "Borrowers" and individually as a
"Borrower"), apply to you (the "Bank") for your commitment, subject to the terms
and conditions hereof and on the basis of the representations and warranties
hereinafter set forth, to extend credit to the Borrowers, all as more fully
hereinafter set forth.
SECTION 1. THE CREDITS.
Section 1.1. Revolving Credit. Subject to the terms and conditions
hereof, the Bank agrees to extend a revolving credit (the "Revolving Credit") to
the Borrowers which may be availed of by each Borrower from time to time during
the period from and including the date hereof to but not including the
Termination Date, at which time the commitment of the Bank to extend credit
under the Revolving Credit shall expire. The Revolving Credit may be utilized by
each Borrower in the form of loans (individually a "Loan" and collectively the
"Loans"), all as more fully hereinafter set forth, provided that (a) the
principal amount of Loans outstanding at any one time to both Borrowers shall
not in the aggregate exceed $25,000,000 (the "Commitment", as such amount may be
reduced pursuant to Section 3.5 hereof) and (b) the principal amount of Loans
outstanding at any one time to the Borrowing Subsidiary shall not in the
aggregate exceed $5,000,000 (the "Borrowing Subsidiary Sublimit"). Each Loan
shall be in a minimum amount of $100,000; provided, however, that each Loan
which bears interest with reference to the Adjusted LIBOR shall be in such
greater amount as is required by Section 2 hereof. All Loans made to the Company
shall be made against and evidenced by a single promissory note in the form
(with appropriate insertions) attached hereto as Exhibit A ("Note One") payable
to the order of the Bank in the principal amount of $25,000,000. All Loans made
to the Borrowing Subsidiary shall be made against and evidenced by a single
promissory note in the form (with appropriate insertions) attached hereto as
Exhibit B ("Note Two") payable to the order of the Bank in the principal amount
of $5,000,000. Each Note shall be dated the date of issuance thereof and be
expressed to mature on the Termination Date. Without regard to the principal
amount of a Note stated on its face, the actual principal amount at any time
outstanding and owing by the relevant Borrower on account of the relevant Note
shall be the sum of all Loans made to such Borrower hereunder less all payments
of principal actually received by the Bank. During the period from and including
the date hereof to but not including the Termination Date, each Borrower may use
the Commitment (in the case of the Borrowing Subsidiary, up to the amount of the
Borrowing Subsidiary Sublimit) by borrowing, repaying
<PAGE> 6
and reborrowing Loans in whole or in part, all in accordance with the terms and
conditions of this Agreement.
Section 1.2. Manner and Disbursement of Loans. The Company (acting
on behalf of itself and the Borrowing Subsidiary pursuant to Section 1.4 hereof)
shall give written or telephonic notice to the Bank (which notice shall be
irrevocable once given and, if given by telephone, shall be promptly confirmed
in writing) by no later than 11:00 a.m. (Chicago time) on the date a Borrower
requests the Bank to make a Loan hereunder. Each such notice shall specify the
identity of the Borrower, the date of the Loan requested (which must be a
Business Day) and the amount of such Loan. Each Loan to a Borrower shall
initially constitute part of the relevant Base Rate Portion except to the extent
the Company has otherwise timely selected a LIBOR Portion as provided in Section
2 hereof. Subject to the provisions of Section 7 hereof, the proceeds of each
Loan shall be made available to the relevant Borrower at the principal office of
the Bank in Chicago, Illinois, in immediately available funds.
Section 1.3. Extension of Termination Date. Not less than 75 days
or more than 120 days prior to each anniversary of the date hereof, the Company,
on behalf of the Borrowers, may advise the Bank in writing of its desire to
extend the Termination Date for an additional 12 months; provided that there
shall not be more than one such request for an extension of the Termination Date
made during any single 12-month period. In the event that the Bank is agreeable
to such extension, it shall so notify the Company within 60 days of the
requested extension (it being understood that the Bank may accept or decline
such a request in its sole discretion, and in the event that the Bank fails to
so notify the Company that the Bank has agreed to such extension the Bank shall
be deemed to have refused to grant the requested extension) and the Borrowers
and the Bank shall enter into such documents as the Bank may reasonably deem
necessary or appropriate to reflect such extension, and all costs and expenses
incurred by the Bank in connection therewith (including reasonable attorneys'
fees) shall be paid by the Borrowers.
Section 1.4. Appointment of the Company as Agent for the Borrowing
Subsidiary; Reliance by Bank. (a) Appointment. The Borrowing Subsidiary
irrevocably appoints the Company as its agent hereunder to make requests on the
Borrowing Subsidiary's behalf under Section 1 hereof for Loans to be made to
such Borrower, to select on the Borrowing Subsidiary's behalf the interest rate
to be applicable under Section 2 hereof to borrowings made by such Borrower, and
to take any other action contemplated by the Loan Documents with respect to
credit extended hereunder to the Borrowing Subsidiary. The Bank shall be
entitled to conclusively presume that any action by the Company under the Loan
Documents is taken on behalf of one or the other of the Borrowers.
(b) Reliance. All requests for Loans and selection of interest rates
to be applicable thereto may be written or oral, including by telephone or
telecopy. The Borrowers agree that the Bank may rely on any such notice given by
any person the Bank in good faith reasonably believes is an Authorized
Representative without the necessity of independent investigation (the Borrowers
hereby indemnifying the Bank from any liability or loss ensuing from such
reliance), and in the event any such telephonic or other oral notice
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<PAGE> 7
conflicts with any written confirmation, such oral or telephonic notice shall
govern if the Bank has acted in reliance thereon.
SECTION 2. INTEREST AND CHANGE IN CIRCUMSTANCES.
Section 2.1. Interest Rate Options.
(a) Subject to all of the terms and conditions of this Section 2,
portions of the principal indebtedness evidenced by a Note (all of the
indebtedness evidenced by a Note bearing interest at the same rate for the same
period of time being hereinafter referred to as a "Portion") may, at the option
of the relevant Borrower, bear interest with reference to the Base Rate ("Base
Rate Portions") or with reference to an Adjusted LIBOR ("LIBOR Portions"), and
Portions of a Note may be converted from time to time from one basis to the
other. All of the indebtedness evidenced by a Note which is not part of a LIBOR
Portion shall constitute a single Base Rate Portion applicable to such Note. All
of the indebtedness evidenced by a Note which bears interest with reference to a
particular Adjusted LIBOR for a particular Interest Period shall constitute a
single LIBOR Portion applicable to such Note. There shall not be more than 4
LIBOR Portions applicable to the Notes outstanding at any one time. Anything
contained herein to the contrary notwithstanding, the obligation of the Bank to
create, continue or effect by conversion any LIBOR Portion shall be conditioned
upon the fact that at the time no Default or Event of Default shall have
occurred and be continuing. Each Borrower hereby promises to pay interest on
each Portion at the rates and times specified in this Section 2.
(b) Base Rate Portion. The Base Rate Portion of a Note shall bear
interest at the rate per annum equal to the Base Rate as in effect from time to
time minus .25%, provided that if such Base Rate Portion or any part thereof is
not paid when due (whether by lapse of time, acceleration or otherwise) such
Portion shall bear interest, whether before or after judgment, until payment in
full thereof at the rate per annum determined by adding 2% to the Base Rate as
in effect from time to time. Interest on each Base Rate Portion shall be payable
quarter-annually in arrears on the last day of each March, June, September and
December in each year (commencing March 31, 1998) and at maturity of the
relevant Note and interest after maturity (whether by lapse of time,
acceleration or otherwise) shall be due and payable upon demand. Any change in
the interest rate on the Base Rate Portions resulting from a change in the Base
Rate shall be effective on the date of the relevant change in the Base Rate.
(c) LIBOR Portions. Each LIBOR Portion of a Note shall bear interest
for each Interest Period selected therefor at a rate per annum determined by
adding .95% to the Adjusted LIBOR for such Interest Period, provided that if any
LIBOR Portion is not paid when due (whether by lapse of time, acceleration or
otherwise) such Portion shall bear interest, whether before or after judgment,
until payment in full thereof through the end of the Interest Period then
applicable thereto at the rate per annum determined by adding 2% to the interest
rate which would otherwise be applicable thereto, and effective at the end of
such Interest Period such LIBOR Portion shall automatically be converted into
and added to the relevant Base Rate Portion and shall thereafter bear interest
at the interest rate applicable
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<PAGE> 8
to such Base Rate Portion after default. Interest on each LIBOR Portion shall be
due and payable on the last day of each Interest Period applicable thereto and,
with respect to any Interest Period applicable to a LIBOR Portion in excess of 3
months, on the date occurring every 3 months after the date such Interest Period
began and at the end of such Interest Period, and interest after maturity
(whether by lapse of time, acceleration or otherwise) shall be due and payable
upon demand. The Company, on behalf of the relevant Borrower, shall notify the
Bank on or before 11:00 a.m. (Chicago time) on the third Business Day preceding
the end of an Interest Period applicable to a LIBOR Portion whether such LIBOR
Portion is to continue as a LIBOR Portion, in which event the Company shall
notify the Bank of the new Interest Period selected therefor, and in the event
the Company shall fail to so notify the Bank, such LIBOR Portion shall
automatically be converted into and added to the relevant Base Rate Portion as
of and on the last day of such Interest Period.
Section 2.2. Minimum Amounts. Each LIBOR Portion shall be in an
amount equal to $1,000,000 or such greater amount which is an integral multiple
of $500,000.
Section 2.3. Computation of Interest. All interest on the LIBOR
Portions of the Notes shall be computed on the basis of a year of 360 days for
the actual number of days elapsed, and all interest on the Base Rate Portion of
the Notes shall be computed on the basis of a year of 365 or 366 days, as the
case may be, for the actual number of days elapsed.
Section 2.4. Manner of Rate Selection. The Company, on behalf of
the relevant Borrower, shall notify the Bank by 11:00 a.m. (Chicago time) at
least 3 Business Days prior to the date upon which it requests that any LIBOR
Portion be created or that any part of the relevant Base Rate Portion be
converted into a LIBOR Portion (each such notice to specify in each instance the
amount thereof and the Interest Period selected therefor). If any request is
made to convert a LIBOR Portion into the relevant Base Rate Portion available
hereunder, such conversion shall only be made so as to become effective as of
the last day of the Interest Period applicable thereto. All requests for the
creation, continuance and conversion of Portions of the Loans under this
Agreement shall be irrevocable, provided that the Borrowers may prepay LIBOR
Portions subject to indemnifying the Bank pursuant to Section 2.8 hereof. Such
requests may be written or oral and the Bank is hereby authorized to honor
telephonic requests for creations, continuances and conversions received by it
from any person the Bank in good faith believes to be an Authorized
Representative without the need of independent investigation, the Borrowers
hereby indemnifying the Bank from any liability or loss ensuing from so acting.
Section 2.5. Change of Law. Notwithstanding any other provisions of
this Agreement or any Note, if at any time the Bank shall determine in good
faith that any change in applicable laws, treaties or regulations or in the
interpretation thereof makes it unlawful for the Bank to create or continue to
maintain any LIBOR Portion, it shall promptly so notify the Company and the
obligation of the Bank to create, continue or maintain any such LIBOR Portion
under this Agreement shall be suspended until it is no longer unlawful for the
Bank to create, continue or maintain such LIBOR Portion. The relevant Borrower,
on demand, shall, if the continued maintenance of any such LIBOR Portion is
unlawful, thereupon prepay the outstanding principal amount of the affected
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<PAGE> 9
LIBOR Portion, together with all interest accrued thereon and all other amounts
payable to the Bank with respect thereto under this Agreement; provided,
however, that such Borrower may elect to convert the principal amount of the
affected Portion into the relevant Base Rate Portion, subject to the terms and
conditions of this Agreement.
Section 2.6. Unavailability of Deposits or Inability to Ascertain
Adjusted LIBOR. Notwithstanding any other provision of this Agreement or any
Note, if prior to the commencement of any Interest Period the Bank shall
determine in good faith that deposits in the amount of any LIBOR Portion
scheduled to be outstanding during such Interest Period are not readily
available to the Bank in the relevant market or, by reason of circumstances
affecting the relevant market, adequate and reasonable means do not exist for
ascertaining Adjusted LIBOR, then the Bank shall promptly give notice thereof to
the Company and the obligation of the Bank to create, continue or effect by
conversion any such LIBOR Portion in such amount and for such Interest Period
shall be suspended until deposits in such amount and for the Interest Period
selected by the relevant Borrower shall again be readily available in the
relevant market and adequate and reasonable means exist for ascertaining
Adjusted LIBOR.
Section 2.7. Taxes and Increased Costs. With respect to any LIBOR
Portion, if the Bank shall determine in good faith that any change in any
applicable law, treaty, regulation or guideline (including, without limitation,
Regulation D of the Board of Governors of the Federal Reserve System) or any new
law, treaty, regulation or guideline, or any interpretation of any of the
foregoing by any governmental authority charged with the administration thereof
or any central bank or other fiscal, monetary or other authority having
jurisdiction over the Bank or its lending branch or the LIBOR Portions
contemplated by this Agreement (whether or not having the force of law), shall:
(i) impose, increase, or deem applicable any reserve, special
deposit or similar requirement against assets held by, or deposits in
or for the account of, or loans by, or any other acquisition of funds
or disbursements by, the Bank which is not in any instance already
accounted for in computing the interest rate applicable to such LIBOR
Portion;
(ii) subject the Bank, any LIBOR Portion or any Note to the
extent it evidences a LIBOR Portion to any tax (including, without
limitation, any United States interest equalization tax or similar tax
however named applicable to the acquisition or holding of debt
obligations and any interest or penalties with respect thereto), duty,
charge, stamp tax, fee, deduction or withholding in respect of this
Agreement, any LIBOR Portion or any Note to the extent it evidences a
LIBOR Portion, except such taxes as may be measured by the overall net
income or gross receipts of the Bank or its lending branches and
imposed by the jurisdiction, or any political subdivision or taxing
authority thereof, in which the Bank's principal executive office or
its lending branch is located;
(iii) change the basis of taxation of payments of principal and
interest due from any Borrower to the Bank hereunder or under any Note
to the extent it
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<PAGE> 10
evidences any LIBOR Portion (other than by a change in taxation of the
overall net income or gross receipts of the Bank); or
(iv) impose on the Bank any penalty with respect to the
foregoing or any other condition regarding this Agreement, any LIBOR
Portion or its disbursement, or any Note to the extent it evidences any
LIBOR Portion;
and the Bank shall determine in good faith that the result of any of the
foregoing is to increase the cost (whether by incurring a cost or adding to a
cost) to the Bank of creating or maintaining any LIBOR Portion hereunder or to
reduce the amount of principal or interest received or receivable by the Bank
(without benefit of, or credit for, any prorations, exemption, credits or other
offsets available under any such laws, treaties, regulations, guidelines or
interpretations thereof), then the relevant Borrower shall pay on demand to the
Bank from time to time as specified by the Bank such additional amounts as the
Bank shall reasonably determine are sufficient to compensate and indemnify it
for such increased cost or reduced amount. If the Bank makes such a claim for
compensation, it shall provide to the Company a certificate setting forth the
computation of the increased cost or reduced amount as a result of any event
mentioned herein in reasonable detail and such certificate shall be deemed prima
facie correct absent manifest error. The Borrowers shall not be required to make
payment to the Bank for any additional amount claimed pursuant to this Section
unless the Bank has given written notice to the Company of the Bank's intent to
request such payment prior to or within 60 days after the date on which the Bank
became entitled to claim such amount.
Section 2.8. Funding Indemnity. In the event the Bank shall incur
any loss, cost or expense (including, without limitation, any loss (including
loss of profit), cost or expense incurred by reason of the liquidation or
reemployment of deposits or other funds acquired or contracted to be acquired by
the Bank to fund or maintain any LIBOR Portion or the relending or reinvesting
of such deposits or other funds or amounts paid or prepaid to the Bank) as a
result of:
(i) any payment of a LIBOR Portion on a date other than the
last day of the then applicable Interest Period for any reason, whether
before or after default, and whether or not such payment is required by
any provisions of this Agreement; or
(ii) any failure by the relevant Borrower to create, borrow,
continue or effect by conversion a LIBOR Portion on the date specified
in a notice given pursuant to this Agreement;
then, upon the demand of the Bank, the relevant Borrower shall pay to the Bank
such amount as will reimburse the Bank for such loss, cost or expense. If the
Bank requests such a reimbursement, it shall provide to the Company a
certificate setting forth the computation of the loss, cost or expense giving
rise to the request for reimbursement in reasonable detail and such certificate
shall be deemed prima facie correct absent manifest error.
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<PAGE> 11
Section 2.9. Lending Branch. The Bank may, at its option, elect to
make, fund or maintain Portions of the Loans hereunder at such of its branches
or offices as the Bank may from time to time elect. To the extent reasonably
possible, the Bank shall designate an alternate branch or funding office with
respect to the LIBOR Portions to reduce any liability of the relevant Borrower
to the Bank under Section 2.7 hereof or to avoid the unavailability of an
interest rate option under Section 2.6 hereof, so long as such designation is
not otherwise disadvantageous to the Bank.
Section 2.10. Discretion of Bank as to Manner of Funding.
Notwithstanding any provision of this Agreement to the contrary, the Bank shall
be entitled to fund and maintain its funding of all or any part of the Notes in
any manner it sees fit, it being understood, however, that for the purposes of
this Agreement all determinations hereunder (including, without limitation,
determinations under Sections 2.6, 2.7 and 2.8 hereof) shall be made as if the
Bank had actually funded and maintained each LIBOR Portion during each Interest
Period applicable thereto through the purchase of deposits in the relevant
market in the amount of such LIBOR Portion, having a maturity corresponding to
such Interest Period, and bearing an interest rate equal to the LIBOR for such
Interest Period.
SECTION 3. FEES, PREPAYMENTS, TERMINATIONS AND APPLICATIONS.
Section 3.1. Fees.
(a) Upfront Fee. The Borrowers shall pay, jointly and severally, to
the Bank on the date hereof a non-refundable upfront fee of $25,000.
(b) Commitment Fee. For the period from and including the date hereof
to but not including the Termination Date, the Borrowers shall pay, jointly and
severally, to the Bank a commitment fee at the rate of .25% per annum (computed
on the basis of a year of 360 days for the actual number of days elapsed) on the
average daily unused portion of the Commitment. Such commitment fee shall be
payable quarter-annually in arrears on the last day of each March, June,
September and December in each year (commencing March 31, 1998) and on the
Termination Date.
Section 3.2. Mandatory Prepayments. (a) In the event that the
aggregate principal amount of Loans outstanding on the Notes shall at any time
exceed the Commitment, the Company shall immediately upon demand pay over the
amount of the excess to the Bank as and for a mandatory prepayment on Note One.
(b) In the event that the aggregate principal amount of Loans
outstanding on Note Two shall at any time exceed the Borrowing Subsidiary
Sublimit, the Borrowing Subsidiary shall immediately upon demand pay over the
amount of the excess to the Bank as and for a mandatory prepayment on Note Two.
Section 3.3. Voluntary Prepayments. Each Borrower shall have the
privilege of prepaying Loans outstanding and owing by it in whole or in part
(but, if in part, then (i) if such Loans constitute part of the relevant Base
Rate Portion, in an amount not less than
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<PAGE> 12
$100,000, (ii) if such Loans constitute part of a LIBOR Portion, in an amount
not less than $500,000, and (iii) in each case, in an amount such that the
minimum amount required for a Loan pursuant to Sections 1.1 and 2.2 hereof
remain outstanding) at any time upon one Business Day prior notice to the Bank
(such notice if received subsequent to 11:00 a.m. Chicago time) on a given day
to be treated as though received at the opening of business on the next Business
Day), by paying to the Bank the principal amount to be prepaid and (i) if such a
prepayment prepays the relevant Note in full and is accompanied by the
termination in whole of the Commitment, accrued interest thereon to the date of
prepayment and (ii) any amounts due the Bank under Section 2.8 hereof.
Section 3.4. Mandatory Termination. After the occurrence of a
Change of Control, the Bank may, by written notice to the Company at any time on
or before the date occurring 120 days after the date the Company notifies the
Bank of such Change of Control, terminate the remaining Commitment and all other
obligations of the Bank hereunder on the date stated in such notice (which shall
in no event be sooner than 120 days after the occurrence of such Change of
Control). On the date the Commitment is so terminated, all outstanding
Obligations (including, without limitation, all principal of and accrued
interest on the Notes) shall forthwith be due and payable without further
demand, presentment, protest, or notice of any kind and the Company shall
immediately pay to the Bank the full amount then available for drawing under
each Letter of Credit (the Company agreeing to immediately make such payment on
the date the Commitment is so terminated and acknowledging and agreeing that the
Bank would not have an adequate remedy at law for the failure by the Company to
honor any such demand and that the Bank shall have the right to require the
Company to specifically perform such undertaking whether or not any drawings or
other demands for payment have been made under any Letter of Credit).
Section 3.5. Voluntary Terminations. The Company, on behalf of the
Borrowers, shall have the right at any time and from time to time, upon 3
Business Days prior notice to the Bank, to terminate without premium or penalty
and in whole or in part (but if in part, then in an amount not less than
$100,000) the Commitment, provided that (a) the Commitment may not be so reduced
to an amount less than the aggregate principal amount of the Loans then
outstanding and (b) any reduction of the Commitment below $5,000,000 shall be
accompanied by a concurrent reduction in the Borrowing Subsidiary Sublimit. No
termination of the Commitment pursuant to this Section may be reinstated.
Section 3.6. Place and Application of Payments. All payments of
principal, interest, fees and all other Obligations payable hereunder and under
the other Loan Documents shall be made to the Bank at its office at 111 West
Monroe Street, Chicago, Illinois (or at such other place as the Bank may
specify) no later than 2:00 p.m. (Chicago time) on the date any such payment is
due and payable. Payments received by the Bank after 2:00 p.m. (Chicago time)
shall be deemed received as of the opening of business on the next Business Day.
All such payments shall be made in lawful money of the United States of America,
in immediately available funds at the place of payment, without set-off or
counterclaim. Unless the relevant Borrower otherwise directs, principal payments
shall be first applied to the relevant Base Rate Portion until payment in full
thereof, with any balance applied to the relevant LIBOR Portions in the order in
which their Interest Periods expire. Any amount
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<PAGE> 13
paid on a Note may, subject to all of the terms and conditions hereof, be
borrowed, repaid and borrowed again. All payments (whether voluntary or
required) shall be accompanied by any amount due the Bank under Section 2.8
hereof, but no acceptance of such a payment without requiring a payment of
amounts due under Section 2.8 shall preclude a later demand by the Bank for any
amount due it under Section 2.8 in respect of such payment.
Section 3.7. Notations. All Loans made against the Notes, the
status of all amounts evidenced by the Notes as constituting part of a Base Rate
Portion or a LIBOR Portion, and, in the case of any LIBOR Portion, the rates of
interest and Interest Periods applicable to such Portions shall be recorded by
the Bank on its books and records or, at its option in any instance, endorsed on
a schedule to the relevant Note and the unpaid principal balance and status,
rates and Interest Periods so recorded or endorsed by the Bank shall be prima
facie evidence in any court or other proceeding brought to enforce the Notes of
the principal amount remaining unpaid thereon, the status of the Loans evidenced
thereby and the interest rates and Interest Periods applicable thereto; provided
that the failure of the Bank to record any of the foregoing shall not limit or
otherwise affect the obligation of the relevant Borrower to repay the principal
amount of the relevant Note together with accrued interest thereon. Prior to any
negotiation of a Note, the Bank shall record on a schedule thereto the status of
all amounts evidenced thereby as constituting part of the Base Rate Portion or a
LIBOR Portion and, in the case of any LIBOR Portion, the rates of interest and
the Interest Periods applicable thereto.
SECTION 4. COLLATERAL.
Section 4.1. Collateral. The payment and performance of the Loans
and the other Obligations shall be secured by all of the issued and outstanding
capital stock (except for directors' qualifying shares as required by law) of
each Banking Subsidiary of the Company pursuant to a pledge agreement in form
and substance satisfactory to the Bank, as the same may be amended or modified
from time to time (the "Pledge Agreement").
Section 4.2. Further Assurances. The Company covenants and agrees
that it shall comply with, and cause each of its Banking Subsidiaries to comply
with, all terms and conditions of each of the Collateral Documents and that the
Company shall, at any time and from time to time as requested by the Bank,
execute and deliver and cause its Banking Subsidiaries to execute and deliver
such further documents and do such acts and things as the Bank may deem
reasonably necessary or desirable to provide for or protect or perfect the Lien
of the Bank in the Collateral.
SECTION 5. DEFINITIONS; INTERPRETATION.
Section 5.1. Definitions. The following terms when used herein
shall have the following meanings:
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<PAGE> 14
"Adjusted LIBOR" means a rate per annum determined by the Bank in
accordance with the following formula:
Adjusted LIBOR = LIBOR
-----------------------
100%-Reserve Percentage
"Reserve Percentage" means, for the purpose of computing Adjusted LIBOR, the
maximum rate of all reserve requirements (including, without limitation, any
marginal, emergency, supplemental or other special reserves) imposed by the
Board of Governors of the Federal Reserve System (or any successor) under
Regulation D on Eurocurrency liabilities (as such term is defined in Regulation
D) for the applicable Interest Period as of the first day of such Interest
Period, but subject to any amendments to such reserve requirement by such Board
or its successor, and taking into account any transitional adjustments thereto
becoming effective during such Interest Period. For purposes of this definition,
LIBOR Portions shall be deemed to be Eurocurrency liabilities as defined in
Regulation D without benefit of or credit for prorations, exemptions or offsets
under Regulation D. "LIBOR" means, for each Interest Period, (a) the LIBOR Index
Rate for such Interest Period, if such rate is available, and (b) if the LIBOR
Index Rate cannot be determined, the arithmetic average of the rates of interest
per annum (rounded upward, if necessary, to the nearest 1/100th of 1%) at which
deposits in U.S. Dollars in immediately available funds are offered to the Bank
at 11:00 a.m. (London, England time) 2 Business Days before the beginning of
such Interest Period by 3 or more major banks in the interbank eurodollar market
selected by the Bank for a period equal to such Interest Period and in an amount
equal or comparable to the applicable LIBOR Portion scheduled to be outstanding
from the Bank during such Interest Period. "LIBOR Index Rate" means, for any
Interest Period, the rate per annum (rounded upwards, if necessary, to the next
higher one hundred-thousandth of a percentage point) for deposits in U.S.
Dollars for a period equal to such Interest Period, which appears on the
Telerate Page 3750 as of 11:00 a.m. (London, England time) on the day 2 Business
Days before the commencement of such Interest Period. "Telerate Page 3750" means
the display designated as "Page 3750" on the Telerate Service (or such other
page as may replace Page 3750 on that service or such other service as may be
nominated by the British Bankers' Association as the information vendor for the
purpose of displaying British Bankers' Association Interest Settlement Rates for
U.S. Dollar deposits). Each determination of LIBOR made by the Bank shall be
conclusive and binding absent manifest error.
"Affiliate" means any Person directly or indirectly controlling or
controlled by, or under direct or indirect common control with, another Person.
A Person shall be deemed to control another Person for the purposes of this
definition if such Person possesses, directly or indirectly, the power to
direct, or cause the direction of, the management and policies of the other
Person, whether through the ownership of voting securities, common directors,
trustees or officers, or by voting control agreement or similar arrangement.
"Agreement" means this Credit Agreement, as the same may be amended,
modified or restated from time to time in accordance with the terms hereof.
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<PAGE> 15
"Authorized Representative" means, for each Borrower, those persons
shown on the list of officers provided by such Borrower pursuant to Section
7.2(a) hereof or on any update of any such list provided by such Borrower to the
Bank, or any further or different officer of such Borrower so named by any
Authorized Representative of such Borrower in a written notice to the Bank.
"Bank" is defined in the introductory paragraph hereof.
"Banking Subsidiary" means any Subsidiary which is a bank or thrift
organized under the laws of the United States of America or any state thereof.
"Base Rate" means, for any day, the greater of (i) the rate of interest
announced by the Bank from time to time as its prime commercial rate, as in
effect on such day (it being understood and agreed that such rate may not be the
Bank's best or lowest rate); and (ii) the sum of (x) the rate determined by the
Bank to be the average (rounded upwards, if necessary, to the next higher 1/100
of 1%) of the rates per annum quoted to the Bank at approximately 10:00 a.m.
(Chicago time) (or as soon thereafter as is practicable) on such day (or, if
such day is not a Business Day, on the immediately preceding Business Day) by
two or more Federal funds brokers selected by the Bank for sale to the Bank at
face value of Federal funds in an amount equal or comparable to the principal
amount owed to the Bank for which such rate is being determined, plus (y) 3/8 of
1%.
"Base Rate Portions" is defined in Section 2.1(a) hereof.
"Borrowers" is defined in the introductory paragraph hereof.
"Borrowing Subsidiary" is defined in the introductory paragraph hereof.
"Borrowing Subsidiary Sublimit" is defined in Section 1.1 hereof.
"Business Day" means any day other than a Saturday or Sunday on which
the Bank is not authorized or required to close in Chicago, Illinois and, when
used with respect to LIBOR Portions, a day on which the Bank is also dealing in
United States Dollar deposits in London, England.
"Capital Lease" means any lease of Property which in accordance with
GAAP is required to be capitalized on the balance sheet of the lessee.
"Capitalized Lease Obligation" means the amount of the liability shown
on the balance sheet of any Person in respect of a Capital Lease determined in
accordance with GAAP.
"Change in Control" means the acquisition by any "person" or "group"
(as such terms are used in sections 13(d) and 14(d) of the Securities Exchange
Act of 1934, as amended) (other than members of the Company's board of directors
or officers of the Company, in each case who are shareholders of the Company as
of the date of this Agreement) at any time
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<PAGE> 16
of beneficial ownership of 25% or more of the outstanding voting stock of the
Company on a fully diluted basis.
"Code" means the Internal Revenue Code of 1986, as amended, and any
successor statute thereto.
"Collateral" means all properties, rights, interests, and privileges
from time to time subject to the Liens granted to the Bank by the Collateral
Documents, it being understood and agreed that the Collateral as of the date of
this Agreement consists of all the equity securities of each of the Company's
Banking Subsidiaries and all rights with respect thereto and proceeds thereof.
"Collateral Documents" means the Pledge Agreement and all other
security agreements, assignments, financing statements and other documents as
shall from time to time secure any Obligations.
"Commitment" is defined in Section 1.1 hereof.
"Company" is defined in the introductory paragraph hereof.
"Consolidated Net Income" means, with reference to any period, the net
income (or net loss) of the Company and its Subsidiaries for such period as
computed on a consolidated basis in accordance with GAAP.
"Consolidated Tangible Net Worth" means, as of any time the same is to
be determined, the total shareholders' equity (including capital stock,
additional paid-in-capital and retained earnings after deducting treasury stock,
but excluding minority interests in Subsidiaries) which would appear on the
balance sheet of the Company and its Subsidiaries determined on a consolidated
basis in accordance with GAAP, less the aggregate book value of all assets which
would be classified as intangible assets under GAAP, including, without
limitation, goodwill, patents, trademarks, trade names, copyright, franchises
and deferred charges (including, without limitation, unamortized debt discount
and expense, organization costs and deferred research and development expense)
and similar assets.
"Contingent Obligation" of a Person means any agreement, undertaking or
arrangement by which such Person assumes, guarantees, endorses, contingently
agrees to purchase or provide funds for the payment of, or otherwise becomes or
is contingently liable upon, the obligation or liability of any other Person, or
agrees to maintain the net worth or working capital or other financial condition
of any other Person, or otherwise assures any creditor of such other Person
against loss, including, without limitation, any comfort letter or application
for a letter of credit.
"Controlled Group" means all members of a controlled group of
corporations and all trades or businesses (whether or not incorporated) under
common control which, together with the Company or any of its Subsidiaries, are
treated as a single employer under Section 414 of the Code.
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<PAGE> 17
"Default" means any event or condition the occurrence of which would,
with the passage of time or the giving of notice, or both, constitute an Event
of Default.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended, or any successor statute thereto.
"Event of Default" means any event or condition identified as such in
Section 9.1 hereof.
"GAAP" means generally accepted accounting principles as in effect from
time to time, including such principles as are utilized in the preparation of
call reports and other regulatory reports required to be filed by the Company
and its Banking Subsidiaries, applied by the Company and its Subsidiaries on a
basis consistent with the preparation of the Company's most recent financial
statements furnished to the Bank pursuant to Section 6.5 hereof.
"Indebtedness for Borrowed Money" means for any Person (without
duplication) (i) all indebtedness created, assumed or incurred in any manner by
such Person representing money borrowed (including by the issuance of debt
securities), (ii) all indebtedness for the deferred purchase price of property
or services (other than trade accounts payable arising in the ordinary course of
business), (iii) all indebtedness secured by any Lien upon Property of such
Person, whether or not such Person has assumed or become liable for the payment
of such indebtedness, (iv) all Capitalized Lease Obligations of such Person, (v)
all Contingent Obligations, (vi) all obligations of such Person on or with
respect to letters of credit, bankers' acceptances and other extensions of
credit whether or not representing obligations for borrowed money and (vii)
Permitted Banking Subsidiary Indebtedness.
"Interest Period" means, with respect to any LIBOR Portion, the period
commencing on, as the case may be, the creation, continuation or conversion date
with respect to such LIBOR Portion and ending 3 or 6 months thereafter as
selected by the Company, on behalf of the relevant Borrower, in its notice as
provided herein; provided that all of the foregoing provisions relating to
Interest Periods are subject to the following:
(i) if any Interest Period would otherwise end on a day which
is not a Business Day, that Interest Period shall be extended to the
next succeeding Business Day, unless the result of such extension would
be to carry such Interest Period into another calendar month in which
event such Interest Period shall end on the immediately preceding
Business Day;
(ii) no Interest Period may extend beyond the final maturity
date of the relevant Note; and
(iii) the interest rate to be applicable to each Portion for
each Interest Period shall apply from and including the first day of
such Interest Period to but excluding the last day thereof.
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<PAGE> 18
For purposes of determining an Interest Period, a month means a period starting
on one day in a calendar month and ending on a numerically corresponding day in
the next calendar month, provided, however, if an Interest Period begins on the
last day of a month or if there is no numerically corresponding day in the month
in which an Interest Period is to end, then such Interest Period shall end on
the last Business Day of such month.
"LIBOR Portions" is defined in Section 2.1(a) hereof.
"Lien" means any mortgage, lien, security interest, pledge, charge or
encumbrance of any kind in respect of any Property, including the interests of a
vendor or lessor under any conditional sale, Capital Lease or other title
retention arrangement.
"Loan" is defined in Section 1.1 hereof.
"Loan Documents" means this Agreement, the Notes and the Collateral
Documents and each other instrument or document delivered hereunder or
thereunder or otherwise in connection therewith.
"Non-Performing Assets" means, with reference to any Person, as of any
time the same is to be determined, the sum of all non-performing assets of such
Person as determined in accordance with regulatory accounting principles
applicable to such Person, including, without limitation, (i) loans or other
extensions of credit on which any payment (whether principal or interest or
otherwise) is not made within 90 days of its original due date, (ii) loans which
have been placed on a non-accrual basis, (iii) loans structured so as to not
bear interest at a then market rate or so that other terms thereof have been
compromised, and (iv) property acquired by repossession or foreclosure and,
without duplication, property acquired pursuant to in-substance foreclosure.
"Note One" is defined in Section 1.1 hereof.
"Note Two" is defined in Section 1.1 hereof.
"Notes" means and includes Note One and Note Two.
"Obligations" means all obligations of the Borrowers to pay principal
and interest on the Loans, all fees and charges payable hereunder, and all other
payment obligations of either Borrower arising under or in relation to any Loan
Document, in each case whether now existing or hereafter arising, due or to
become due, direct or indirect, absolute or contingent, and howsoever evidenced,
held or acquired.
"PBGC" means the Pension Benefit Guaranty Corporation or any Person
succeeding to any or all of its functions under ERISA.
"Permitted Banking Subsidiary Indebtedness" means obligations incurred
by any Banking Subsidiary or the Borrowing Subsidiary in the ordinary course of
business in such circumstances as may be incidental or usual in carrying on the
banking or trust or mortgage
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<PAGE> 19
business of a bank, thrift, trust company, or mortgage company incurred in
accordance with applicable laws and regulations and safe and sound practices,
including, without limitation, obligations incurred in connection with (i) any
deposits with or funds collected by such Subsidiary, (ii) any banker's
acceptance credit of such Subsidiary, (iii) any check, note, certificate of
deposit, instrument, money or letter of credit issued by such Subsidiary, (iv)
any check, note, certificate of deposit, money order, traveler's check, draft or
bill of exchange issued, accepted or endorsed by such Subsidiary, (v) any
discount with, borrowing from, or other obligation to, any Federal Reserve Bank,
(vi) any agreement made by such Subsidiary to purchase or repurchase securities,
loans or Federal funds or any interest or participation in any thereof, (vii)
any guarantee or similar obligation incurred by such Subsidiary in the ordinary
course of its banking or trust business, (viii) any transaction in the nature of
an extension of credit, whether in the form of a commitment or otherwise,
undertaken by such Subsidiary for the account of a third party with the
application of the same banking considerations and legal lending limits that
would be applicable if the transaction were a loan to such party, (ix) any
transaction in which such Subsidiary acts solely in the fiduciary or agency
capacity, and (x) other short-term liabilities similar to those enumerated in
clauses (i) and (vi) above, including United States Treasury tax and loan
borrowings.
"Person" means an individual, partnership, corporation, limited
liability company, association, trust, unincorporated organization or any other
entity or organization, including a government or agency or political
subdivision thereof.
"Plan" means any employee pension benefit plan covered by Title IV of
ERISA or subject to the minimum funding standards under Section 412 of the Code
that either (i) is maintained by a member of the Controlled Group for employees
of a member of the Controlled Group or (ii) is maintained pursuant to a
collective bargaining agreement or any other arrangement under which more than
one employer makes contributions and to which a member of the Controlled Group
is then making or accruing an obligation to make contributions or has within the
preceding five plan years made contributions.
"Pledge Agreement" is defined in Section 3.1 hereof.
"Portion" is defined in Section 2.1(a) hereof.
"Property" means any interest in any kind of property or asset, whether
real, personal or mixed, or tangible or intangible.
"Revolving Credit" is defined in Section 1.1 hereof.
"Subsidiary" means any corporation or other Person more than 50% of the
outstanding ordinary voting shares or other equity interests of which is at the
time directly or indirectly owned by the Company, by one or more of its
Subsidiaries, or by the Company and one or more of its Subsidiaries.
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<PAGE> 20
"Termination Date" means January 30, 2000, or such later date to which
the Termination Date is extended pursuant to Section 1.3 hereof, or such earlier
date on which the Commitment is terminated in whole pursuant to Section 3.4,
3.5, 9.2 or 9.3 hereof.
"Tier I Capital" of any Person means, at any time, the regulatory
"core" capital (Tier I) of such Person, as defined and determined from time to
time by applicable bank or thrift regulatory authorities.
"Tier I Leverage Ratio" of any Person means, at any time, the ratio of
regulatory "core" capital (Tier I) to total assets, all as defined and
determined from time to time by applicable bank or thrift regulatory
authorities.
"Tier I Risk Based Capital Ratio" means the ratio of regulatory "core"
capital (Tier I) to weighted-risk assets and off-balance sheet items, all as
defined and determined from time to time by applicable bank or thrift regulatory
authorities.
"Total Risk Based Capital Ratio" of any Person means, at any time, the
ratio of regulatory "core" capital (Tier I) and supplementary capital elements
(Tier II) to weighted-risk assets and off-balance sheet items, all as defined
and determined from time to time by applicable bank or thrift regulatory
authorities.
"Unfunded Vested Liabilities" means, for any Plan at any time, the
amount (if any) by which the present value of all vested nonforfeitable accrued
benefits under such Plan exceeds the fair market value of all Plan assets
allocable to such benefits, all determined as of the then most recent valuation
date for such Plan, but only to the extent that such excess represents a
potential liability of a member of the Controlled Group to the PBGC or the Plan
under Title IV of ERISA.
"Welfare Plan" means a "welfare plan" as defined in Section 3(1) of
ERISA.
"Wholly-Owned Subsidiary" means a Subsidiary of which all of the issued
and outstanding shares of capital stock (other than directors' qualifying shares
as required by law) or other equity interests are owned by the Company and/or
one or more Wholly-Owned Subsidiaries within the meaning of this definition.
Section 5.2. Interpretation. The foregoing definitions are equally
applicable to both the singular and plural forms of the terms defined. The words
"hereof", "herein", and "hereunder" and words of like import when used in this
Agreement shall refer to this Agreement as a whole and not to any particular
provision of this Agreement. All references to time of day herein are references
to Chicago, Illinois time unless otherwise specifically provided. Where the
character or amount of any asset or liability or item of income or expense is
required to be determined or any consolidation or other accounting computation
is required to be made for the purposes of this Agreement, it shall be done in
accordance with GAAP except where such principles are inconsistent with the
specific provisions of this Agreement.
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<PAGE> 21
SECTION 6. REPRESENTATIONS AND WARRANTIES.
The Borrowers represent and warrant to the Bank as follows:
Section 6.1. Organization and Qualification. The Company is duly
organized, validly existing and in good standing as a corporation under the laws
of the State of Delaware, has full and adequate corporate power to own its
Property and conduct its business as now conducted, and is duly licensed or
qualified and in good standing in each jurisdiction in which the nature of the
business conducted by it or the nature of the Property owned or leased by it
requires such licensing or qualifying, where the failure to do so is reasonably
likely to have a material adverse effect on the financial condition, Properties,
business or operations of such Person. Without limiting the generality of the
foregoing, the Company is a "bank holding company" as that term is defined in
the federal Bank Holding Company Act of 1956, as amended, and as such, the
Company has received all necessary approvals from and has filed all necessary
reports with the Board of Governors of the Federal Reserve System.
Section 6.2. Subsidiaries. Each Subsidiary (including, without
limitation, the Borrowing Subsidiary) is duly organized, validly existing and in
good standing under the laws of the jurisdiction in which it is incorporated or
organized, as the case may be, has full and adequate power to own its Property
and conduct its business as now conducted, and is duly licensed or qualified and
in good standing in each jurisdiction in which the nature of the business
conducted by it or the nature of the Property owned or leased by it requires
such licensing or qualifying, where the failure to do so is reasonably likely to
have a material adverse effect on the financial condition, Properties, business
or operations of the Company and its Subsidiaries taken as a whole. Schedule 6.2
hereto identifies each Subsidiary, the jurisdiction of its incorporation or
organization, as the case may be, the percentage of issued and outstanding
shares of each class of its capital stock or other equity interests owned by the
Company and the Subsidiaries and, if such percentage is not 100% (excluding
directors' qualifying shares as required by law), a description of each class of
its authorized capital stock and other equity interests and the number of shares
of each class issued and outstanding. All of the outstanding shares of capital
stock and other equity interests of each Subsidiary are validly issued and
outstanding and fully paid and nonassessable and all such shares and other
equity interests indicated on Schedule 6.2 as owned by the Company or a
Subsidiary are owned, beneficially and of record, by the Company or such
Subsidiary free and clear of all Liens other than Liens granted in favor of the
Bank. There are no outstanding commitments or other obligations of any
Subsidiary to issue, and no options, warrants or other rights of any Person to
acquire, any shares of any class of capital stock or other equity interests of
any Subsidiary.
Section 6.3. Authority and Validity of Obligations. Each Borrower
has full right and authority to enter into this Agreement and the other Loan
Documents, to make the borrowings herein provided for, to issue its Note in
evidence thereof, and to perform all of its obligations hereunder and under the
other Loan Documents. The Loan Documents delivered by each Borrower have been
duly authorized, executed and delivered by the relevant Borrower and constitute
valid and binding obligations of such Borrower
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<PAGE> 22
enforceable in accordance with their terms except as enforceability may be
limited by bankruptcy, insolvency, fraudulent conveyance or similar laws
affecting creditors' rights generally and general principles of equity
(regardless of whether the application of such principles is considered in a
proceeding in equity or at law); and this Agreement and the other Loan Documents
do not, nor does the performance or observance by the Borrowers of any of the
matters and things herein or therein provided for, contravene or constitute a
default under any provision of law or any judgment, injunction, order or decree
binding upon either Borrower or any provision of the articles of incorporation
or by-laws of either Borrower or any covenant, indenture or agreement of or
affecting either Borrower or any of their Property, or result in the creation or
imposition of any Lien on any Property of either Borrower except for Liens
granted in favor of the Bank.
Section 6.4. Use of Proceeds; Margin Stock. The Company shall use
the proceeds of the Loans made available to it hereunder for its general working
capital purposes and such other legal and proper purposes as are consistent with
all applicable laws, provided that, except with respect to funding non-hostile
acquisitions of banks and/or thrifts pursuant to Section 8.13(g) hereof, the
proceeds of the Loans made available to the Company shall not be used for the
purpose of acquiring all or any substantial part of the assets or equity
interest in another Person without the prior written consent of the Bank. The
Borrowing Subsidiary shall use the proceeds of the Loans made available to it
hereunder solely for its general working capital purposes, provided that the
proceeds of the Loans made available to the Borrowing Subsidiary shall not be
used for the purpose of acquiring all or any substantial part of the assets or
equity interest in another Person without the prior written consent of the Bank.
Neither Borrower is engaged in the business of extending credit for the purpose
of purchasing or carrying margin stock (within the meaning of Regulation U of
the Board of Governors of the Federal Reserve System), and no part of the
proceeds of any Loan will be used to purchase or carry any margin stock, or to
extend credit to others for the purpose of purchasing or carrying any such
margin stock. Margin stock (as hereinabove defined) constitutes less than 25% of
those assets of the Company and its Subsidiaries which are subject to any
limitation on sale, pledge, or other restriction hereunder.
Section 6.5. Financial Reports. The consolidated balance sheet of
the Company and its Subsidiaries as at December 31, 1996, and the related
consolidated statements of income, retained earnings and cash flows of the
Company and its Subsidiaries for the fiscal year then ended, and accompanying
notes thereto, which financial statements are accompanied by the audit report of
Crowe, Chizek & Company, LLP., independent public accountants, and the unaudited
interim balance sheet of the Company and its Subsidiaries as at September 30,
1997, and the related statements of income, retained earnings and cash flows of
the Company and its Subsidiaries for the 9 months then ended, heretofore
furnished to the Bank, fairly present the consolidated financial condition of
the Company and its Subsidiaries as at said dates and the consolidated results
of their operations and cash flows for the periods then ended in conformity with
generally accepted accounting principles applied on a consistent basis. Neither
the Company nor any Subsidiary has contingent liabilities which are material to
it other than as indicated on such financial statements or, with respect to
future periods, on the financial statements furnished pursuant to Section 8.5
hereof.
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<PAGE> 23
Section 6.6. No Material Adverse Change. Since September 30, 1997,
there has been no change in the condition (financial or otherwise) or business
prospects of the Company or any Subsidiary which individually or in the
aggregate have been materially adverse to the Company or the Company and its
Subsidiaries taken as a whole.
Section 6.7. Full Disclosure. The statements and information
furnished to the Bank in connection with the negotiation of this Agreement and
the other Loan Documents and the commitment by the Bank to provide all or part
of the financing contemplated hereby do not contain any untrue statements of a
material fact or omit a material fact necessary to make the material statements
contained herein or therein not misleading, the Bank acknowledging that as to
any projections furnished to the Bank, the Borrowers only represent that the
same were prepared on the basis of information and estimates the Borrowers
believed to be reasonable.
Section 6.8. Good Title. The Company and its Subsidiaries each have
good and defensible title to their assets as reflected on the most recent
consolidated balance sheet of the Company and its Subsidiaries furnished to the
Bank (except for sales of assets by the Company and its Subsidiaries in the
ordinary course of business) subject to no Liens other than such thereof as are
permitted by Section 8.13 hereof.
Section 6.9. Litigation and Other Controversies. Except as
disclosed on Schedule 6.9 hereof, there is no litigation or governmental
proceeding or labor controversy pending, nor to the knowledge of the Company
threatened, against the Company or any Subsidiary which if adversely determined
would (a) impair the validity or enforceability of, or impair the ability of
either Borrower to perform its obligations under, this Agreement or any other
Loan Document or (b) result in any material adverse change in the financial
condition, Properties, business or operations of the Company or the Company and
its Subsidiaries taken as a whole .
Section 6.10. Taxes. All tax returns required to be filed by the
Company or any Subsidiary in any jurisdiction have, in fact, been filed, and all
taxes, assessments, fees and other governmental charges upon the Company or any
Subsidiary or upon any of their respective Properties, income or franchises,
which are shown to be due and payable in such returns, have been paid, except to
the extent the same are being contested in good faith and by appropriate
proceedings which prevent enforcement of the matter under contest and adequate
reserves are provided therefor. The Company does not know of any proposed
additional tax assessment against it or its Subsidiaries for which adequate
provision in accordance with GAAP has not been made on its accounts. Adequate
provisions in accordance with GAAP for taxes on the books of the Company and
each Subsidiary have been made for all open years, and for its current fiscal
period.
Section 6.11. Approvals. No authorization, consent, license, or
exemption from, or filing or registration with, any court or governmental
department, agency or instrumentality, nor any approval or consent of the
stockholders of the Company or any other Person, is or will be necessary to the
valid execution, delivery or performance by either Borrower of this Agreement or
any other Loan Document, except for the approval of
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<PAGE> 24
the Board of Directors of each Borrower which has been obtained and remains in
full force and effect.
Section 6.12. Investment Company. Neither the Company nor any
Subsidiary is an "investment company" or a company "controlled" by an
"investment company" within the meaning of the Investment Company Act of 1940,
as amended.
Section 6.13. ERISA. The Company and each other member of its
Controlled Group has fulfilled its obligations under the minimum funding
standards of, and is in compliance in all material respects with, ERISA and the
Code pertaining to each Plan to the extent applicable to it and has not incurred
any liability to the PBGC or a Plan under Title IV of ERISA other than a
liability to the PBGC for premiums under Section 4007 of ERISA. Neither the
Company nor any Subsidiary has any material contingent liabilities with respect
to any post-retirement benefits under a Welfare Plan, other than liability for
continuation coverage described in article 6 of Title I of ERISA.
Section 6.14. Compliance with Laws. The Company and each of its
Subsidiaries are in compliance with the requirements of all federal, state and
local laws, rules and regulations applicable to or pertaining to their
Properties or business operations (including, without limitation, the
Occupational Safety and Health Act of 1970, the Americans with Disabilities Act
of 1990, and laws and regulations establishing quality criteria and standards
for air, water, land and toxic or hazardous wastes and substances), to the
extent non-compliance therewith is reasonably likely to have a material adverse
effect on the financial condition, Properties, business or operations of the
Company or the Company and its Subsidiaries taken as a whole. Neither the
Company nor any Subsidiary has received notice to the effect that its operations
are not in compliance with any of the requirements of applicable federal, state
or local environmental, health and safety statutes and regulations or are the
subject of any governmental investigation evaluating whether any remedial action
is needed to respond to a release of any toxic or hazardous waste or substance
into the environment, which non-compliance or remedial action is reasonably
likely to have a material adverse effect on the financial condition, Properties,
business or operations of the Company or the Company and its Subsidiaries taken
as a whole. Neither of the Borrowers (or any of their directors or officers) nor
any Banking Subsidiary (or any of its directors or officers) is a party to, or
subject to, any agreement with, or directive or order issued by, any federal or
state bank or thrift regulatory authority which imposes restrictions or
requirements on it which are not generally applicable to banks or thrifts, or
their holding companies; and no action or administrative proceeding is pending
or, to the knowledge of either Borrower, threatened against either Borrower or
any Banking Subsidiary or any of their directors or officers which seeks to
impose any such restriction or requirement.
Section 6.15. Other Agreements. Neither the Company nor any
Subsidiary is in default under the terms of any covenant, indenture or agreement
of or affecting the Company, any Subsidiary or any of their Properties, which
default if uncured would have a material adverse effect on the financial
condition, Properties, business or operations of the Company or any Subsidiary.
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<PAGE> 25
Section 6.16. No Default. No Default or Event of Default has
occurred and is continuing.
SECTION 7. CONDITIONS PRECEDENT.
The obligation of the Bank to make any Loan under this Agreement is
subject to the following conditions precedent:
Section 7.1. All Advances. As of the time of the making of each
Loan (including the initial Loan) hereunder:
(a) each of the representations and warranties set forth in
Section 6 hereof and in the other Loan Documents shall be true and
correct as of such time, except to the extent the same expressly relate
to an earlier date;
(b) the Borrowers shall be in full compliance with all of the
terms and conditions of this Agreement and of the other Loan Documents,
and no Default or Event of Default shall have occurred and be
continuing or would occur as a result of making such extension of
credit; and
(c) such extension of credit shall not violate any order,
judgment or decree of any court or other authority or any provision of
law or regulation applicable to the Bank (including, without
limitation, Regulation U of the Board of Governors of the Federal
Reserve System) as then in effect.
A Borrower's request for any Loan shall constitute its warranty as to the facts
specified in subsections (a) and (b) above.
Section 7.2. Initial Advance. At or prior to the making of the
initial Loan hereunder, the following conditions precedent shall also have been
satisfied:
(a) the Bank shall have received the following (each to be
properly executed and completed) and the same shall have been approved
as to form and substance by the Bank:
(i) the Notes;
(ii) the Pledge Agreement, duly executed by the
Company, together with (a) the original stock certificates for
all the issued and outstanding shares of stock (exclusive of
directors' qualifying shares) of each of its Banking
Subsidiaries as of the date hereof, (b) stock powers for the
Collateral, each to be executed in blank and undated, and (c)
UCC financing statements to be filed against the Company, as
debtor, in favor of the Bank, as secured party;
(iii) a payoff letter from LaSalle National Bank
confirming the amount required to pay off the obligations
owing to it by each Borrower and
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confirming the release of all collateral for such credit upon
receipt of such payoff amount;
(iv) copies (executed or certified, as may be
appropriate) of all proceedings taken in connection with the
execution and delivery of this Agreement and the other Loan
Documents to the extent the Bank or its counsel may reasonably
request; and
(v) an incumbency certificate containing the name,
title and genuine signatures of each Borrower's Authorized
Representatives;
(b) the Bank shall have received the initial fees called for
hereby;
(c) legal matters incident to the execution and delivery of
this Agreement and the other Loan Documents and to the transactions
contemplated hereby shall be satisfactory to the Bank and its counsel;
and the Bank shall have received the favorable written opinion of
counsel for the Borrowers in form and substance satisfactory to the
Bank and its counsel;
(d) the Bank shall have received a good standing certificate
for each Borrower (dated as of the date no earlier than 30 days prior
to the date hereof) from the office of the secretary of state of the
state of its incorporation and each state in which it is qualified to
do business as a foreign corporation; and
(e) the Bank shall have received such other agreements,
instruments, documents, certificates and opinions as the Bank may
reasonably request.
SECTION 8. COVENANTS.
The Borrowers agree that, so long as any credit is available to or in
use by either Borrower hereunder, except to the extent compliance in any case or
cases is waived in writing by the Bank:
Section 8.1. Maintenance of Business. The Company shall, and shall
cause each Subsidiary to, preserve and keep in full force and effect its
corporate existence and rights (charter or statutory) necessary for the proper
conduct of business under the respective regulatory agencies having supervision
of such business; provided, however, that nothing in this Section shall prevent
the Company from dissolving any Subsidiary if such action is, in the judgment of
the Company, desirable in the conduct of its business and not disadvantageous in
any material respect to the Bank. The Company shall, and shall cause each
Subsidiary to, preserve and keep in force and effect all licenses, permits and
franchises necessary to the proper conduct of its business; provided, however,
that nothing in this Section shall prevent the Company or any Subsidiary from
permitting any license, permit or franchise to lapse if such action is, in the
judgment of the Company, desirable in the conduct of its business and not
disadvantageous in any material respect to the Bank.
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Section 8.2. Maintenance of Properties. The Company shall maintain,
preserve and keep its property, plant and equipment in good repair, working
order and condition (ordinary wear and tear excepted) and shall from time to
time make all needful and proper repairs, renewals, replacements, additions and
betterments thereto so that at all times the efficiency thereof shall be fully
preserved and maintained, and shall cause each Subsidiary to do so in respect of
Property owned or used by it; provided, however, that nothing in this Section
shall prevent (a) the Company or any Subsidiary from discontinuing the operation
and maintenance of any of its properties if such discontinuation is, in the
judgment of the Company, desirable in the conduct of its business and not
disadvantageous in any material respect to the Bank or (b) any Banking
Subsidiary from closing or selling a branch office if such closing or sale is,
in the judgment of the Company, desirable in the conduct of its business and is
not disadvantageous in any material respect to the Bank.
Section 8.3. Taxes and Assessments. The Company shall duly pay and
discharge, and shall cause each Subsidiary to duly pay and discharge, all taxes,
rates, assessments, fees and governmental charges upon or against it or its
Properties, in each case before the same become delinquent and before penalties
accrue thereon, unless and to the extent that the same are being contested in
good faith and by appropriate proceedings which prevent enforcement of the
matter under contest and adequate reserves are provided therefor.
Section 8.4. Insurance. The Company shall insure and keep insured,
and shall cause each Subsidiary to insure and keep insured, with good and
responsible insurance companies, all insurable Property owned by it which is of
a character usually insured by Persons similarly situated and operating like
Properties against loss or damage from such hazards and risks, and in such
amounts, as are insured by Persons similarly situated and operating like
Properties; and the Company shall insure, and shall cause each Subsidiary to
insure, such other hazards and risks (including employers' and public liability
risks) with good and responsible insurance companies as and to the extent
usually insured by Persons similarly situated and conducting similar businesses.
The Company shall upon request furnish to the Bank a certificate setting forth
in summary form the nature and extent of the insurance maintained pursuant to
this Section.
Section 8.5. Financial Reports. The Company shall, and shall cause
each Subsidiary to, maintain a standard system of accounting in accordance with
GAAP and shall furnish to the Bank and its duly authorized representatives such
information respecting the business and financial condition of the Company and
its Subsidiaries (including non-financial information and examination reports
and supervisory letters to the extent permitted by applicable regulatory
authorities) as the Bank may reasonably request; and without any request, shall
furnish to the Bank:
(a) unless a Form 10-Q report is delivered to the Bank for
such quarter-annual accounting period pursuant to subsection (f) below,
as soon as available, and in any event within 45 days after the close
of each quarter-annual accounting period of the Company, a copy of the
Company's consolidated balance sheet of the Company and its
Subsidiaries as of the last day of such period and the consolidated
statements of income, retained earnings and cash flows of the Company
and its Subsidiaries for the
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quarter and the fiscal year-to date period then ended, each in
reasonable detail showing in comparative form the figures for the
corresponding date and period in the previous fiscal year, prepared by
the Company in accordance with GAAP and certified to by the President
or chief financial officer of the Company;
(b) as soon as available, and in any event within 120 days
after the close of each annual accounting period of the Company, a copy
of the consolidated and consolidating balance sheet of the Company and
its Subsidiaries as of the close of such period and the consolidated
and consolidating statements of income, retained earnings and cash
flows of the Company and its Subsidiaries for such period, and
accompanying notes thereto, each in reasonable detail showing in
comparative form the figures for the previous fiscal year, accompanied
by an unqualified opinion thereon of Crowe, Chizek & Company, LLP or
another firm of independent public accountants of recognized standing,
selected by the Company and satisfactory to the Bank, to the effect
that the consolidated financial statements have been prepared in
accordance with GAAP and present fairly in accordance with GAAP the
consolidated financial condition of the Company and its Subsidiaries as
of the close of such fiscal year and the results of their operations
and cash flows for the fiscal year then ended and that an examination
of such accounts in connection with such consolidated financial
statements has been made in accordance with generally accepted auditing
standards and, accordingly, such examination included such tests of the
accounting records and such other auditing procedures as were
considered necessary in the circumstances (it being understood and
agreed no such opinion is required with respect to any consolidating
financial statements);
(c) as soon as available, and in any event within 45 days
after the close of each quarter-annual accounting period of each
Banking Subsidiary, all call reports and other financial statements
required to be delivered by such Banking Subsidiary to any governmental
authority or authorities having jurisdiction over such Banking
Subsidiary and all schedules thereto;
(d) promptly after receipt thereof, any management letters or
similar written reports concerning significant aspects of the Company's
or any Subsidiary's operations and financial affairs given to it by its
independent public accountants;
(e) promptly upon the furnishing thereof to the shareholders
of the Company, copies of all financial statements, reports and proxy
statements so furnished;
(f) promptly upon the filing thereof (if any), copies of all
registration statements, Form 10-K, Form 10-Q and Form 8-K reports and
proxy statements which the Company or any of its Subsidiaries file with
the Securities and Exchange Commission;
(g) promptly upon the receipt or execution thereof, (i)
notice by the Company or any Banking Subsidiary that (1) it has
received a request or directive
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from any federal or state regulatory agency which requires it to submit
a capital maintenance or restoration plan or restricts the payment of
dividends by any Banking Subsidiary to the Company or (2) it has
submitted a capital maintenance or restoration plan to any federal or
state regulatory agency or has entered into a memorandum or agreement
with any such agency, including, without limitation, any agreement
which restricts the payment of dividends by any Banking Subsidiary to
the Company or otherwise imposes restrictions or requirements on it
which are not generally applicable to banks or thrifts or their holding
companies, and (ii) copies of any such plan, memorandum or agreement,
unless disclosure is prohibited by the terms thereof and, after the
Company or such Banking Subsidiary has in good faith attempted to
obtain the consent of such regulatory agency, such agency will not
consent to the disclosure of such plan, memorandum or agreement to the
Bank;
(h) promptly after knowledge thereof shall have come to the
attention of any responsible officer of either Borrower, written notice
of any threatened (in writing) or pending litigation or governmental
proceeding or labor controversy against either Borrower or any
Subsidiary which, if adversely determined, would materially adversely
effect the financial condition, Properties, business or operations of
the Company or any Subsidiary or of the occurrence of any Default or
Event of Default hereunder; and
(i) prompt written notice of a Change in Control.
Each of the financial statements furnished to the Bank pursuant to subsections
(a) and (b) of this Section shall be accompanied by a written certificate in the
form attached hereto as Exhibit C signed by the President or chief financial
officer of the Company to the effect that to the best of such officer's
knowledge and belief no Default or Event of Default has occurred during the
period covered by such statements or, if any such Default or Event of Default
has occurred during such period, setting forth a description of such Default or
Event of Default and specifying the action, if any, taken by either Borrower to
remedy the same. Such certificate shall also set forth the calculations
supporting such statements in respect of Sections 8.7, 8.8, 8.9, 8.10 and 8.11
of this Agreement.
Section 8.6. Inspection. The Company shall, and shall cause each
Subsidiary to, permit the Bank and its duly authorized representatives and
agents to visit and inspect any of the Properties, corporate books and financial
records of the Company and each Subsidiary, to examine and make copies of the
books of accounts and other financial records of the Company and each
Subsidiary, and to discuss the affairs, finances and accounts of the Company and
each Subsidiary with, and to be advised as to the same by, its officers,
employees and independent public accountants (and by this provision each
Borrower hereby authorizes such accountants to discuss with the Bank the
finances and affairs of the Company and of each Subsidiary) at such reasonable
times and reasonable intervals as the Bank may designate; provided, however,
that neither the Company nor any Subsidiary shall be required to make available
to the Bank any customer lists or other proprietary information unless such
information is required by the Bank to determine the financial condition of the
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Company or any Subsidiary or to determine the ability of either Borrower to meet
its obligations hereunder.
Section 8.7. Non-Performing Assets. The Company shall, as of the
last day of each fiscal quarter, maintain on a consolidated basis with its
Banking Subsidiaries, and shall cause each Banking Subsidiary to maintain as of
such day on an individual basis, a ratio of (a) Non-Performing Assets of the
Company on such consolidated basis or such Banking Subsidiary, as the case may
be, to (b) the sum of (i) stockholders' equity for the Company or Tier I Capital
for such Banking Subsidiary, as the case may be, plus (ii) loan loss reserves
established by the Company on such consolidated basis or such Banking
Subsidiary, as the case may be, in accordance with regulatory accounting
principles applicable to the Company or such Banking Subsidiary, of not more
than .25 to 1.0.
Section 8.8. Regulatory Capital Requirements.
(a) The Company shall maintain on a consolidated basis with its
Banking Subsidiaries, and shall cause each Banking Subsidiary to maintain on an
individual basis:
(i) a Tier I Leverage Ratio of greater than 5% or such
greater amount as may be required to be considered "well capitalized"
by applicable regulatory authorities from time to time;
(ii) a Total Risk Based Capital Ratio of greater than 10% or
such greater amount as may be required to be considered "well
capitalized" by applicable regulatory authorities from time to time;
and
(iii) a Tier I Risk Based Capital Ratio of greater than 6% or
such greater amount as may be required to be considered "well
capitalized" by applicable regulatory authorities from time to time.
(b) Each Banking Subsidiary shall at all times be at least "well
capitalized" as defined in the Federal Deposit Insurance Corporation Improvement
Act of 1991, as applicable, and any regulations to be issued thereunder, as such
statute or regulations may each be amended or supplemented from time to time.
(c) Each such requirement described in clauses (a) and (b) above
shall be computed and determined in accordance with the rules and regulations as
in effect from time to time established by the rules and regulations as in
effect from time to time established by the appropriate governmental authority
having jurisdiction over such Banking Subsidiary. In addition to the provisions
set forth above, the Company shall, and shall cause each Subsidiary to, comply
with any and all capital guidelines and requirements as in effect from time to
time established by the relevant governmental authority or authorities having
jurisdiction over the Company or any Subsidiary.
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Section 8.9. Minimum Consolidated Net Income. As of the last day of
each fiscal quarter, the Company shall maintain Consolidated Net Income for the
four fiscal quarters then ended of not less than $5,500,000.
Section 8.10. Minimum Consolidated Tangible Net Worth. The Company
shall at all times maintain Consolidated Tangible Net Worth of not less than
$45,000,000.
Section 8.11. Indebtedness for Borrowed Money. The Company shall
not, nor shall it permit any Subsidiary to, issue, incur, assume, create or have
outstanding any Indebtedness for Borrowed Money; provided, however, that the
foregoing shall not restrict nor operate to prevent:
(a) the Obligations of the Company owing to the Bank and other
indebtedness and obligations of the Company or any Subsidiary from time
to time owing to the Bank;
(b) Permitted Banking Subsidiary Indebtedness;
(c) indebtedness of the Company or any Subsidiary owing to the
Company or any other Subsidiary;
(d) Contingent Obligations incurred with respect to the
endorsement of instruments for deposit or collection in the ordinary
course of business;
(e) purchase money indebtedness and Capitalized Lease
Obligations secured by Liens permitted by Section 8.12(e) hereof in an
aggregate amount not to exceed $2,000,000 at any one time outstanding;
(f) indebtedness repaid and permanently retired out of the
initial Loan made hereunder;
(g) indebtedness in the aggregate principal amount not
exceeding $275,000 owing to Melvin Eggert, as the same may be reduced
by repayments of principal thereon; and
(h) indebtedness not otherwise permitted under this Section in
aggregate amount not to exceed $2,000,000 at any one time outstanding.
Section 8.12. Liens. The Company shall not, nor shall it permit any
Subsidiary to, create, incur or permit to exist any Lien of any kind on any
Property owned, whether now or hereafter owned, directly or indirectly, by the
Company or any other Subsidiary, except
(a) Liens arising by statute in connection with worker's
compensation, unemployment insurance, old age benefits, social security
obligations, taxes, assessments, statutory obligations or other similar
charges, good faith cash deposits in connection with tenders, contracts
or leases to which the Company or any Subsidiary
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is a party or other cash deposits required to be made in the ordinary
course of business, provided in each case that the obligation is not
for borrowed money and that the obligation secured is not overdue or,
if overdue, is being contested in good faith by appropriate proceedings
which prevent enforcement of the matter under contest and adequate
reserves have been established therefor;
(b) mechanics', workmen's, materialmen's, landlords',
carriers', or other similar Liens arising in the ordinary course of
business with respect to obligations which are not due or which are
being contested in good faith by appropriate proceedings which prevent
enforcement of the matter under contest;
(c) the pledge of assets for the purpose of securing an
appeal, stay or discharge in the course of any legal proceeding,
provided that the aggregate amount of liabilities of the Company and
its Subsidiaries secured by a pledge of assets permitted under this
subsection, including interest and penalties thereon, if any, shall not
be in excess of $1,000,000 at any one time outstanding;
(d) liens, charges and encumbrances incidental to the conduct
of the business of the Banking Subsidiaries or the ownership of any of
their Properties incurred in the ordinary course of business and not in
connection with the borrowing of money, and liens securing Permitted
Banking Subsidiary Indebtedness in the ordinary course of business;
(e) Liens on property of the Company or any of its
Subsidiaries created solely for the purpose of securing indebtedness
permitted by Section 8.11(e) hereof, representing or incurred to
finance, refinance or refund the purchase price of Property, provided
that no such Lien shall extend to or cover other Property of the
Company or such Subsidiary other than the respective Property so
acquired, and the principal amount of indebtedness secured by any such
Lien shall at no time exceed the original purchase price of such
Property;
(f) Liens to secure public funds or other pledges of funds
required by law to secure deposits;
(g) repurchase agreements, reverse repurchase agreements and
other similar transactions entered into by any Banking Subsidiary in
the ordinary course of its banking or trust business;
(h) Liens on the real estate owned by the Company securing
indebtedness permitted by Section 8.11(g) hereof; and
(i) utility easements, building restrictions and such other
encumbrances or charges against real property as are of a nature
generally existing with respect to properties of a similar character
and which do not in any material way affect the marketability of the
same or interfere with the use thereof in the business of the Company
or its Subsidiaries.
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Section 8.13. Investments, Loans, Advances and Acquisitions. The
Company will not, and will not permit any Subsidiary to, directly or indirectly,
make, retain or have outstanding any investments (whether through purchase of
stock or obligations or otherwise) in, or loans or advances (other than for
travel advances and similar cash advances made to employees in the ordinary
course of business) to, any other Person, or acquire all or any substantial part
of the assets or business of any other Person or division thereof; provided,
however, that the foregoing provisions shall not apply to nor operate to
prevent:
(a) investments in direct obligations of the United States of
America or of any agency or instrumentality thereof whose obligations
constitute full faith and credit obligations of the United States of
America provided that any such obligations shall mature within one year
from the date the same are acquired;
(b) investments in commercial paper rated P-1 by Moody's
Investors Services, Inc. and A-1 by Standard & Poor's Corporation
maturing within one year of the date of issuance thereof;
(c) investments in certificates of deposit issued by any
United States commercial bank having capital and surplus of not less
than $25,000,000 maturing not more than one year from the date of
acquisition thereof placed with such bank;
(d) investments of any Banking Subsidiary made in accordance
with sound banking practices in the ordinary course of its banking or
trust business consisting of extensions of credit in the form of loans,
acceptances, repurchase agreements, letter of credit and similar
transactions;
(e) investments of any Banking Subsidiary made in the
ordinary course of its banking or trust business consisting of
marketable securities and money-market instruments which it is
permitted to hold and invest in under applicable law and regulation;
(f) investments of the Borrowing Subsidiary made in the
ordinary course of its business consisting of residential mortgage
loans, servicing rights and similar assets;
(g) one or more non-hostile acquisitions by the Company of
any banks or thrifts with an aggregate purchase price (whether in cash,
assumed liabilities or otherwise, but excluding from such determination
the value of equity securities of the Company issued to the sellers in
connection with any such transaction) for all such transactions during
the term of this Agreement not exceeding $5,000,000; and
(h) investments, loans and advances not otherwise permitted
by this Section aggregating not more than $2,000,000 at any one time
outstanding.
Section 8.14. Mergers, Consolidations, Leases and Sales. The Company
shall not, nor shall it permit any Subsidiary to, be a party to any merger or
consolidation, or sell, transfer,
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lease or otherwise dispose of the Collateral or all or any substantial part of
its property, assets or business, or lease any property theretofor owned by the
Company or any Subsidiary; provided, however, that this Section shall not
prohibit:
(a) any Subsidiary from merging into or consolidating with
the Company or any Wholly-Owned Subsidiary provided that at the time of
such merger or consolidation and immediately after giving effect
thereto, no Default or Event of Default shall occur or be continuing
and the surviving entity is the Company or such Wholly-Owned
Subsidiary, as the case may be; and
(b) sales or leases of assets (other than the Collateral) in
the ordinary course of business.
A sale or disposition of 5% of the consolidated total assets of the Company
shall be deemed substantial for the foregoing purposes.
Section 8.15. Maintenance of Subsidiaries. The Company shall not
assign, sell or transfer, or permit any Subsidiary to issue, assign, sell or
transfer, any shares of capital stock of a Subsidiary; provided that the
foregoing shall not operate to prevent (a) the issuance, sale and transfer to
any person of any shares of capital stock of a Subsidiary solely for the purpose
of qualifying, and to the extent legally necessary to qualify, such person as a
director of such Subsidiary or (b) the transfer of the capital stock of a
Subsidiary which is not a Banking Subsidiary to the Company or another
Subsidiary.
Section 8.16. Dividends and Certain Other Restricted Payments. The
Company shall not (a) declare or pay any dividends on or make any other
distributions in respect of any class or series of its capital stock (other than
dividends payable solely in its capital stock) or (b) directly or indirectly
purchase, redeem or otherwise acquire or retire any of its capital stock;
provided, however, that the Company may declare and pay dividends and/or redeem
its capital stock during any fiscal year if, and only if, at the time of each
such dividend or redemption and immediately after giving effect thereto, (x) the
aggregate amount of dividends paid and amount paid to redeem its capital stock
in such fiscal year does not exceed the lesser of 25% of Consolidated Net Income
(deemed 0 if a loss) for the most recently completed fiscal year or $1,000,000,
and (y) no Default or Event of Default exists.
Section 8.17. ERISA. The Company shall, and shall cause each
Subsidiary to, promptly pay and discharge all obligations and liabilities
arising under ERISA of a character which if unpaid or unperformed is reasonably
likely to result in the imposition of a Lien against any of its Properties. The
Company shall, and shall cause each Subsidiary to, promptly notify the Bank of
(i) the occurrence of any reportable event (as defined in ERISA) with respect to
a Plan (other than such a reportable event described in ERISA Section 4043(c)
for which the 30-day notice requirement is waived provided that the loss of
qualification of a Plan and the failure to meet the minimum funding standards of
Section 412 of the Code or Section 302 of ERISA shall require notification
regardless of whether notice of such event is waived), (ii) receipt of any
notice from the PBGC of its intention to seek termination of any Plan or
appointment of a trustee therefor, (iii) its intention to terminate
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or withdraw from any Plan, and (iv) the occurrence of any event with respect to
any Plan which would result in the incurrence by the Company or any Subsidiary
of any material liability, fine or penalty, or any material increase in the
contingent liability of the Company or any Subsidiary with respect to any
post-retirement Welfare Plan benefit.
Section 8.18. Compliance with Laws. The Company shall, and shall
cause each Subsidiary to, comply in all respects with the requirements of all
federal, state and local laws, rules, regulations, ordinances and orders
applicable to or pertaining to their Properties or business operations,
non-compliance with which could have a material adverse effect on the financial
condition, Properties, business or operations of the Company or any Subsidiary
or could result in a Lien upon any of their Property.
Section 8.19. Formation of Subsidiaries. Except for existing
Subsidiaries designated on Schedule 6.2 hereto, the Company shall not, nor shall
it permit any Subsidiary to, form or acquire any Subsidiary without the prior
written consent of the Bank unless such formation or acquisition is, in the
judgment of the Company, desirable in the conduct of its business and not
disadvantageous in any material respect to the Bank.
Section 8.20. Change in the Nature of Business. The Company shall
not, and shall not permit any Subsidiary to, engage in any business or activity
if as a result the general nature of the business of the Company or any
Subsidiary would be changed in any material respect from the general nature of
the business engaged in by the Company or such Subsidiary on the date of this
Agreement.
Section 8.21. Use of Proceeds. Each Borrower shall use the proceeds
of the Loans made available to it hereunder in accordance with the terms of
Section 6.4 hereof.
SECTION 9. EVENTS OF DEFAULT AND REMEDIES.
Section 9.1. Events of Default. Any one or more of the following
shall constitute an "Event of Default" hereunder:
(a) default in the payment when due of the principal of any
Note (whether at the stated maturity thereof or at any other time
provided for in this Agreement), or default for a period of 5 days in
the payment when due all or any part of any other Obligation payable by
the Company hereunder or under any other Loan Document (whether at the
stated maturity thereof or at any other time provided for in this
Agreement), or default for a period of 5 days in the payment when due
of any other indebtedness or obligation (whether direct, contingent or
otherwise) of either Borrower owing to the Bank; or
(b) default in the observance or performance of any covenant
set forth in Sections 8.7, 8.8, 8.9, 8.10, 8.11, 8.13, 8.14, 8.15,
8.16, or 8.21 hereof or default after notice to the Company in the
observance or performance of any covenant set forth in Sections 8.5 or
8.6 hereof or default with respect to voluntary Liens granted by the
Company or any of its Subsidiaries in violation of Section 8.12 hereof;
or
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(c) default in the observance or performance of any other
provision hereof or of any other Loan Document which is not remedied
within 30 days after the earlier of (i) the date on which such failure
shall first become known to any executive officer of either Borrower or
(ii) written notice thereof is given to the Company by the Bank; or
(d) any representation or warranty made by either Borrower
herein or in any other Loan Document, or in any statement or
certificate furnished by it pursuant hereto or thereto, or in
connection with any extension of credit made hereunder, proves untrue
in any material respect as of the date of the issuance or making
thereof; or
(e) any event occurs or condition exists (other than those
described in subsections (a) through (d) above) which is specified as
an event of default under any of the other Loan Documents, or any of
the Loan Documents, or any material provision thereof, shall for any
reason not be or shall cease to be in full force and effect or is
declared to be null and void;
(f) default shall occur under any Indebtedness for Borrowed
Money aggregating $1,000,000 or more issued, assumed or guaranteed by
either Borrower or any Subsidiary, or under any indenture, agreement or
other instrument under which the same may be issued, and such default
shall continue for a period of time sufficient to permit the
acceleration of the maturity of any such Indebtedness for Borrowed
Money (whether or not such maturity is in fact accelerated), or any
such Indebtedness for Borrowed Money shall not be paid when due
(whether by lapse of time, acceleration or otherwise); or
(g) any judgment or judgments, writ or writs, or warrant or
warrants of attachment, or any similar process or processes, the
aggregate amount of which (after reduction by the amount covered by
insurance) exceeds $1,000,000 shall be entered or filed against either
Borrower or any Subsidiary or against any of their Property and which
remains unvacated, unbonded, unstayed or unsatisfied for a period of 30
days; or
(h) either Borrower or any member of its Controlled Group
shall fail to pay when due an amount or amounts aggregating in excess
$500,000 which it shall have become liable to pay to the PBGC or to a
Plan under Title IV of ERISA; or notice of intent to terminate a Plan
or Plans having aggregate Unfunded Vested Liabilities in excess of
$500,000 (collectively, a "Material Plan") shall be filed under Title
IV of ERISA by either Borrower or any other member of its Controlled
Group, any plan administrator or any combination of the foregoing; or
the PBGC shall institute proceedings under Title IV of ERISA to
terminate or to cause a trustee to be appointed to administer any
Material Plan or a proceeding shall be instituted by a fiduciary of any
Material Plan against either Borrower or any member of its Controlled
Group to enforce Section 515 or 4219(c)(5) of ERISA and such proceeding
shall not have been dismissed within 30 days thereafter; or a condition
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<PAGE> 37
shall exist by reason of which the PBGC would be entitled to obtain a
decree adjudicating that any Material Plan must be terminated; or
(j) dissolution or termination of the existence of either
Borrower or any Banking Subsidiary (unless otherwise permitted by the
terms of this Agreement); or
(k) the Borrowing Subsidiary or any Bank Subsidiary shall
cease at any time and for any reason to be a Wholly-Owned Subsidiary of
the Company; or
(l) any conservator or receiver shall be appointed for either
Borrower or any Banking Subsidiary under applicable federal or state
law applicable to banks, thrifts, or their holding companies, or any
Banking Subsidiary shall suspend payment of its obligations, or any
Banking Subsidiary shall cease to be a federally insured depository
institution, or a cease and desist order shall be issued against either
Borrower or any Subsidiary pursuant to applicable federal or state law
applicable to banks, thrifts, or their holding companies, or either
Borrower or any Subsidiary shall enter into any commitment to maintain
the capital of an insured depository institution in a required amount
with any federal or state regulator or any such regulator shall require
either Borrower or any Subsidiary to submit a capital maintenance or
restoration plan, in each case where such action continues in effect
for a period of 30 days; or
(m) either Borrower or any Subsidiary shall (i) have entered
involuntarily against it an order for relief under the United States
Bankruptcy Code, as amended, (ii) not pay, or admit in writing its
inability to pay, its debts generally as they become due, (iii) make an
assignment for the benefit of creditors, (iv) apply for, seek, consent
to, or acquiesce in, the appointment of a receiver, custodian, trustee,
examiner, liquidator or similar official for it or any substantial part
of its Property, (v) institute any proceeding seeking to have entered
against it an order for relief under the United States Bankruptcy Code,
as amended, to adjudicate it insolvent, or seeking dissolution, winding
up, liquidation, reorganization, arrangement, adjustment or composition
of it or its debts under any law relating to bankruptcy, insolvency or
reorganization or relief of debtors or fail to file an answer or other
pleading denying the material allegations of any such proceeding filed
against it, or (vi) fail to contest in good faith any appointment or
proceeding described in Section 9.1(n) hereof; or
(n) a custodian, receiver, trustee, examiner, liquidator or
similar official shall be appointed for either Borrower or any
Subsidiary or any substantial part of its Property, or a proceeding
described in Section 9.1(m)(v) shall be instituted against either
Borrower or any Subsidiary, and such appointment continues undischarged
or such proceeding continues undismissed or unstayed for a period of 60
days.
Section 9.2. Non-Bankruptcy Defaults. When any Event of Default
described in subsection (a) through (l), both inclusive, of Section 9.1 has
occurred and is continuing, the Bank may, by notice to the Company, take one or
more of the following actions:
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<PAGE> 38
(a) terminate the obligation of the Bank to extend any
further credit hereunder on the date (which may be the date thereof)
stated in such notice;
(b) declare the principal of and the accrued interest on the
Notes to be forthwith due and payable and thereupon the Notes,
including both principal and interest and all fees, charges and other
Obligations payable hereunder and under the other Loan Documents, shall
be and become immediately due and payable without further demand,
presentment, protest or notice of any kind; and
(c) enforce any and all rights and remedies available to it
under the Loan Documents or applicable law.
Section 9.3. Bankruptcy Defaults. When any Event of Default
described in subsection (m) or (n) of Section 9.1 has occurred and is
continuing, then the Notes, including both principal and interest, and all fees,
charges and other Obligations payable hereunder and under the other Loan
Documents, shall immediately become due and payable without presentment, demand,
protest or notice of any kind, and the obligation of the Bank to extend further
credit pursuant to any of the terms hereof shall immediately terminate. In
addition, the Bank may exercise any and all remedies available to it under the
Loan Documents or applicable law.
SECTION 10. THE GUARANTEE.
Section 10.1. The Guarantee. To induce the Bank to provide the
credits described herein to the Borrowing Subsidiary and in consideration of
benefits expected to accrue to the Company by reason of the commitment of the
Bank hereunder and for other good and valuable consideration, receipt of which
is hereby acknowledged, the Company hereby unconditionally and irrevocably
agrees it is liable for, and guarantees to the Bank and any other holder of the
Obligations, the due and punctual payment of all present and future indebtedness
of the Borrowing Subsidiary evidenced by or arising out of the Loan Documents,
including, but not limited to, the due and punctual payment of principal of and
interest on Note Two and the due and punctual payment of all other Obligations
now or hereafter owed by the Borrowing Subsidiary under the Loan Documents as
and when the same shall become due and payable, whether at stated maturity, by
acceleration or otherwise, according to the terms hereof and thereof. In case of
failure by the Borrowing Subsidiary punctually to pay any indebtedness or other
Obligations guaranteed hereby, the Company hereby unconditionally agrees to make
such payment or to cause such payment to be made punctually as and when the same
shall become due and payable, whether at stated maturity, by acceleration or
otherwise, and as if such payment were made by the defaulting Borrower.
Section 10.2. Guarantee Unconditional. The obligations of the
Company as a guarantor under this Section 10 shall be unconditional and absolute
and, without limiting the generality of the foregoing, shall not be released,
discharged or otherwise affected by:
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<PAGE> 39
(a) any extension, renewal, settlement, compromise, waiver or
release in respect of any obligation of the Borrowing Subsidiary under
this Agreement or any other Loan Document or by operation of law or
otherwise;
(b) any modification or amendment of or supplement to this
Agreement or any other Loan Document;
(c) any change in the corporate existence, structure or
ownership of, or any insolvency, bankruptcy, reorganization or other
similar proceeding affecting, the Borrowing Subsidiary or its assets,
or any resulting release or discharge of any obligation of the
Borrowing Subsidiary contained in any Loan Document;
(d) the existence of any claim, set-off or other rights which
either Borrower may have at any time against the Bank or any other
Person, whether or not arising in connection herewith;
(e) any failure to assert, or any assertion of, any claim or
demand or any exercise of, or failure to exercise, any rights or
remedies against the Borrowing Subsidiary or any other Person or
Property;
(f) any application of any sums by whomsoever paid or
howsoever realized to any obligation of either Borrower, regardless of
what obligations of the Borrowing Subsidiary remain unpaid;
(g) any invalidity or unenforceability relating to or against
the Borrowing Subsidiary for any reason of this Agreement or of any
other Loan Document or any provision of applicable law or regulation
purporting to prohibit the payment by the Borrowing Subsidiary of the
principal of or interest on Note Two, or any other amount payable by it
under the Loan Documents; or
(h) any other act or omission to act or delay of any kind by
the Bank or any other Person or any other circumstance whatsoever that
might, but for the provisions of this paragraph, constitute a legal or
equitable discharge of the obligations of the Company under this
Section 10.
Section 10.3. Discharge Only Upon Payment in Full; Reinstatement in
Certain Circumstances. The Company's obligations under this Section 10 shall
remain in full force and effect until the Commitment of the Bank to extend
credit hereunder is terminated and the principal of and interest on Note Two and
all other amounts payable by each Borrower under this Agreement and all other
Loan Documents shall have been paid in full. If at any time any payment of the
principal of or interest on Note Two or any other amount payable by the
Borrowing Subsidiary under the Loan Documents is rescinded or must be otherwise
restored or returned upon the insolvency, bankruptcy or reorganization of the
Borrowing Subsidiary or otherwise, the Company's obligations under this Section
10 with respect to such payment shall be reinstated at such time as though such
payment had become due but had not been made at such time.
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<PAGE> 40
Section 10.4. Waivers. The Company irrevocably waives acceptance
hereof, presentment, demand, protest and any notice not provided for herein, as
well as any requirement that at any time any action be taken by the Bank or any
other Person against the Borrowing Subsidiary or any other Person.
Section 10.5. Subrogation and Contribution. Unless and until the
Obligations have been fully paid and satisfied and the Commitment has
terminated, the Company hereby agrees it will not exercise any claim or other
right it may now or hereafter acquire against the Borrowing Subsidiary that
arises from the existence, payment, performance or enforcement of such
Borrower's obligations under this Section 10 or any other Loan Document,
including, without limitation, any right of subrogation, reimbursement,
exoneration, contribution, indemnification, or any right to participate in any
claim or remedy of the Bank or any other holder of any of the Obligations
against the Borrowing Subsidiary whether or not such claim, remedy or right
arises in equity or under contract, statute or common law, including, without
limitation, the right to take or receive from the Borrowing Subsidiary directly
or indirectly, in cash or other Property or by set-off or in any other manner,
payment or security on account of such claim or other right (other than
reimbursement claims against the Borrowing Subsidiary for amounts advanced for
its account).
Section 10.6. Stay of Acceleration. If acceleration of the time for
payment of any amount payable by the Borrowing Subsidiary under this Agreement
or any other Loan Document is stayed upon the insolvency, bankruptcy or
reorganization of such Borrower, all such amounts otherwise subject to
acceleration under the terms of this Agreement or the other Loan Documents shall
nonetheless be payable by the Company hereunder forthwith on demand by the Bank.
SECTION 11. MISCELLANEOUS.
Section 11.1. Non-Business Day. If any payment hereunder becomes due
and payable on a day which is not a Business Day, the due date of such payment
shall be extended to the next succeeding Business Day on which date such payment
shall be due and payable. In the case of any payment of principal falling due on
a day which is not a Business Day, interest on such principal amount shall
continue to accrue during such extension at the rate per annum then in effect,
which accrued amount shall be due and payable on the next scheduled date for the
payment of interest.
Section 11.2. No Waiver, Cumulative Remedies. No delay or failure on
the part of the Bank or on the part of the holder of the Obligations in the
exercise of any power or right shall operate as a waiver thereof or as an
acquiescence in any default, nor shall any single or partial exercise of any
power or right preclude any other or further exercise thereof or the exercise of
any other power or right. The rights and remedies hereunder of the Bank and of
the holder of the Obligations are cumulative to, and not exclusive of, any
rights or remedies which any of them would otherwise have.
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<PAGE> 41
Section 11.3. Amendments, Etc. No amendment, modification,
termination or waiver of any provision of this Agreement or of any other Loan
Document, nor consent to any departure by either Borrower therefrom, shall in
any event be effective unless the same shall be in writing and signed by the
Bank and the relevant Borrower. No notice to or demand on any Borrower in any
case shall entitle such Borrower to any other or further notice or demand in
similar or other circumstances.
Section 11.4. Costs and Expenses. The Borrowers jointly and
severally agree to pay on demand the costs and expenses of the Bank in
connection with the negotiation, preparation, execution and delivery of this
Agreement, the other Loan Documents and the other instruments and documents to
be delivered hereunder or thereunder (which costs and expenses in the case of
the negotiation, preparation, execution and delivery of this Agreement shall be
limited to $10,000), and in connection with the transactions contemplated hereby
or thereby, and in connection with any consents hereunder or waivers or
amendments hereto or thereto, including the fees and expenses of counsel for the
Bank with respect to all of the foregoing (whether or not the transactions
contemplated hereby are consummated). The Borrowers further jointly and
severally agree to pay to the Bank or any other holder of the Obligations all
costs and expenses (including court costs and reasonable attorneys' fees), if
any, incurred or paid by the Bank or any other holder of the Obligations in
connection with any Default or Event of Default or in connection with the
enforcement of this Agreement or any of the other Loan Documents or any other
instrument or document delivered hereunder or thereunder. The obligations of the
Borrowers under this Section shall survive the termination of this Agreement.
Section 11.5. Documentary Taxes. The Borrowers jointly and severally
agree to pay on demand any documentary, stamp or similar taxes payable in
respect of this Agreement or any other Loan Document, including interest and
penalties, in the event any such taxes are assessed, irrespective of when such
assessment is made and whether or not any credit is then in use or available
hereunder.
Section 11.6. Survival of Representations. All representations and
warranties made herein or in any of the other Loan Documents or in certificates
given pursuant hereto or thereto shall survive the execution and delivery of
this Agreement and the other Loan Documents, and shall continue in full force
and effect with respect to the date as of which they were made as long as any
credit is in use or available hereunder.
Section 11.7. Notices. Except as otherwise specified herein, all
notices hereunder shall be in writing (including, without limitation, notice by
telecopy) and shall be given to the relevant party at its address or telecopier
number set forth below, or such other address or telecopier number as such party
may hereafter specify by notice to the other given by United States certified or
registered mail, by telecopy or by other telecommunication device capable of
creating a written record of such notice and its receipt.
Notices hereunder shall be addressed:
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<PAGE> 42
<TABLE>
<S> <C>
to the Company at: to the Bank at:
Midwest Centre P.O. Box 755
501 West North Avenue 111 West Monroe Street
Melrose Park, Illinois 60160 Chicago, Illinois 60690
Attention: Robert L. Woods Attention: Mr. Michael Cameli
Telephone: (708) 865-2500 Telephone: (312) 461-2396
Telecopy: (708) 865-7273 Telecopy: (312) 765-8382
</TABLE>
Each such notice, request or other communication shall be effective (i) if given
by telecopier, when such telecopy is transmitted to the telecopier number
specified in this Section and a confirmation of such telecopy has been received
by the sender, (ii) if given by mail, 5 days after such communication is
deposited in the mail, certified or registered with return receipt requested,
addressed as aforesaid or (iii) if given by any other means, when delivered at
the addresses specified in this Section; provided that any notice given pursuant
to Section 1 or Section 2 hereof shall be effective only upon receipt.
Section 11.8. Confidentiality. The Bank shall hold in confidence any
nonpublic information delivered or made available to it by the Company or any
Subsidiary or their respective officers, employees and independent public
accountants. The foregoing to the contrary notwithstanding, nothing herein shall
prevent the Bank from disclosing any information delivered or made available to
it by the Company or any Subsidiary (i) to any other Person if reasonably
incidental to the administration of the credit contemplated hereby, (ii) upon
the order of any court or administrative agency, (iii) upon the request or
demand of any regulatory agency or authority, (iv) which has been publicly
disclosed other than as a result of a disclosure by the Bank which is not
permitted by this Agreement, (v) in connection with any litigation to which the
Bank or any of its Affiliates may be a party, along with the Company, any
Subsidiary or any of their respective Affiliates, (vi) to the extent reasonably
required in connection with the exercise of any right or remedy under this
Agreement, the other Loan Documents or otherwise, (vii) to the Bank's legal
counsel and financial consultants and auditors, and (viii) to any actual or
proposed participant or assignee of all or part of its rights under the credit
contemplated hereby provided such participant or assignee agrees in writing to
be bound by the duty of confidentiality under this Section to the same extent as
if it were the Bank hereunder.
Section 11.9. Headings. Section headings used in this Agreement are
for convenience of reference only and are not a part of this Agreement for any
other purpose.
Section 11.10. Severability of Provisions. Any provision of this
Agreement which is prohibited or unenforceable in any jurisdiction shall, as to
such jurisdiction, be ineffective to the extent of such prohibition or
unenforceability without invalidating the remaining provisions hereof or
affecting the validity or enforceability of such provision in any other
jurisdiction.
Section 11.11. Construction. The parties hereto acknowledge and agree
that this Agreement and the other Loan Documents shall not be construed more
favorably in favor of one than the other based upon which party drafted the
same, it being acknowledged that all
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<PAGE> 43
parties hereto contributed substantially to the negotiation of this Agreement
and the other Loan Documents. Nothing contained herein shall be deemed or
construed to permit any act or omission which is prohibited by the terms of any
of the other Loan Documents, the covenants and agreements contained herein being
in addition to and not in substitution for the covenants and agreements
contained in the other Loan Documents.
Section 11.12. Counterparts. This Agreement may be executed in any
number of counterparts, and by different parties hereto on separate counterpart
signature pages, and all such counterparts taken together shall be deemed to
constitute one and the same instrument.
Section 11.13. Binding Nature, Governing Law, Etc. This Agreement
shall be binding upon each Borrower and its successors and assigns, and shall
inure to the benefit of the Bank and the benefit of its successors and assigns,
including any subsequent holder of the Obligations. Neither Borrower may assign
its rights hereunder without the written consent of the Bank. This Agreement
constitutes the entire understanding of the parties with respect to the subject
matter hereof and any prior agreements, whether written or oral, with respect
thereto are superseded hereby. THIS AGREEMENT AND THE RIGHTS AND DUTIES OF THE
PARTIES HERETO SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE
INTERNAL LAWS OF THE STATE OF ILLINOIS WITHOUT REGARD TO PRINCIPLES OF CONFLICTS
OF LAWS.
Section 11.14. Submission to Jurisdiction; Waiver of Jury Trial. Each
Borrower hereby submits to the nonexclusive jurisdiction of the United States
District Court for the Northern District of Illinois and of any Illinois State
court sitting in the City of Chicago for purposes of all legal proceedings
arising out of or relating to this Agreement, the other Loan Documents or the
transactions contemplated hereby or thereby. Each Borrower irrevocably waives,
to the fullest extent permitted by law, any objection which it may now or
hereafter have to the laying of the venue of any such proceeding brought in such
a court and any claim that any such proceeding brought in such a court has been
brought in an inconvenient forum. EACH BORROWER AND THE BANK HEREBY IRREVOCABLY
WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF
OR RELATING TO ANY LOAN DOCUMENT OR THE TRANSACTIONS CONTEMPLATED THEREBY.
[SIGNATURE PAGE TO FOLLOW]
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<PAGE> 44
Upon your acceptance hereof in the manner hereinafter set forth, this
Agreement shall constitute a contract between us for the uses and purposes
hereinabove set forth.
Dated as of this 30th day of January, 1998.
MIDWEST BANC HOLDINGS, INC.
By /s/ Robert L. Woods
-------------------------------------
Name ROBERT L. WOODS
---------------------------------
Title President
--------------------------------
MIDWEST ONE MORTGAGE SERVICES, INC.
By
-------------------------------------
Name
--------------------------------
Title
--------------------------------
Accepted and agreed to at Chicago, Illinois as of the day and year last
above written.
HARRIS TRUST AND SAVINGS BANK
By
-------------------------------------
Name
---------------------------------
Title
--------------------------------
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<PAGE> 45
Upon your acceptance hereof in the manner hereinafter set forth, this
Agreement shall constitute a contract between us for the uses and purposes
hereinabove set forth.
Dated as of this 30th day of January, 1998.
MIDWEST BANC HOLDINGS, INC.
By
-------------------------------------
Name
---------------------------------
Title
--------------------------------
MIDWEST ONE MORTGAGE SERVICES, INC.
By /s/ James I. McMahon
-------------------------------------
Name James I. McMahon
---------------------------------
Title President
--------------------------------
Accepted and agreed to at Chicago, Illinois as of the day and year last
above written.
HARRIS TRUST AND SAVINGS BANK
By
-------------------------------------
Name
---------------------------------
Title
--------------------------------
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<PAGE> 46
EXHIBIT A
REVOLVING NOTE ONE
Chicago, Illinois
$25,000,000.00 January 30, 1998
On the Termination Date, for value received, the undersigned, MIDWEST
BANC HOLDINGS, INC., a Delaware corporation (the "Borrower"), hereby promises to
pay to the order of HARRIS TRUST AND SAVINGS BANK (the "Bank") at its office at
111 West Monroe Street, Chicago, Illinois, the principal sum of (i) TWENTY FIVE
MILLION AND NO/100 Dollars ($25,000,000.00), or (ii) such lesser amount as may
at the time of the maturity hereof, whether by acceleration or otherwise, be the
aggregate unpaid principal amount of all Loans owing from the Borrower to the
Bank under the Revolving Credit provided for in the Credit Agreement hereinafter
mentioned.
This Note evidences Loans made or to be made to the Borrower by the
Bank under the Revolving Credit provided for under that certain Credit Agreement
dated as of January 30, 1998, between the Borrower, Midwest One Mortgage
Services, Inc., and the Bank (said Credit Agreement, as the same may be amended,
modified or restated from time to time, being referred to herein as the "Credit
Agreement") and the Borrower hereby promises to pay interest at the office
described above on such Loans evidenced hereby at the rates and at the times and
in the manner specified therefor in the Credit Agreement.
Each Loan made under the Revolving Credit against this Note, any
repayment of principal hereon, the status of each such Loan from time to time as
part of the Base Rate Portion or a LIBOR Portion and, in the case of any LIBOR
Portion, the interest rate and Interest Period applicable thereto shall be
endorsed by the holder hereof on a schedule to this Note or recorded on the
books and records of the holder hereof (provided that such entries shall be
endorsed on a schedule to this Note prior to any negotiation hereof). The
Borrower agrees that in any action or proceeding instituted to collect or
enforce collection of this Note, the entries endorsed on a schedule to this Note
or recorded on the books and records of the holder hereof shall be prima facie
evidence of the unpaid principal balance of this Note, the status of each such
Loan from time to time as part of the Base Rate Portion or a LIBOR Portion and,
in the case of any LIBOR Portion, the interest rate and Interest Period
applicable thereto.
This Note is issued by the Borrower under the terms and provisions of
the Credit Agreement and is secured by, among other things, the Collateral
Documents, and this Note and the holder hereof are entitled to all of the
benefits and security provided for thereby or referred to therein, to which
reference is hereby made for a statement thereof. This Note may be declared to
be, or be and become, due prior to its expressed maturity, voluntary prepayments
may be made hereon, and certain prepayments are required to be made hereon, all
in the events, on the terms and with the effects provided in the Credit
Agreement. All
<PAGE> 47
capitalized terms used herein without definition shall have the same meanings
herein as such terms are defined in the Credit Agreement.
The Borrower hereby promises to pay all costs and expenses (including
court costs and reasonable attorneys' fees) suffered or incurred by the holder
hereof in collecting this Note or enforcing any rights in any collateral
therefor. The Borrower hereby waives presentment for payment and demand. THIS
NOTE SHALL BE CONSTRUED IN ACCORDANCE WITH, AND GOVERNED BY, THE INTERNAL LAWS
OF THE STATE OF ILLINOIS WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAWS.
MIDWEST BANC HOLDINGS, INC.
By
-------------------------------------
Name
---------------------------------
Title
--------------------------------
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<PAGE> 48
EXHIBIT B
REVOLVING CREDIT NOTE
Chicago, Illinois
$5,000,000.00 January 30, 1998
On the Termination Date, for value received, the undersigned, MIDWEST
ONE MORTGAGE SERVICES, INC., an Illinois corporation (the "Borrower"), hereby
promises to pay to the order of HARRIS TRUST AND SAVINGS BANK (the "Bank") at
its office at 111 West Monroe Street, Chicago, Illinois, the principal sum of
(i) FIVE MILLION AND NO/100 Dollars ($5,000,000.00), or (ii) such lesser amount
as may at the time of the maturity hereof, whether by acceleration or otherwise,
be the aggregate unpaid principal amount of all Loans owing from the Borrower to
the Bank under the Revolving Credit provided for in the Credit Agreement
hereinafter mentioned.
This Note evidences Loans made or to be made to the Borrower by the
Bank under the Revolving Credit provided for under that certain Credit Agreement
dated as of January 30, 1998, between the Borrower, Midwest Banc Holdings, Inc.
and the Bank (said Credit Agreement, as the same may be amended, modified or
restated from time to time, being referred to herein as the "Credit Agreement")
and the Borrower hereby promises to pay interest at the office described above
on such Loans evidenced hereby at the rates and at the times and in the manner
specified therefor in the Credit Agreement.
Each Loan made under the Revolving Credit against this Note, any
repayment of principal hereon, the status of each such Loan from time to time as
part of the Base Rate Portion or a LIBOR Portion and, in the case of any LIBOR
Portion, the interest rate and Interest Period applicable thereto shall be
endorsed by the holder hereof on a schedule to this Note or recorded on the
books and records of the holder hereof (provided that such entries shall be
endorsed on a schedule to this Note prior to any negotiation hereof). The
Borrower agrees that in any action or proceeding instituted to collect or
enforce collection of this Note, the entries endorsed on a schedule to this Note
or recorded on the books and records of the holder hereof shall be prima facie
evidence of the unpaid principal balance of this Note, the status of each such
Loan from time to time as part of the Base Rate Portion or a LIBOR Portion and,
in the case of any LIBOR Portion, the interest rate and Interest Period
applicable thereto.
This Note is issued by the Borrower under the terms and provisions of
the Credit Agreement and is secured by, among other things, the Collateral
Documents, and this Note and the holder hereof are entitled to all of the
benefits and security provided for thereby or referred to therein, to which
reference is hereby made for a statement thereof. This Note may be declared to
be, or be and become, due prior to its expressed maturity, voluntary prepayments
may be made hereon, and certain prepayments are required to be made hereon, all
in the events, on the terms and with the effects provided in the Credit
Agreement. All
<PAGE> 49
capitalized terms used herein without definition shall have the same meanings
herein as such terms are defined in the Credit Agreement.
The Borrower hereby promises to pay all costs and expenses (including
court costs and reasonable attorneys' fees) suffered or incurred by the holder
hereof in collecting this Note or enforcing any rights in any collateral
therefor. The Borrower hereby waives presentment for payment and demand. THIS
NOTE SHALL BE CONSTRUED IN ACCORDANCE WITH, AND GOVERNED BY, THE INTERNAL LAWS
OF THE STATE OF ILLINOIS WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAWS.
MIDWEST ONE MORTGAGE SERVICES, INC.
By
-------------------------------------
Name
---------------------------------
Title
--------------------------------
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<PAGE> 1
EXHIBIT 23.2
[CROWE CHIZEK LETTERHEAD]
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the use in the prospectus constituting part of this Amended
Registration Statement on Form S-1 of our report dated January 16, 1998 except
for Note 9, as to which the date is January 30, 1998 relating to the
consolidated financial statements of Midwest Banc Holdings, Inc. (formerly
First Midwest Corporation of Delaware) and subsidiaries which appear in such
prospectus. We also consent to the reference to us under the caption "Experts"
in such prospectus.
Crowe, Chizek and Company LLP
Oak Brook, Illinois
February 4, 1998
