<PAGE> 1
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. 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......................... $15.00 $1.05 $13.95
- ---------------------------------------------------------------------------------------------------------
Total(3).......................... $16,500,000 $1,155,000 $15,345,000
=========================================================================================================
</TABLE>
(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 $18,975,000, $1,328,250 and $17,646,750,
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
February 27, 1998.
-------------------------
HOWE BARNES INVESTMENTS, INC.
February 23, 1998
<PAGE> 2
[MIDWEST BANC LOGO]
MAP
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> 3
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> 4
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> 5
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
DECEMBER 31,
----------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
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
Stockholders' 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.
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> 6
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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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."
7
<PAGE> 8
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
the initial public offering price of $15.00 per share, the dilution per share to
new stockholders would be $9.11. 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> 9
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 4,641,858 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."
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<PAGE> 10
USE OF PROCEEDS
The net proceeds to the Company from the sale of 1,100,000 shares of Common
Stock in the Offering, after deducting the underwriting discount and estimated
offering expenses, are estimated to be $14,945,000 ($17,246,750 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> 11
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> 12
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> 13
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 the
initial public offering price of $15.00 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 7,405
------- -------
Total short-term borrowings............................ $34,342 $25,397
======= =======
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 27,555
Retained earnings......................................... 40,026 40,026
Unrealized gain on securities............................. 675 675
Treasury stock, at cost................................... (462) (462)
------- -------
Total stockholders' equity............................. 52,960 67,905
------- -------
Total capitalization................................. $74,185 $89,130
======= =======
</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> 14
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 the
initial public offering price of $15.00 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 $65.5 million or
$5.89 per share of Common Stock. This represents an immediate increase in net
tangible book value of $0.84 per share to the existing stockholders, and an
immediate dilution of $9.11 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).................. $15.00
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)........................... .84
-----
Pro forma net tangible book value per share after
Offering.................................................. 5.89
------
Dilution of net tangible book value per share to new
investors(3).............................................. $ 9.11
======
</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 $5.94 and the dilution of net tangible
book value per share to new investors would be $9.06.
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 $15.00
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 16,500,000 15.00
</TABLE>
14
<PAGE> 15
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data of the Company shown below should
be read in conjunction with the Consolidated Financial Statements and the 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
Stockholders' 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> 16
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> 17
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% in 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 amounts 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> 18
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> 19
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> 20
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> 21
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> 22
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> 23
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> 24
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> 25
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> 26
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> 27
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> 28
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> 29
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> 30
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> 31
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> 32
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 $5.0
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> 33
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> 34
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
consist 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> 35
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> 36
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.
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<PAGE> 37
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 stockholders. 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.
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<PAGE> 38
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.
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<PAGE> 39
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.
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<PAGE> 40
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
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<PAGE> 41
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.
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<PAGE> 42
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
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<PAGE> 43
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.
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<PAGE> 44
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
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<PAGE> 45
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.
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<PAGE> 46
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
46
<PAGE> 47
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.
47
<PAGE> 48
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> 49
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 and a
director 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 $12,000 for legal services
rendered to the board of directors of Midwest Bank and Trust Company and Midwest
Bank.
49
<PAGE> 50
EXECUTIVE COMPENSATION
The following table summarizes the compensation paid by the Company to the
President and Chief Executive Officer and the four other most highly paid
executive officers (the "Named Executive Officers") during 1997, 1996 and 1995.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
--------------------------------------------- SECURITIES
NAME AND PRINCIPAL OTHER ANNUAL UNDERLYING ALL OTHER
POSITION YEAR SALARY($) 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 30,950(1) 0 11,462(2)
Executive Officer 1995 250,000 100,000 27,175(1) 0 10,994(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 19,530(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 16,137(5) 0 5,775(4)
James I. McMahon............ 1997 150,000 29,462 15,920(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 7,300(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 $620 in life insurance premiums paid by
Company.
50
<PAGE> 51
The information presented below summarizes certain information about the
Common Stock underlying options which were granted in 1997 by the Company to the
Named Executive Officers.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-------------------------------------------------------- POTENTIAL REALIZABLE VALUE AT
NUMBER OF PERCENT OF ASSUMED ANNUAL RATES OF
SECURITIES TOTAL OPTIONS STOCK PRICE APPRECIATION
UNDERLYING GRANTED TO EXERCISE OF FOR OPTION TERM
OPTION EMPLOYEES IN BASE PRICE EXPIRATION ------------------------------
NAME GRANTED(#) FISCAL YEAR ($/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> 52
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.
52
<PAGE> 53
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.
53
<PAGE> 54
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........................................ 11,426(11)(12) * *
Stephen M. Karaba....................................... 10,540(11)(13) * *
Directors and executive officers as a group (12
persons).............................................. 4,650,858(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 and 4,000
shares held in an IRA account for the benefit of 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. Does not include 101,698 shares held in the Company's 401(k) Plan,
for which Midwest Trust Services, Inc. acts as trustee. The trustee under
the 401(k) Plan has sole voting and investment power with respect to such
shares.
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<PAGE> 55
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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<PAGE> 56
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,
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open-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
63
<PAGE> 64
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> 65
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> 66
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............................. 620,000
ABN AMRO Incorporated.................................... 60,000
Robert W. Baird & Co., Incorporated...................... 60,000
Fahnestock & Co., Inc. .................................. 60,000
Ryan, Beck & Co., Inc. .................................. 60,000
Sandler O'Neill & Partners, L.P. ........................ 60,000
Stifel, Nicolaus & Company, Incorporated................. 60,000
Chicago Capital, Inc. ................................... 40,000
Mesirow Financial, Inc. ................................. 40,000
David A. Noyes & Company................................. 40,000
---------
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 $0.50 per share. Additionally, the
Underwriters may allow, and such dealers may reallow, a concession not in excess
of $0.25 per share to certain other dealers.
66
<PAGE> 67
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 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 4,641,858 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
67
<PAGE> 68
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. 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.
68
<PAGE> 69
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> 70
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> 71
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> 72
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> 73
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> 74
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> 75
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> 76
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
stockholders 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> 77
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> 78
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> 79
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> 80
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> 81
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> 82
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> 83
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 $25 million (subject to certain reductions) 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> 84
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> 85
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> 86
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> 87
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 exercisable 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> 88
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> 89
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> 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 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> 91
======================================================
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 MARCH 20, 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.
FEBRUARY 23, 1998
======================================================
