<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For transition period from ________ to ________
Commission File Number: 0-29598
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MIDWEST BANC HOLDINGS, INC.
-----------------------------------------------------------------
(Exact name of Registrant as specified in its charter.)
Delaware 36-3252484
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(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
501 W. North Ave., Melrose Park, IL 60160
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(Address of principal executive offices) (ZIP code)
(708) 865-1053
--------------
(Registrant's telephone number, including area code)
Indicate by checkmark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
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Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the close of the period covered by this report.
Class Outstanding September 30, 1999
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Common, par value $.01 10,927,046
1
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MIDWEST BANC HOLDINGS, INC.
Form 10-Quarterly Report
Table of Contents
PART I
Page Number
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Item 1. Financial Statements.......................................... 3
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition............... 9
Item 3. Quantitative and Qualitative Disclosures about Market Risk.... 24
PART II
Item 1. Legal Proceedings............................................. 26
Item 2. Changes in Securities and Use of Proceeds..................... 26
Item 3. Defaults Upon Senior Securities............................... 26
Item 4. Submission of Matters to a Vote of Security Holders........... 26
Item 5. Other Information............................................. 26
Item 6. Exhibits and Reports on Form 8-K.............................. 26
Form 10-Q Signature Page................................................ 27
2
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PART I - Financial Information
MIDWEST BANC HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS (unaudited)
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------ -----------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 39,196 $ 40,253
Securities available-for-sale 482,280 458,331
Securities held-to-maturity 29,402 23,598
Loans 617,235 521,880
Allowance for loan losses (7,165) (6,576)
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Net loans 610,070 515,304
Premises and equipment, net 19,185 17,597
Goodwill, net 2,415 2,610
Other real estate owned 2,056 1,245
Other assets 17,610 12,376
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Total assets $ 1,202,214 $1,071,314
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits
Noninterest-bearing $ 106,670 $ 114,566
Interest-bearing 839,860 754,586
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Total deposits 946,530 869,152
Securities sold under agreements to repurchase
and federal funds purchased 13,819 10,469
Advances from the Federal Home Loan Bank 157,000 101,000
Notes payable and other borrowings 7,725 6,800
Other liabilities 7,101 6,264
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Total liabilities 1,132,175 993,685
STOCKHOLDERS' EQUITY
Preferred stock; $.01 par value; authorized 1,000,000 shares;
none issued
Common stock, $.01 par value; authorized 17,000,000 shares;
11,379,392 shares issued 114 114
Surplus 29,704 29,704
Retained earnings 54,855 48,795
Accumulated other comprehensive income (8,279) (522)
Treasury stock, at cost (452,346 shares at September 30, 1999
and 100,000 shares at December 31, 1998) (6,355) (462)
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Total stockholders' equity 70,039 77,629
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Total liabilities and stockholders' equity $ 1,202,214 $1,071,314
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</TABLE>
3
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MIDWEST BANC HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF INCOME (unaudited)
Three Months Ended September 30, 1999 and 1998
(In thousands, except per share data)
1999 1998
---- ----
INTEREST INCOME
Loans, including fees $13,575 $12,090
Securities
Taxable 7,835 6,841
Tax-exempt 393 316
Trading account securities 25 -
Federal funds sold and other 91 108
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Total interest income 21,919 19,355
INTEREST EXPENSE
Deposits 9,301 9,353
Advances from the Federal Home Loan Bank 1,779 1,112
Other borrowings 240 184
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Total interest expense 11,320 10,649
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Net interest income 10,599 8,706
Provision for loan losses 639 195
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Net interest income after provision for loan losses 9,960 8,511
OTHER INCOME
Service charges on deposits 875 767
Gains on securities transactions 51 42
Net trading account profits 91 1
Mortgage loan origination fees 141 230
Trust income 166 171
Gain on sale of other real estate 9 -
Insurance commissions and fees 81 -
Investment commissions and fees 56 44
Other income 167 244
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Total other income 1,637 1,499
OTHER EXPENSE
Salaries and employee benefits 3,751 3,399
Occupancy expense, net 1,127 993
Professional services 442 306
Marketing 221 175
Other expenses 998 849
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Total other expenses 6,539 5,722
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Income before income taxes 5,058 4,288
Provision for income taxes 1,823 1,570
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NET INCOME $ 3,235 $ 2,718
======= =======
Basic earnings per share $ 0.29 $ 0.24
======= =======
Diluted earnings per share $ 0.29 $ 0.24
======= =======
4
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MIDWEST BANC HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF INCOME (unaudited)
Nine Months Ended September 30, 1999 and 1998
(In thousands, except per share data)
1999 1998
---- ----
INTEREST INCOME
Loans, including fees $37,617 $35,903
Securities
Taxable 21,935 18,329
Tax-exempt 864 918
Trading account securities 46 170
Federal funds sold and other 259 399
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Total interest income 60,721 55,719
INTEREST EXPENSE
Deposits 26,954 26,996
Advances from the Federal Home Loan Bank 4,319 2,715
Other borrowings 694 752
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Total interest expense 31,967 30,463
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Net interest income 28,754 25,256
Provision for loan losses 1,518 1,020
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Net interest income after provision for loan losses 27,236 24,236
OTHER INCOME
Service charges on deposits 2,475 2,261
Gains on securities transactions 258 767
Net trading account profits 96 19
Mortgage loan origination fees 625 717
Trust income 470 470
Gain on sale of other real estate 309 -
Insurance commissions and fees 270 -
Investment commissions and fees 151 117
Other income 493 563
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Total other income 5,147 4,914
OTHER EXPENSE
Salaries and employee benefits 11,075 10,025
Occupancy expense, net 3,271 2,855
Professional services 1,217 837
Marketing 606 568
Other expenses 2,941 2,789
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Total other expenses 19,110 17,074
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Income before income taxes 13,273 12,076
Provision for income taxes 4,736 4,414
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NET INCOME $ 8,537 $ 7,662
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Basic earnings per share $ 0.77 $ 0.69
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Diluted earnings per share $ 0.77 $ 0.69
======= =======
5
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MIDWEST BANC HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (unaudited)
Nine Months Ended September 30, 1999 and 1998
<TABLE>
<CAPTION>
Accumulated
Other Total
Common Retained Comprehensive Treasury Stockholders'
(In thousands, except share and per share data) Stock Surplus Earnings Income Stock Equity
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1998 $101 $12,620 $40,026 $ 675 $ (462) $ 52,960
Cash dividends declared ($0.090 per share) - - (790) - - (790)
Issuance of common stock 13 17,084 - - - 17,097
Comprehensive Income
Net income - - 7,662 - - 7,662
Net decrease in fair value of securities
classified as available-for-sale, net of
income taxes and reclassification adjustments - - - (141) - (141)
-----------
Total comprehensive income 7,521
---- ------- ------- --------- ------- -----------
Balance, September 30, 1998 $114 $29,704 $46,898 $ 534 $ (462) $ 76,788
==== ======= ======= ========= ======= ===========
Balance, January 1, 1999 $114 $29,704 $48,795 $ (522) $ (462) $ 77,629
Cash dividends declared ($0.225 per share) - - (2,477) - - (2,477)
Purchase of 352,346 shares of treasury stock - - - - (5,894) (5,894)
Issuance of 512 shares of common stock in
connection with the exercise of stock options - - - - 1 1
Comprehensive Income
Net income - - 8,537 - - 8,537
Net decrease in fair value of securities
classified as available-for-sale, net of
income taxes and reclassification adjustments - - - (7,757) - (7,757)
-----------
Total comprehensive income 780
---- ------- ------- --------- ------- -----------
Balance, September 30, 1999 $114 $29,704 $54,855 $ (8,279) $(6,355) $ 70,039
==== ======= ======= ========= ======= ===========
</TABLE>
6
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MIDWEST BANC HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Nine Months Ended September 30, 1999 and 1998
(In thousands)
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 8,537 $ 7,662
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation 1,704 1,557
Provision for loan losses 1,518 1,020
Proceeds from sales of trading account securities, net 96 5,027
Net gain on sale of securities (258) (767)
Net trading account profits (96) (19)
Net proceeds from sales of real estate loans originated for sale 3,332 5,826
Gain on sale of other real estate (309) -
Increase in other assets (58) (2,156)
Increase in other liabilities 837 277
-------- --------
Net cash provided by operating activities 15,303 18,427
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales and maturities of securities
available-for-sale 117,725 232,848
Principal payments on securities available-for-sale 86,468 93,348
Purchase of securities available-for-sale (240,576) (444,950)
Purchase of securities held-to-maturity (6,885) (6,750)
Maturities of securities held-to-maturity 1,081 1,345
Net increase in loans (101,710) (19,839)
Proceeds from sale of other real estate 1,546 -
Property and equipment expenditures, net (3,292) (3,354)
-------- --------
Net cash used in investing activities (145,643) (147,352)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 77,378 59,312
Issuance of common stock - 17,097
Bank borrowings 70,200 94,970
Payments on bank borrowings (13,275) (48,405)
Dividends paid (2,477) (790)
Securities sold under agreements to repurchase
and federal funds purchased 3,350 226
Treasury stock purchases (5,894) -
Proceeds from exercise of stock options, net of
treasury shares issued 1 -
-------- --------
Net cash provided by financing activities 129,283 122,410
-------- --------
Decrease in cash and cash equivalents (1,057) (6,515)
Cash and cash equivalents at beginning of period 40,253 34,471
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 39,196 $ 27,956
======== ========
</TABLE>
7
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NOTE 1 - BASIS OF PRESENTATION
The financial information of Midwest Banc Holdings, Inc. (the "Company")
included herein is unaudited; however, such information reflects all adjustments
(consisting only of normal recurring adjustments) which are, in the opinion of
management, necessary for a fair presentation for the interim periods. The
financial statements have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulations S-X.
The annualized results of operations for the three months and nine months ended
September 30, 1999 are not necessarily indicative of the results expected for
the full year ending December 31, 1999.
For purposes of per share calculations, the Company had 10,927,046 shares of
common stock outstanding at September 30, 1999, 11,279,392 shares outstanding at
December 31, 1998, and 11,279,392 shares outstanding at September 30, 1998.
Quarterly weighted average shares of common stock outstanding were 10,972,265
and 11,279,392 for the three months ended September 30, 1999 and 1998,
respectively. Weighted average shares were 11,067,255 and 11,028,701 for the
nine month periods ended September 30, 1999 and 1998, respectively.
NOTE 2 - NEW ACCOUNTING STANDARDS
Statement of Financial Accounting Standards No. 133 (the "Statement") on
derivatives will, in the year 2000, require all derivatives to be recorded at
fair value in the balance sheet, with changes in fair value recorded in the
income statement. If derivatives are documented and effective as hedges, the
change in the derivative fair value will be offset by an equal change in the
fair value of the hedged item. Under the new standard, securities
held-to-maturity can no longer be hedged, except for changes in the issuer's
creditworthiness. Therefore, upon adoption of the Statement, companies will have
another one-time window of opportunity to reclassify held-to-maturity securities
to either trading or available-for-sale, provided certain criteria are met. The
Statement may be adopted early, at the start of a calendar quarter. The Company
does not currently plan to adopt the Statement early. Adoption of this Statement
is not expected to have a material impact since the Company does not have
significant derivative instruments or hedging activity.
Statement of Financial Accounting Standards No. 134 on mortgage banking will, in
1999, allow mortgage loans held for sale that are securitized to be classified
as trading, available-for-sale, or in certain circumstances, held-to-maturity.
Currently, these must be classified as trading. Since the Company has not
securitized loans, this statement is not expected to impact the Company.
The Financial Accounting Standards Board (FASB) continues to study several
issues, including recording all financial instruments at fair value and
abolishing pooling-of-interests accounting. On September 8, 1999, the FASB
issued an exposure draft which proposes to eliminate pooling-of-interest
accounting for business combinations. Any business combination entered into
after the effective date of this provision will be required to be accounted for
using the purchase method of accounting. The FASB will accept comments on this
proposed rule until December 7, 1999 and a final statement is expected to become
effective during the fourth quarter of 2000.
8
<PAGE> 9
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS - THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1999
AND 1998
Consolidated net income for the third quarter of 1999 was $3.2 million or $ 0.29
cents per basic and diluted share ("per share"), a 19.0% increase compared to
$2.7 million or $ 0.24 cents per share earned in the third quarter of 1998.
Earnings per share for the three months ended September 30, 1999 were 20.8%
higher than for the comparable period in 1998. Consolidated net income for the
nine months ended September 30, 1999 was $8.5 million or $.77 a share compared
to $7.7 million or $.69 a share for the similar period in 1998. Earnings per
share for the nine months ended September 30, 1999 were 11.6% higher than for
the comparable period in 1998.
Net interest income increased 21.7% to $10.6 million in the third quarter of
1999 compared to $8.7 million in the third quarter of 1998. During the nine
months ended September 30, 1999, net interest income increased 13.9% to $28.8
million compared to $25.3 million for the comparable period in 1998. Excluding
gains on the sale of securities available-for-sale and net trading account
profits, noninterest income increased 2.7% to $1.5 million in the third quarter
of 1999 compared to the similar period in 1998. Noninterest expenses increased
14.3% to $6.5 million in the third quarter of 1999 compared to the similar
period in 1998. Excluding gains on the sale of securities available-for-sale and
net trading account profits, noninterest income increased 16.1% to $4.8 million
and noninterest expenses increased 11.9% to $19.1 million year to date in 1999
compared to the similar nine month period in 1998.
Net Interest Income
Net interest income was $10.6 million and $8.7 million during the three months
ended September 30, 1999 and 1998, respectively, an increase of 21.7%. During
the nine months ended September 30, 1999, net interest income increased $3.5
million or 13.9% to $28.8 million compared to $25.3 million for the similar
period in 1998. The Company's net interest margin (tax equivalent net interest
income as a percentage of earning assets) was 3.88% for the three months ended
September 30, 1999 and 3.62% for the same period a year earlier. During the nine
months ended September 30, 1999 and 1998, the net interest margin was 3.67%. Net
interest income increased due to the growth in average earning assets from
$978.7 million during the third quarter of 1998 to $1.1 billion during the third
quarter of 1999. During the nine months ended September 30, 1999, average
earning assets increased 13.9% to $1.1 billion from $935.5 million during the
nine months ended September 30, 1998.
The increase in the net interest margin for the third quarter of 1999 was
primarily due to an increase in loans as a percentage of average earning assets,
partially offset by a decline in average loan yield, and lower average interest
rates on deposits and borrowings. The average loan yield was 9.08% during the
third quarter of 1999, a decrease of 0.40% from the average yield of 9.48%
during the third quarter of 1998. For the nine months ended September 30, 1999,
the average loan yield was 8.88%, a decrease of .57% from the average yield of
9.45% for the same period in 1998.
9
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ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (continued)
Net Interest Income (continued)
Yields on investment securities were 6.68% for the third quarter of 1999
compared to 6.36% for the comparable period in 1998. However, the year to date
net interest margin was affected by a flattening of interest rate yield curves
and accelerated prepayments under existing mortgage-backed securities
investments primarily in the first quarter. During the nine months ended
September 30, 1999, investment securities yields were 6.33% compared to 6.34%
for the same period in 1998.
Overall, the yield on earning assets was 7.96% for both the third quarter of
1998 and 1999. Lower loan yields were offset by improving investment yields and
an increase in loans as a percentage of average earning assets. Loans
represented 53.8% of average earning assets during the third quarter of 1999
compared to 52.1% during the third quarter of 1998.
Average rates on deposits decreased .52% from 5.00% in the third quarter of 1998
to 4.48% for the three months ended September 30, 1999. Average rates on
deposits decreased .48% from 4.96% for the nine months ended September 30, 1998
to 4.48% for the nine months ended September 30, 1999. Average rates on
borrowings were 5.44% and 5.04% for the third quarters of 1998 and 1999,
respectively. The average rates on borrowings were 5.52% and 5.15% for the nine
months ended September 30, 1998 and 1999, respectively.
Provision for Loan Losses
The Company's provision for loan losses was $639,000 for the third quarter of
1999 compared to $195,000 for the similar period in 1998. This increase was
primarily due to the increase in net charge-offs and non-performing assets
during the third quarter of 1999. For the nine months ended September 30, 1999,
the provision for losses increased from $1.0 million in 1998 to $1.5 million in
1999. Net charge-offs for the three months ended September 30, 1999 and 1998
were $317,000 and $133,000, respectively. Net charge-offs for the nine months
ended September 30, 1999 and 1998 were $929,000 and $628,000, respectively.
The allowance for loan losses as a percentage of total loans was 1.16% as of
September 30, 1999 and 1.26% as of December 31, 1998.
Other Income
Other income, excluding gains on securities available-for-sale and net trading
account profits, was $1.5 million for the three months ended September 30, 1999
and $1.5 million for the same period in 1998. For the nine months ended
September 30, 1999, other income, excluding gains on securities
available-for-sale and net trading account profits, was $4.8 million compared to
$4.1 million for the comparable period in 1998, an increase of $665,000 or 16.1%
10
<PAGE> 11
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (continued)
Other Income (continued)
The most significant factor in the increase in other income was a $300,000 gain
on the sale of other real estate, which was completed as part of a loan workout
during the first quarter of 1999.
Service charges and fees increased 14.1% or $108,000 from $767,000 in the third
quarter of 1998 to $875,000 in the third quarter of 1999. Year-to-date, service
charges and fees increased 9.5% or $214,000 from $2.3 million in 1998 to $2.5
million in 1999. Service charges and fees include service charges on deposit
accounts which are expected to increase with future deposit growth.
Commissions on insurance and investment brokerage activities increased $93,000
to $137,000 for the quarter ended September 30, 1999 compared to $44,000 for the
quarter ended September 30, 1998. For the nine months ended September 30, 1999,
commissions on insurance and investment brokerage activities increased $304,000
to $421,000 compared to the similar period in 1998. The increase in fees was
primarily due to insurance activities of Porter Insurance Agency, Inc., which
was acquired by Midwest Bank of Western Illinois in the fourth quarter of 1998,
and higher investment brokerage volume.
Mortgage banking fee income decreased 38.7% to $141,000 during the third quarter
of 1999 compared to $230,000 during the third quarter of 1998. Year-to-date,
mortgage fees were $625,000 and $717,000 in 1999 and 1998, respectively. Since
mortgage banking income is sensitive to interest rate levels, the reduction in
long-term interest rates created a significant demand for refinancing existing
mortgages, as well as financing new home sales, during 1998. Activity during the
third quarter of 1999 was moderate, but the demand for refinancings lessened
significantly. Most fixed rate mortgages which the Company originates are sold.
Sales of securities available-for-sale resulted in a net gain of $51,000 in the
third quarter of 1999 compared to a net gain of $42,000 for the comparable
period in 1998. For the nine months ended September 30, 1999, gains on the sale
of securities available-for-sale were $258,000 compared to $767,000 during the
similar period in 1998. Securities available-for-sale are held for indefinite
periods of time and include securities that will be used as a part of the
Company's asset/liability management strategy. Such securities may be sold in
response to changes in interest rates, liquidity needs or significant prepayment
risk. Net trading account profits were $91,000 during the third quarter of 1999
compared to a gain of $1,000 for the comparable period in 1998. Year-to-date,
net trading account profits were $96,000 and $19,000 in 1999 and 1998,
respectively.
11
<PAGE> 12
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (continued)
Other Expenses
Total other expenses increased 14.3% or $817,000 from $5.7 million during the
three months ended September 30, 1998 to $6.5 million during the third quarter
of 1999. For the nine months ended September 30, 1999, total other expenses
increased 11.9% or $2.0 million to $19.1 million compared to the similar period
in 1998.
Salary and benefit expenses increased 10.4% or $352,000 from $3.4 million during
the three months ended September 30, 1998 to $3.8 million for the third quarter
of 1999. For the nine months ended September 30, 1999, salary and benefit
expenses increased $1.1 million or 10.5% to $11.1 million compared to the
similar period in 1998. The full-time equivalent number of employees was 314 at
September 30, 1998 and 327 at September 30, 1999. The increase in the full time
equivalent number of employees, as well as salaries and benefits, was primarily
due to the initial staffing and related compensation costs of two new banking
centers, employee expenses for Porter Insurance Agency, Inc., which was acquired
in the fourth quarter of 1998, and annual merit increases in salaries during
1999.
Occupancy expenses increased $134,000 or 13.5% to $1.1 million during the third
quarter of 1999 compared to $1.0 million in the third quarter of 1998. For the
nine months ended September 30, 1999, occupancy expenses increased $416,000 or
14.6% to $3.3 million compared to the nine months ended September 30, 1998.
Renovation costs and increased depreciation expense related to the Company's
largest banking center, as well as the construction and opening of two new
banking locations in Island Lake and McHenry, were primary factors in the higher
occupancy expense levels in 1999.
Expenses, other than salary and employee benefits and occupancy, increased
$331,000 or 24.9% from $1.3 million in the third quarter of 1998 to $1.7 million
in the third quarter of 1999. Other expenses increased $570,000 or 13.6% to $4.8
million for the nine months ended September 30, 1999 compared to the similar
period in 1998. The increase in expenses was due primarily to start-up expenses
for new banking locations, legal expenses related to loan workouts, new
outsourcing arrangements in 1999 and general operating costs. In addition, 1999
expenses include the initial start-up costs of Midwest One Financial Services, a
joint venture providing insurance and investment brokerage services at Midwest
Bank of McHenry County.
Income Taxes
The Company recorded income tax expense of $1.8 million and $1.6 million for the
quarters ended September 30, 1999 and 1998, respectively. Year-to-date, the
provision for income taxes increased $322,000 or 7.3% to $4.7 million compared
to $4.4 million for the similar period in 1998. The increase in income taxes was
primarily due to the growth in pre-tax income in 1999 compared to 1998.
12
<PAGE> 13
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (continued)
FINANCIAL CONDITION
Loans
Total loans increased $95.4 million or 18.3% from $521.9 million at December 31,
1998 to $617.2 million as of September 30, 1999. Commercial loans increased
$29.6 million or 20.0% from $148.1 million as of December 31, 1998 to $177.7
million as of September 30, 1999. Commercial real estate loans increased 24.0%
or $55.0 million to $284.5 million as of September 30, 1999 from $229.5 million
as of December 31, 1998. Agricultural loans increased 24.4% or $8.1 million from
$33.2 million at December 31, 1998 to $41.3 million as of September 30, 1999.
Residential real estate loans increased $2.9 million or 3.0% to $98.5 million as
of September 30, 1999 from $95.6 million as of December 31, 1998. Consumer loans
decreased 0.6% to $16.0 million as of September 30, 1999.
Residential mortgage loans have previously been originated by the Company's
mortgage banking subsidiary, Midwest One Mortgage Services, Inc., ("Midwest One
Mortgage"). As of September 15, 1999, the operations and activities of Midwest
One Mortgage were transferred to the Company's bank subsidiaries which will now
handle all mortgage services. Most residential loans are sold in the secondary
market. At any point in time, loans will be at various stages of the mortgage
banking process. Included as part of residential real estate loans are loans
held for sale which were $3.8 million as of December 31, 1998 and $580,500 at
September 30, 1999. The carrying value of these loans approximated their market
value at that time.
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 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 upon 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.
Following is a summary of changes in the allowance for loan losses for the nine
months ended September 30:
(In thousands) 1999 1998
-------------- ---- ----
Balance, January 1 $ 6,576 $ 6,143
Provision charged to operations 1,518 1,020
Loans charged-off (1,097) (881)
Recoveries 168 253
---------- ---------
Balance, September 30 $ 7,165 $ 6,535
========== =========
13
<PAGE> 14
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (continued)
Allowance for Loan Losses (continued)
On a quarterly basis, management of each of the subsidiary banks, and the board
of directors of the Company on a consolidated basis, meet to review the adequacy
of the allowance for loan losses. The Company maintains an internal loan review
function, which reviews commercial and consumer credits with the individual loan
officers and assigns a risk rating grade. The grading system is in compliance
with regulatory classifications, and the allowance is allocated to the loans
based upon regulatory grading, except in instances where there are known
differences (i.e. collateral value is minimal, etc.). Once the specific portion
of the allocation is calculated, management then calculates a percentage of each
category based upon the past five years of loan loss history. The unallocated
portion of the allowance is determined based upon current economic conditions,
trends in the portfolio, including delinquencies and impairments, as well as
changes in the composition of the portfolio.
The allowance for loan losses as a percentage of total loans was 1.16% as of
September 30, 1999 and 1.26% as of December 31, 1998. In management's judgment,
an adequate allowance for loan losses has been established.
Nonaccrual and Non-performing Loans
Nonaccrual loans increased to $2.3 million as of September 30, 1999 from $2.2
million as of December 31, 1998. Most of the nonaccrual loans are related to
several commercial loans which are being addressed by specific workout plans at
this time.
Non-performing loans include nonaccrual loans and accruing loans which are
ninety days or more delinquent. Typically, these loans have adequate collateral
protection or personal guaranties to provide a source of repayment to the bank.
Non-performing loans were $4.8 million as of September 30, 1999 compared to $4.7
million at December 31, 1998 and $4.2 million at September 30, 1998.
Non-performing loans were .78%, .90%, and .83% of total loans as of September
30, 1999, December 31, 1998 and September 30, 1998, respectively. Non-performing
loans were .40%, .44%, and .40% of total assets as of September 30, 1999,
December 31, 1998 and September 30, 1998, respectively.
The increase in the amount of non-performing loans was primarily due to several
specific credits which continue to make partial payments or are in the process
of loan workout or collection litigation.
Other real estate owned was $2.1 million and $1.2 million at September 30, 1999
and December 31, 1998, respectively. Other real estate owned was .17% and .12%
of total assets as of September 30, 1999 and December 31, 1998, respectively.
14
<PAGE> 15
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (continued)
Securities
Securities are classified as available-for-sale if they may be sold as part of
the Company's asset/liability management strategy in response to changes in
interest rates, liquidity needs, or significant prepayment risk. Securities
available-for-sale are carried at fair value, with related unrealized net gains
or losses, net of deferred income taxes, reported in accumulated other
comprehensive income. As of September 30, 1999, net unrealized losses on
securities available- for-sale were $8.3 million compared to $522,000 at
December 31, 1998. The increase in net unrealized losses on securities
available-for-sale resulted in a $7.8 million decrease in equity.
Securities available-for-sale increased 5.2% to $482.3 million as of September
30, 1999, from $458.3 million as of December 31, 1998. U.S. Treasury and agency
securities remained unchanged at $1.9 million as of September 30, 1999 and
December 31, 1998. U.S. government agency mortgage-backed securities and
collateralized mortgage obligations increased 5.0% or $21.7 million from $438.8
million as of December 31, 1998 to $460.5 million as of September 30, 1999.
Equity securities were $12.3 million or 2.39% of securities at September 30,
1999. Equity securities were primarily Federal Home Loan Bank and Federal
Reserve Bank stock as of September 30, 1999.
Securities held-to-maturity increased $5.8 million or 24.6% from December 31,
1998. The securities were municipal bonds issued primarily by governmental
agencies within the communities served by the Company and its subsidiary banks.
No trading account securities were outstanding at September 30, 1999 or December
31, 1998.
Deposits and Borrowed Funds
Total deposits of $946.5 million as of September 30, 1999 represented an
increase of $77.4 million or 8.9% from $869.1 million as of December 31, 1998.
Non-interest-bearing deposits were $106.7 million as of September 30, 1999,
approximately $7.9 million lower than the $114.6 million in non-interest-bearing
deposits as of December 31, 1998. Over the same period, interest-bearing
deposits increased 11.3% or $85.3 million. The higher level of interest-bearing
deposits included an increase of $50.3 million in NOW and money market accounts
and a $40.8 million increase in public funds (primarily State of Illinois
deposits). These increases were offset partially by a $10.5 million decrease in
certificates of deposit as part of a management strategy to lower overall
funding costs. As a result, interest bearing transactional accounts and public
funds have increased their respective percentages of the overall deposit mix at
September 30, 1999 compared to December 31, 1998.
The Company's membership in the Federal Home Loan Bank System gives it the
ability to borrow funds from the Federal Home Loan Bank of Chicago for short or
long-term purposes under a variety of programs. The loans were used to fund
growth and permit the bank subsidiaries to extend term maturities, reduce
funding costs and manage interest rate risk exposures more effectively.
15
<PAGE> 16
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (continued)
Deposits and Borrowed Funds (continued)
Federal Home Loan Bank advances were $157 million and $101 million at September
30, 1999 and December 31, 1998, respectively. The weighted average rate for
Federal Home Loan Bank advances was 5.07% during the nine months ended September
30, 1999 with a range of maturities between one and ten years. This rate
compares favorably to our average 1999 rate of 5.30% for certificates of deposit
under $100,000.
Borrowed funds at September 30, 1999 and December 31, 1998 are listed below:
(In thousands) 1999 1998
- ------------- ---------- ---------
Federal Home Loan Bank (FHLB)
advances to bank subsidiaries $ 157,000 $ 101,000
Revolving line of credit
to Midwest Banc Holdings, Inc. 7,500 4,000
($20,000,000 available)
Revolving warehouse line of credit
to Midwest One Mortgage Services - 2,500
($5,000,000 available until September 15, 1999)
Mortgage payable 75 150
Note issued to acquire Porter Insurance Agency, Inc. 150 150
---------- ---------
Total notes payable $ 164,725 $ 107,800
========== =========
The Company also utilizes securities sold under repurchase agreements as a
source of funds. Most local municipalities, and some other organizations, must
have funds insured or collateralized as a matter of their own policies.
Repurchase agreements provide a source of funds and do not increase the
Company's reserve requirement. Although the balance of repurchase agreements is
subject to variation, particularly seasonal variation, the account relationships
represented by these balances are principally local and have been maintained for
relatively long periods of time.
Capital Resources
Stockholders' equity decreased $7.6 million or 9.8% from $77.6 million at
December 31, 1998 to $70.0 million at September 30, 1999. Year-to-date earnings
for 1999 were largely offset by dividends and amounts used to repurchase
outstanding common stock. In addition, the Company recorded a $7.8 million
decrease in accumulated other comprehensive income.
16
<PAGE> 17
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (continued)
Capital Resources (continued)
Under previously announced plans, the Company repurchased 75,950 shares of
common stock during the third quarter and 352,346 year-to-date in 1999 at
prevailing market prices. The weighted average purchase price was $16.73 for
stock repurchases year-to-date in 1999. The amount of shares repurchased
represents more than 78% of the authorized buy back amount of 450,000 shares
during 1999. The amount repurchased was approximately $5.9 million and
represented less than 8.0% of the total dollar amount of equity at December 31,
1998.
The Company and its four subsidiary banks (the "Banks") are subject to
regulatory capital requirements administered by federal banking agencies.
Capital adequacy guidelines and prompt corrective action regulations involve
quantitative measures of assets, liabilities, and certain off-balance-sheet
items calculated under regulatory accounting practices. Capital amounts and
classifications are also subject to qualitative judgments by regulators about
components, risk weightings, and other factors, and the regulators can lower
classifications in certain areas. Failure to meet various capital requirements
may result in regulatory action that could have a direct material effect on the
financial statements.
The prompt corrective action regulations provide five classifications, including
well capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized, and critically undercapitalized, although these terms are not
used to represent overall financial condition. If adequately capitalized,
regulatory approval is required to accept brokered deposits. If
undercapitalized, capital distributions are limited, as is asset growth and
expansion, and plans for capital restoration are required.
The Company and the Banks were categorized as well capitalized as of September
30, 1999. Management is not aware of any conditions or events since the most
recent regulatory notification that would change the Company's or the Banks'
categories.
17
<PAGE> 18
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (continued)
Capital Resources (continued)
Capital levels and minimum required levels (dollars in thousands):
<TABLE>
<CAPTION>
Minimum Required
Minimum Required to be Well
Actual For Capital Adequacy Capitalized
---------------------- ---------------------- ----------------------
As of September 30, 1999 (in thousands) Amount Ratio Amount Ratio Amount Ratio
- ---------------------------------------------------------- -------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Total capital to risk weighted assets
Company $ 82,996 12.5% $ 53,105 8.0% $ 66,381 10.0%
Midwest Bank and Trust Company 40,270 12.7% 25,347 8.0% 31,684 10.0%
Midwest Bank 16,922 12.0% 11,283 8.0% 14,104 10.0%
Midwest Bank of McHenry County 16,882 14.6% 9,238 8.0% 11,548 10.0%
Midwest Bank of Western Illinois 12,389 14.4% 6,891 8.0% 8,614 10.0%
Tier I capital to risk weighted assets
Company 75,831 11.4% 26,552 4.0% 39,829 6.0%
Midwest Bank and Trust Company 36,730 11.6% 12,673 4.0% 19,010 6.0%
Midwest Bank 15,538 11.0% 5,641 4.0% 8,462 6.0%
Midwest Bank of McHenry County 15,605 13.5% 4,619 4.0% 6,929 6.0%
Midwest Bank of Western Illinois 11,424 13.3% 3,446 4.0% 5,168 6.0%
Tier I capital to average assets
Company 75,831 6.4% 47,068 4.0% 58,835 5.0%
Midwest Bank and Trust Company 36,730 6.7% 21,938 4.0% 27,422 5.0%
Midwest Bank 15,538 6.6% 9,372 4.0% 11,715 5.0%
Midwest Bank of McHenry County 15,605 6.8% 9,240 4.0% 11,550 5.0%
Midwest Bank of Western Illinois 11,424 7.2% 6,368 4.0% 7,960 5.0%
<CAPTION>
Minimum Required
Minimum Required to be Well
Actual For Capital Adequacy Capitalized
---------------------- ---------------------- ----------------------
As of December 31, 1998 (in thousands) Amount Ratio Amount Ratio Amount Ratio
- ---------------------------------------------------------- -------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Total capital to risk weighted assets
Company $ 82,573 14.6% $ 45,129 8.0% $ 56,411 10.0%
Midwest Bank and Trust Company 38,448 14.7% 20,968 8.0% 26,210 10.0%
Midwest Bank 15,981 13.3% 9,587 8.0% 11,984 10.0%
Midwest Bank of McHenry County 15,178 15.6% 7,797 8.0% 9,746 10.0%
Midwest Bank of Western Illinois 11,047 14.0% 6,310 8.0% 7,888 10.0%
Tier I capital to risk weighted assets
Company 75,997 13.5% $ 22,565 4.0% $ 33,846 6.0%
Midwest Bank and Trust Company 35,322 13.5% 10,484 4.0% 15,726 6.0%
Midwest Bank 14,610 12.2% 4,794 4.0% 7,191 6.0%
Midwest Bank of McHenry County 13,995 14.4% 3,898 4.0% 5,848 6.0%
Midwest Bank of Western Illinois 10,151 12.9% 3,155 4.0% 4,733 6.0%
Tier I capital to average assets
Company 75,997 7.1% $ 42,686 4.0% $ 53,358 5.0%
Midwest Bank and Trust Company 35,322 7.1% 19,924 4.0% 24,906 5.0%
Midwest Bank 14,610 7.1% 8,288 4.0% 10,360 5.0%
Midwest Bank of McHenry County 13,995 6.8% 8,213 4.0% 10,266 5.0%
Midwest Bank of Western Illinois 10,151 6.8% 6,009 4.0% 7,512 5.0%
</TABLE>
18
<PAGE> 19
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (continued)
Liquidity
Liquidity measures the ability of the Company to meet maturing obligations and
its existing commitments, to withstand fluctuations in deposit levels, to fund
its operations and to provide for customers' credit needs. The liquidity of the
Company principally depends on cash flows from operating activities, investment
in and maturity of assets, changes in balances of deposits and borrowings, and
its ability to borrow funds in the money or capital markets.
Net cash inflows provided by operations were $15.3 million for the nine months
ended September 30, 1999 compared to $18.4 million a year earlier. Net cash
outflows from investing activities were $145.6 million in the first nine months
of 1999 compared to a net cash outflow of $147.4 million a year earlier. Cash
inflows from financing activities for the nine months ended September 30, 1999
were $129.3 million compared to a net inflow of $122.4 million in 1998.
In the event of short-term liquidity needs, the Banks may purchase federal funds
from correspondent banks. In addition, the Company has established repurchase
agreements and brokered certificates of deposit arrangements with various
financial sources. The Company's membership in the Federal Home Loan Bank System
gives it the ability to borrow funds from the Federal Home Loan Bank of Chicago
for short or long-term purposes under a variety of programs.
Interest received net of interest paid was a principal source of operating cash
inflows for the three months ended September 30, 1999 and September 30, 1998,
respectively. Management of investing and financing activities and market
conditions determine the level and the stability of net interest cash flows.
Management's policy is to mitigate the impact of changes in market interest
rates to the extent possible so that balance sheet growth is the principal
determinant of growth in net interest cash flows.
YEAR 2000 COMPLIANCE
Company's State of Readiness
The Company has conducted a comprehensive review of its computer systems for
"Year 2000" issues, and has developed an implementation plan to identify and
resolve potential problems in compliance with Federal Reserve Bank guidelines.
The Company has completed the testing required for Year 2000 compatibility and
believes its systems and software are prepared to address any reasonable
contingencies and risks without any material disruption in its business or
service.
19
<PAGE> 20
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (continued)
YEAR 2000 COMPLIANCE (continued)
A Project Coordinator, who is a Vice President of the Company, has been assigned
the responsibility of coordinating the Year 2000 effort throughout the Company.
The Project Coordinator is a Director of First Midwest Data Corp. and,
therefore, familiar with issues of system, vendor and customer risks relating to
Year 2000 compatibility. The Company's Information Services Officer assists the
Project Coordinator and is responsible for all network and personal computer
connections and software use within the Company.
In addition, the Company formed a Year 2000 Committee consisting of senior bank
officers and other knowledgeable bank personnel. The President of First Midwest
Data Corp. is a member of the Committee and lends significant data processing
experience to the project. The Project Coordinator is designated the Year 2000
Committee Coordinator.
The Company's implementation plan involves procedures and tests to reduce Year
2000 risks to and by customers, equipment, vendors and the providers of computer
hardware and software services. The Company identified mission critical vendors
who have provided the Company with the results of their own tests for Year 2000
compliance and the Company is satisfied with the results to date. The Company
performed an analysis of all inventory purchased and made visual inspections of
its buildings, contents and equipment. Testing plans were developed and
completed to measure the compatibility of all Year 2000 related equipment and
software. In addition, the Company reviews all contracts for the purchase of new
chip-related or date-related equipment or software, and all purchases are
required to bear Year 2000 compatibility confirmations.
The Company owns two in-house computer systems. The manufacturers of the
hardware and software used by the Company have also performed extensive Year
2000 testing and found their systems to be Year 2000 compatible. A proxy test
performed by a thirteen financial institution consortium--each organization
being a client of the software provider to the Company --was completed prior to
year-end 1998. The test results indicated there were no significant Year 2000
problems. In addition, the Company has run its own tests to determine
compatibility. The Company found no Year 2000 deficiencies in its tests. The
Company has completed impact analyses of potential adverse Year 2000 situations
and will continue to assess any exposures which become apparent between now and
the end of 1999.
In addition, the Company uses personal computers at its local offices, connected
through networks, to maintain critical systems. Each of the banking centers,
therefore, is considered mission critical. The computers use stand-alone vendor
products or service providers to provide information and customer service
software.
20
<PAGE> 21
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (continued)
YEAR 2000 COMPLIANCE (continued)
The Company has determined that it relies on seventy-eight mission critical
applications or systems. This also includes the Company's reliance on vendors or
products produced by others. The Company has control over thirty-three of these
systems, and third parties provide forty-five. All thirty-three of the
controlled mission critical systems have been tested with successful Year 2000
results. The Company is in regular contact with providers, and each is providing
the Company with status updates and new information as it becomes available.
The Company also completes daily, monthly, quarterly and annual backups of its
data processing systems. These records are maintained offsite and are readily
accessible if needed. In addition, the Company and its banks produce all account
records on a daily basis in a secondary method which includes copying all
customer transaction data to CD. As a result, customer financial records can be
recovered regardless of any disruptions to data processing.
The Company has been examined by the Federal Reserve Bank and the Illinois
Office of Banks and Real Estate through Phase I, II and III examinations. The
Company's efforts were considered adequate in those examinations.
Risks Posed by Year 2000 Issues
Based upon responses from vendors, the Company's own testing and independent
appraisals conducted on behalf of the Company and selected equipment and
software suppliers, the Company believes its systems are, or will be, fully
compliant before the end of 1999. The Company maintains continuing contact with
its equipment and software vendors on Year 2000 issues and does not anticipate
significant problems at this time.
Nevertheless, the Company recognizes the potential risks posed by Year 2000
issues, and there can be no assurance that the Company will not be significantly
affected by Year 2000 issues. These risks include, without limitation,
disruption to customer service caused by computer and system interruptions,
failure to comply with federal and state regulations, and an inability to
collect and service outstanding loans due to customers' failure to address Year
2000 issues. The Company remains alert to any potential Year 2000 problems
created by customers and has been obtaining information and data from customers
to assess potential exposures. To date, responses from customers have not
indicated significant Year 2000 issues to be resolved. Potential losses created
by cash flow problems of existing borrowers due to Year 2000 issues cannot be
quantified at this time with any meaningful degree of accuracy. As a result, the
Banks have not provided any additional amounts to the Allowance for Loan Losses
to cover Year 2000 related repayment risks at this time.
21
<PAGE> 22
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (continued)
YEAR 2000 COMPLIANCE (continued)
The Company and its subsidiary banks have also reviewed their funding sources
and developed strategies to address any potential increased demand for funds by
borrowers or depositors at the end of 1999 and early 2000. These strategies
provide options to meet customer requirements and establish a diversified
network of funding sources.
Events over which the Company has no control, such as sources of electrical and
gas power or loss of telephone communications, may result in a disruption of
service to customers. These potential events have been reviewed, and short-term
contingency plans have been developed to address situations in which there is a
widespread loss of these vital utility services. In such circumstances, the
Banks' plans provide for limited business services until such vital utility
services resume and are fully restored.
The impact of Year 2000 problems could be significant. The inability to process,
reconcile and report customer account information could create concern for the
safety and security of customer deposits. However, customer funds eligible for
FDIC insurance will continue to be insured against loss regardless of any Year
2000 disruption.
Contingency Plans and Costs
The Company has created, distributed and tested contingency plans for situations
where customer service may be inhibited by sources beyond its control. These
contingency plans provide alternatives for processing customer transactions,
liquidity and business continuation in case of a major disruption caused by Year
2000 issues. The plans provide all Company subsidiaries with information that
will be necessary to maintain service of customers during such circumstances.
Updates and responses to additional situations will be covered in these plans as
appropriate and consistent with regulatory guidelines.
The current contingency plans provide instructions for the operation of bank
offices with manual record keeping and transaction processing in the event of
power loss or interruption of telecommunications. Liquidity planning and funds
management is also included in the contingency plans. Each Bank has approved a
disaster recovery plan in the event of significant events which may inhibit
normal banking operations. The Company's data processing operation utilizes a
natural gas backup generator to provide power if electrical service is
disrupted. Emergency backup generator capacity is also available at the primary
banking center of the Company's flagship bank. The backup capacity and
generators have been tested in real-time situations and found to be reliable.
The Company has incurred internal and external expenditures of approximately
$270,000 in addressing Year 2000 issues through September 30, 1999. This cost
does not include internal salary and employee benefit costs for individuals that
have responsibilities or are involved with the Year 2000 project. The Company is
planning additional expenditures, including upgrades in teller equipment, which
will increase total Year 2000 expenditures to approximately $320,000.
22
<PAGE> 23
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (continued)
YEAR 2000 COMPLIANCE (continued)
Management does not believe these expenditures are or will be material in nature
or have a material impact on the Company's operations.
The estimated costs are based upon management's best estimates and include
assumptions of future events, availability of specific resources, third party,
vendor or customer modification plans and other factors. However, there can be
no guarantee that current estimates will be realized, and actual results may
differ significantly from these estimates.
23
<PAGE> 24
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
Interest Rate Sensitivity Analysis
The Company's overall interest rate sensitivity is demonstrated by net interest
income analysis. Net interest income analysis measures the change in net
interest income in the event of hypothetical changes in interest rates. This
analysis assesses the risk of change in net interest income in the event of
sudden and sustained 1.0% to 2.0% increases and decreases in market interest
rates. The table below presents the Company's projected changes in net interest
income for the various rate shock levels at September 30, 1999.
Net Interest Income
-------------------
(Dollars in thousands) Amount $ Change % Change
------ -------- --------
-200 bp $ 40,707 16 0.04
-100 bp 40,820 129 0.32
Base 40,691 --- ---
+100 bp 40,534 (157) (0.39)
+200 bp 40,169 (522) (1.28)
As shown above, at September 30, 1999, the effect of an immediate 200 basis
point increase in interest rates would decrease the Company's net interest
income by 1.28% or $522,000. The effect of an immediate 200 basis point
reduction in rates would increase the Company's net interest income by 0.04% or
$16,000.
The projected changes in the Company's net interest income for the various rate
shock levels at September 30, 1998 were the following:
Net Interest Income
-------------------
(Dollars in thousands) Amount $ Change % Change
------ -------- --------
-200 bp $ 33,021 (2,922) (8.13)
-100 bp 34,030 (1,913) (5.32)
Base 35,943 --- ---
+100 bp 36,204 261 0.73
+200 bp 35,823 (120) (0.33)
The asset liability mix of earning assets and interest-bearing liabilities has
changed during the past twelve months due to overall growth and repositioning of
the investment securities portfolio. Changes in interest rates, a restructuring
of the investment securities portfolio, and an increased percentage of variable
rate deposits combined to reduce rate sensitivity as of September 30, 1999
compared to September 30, 1998, if there is a decline in interest rates.
24
<PAGE> 25
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK (continued)
Interest Rate Sensitivity Analysis (continued)
Computations of the prospective effects of hypothetical interest rate changes
are based on numerous assumptions, including relative levels of market interest
rates, loan prepayments and deposit decay rates, and should not be relied upon
as indicative of actual results. Actual values may differ from those projections
set forth above, should market conditions vary from assumptions used in
preparing the analyses. Further, the computations do not contemplate any actions
the Company may undertake in response to changes in interest rates.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995
This report contains certain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. The Company intends such
forward-looking statements to be covered by the safe harbor provisions for
forward-looking statements contained in the Private Securities Reform Act of
1995, and is including this statement for purposes of these safe harbor
provisions. Forward-looking statements, which are based on certain assumptions
and describe future plans, strategies, and expectations of the Company, are
generally identifiable by use of the words "believe," "expect," "intend,"
"anticipate," "estimate," "project," or similar expressions. The Company's
ability to predict results or the actual effect of future plans or strategies is
inherently uncertain. Factors which could have a material adverse affect on the
operations and future prospects of the Company and its subsidiaries include, but
are not limited to, changes in interest rates; general economic conditions;
legislative/regulatory changes; monetary and fiscal policies of the U.S.
government, including policies of the U.S. Treasury and the Federal Reserve
Board; the quality or composition of the loan or investment portfolios; demand
for loan products; deposit flows; competition; demand for financial services in
the Company's market area; the effectiveness of the Company's compliance review
and implementation plan to identify and resolve Year 2000 issues; and accounting
principles, policies, and guidelines. These risks and uncertainties should be
considered in evaluating forward-looking statements and undue reliance should
not be placed on such statements. Further information concerning the Company and
its business, including additional factors that could materially affect the
Company's financial results, is included in the Company's filings with the
Securities and Exchange Commission.
25
<PAGE> 26
PART II
MIDWEST BANC HOLDINGS, INC.
Item 1. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Company
or its subsidiaries are a party other than ordinary routine
litigation incidental to their respective businesses.
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
Item 3. DEFAULTS UPON SENIOR SECURITIES
None
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
Item 5. OTHER INFORMATION
None
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 27 Financial Data Schedule
(b) Filings on Form 8-K
None
26
<PAGE> 27
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MIDWEST BANC HOLDINGS, INC.
(Registrant)
By: /s/ Robert L. Woods
-------------------------------
Robert L. Woods,
President and
Chief Executive Officer
By: /s/ Edward H. Sibbald
-------------------------------
Edward H. Sibbald,
Executive Vice President and
Chief Financial Officer
Date: November 12, 1999
27
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 32,273
<INT-BEARING-DEPOSITS> 1,923
<FED-FUNDS-SOLD> 5,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 482,280
<INVESTMENTS-CARRYING> 511,682
<INVESTMENTS-MARKET> 511,117
<LOANS> 617,235
<ALLOWANCE> (7,165)
<TOTAL-ASSETS> 1,202,214
<DEPOSITS> 946,530
<SHORT-TERM> 13,819
<LIABILITIES-OTHER> 7,101
<LONG-TERM> 164,725
0
0
<COMMON> 114
<OTHER-SE> 69,925
<TOTAL-LIABILITIES-AND-EQUITY> 1,202,214
<INTEREST-LOAN> 37,617
<INTEREST-INVEST> 22,845
<INTEREST-OTHER> 259
<INTEREST-TOTAL> 26,954
<INTEREST-DEPOSIT> 31,967
<INTEREST-EXPENSE> 28,754
<INTEREST-INCOME-NET> 1,518
<LOAN-LOSSES> 4,793
<SECURITIES-GAINS> 354
<EXPENSE-OTHER> 19,110
<INCOME-PRETAX> 13,273
<INCOME-PRE-EXTRAORDINARY> 13,273
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,537
<EPS-BASIC> $0.77
<EPS-DILUTED> $0.77
<YIELD-ACTUAL> 3.67
<LOANS-NON> 2,343
<LOANS-PAST> 2,497
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 6,576
<CHARGE-OFFS> 1,095
<RECOVERIES> 168
<ALLOWANCE-CLOSE> 7,165
<ALLOWANCE-DOMESTIC> 7,165
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
