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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-29598
MIDWEST BANC HOLDINGS, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 36-3252484
(State of Incorporation) (I.R.S. Employer Identification Number)
501 WEST NORTH AVENUE,
MELROSE PARK, ILLINOIS
60160
(Address of principal executive offices including ZIP Code)
(708) 865-1053
(Registrant's telephone number including Area Code)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $0.01 PAR VALUE
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by Reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of March 17, 2000, the aggregate market value of the registrant's common
stock held by nonaffiliates of the registrant was approximately $89,428,560
based upon the price of the last sale on that date.(1)
As of March 17, 2000, the number of shares outstanding of the registrant's
common stock, par value $0.01 per share, was 10,777,392.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's Proxy Statement for the 2000 Annual Meeting of
Stockholders are incorporated by reference into Part III.
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1 Based upon the closing price of the registrant's common stock on March 17,
2000, and reports of beneficial ownership filed by directors and executive
officers of registrant and by beneficial owners of more than 5% of the
outstanding shares of common stock of the registrant. However, such
determination of shares owned by affiliates does not constitute an admission
of affiliate status or beneficial interest in shares of registrant's common
stock.
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MIDWEST BANC HOLDINGS, INC.
FORM 10-K
INDEX
PAGE NO.
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PART I
Item 1. Business 1
Item 2. Properties 16
Item 3. Legal Proceedings 17
Item 4. Submission of Matters to a Vote of Security Holders 17
PART II
Item 5. Market for the Registrant's Common Equity and Related Security Holder Matters 18
Item 6. Selected Consolidated Financial Data 19
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 20
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 39
Item 8. Consolidated Financial Statements and Supplementary Data 39
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 39
PART III
Item 10. Directors and Executive Officers of the Registrant 40
Item 11. Executive Compensation 40
Item 12. Security Ownership of Certain Beneficial Owners and Management 40
Item 13. Certain Relationships and Related Transactions 40
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 40
Signature(s) Page 42
Index to Consolidated Financial Statements F-1
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PART I
ITEM 1. BUSINESS
THE COMPANY
The Company is a community-based bank holding company headquartered in
Melrose Park, Illinois. The Company provides a wide range of services, including
traditional banking services, personal and corporate trust services, residential
mortgage services, insurance brokerage and retail 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 Midwest Bank of Western Illinois (collectively, the "Banks"). Each
of the Banks is chartered as an Illinois state bank. In addition, two of the
Banks have nonbank subsidiaries that provide insurance and investment brokerage
services, and the Company has one nonbank subsidiary that provides data
processing services.
The Banks are community-oriented, full-service commercial banks,
providing traditional banking services to individuals, small-to-medium-sized
businesses, government and public entities and not-for-profit organizations. The
Banks operate out of 16 locations with eleven banking centers in the greater
Chicago metropolitan area and five banking centers in Western Illinois. Porter
Insurance Agency, Inc., a subsidiary of Midwest Bank of Western Illinois, acts
as an insurance agency for individuals and corporations. Midwest One Financial
Services, L.L.C., a limited liability company controlled by Midwest Bank of
McHenry County, offers insurance services and retail brokerage activities within
McHenry County. First Midwest Data Corp., a subsidiary of the Company, provides
data processing services to the Company and all subsidiaries except Midwest Bank
of Western Illinois and Porter Insurance Agency, Inc.
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 is a Delaware corporation. The Company was founded in 1983
as a bank holding company under the Bank Holding Company Act of 1956, as
amended, for Midwest Bank and Trust Company.
Certain information with respect to the Banks and the Company's nonbank
consolidated subsidiaries as of December 31, 1999, is set forth below:
NUMBER OF BANKING
COMPANY SUBSIDIARIES HEADQUARTERS MARKET AREA CENTERS OR OFFICES
- -------------------- ------------ ----------- ------------------
Banks:
Midwest Bank and Trust Company Elmwood Park, IL Chicago, Elmwood Park, 5
Melrose Park, Oak Park,
River Forest, Forest
Park, Franklin Park,
River Grove, and Maywood
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NUMBER OF BANKING
COMPANY SUBSIDIARIES HEADQUARTERS MARKET AREA CENTERS OR OFFICES
- -------------------- ------------ ----------- ------------------
Midwest Bank Hinsdale, IL Hinsdale, Downers Grove, 2
Burr Ridge, Westmont, Oak
Brook, and Clarendon Hills
Midwest Bank of McHenry County Union, IL Union, Algonquin, 4
Marengo, Crystal Lake,
East Dundee, McHenry,
Lake in the Hills,
Huntley, Island Lake,
Wauconda, and
Carpentersville
Midwest Bank of Western Illinois Monmouth, IL Monmouth, Galesburg, 5
Oquawka, Kirkwood,
and Aledo
Nonbanks:
Porter Insurance Agency, Inc. Alexis, IL Western Illinois 2
Midwest One Financial Services, L.L.C. Algonquin, IL McHenry County 2
First Midwest Data Corp Melrose Park, IL * 1
* Performs data processing services for the Company, all of the Banks, except
Midwest Bank of Western Illinois, and all of the nonbank subsidiaries,
except Porter Insurance Agency, Inc.
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 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. In 1987, this location and surrounding acreage were developed
into Midwest Centre, 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.
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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 changed its name to Midwest Bank of Union in 1991. 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. New banking centers were opened in Island Lake in 1998 and McHenry
in 1999.
The Company established 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, Illinois which has been expanded into a
full-service banking center. A third banking center in Roselle, Illinois opened
in February 2000.
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. In 1998, The National Bank of Monmouth converted from a
national bank to an Illinois state chartered bank and changed its name to
Midwest Bank of Western Illinois. On December 18, 1999, Midwest Bank of Western
Illinois acquired the deposits and fixed assets of the Aledo Banking Center of
Associated Bank-Illinois. Midwest Bank of Western Illinois currently has a
network of five banking centers in Monmouth, Galesburg, Oquawka, Kirkwood, and
Aledo.
Nonbank Subsidiaries
The Company's nonbank subsidiaries were created 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 all of the Banks except Midwest Bank of Western Illinois,
including processing of demand deposits, savings accounts, time deposits, loans
and general ledgers, and managing telephone banking and on-line computer
services for retail and commercial customers. Midwest Bank of Western Illinois
and Porter Insurance Agency, Inc. provide their own data processing services.
Midwest Trust Services, Inc. was a full-service Illinois trust company
offering land trusts, personal trusts, custody accounts, retirement plan
services, and corporate trust services. Effective February 1999, Midwest Trust
Services, Inc. sold certain trusts representing certain lines of trust business,
including personal trusts, individual retirement accounts and life insurance
trusts, to a third party. Subsequently, Midwest Trust Services, Inc. was
dissolved during the fourth quarter of 1999 and existing trust operations became
a department of Midwest Bank and Trust Company.
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. were
generally sold with servicing rights released to a large, diversified group of
qualified secondary market investors. The Company transferred ownership of
Midwest One Mortgage Services, Inc. to Midwest Bank as a capital contribution in
1997. Subsequently, Midwest One Mortgage Services, Inc. was dissolved in
September 1999 with mortgage origination marketing activities transferred to
each of the Banks.
Porter Insurance Agency, Inc. was acquired by Midwest Bank of Western
Illinois in 1998 to provide insurance services to customers of the bank. This
subsidiary also maintains an independent customer base that represents more than
90% of its current premiums and commissions.
Midwest One Financial Services, L.L.C. began operations in January 1999
as a joint venture between Midwest Bank of McHenry County and First Midwest
Financial Group, Inc. (subsequently acquired by the Greater Chicago Group, Inc.)
to provide insurance services and products within McHenry County. In addition,
Midwest One Financial Services, L.L.C. provides retail securities brokerage
services. Midwest Bank of McHenry County owns 51% of Midwest One Financial
Services, L.L.C. and serves as its managing member.
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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 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 year ended December 31, 1999.
TOTAL TOTAL NET
(IN THOUSANDS) ASSETS EQUITY INCOME
-------------- ------ ------ ------
Midwest Bank and Trust Company(1) $555,677 $ 32,716 $ 7,340
Midwest Bank(2) 256,791 13,770 2,577
Midwest Bank of McHenry County(3) 252,213 13,600 2,254
Midwest Bank of Western Illinois(4) 187,315 12,084 1,351
(1) Does not include net income for Midwest Trust Services, Inc.
(2) Does not include net income for Midwest One Mortgage Services, Inc.
(3) Does not include net income of Midwest One Financial Services, L.L.C.
(4) Does not include net income of Porter Insurance Agency, Inc.
The Banks accounted for nearly 99.0% of assets and virtually all the
net income of the Company as of and for the years ended 1999, 1998, and 1997.
MARKETS
The Banks operate in broadly diverse markets, with varying levels and
growth rates of economic development and activity. Population trends, geographic
density, and the demographic mix vary by market. 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 11 full-service locations in the Chicago metropolitan area and out of
five offices in West Central Illinois. Accordingly, the Company's business
extends throughout the Chicago metropolitan area and Western Illinois, but is
highly concentrated in the areas in which the Banks' offices are located. The
communities in which the Banks' 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.
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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, develop its insurance and retail brokerage
activities, and expand into other financial services. The Company's strategy
includes the following objectives: (i) maintain high levels of customer service
through a decentralized operating structure; (ii) increase market share within
existing markets and expand into new markets; (iii) enhance cross-selling of
value-added products and services; (iv) maintain a leadership position in
product development and marketing; (v) increase the revenue base of nonbank
financial services subsidiaries; (vi) increase existing loan-to-deposit ratios
of the Banks; and (vii) expand funding sources for liquidity and interest rate
risk management. Management believes that these strategies, which are subject to
change at any time based upon market conditions, 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 and 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 specific 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 permits interest rate
adjustments at the customer's option, the Customer Choice CD, which has limited
or reduced prepayment penalties, and the ADDvantage CD where customers can add
additional amounts to an existing certificate at any time prior to maturity.
Lending Services
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 installment 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 focused 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
collateral.
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 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 consists of 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
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only a small portion tied to livestock. Midwest Bank of Western Illinois 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,
most 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 medium-term fixed-rate loans. See "Management's
Discussion and Analysis of Financial Condition and Results of Operation."
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.
ATMs
The Banks maintain a network of 23 ATM sites generally located within
the Banks' local markets. All ATM equipment is owned by the Banks. Fourteen of
the ATM sites are located at various banking centers, and nine are maintained
off-site at hotels, supermarkets and schools.
Trust Activities
Midwest Trust Services, Inc. was, until December 1999, a full-service
Illinois trust company subsidiary of Midwest Bank and Trust Company offering
land trusts, personal trusts, custody accounts, retirement plan services, and
corporate trust services. Effective February 1999, Midwest Trust Services, Inc.
and Midwest Bank and Trust Company sold certain trusts representing certain
lines of trust business, including personal trusts, individual retirement
accounts and life insurance trusts, to a third party. Subsequently, Midwest
Trust Services, Inc. was dissolved during the fourth quarter of 1999 and
remaining trust operations were transferred to the Trust Department of Midwest
Bank and Trust Company.
As of December 31, 1999, the Trust Department of Midwest Bank and Trust
Company maintained relationships representing an aggregate market value of
$155.5 million in assets with an aggregate book value of $147.0 million. In
addition, the Trust Department of Midwest Bank and Trust Company administered
2,068 land trust accounts as of December 31, 1999.
Midwest Bank of Western Illinois also provides trust services to its
customers and maintained trust accounts with an aggregate market value of $56.5
million and an aggregate book value of $41.0 million as of December 31, 1999.
Insurance Services
Porter Insurance Agency, Inc. is a full line independent insurance
agency acquired by Midwest Bank of Western Illinois in 1998. Concentrating in
agricultural-related insurance products, Porter Insurance Agency, Inc. is one of
the largest writers of crop hail insurance in Western Illinois. In addition, the
mix of services includes individual health care contracts, homeowners'
insurance, as well as commercial and retail automobile insurance for
individuals, new car dealerships and commercial trucking fleets.
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Securities Brokerage
Securities brokerage services are provided through arrangements with
three independent regional brokerage firms. Licensed brokers are located at four
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, Porter Insurance Agency, Inc. and Midwest One Financial Services, L.L.C.
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, insurance companies and agencies,
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 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 Banks compete for deposits
principally by offering depositors a variety of deposit programs, convenient
office locations and 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.
EMPLOYEES
As of December 31, 1999, the Company and its subsidiaries had 285
full-time employees and 129 part-time employees, or 339 full-time equivalent
employees. Management considers its relationship with its employees to be good.
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SUPERVISION AND REGULATION
Bank holding companies and banks are extensively regulated under
federal and state law. References under this heading to applicable statutes or
regulations are brief summaries of portions thereof which do not purport to be
complete and which are qualified in their entirety by reference to those
statutes and regulations. Any change in applicable laws or regulations may have
a material adverse effect on the business of commercial banks and bank holding
companies, including the Company and the Banks. However, management is not aware
of any current recommendations by any regulatory authority which, if
implemented, would have or would be reasonably likely to have a material effect
on the liquidity, capital resources or operations of the Company or the Banks.
RECENT LEGISLATION
On November 12, 1999, the Gramm-Leach-Bliley Act (the "GLB Act") was
enacted. The GLB Act amended or repealed certain provisions of the
Glass-Steagall Act and other legislation that restricted the ability of bank
holding companies, securities firms and insurance companies from affiliating
with one another. Further, the GLB Act expanded the kinds of activities in which
bank holding companies may engage by allowing well managed and well capitalized
bank holding companies to be designated as "financial holding companies." In
addition, the GLB Act contains provisions intended to safeguard consumer
financial information in the hands of financial service providers by, among
other things, requiring such entities to disclose their privacy policies to
their customers and allowing customers to "opt out" of having their financial
service providers disclose their confidential financial information to third
parties, subject to certain exceptions. The federal regulatory agencies have not
as of this date issued final regulations under the GLB Act. However, it is not
anticipated that the GLB Act will have a material adverse effect on the
operations or prospects of the Company and its subsidiaries.
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 Financial
Services, L.L.C., Porter Insurance Agency, 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 data processing
operations of First Midwest Data Corp. Under the BHC Act, 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.
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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, 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, 1999, 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 12.2% and a Tier 1 capital to risk-weighted
assets ratio of 11.1% as of December 31, 1999.
BANK REGULATION
Under Illinois law, the Banks are subject to supervision and
examination by the Illinois Commissioner. Each of the Banks is a member of the
Federal Reserve System and as such is also subject to examination by the Federal
Reserve. The Federal Reserve also supervises compliance with the provisions of
federal law and regulations which place restrictions on loans by member banks to
their directors, executive officers, and other controlling persons. Each Bank is
also a member of the FHLB of Chicago and may be subject to examination by the
FHLB of Chicago. As affiliates of the Banks, the Company, Porter Insurance
Agency, Inc., and Midwest One Financial Services, L.L.C. are also subject to
examination by the Federal Reserve.
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.
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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FINANCIAL INSTITUTION REGULATION
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 a bank and an affiliate of such bank, as well
as the aggregate amount of transactions between a bank 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 the Banks 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.
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.
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,
relating generally to operations and management, asset growth, asset quality,
earnings, stock valuation, and compensation. The Federal Reserve 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,
the Federal Reserve adopted regulations that authorize, but do not require, the
Federal Reserve to order an institution that has been given notice by the
Federal Reserve 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
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 may seek to enforce such order in judicial proceedings and to impose
civil money penalties. The Federal Reserve and the other federal bank regulatory
agencies also adopted guidelines for asset quality and earnings standards.
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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, 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 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 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 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 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 a 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 amended the risk-based assessment system and on
December 11, 1995, adopted an assessment rate schedule for BIF-insured deposits.
The 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 1999, the Banks were assessed deposit insurance in the aggregate
amount of $102,548. 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, 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
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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 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 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. All of the Banks
have been examined under the revised CRA regulations.
Consumer Compliance. Each Bank has been examined for consumer
compliance during the past twelve months. The Federal Reserve has made Midwest
Bank of McHenry County aware of certain deficiencies in its consumer compliance
program as it relates to the accuracy of its past Home Mortgage Disclosure Act
("HMDA") filings and has presented a draft Memorandum of Understanding ("MOU")
to the bank. The directors of Midwest Bank of McHenry County have executed the
MOU and delivered it to the Federal Reserve. Consistent with the MOU, management
is working with the Federal Reserve to resolve the HMDA reporting deficiency in
an appropriate manner. In addition, management has retained regulatory
consultants to assess current practices and develop action plans to resolve
outstanding consumer compliance issues. While management believes it is
addressing this HMDA reporting problem appropriately, if management should fail
to do so 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.
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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.
While the State of Illinois has adopted legislation "opting in" to
interstate bank mergers, it did not allow out of state banks to enter the
Illinois market through de novo branching or through branch-only acquisitions.
Since many states ("host states") allow out of state banks to enter a host state
by de novo branching or branch-only acquisitions only if the banks of the host
state are afforded reciprocal treatment in the other state, the Banks have
limited opportunities to expand in other states except through whole bank or
bank holding company acquisitions. It is anticipated that this interstate merger
and branching ability will increase competition and further consolidate the
financial institutions industry.
In 1997, the State of Illinois enacted legislation allowing a state
bank to act as agent for any fire, life or other insurance company authorized to
do business in the State of Illinois. Similarly, the Illinois Insurance Code was
amended to allow a state bank to form a subsidiary for the purpose of becoming a
firm registered to sell insurance. Such sales of insurance by a state bank may
only take place through individuals who have been issued and maintain an
insurance producer's license pursuant to the Illinois Insurance Code.
State banks are prohibited from assuming or guaranteeing any premium on
an insurance policy issued through the bank. Moreover, state law expressly
prohibits tying the provision of any insurance product to the making of any loan
or extension of credit, and requires state banks to make disclosures of this
fact in some instances. Other consumer oriented safeguards are also required.
In October 1998, Midwest Bank of Western Illinois acquired the Porter
Insurance Agency, Inc. Porter Insurance Agency, Inc. is a subsidiary of Midwest
Bank of Western Illinois and is a full-lines insurance agency. In December 1998,
Midwest Bank of McHenry County acquired a majority interest in Midwest One
Financial Services, L.L.C., a newly formed limited liability company whose
purpose is to engage in the insurance agency business. Porter Insurance Company,
Inc. and Midwest One Financial Services, L.L.C. are registered with, and subject
to examination by, the Illinois Department of Insurance, and the Company
believes that each is operating in compliance with applicable laws of the State
of Illinois.
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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.
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 impact of undetected 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.
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EXECUTIVE OFFICERS OF THE REGISTRANT
The following executive officers were employed by the Company and its
subsidiaries as of March 29, 2000.
Robert L. Woods (70) 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 1991. Mr. Woods also
serves as Chairman of the Board of Directors of Midwest Bank and as a director
of Midwest Bank and Trust Company and First Midwest Data Corp. In addition, he
was a director of Midwest Trust Services, Inc. and Midwest One Mortgage
Services, Inc. until their dissolution in 1999.
Brad A. Luecke (49) was named Executive Vice President of the Company
in 2000 and has served as President and Chief Executive Officer and director of
Midwest Bank and Trust Company since 1991. Mr. Luecke previously served as
President, Trust Officer and director of Midwest Trust Services, Inc. and as a
director of Midwest One Mortgage Services, Inc. until their dissolution in 1999.
Edward H. Sibbald (51) was named a Senior Vice President of the Company
in 2000 and has served as Chief Financial Officer of the Company since 1997.
Previously, Mr. Sibbald served as Executive Vice President from 1997 to 1999 and
Senior Vice President-Administration from 1991 to 1997. Mr. Sibbald also serves
as Chairman of the Executive Committee and director of Midwest Bank of Western
Illinois and as a director of Midwest Bank of McHenry County and First Midwest
Data Corp. In addition, he served as Vice President and Secretary and as a
director of Midwest One Mortgage Services, Inc. until its dissolution in 1999.
Stephen M. Karaba (42) was named a Senior Vice President of the Company
in 2000 and has served as President of Midwest Bank of McHenry County since
1994. Mr. Karaba also serves as Chairman of Midwest One Financial Services,
L.L.C. Previously, Mr. Karaba had management and executive positions within
Midwest Bank and Trust Company and Midwest Bank of McHenry County since 1989.
Mr. Karaba has been a director of Midwest Bank of McHenry County since 1994 and
Midwest Bank of Western Illinois since 1998. In addition, he served as a
director of Midwest Trust Services, Inc. and Midwest One Mortgage Services, Inc.
until their dissolution in 1999.
Christopher J. Gavin (38) was named a Senior Vice President of the
Company in 2000 and has served as President and Chief Executive Officer of
Midwest Bank of Western Illinois since 1998. He also has been a director of
Midwest Bank of Western Illinois since 1997 and has served as a director of
Porter Insurance Agency, Inc. since 1998. Mr. Gavin was Executive Vice President
and Chief Credit Officer of Midwest Bank of Western Illinois from 1997 to 1998.
Previously, Mr. Gavin had fifteen years of experience in commercial and
community banking with Monmouth Trust and Savings Bank.
James I. McMahon (46) 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 and previously had management and executive positions
within Midwest Bank and Trust Company. He previously served as President and
director of Midwest One Mortgage Services, Inc. and as a director of Midwest
Trust Services, Inc. until their dissolution in 1999. Mr. McMahon resigned from
all positions with the Company and its subsidiaries effective March 1, 2000.
Mary M. Henthorn (42) was named President of Midwest Bank in March
2000, succeeding James I. McMahon. Previously, she served as Executive Vice
President and a director of Midwest Bank since 1996 and in various management
capacities at Midwest Bank since 1992.
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ITEM 2. PROPERTIES
The following table sets forth certain information regarding the
Company's principal office and subsidiary facilities.
NET BOOK VALUE AT
DECEMBER 31, 1999 LEASED OR
LOCATION DATE ACQUIRED (IN THOUSANDS) OWNED
-------- ------------- ----------------- ---------
Principal Office
501 West North Avenue
Melrose Park, Illinois 60160 1987 $ 2,201 Owned
Midwest Bank and Trust Company Facilities
1606 North Harlem Avenue
Elmwood Park, Illinois 60607 1959 1,911 Owned
300 South Michigan Avenue
Chicago, Illinois 60604 1986 -0- Leased
4012 North Pulaski Road
Chicago, Illinois 60641 1993 1,267 Owned
7227 West Addison Street
Chicago, Illinois 60634 1996 1,291 Owned
Midwest Bank Facilities
500 West Chestnut Street
Hinsdale, Illinois 60521 1991 1,847 Owned
927 Curtiss Street
Downers Grove, Illinois 60515 1996 5 Leased
505 N. Roselle Rd (1)
Roselle, Illinois 60172 1999 1,984 Owned
Midwest Bank of McHenry County Facilities
17622 Depot Street
Union, Illinois 60180 1987 55 Owned
2045 East Algonquin Road
Algonquin, Illinois 60102 1994 956 Owned
204 E. State Road
Island Lake, Illinois 60042 1998 373 Owned
5555 Bull Valley Road
McHenry, Illinois 60050 1998 1,428 Owned
Midwest Bank of Western Illinois Facilities
200 East Broadway (2)
Monmonth, Illinois 61462 1993 2,829 Owned
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NET BOOK VALUE AT
DECEMBER 31, 1999 LEASED OR
LOCATION DATE ACQUIRED (IN THOUSANDS) OWNED
-------- ------------- ----------------- ---------
612 West Main Street
Galesburg, Illinois 61401 1996 $ 580 Owned
Schuyler Street
Oquawka, Illinois 61469 1991 94 Owned
104 S.E. 3rd Avenue
Aledo, Illinois 61231 1999 75 Owned
106 South Kirk
Kirkwood, Illinois 61473 1993 -0- Owned
(1) Roselle banking center opened in February 2000.
(2) Bank facility acquired in 1993. New headquarters built in 1999 including
renovation of former facilities at 208 East Broadway. Original headquarters
at 100 East Broadway will be donated to City of Monmouth in 2000.
ITEM 3. 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SECURITY
HOLDER MATTERS
The Company's common stock is traded over-the-counter and quoted on the
Nasdaq National Market under the symbol "MBHI". As of March 17, 2000, the
Company had 1,758 stockholders. The table below sets forth the high and low sale
prices of the common stock during the periods indicated.
HIGH LOW
------ ------
1998
First Quarter $17.75 $14.00
Second Quarter 20.50 17.00
Third Quarter 18.50 14.06
Fourth Quarter 15.88 14.50
1999
First Quarter $16.38 $15.25
Second Quarter 19.00 15.88
Third Quarter 19.38 14.88
Fourth Quarter 17.88 13.50
The Company has declared per share cash dividends with respect to its
common stock as follows:
1998
First Quarter $0.020
Second Quarter 0.020
Third Quarter 0.030
Fourth Quarter 0.075
1999
First Quarter $0.075
Second Quarter 0.075
Third Quarter 0.075
Fourth Quarter 0.125
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 depends 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 Financial
Condition and Results of Operations--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.
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth certain summary consolidated financial
data at or for the periods indicated. This information should be read in
conjunction with the Consolidated Financial Statements and notes thereto
included herein. See "Item 8, Consolidated Financial Statements and
Supplementary Data."
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF INCOME DATA:
Total interest income $ 84,146 $ 74,827 $ 67,326 $ 57,298 $ 47,603
Total interest expense 44,262 41,014 35,311 28,918 22,619
----------- ----------- ----------- ----------- -----------
Net interest income 39,884 33,813 32,015 28,380 24,984
Provision for loan losses 2,203 1,326 2,454 1,718 1,542
Other income 6,734 6,787 5,563 4,410 3,522
Other expenses 25,774 22,895 21,076 19,167 17,781
----------- ----------- ----------- ----------- -----------
Income before income taxes 18,641 16,379 14,048 11,905 9,183
Provision for income taxes 6,750 5,974 5,537 4,597 3,151
----------- ----------- ----------- ----------- -----------
Net income $ 11,891 $ 10,405 $ 8,511 $ 7,308 $ 6,032
=========== =========== =========== =========== ===========
PER SHARE DATA: (1)
Net income (basic) $ 1.08 $ 0.94 $ 0.85 $ 0.73 $ 0.60
Net income (diluted) 1.07 0.94 0.85 0.73 0.60
Cash dividends declared 0.35 0.145 0.055 0.055 0.055
Book value at end of year 6.22 6.88 5.29 4.29 3.83
Tangible book value at end of year 6.00 6.65 5.05 4.03 3.55
SELECTED FINANCIAL RATIOS:
Return on average assets 1.04% 1.04% 1.01% 1.01% 1.02%
Return on average equity 16.39 14.60 18.36 19.36 18.65
Dividend payout ratio 32.28 15.72 6.47 7.53 9.70
Average equity to average assets 6.31 7.11 5.51 5.20 5.49
Net interest margin (tax equivalent) 3.75 3.61 4.11 4.27 4.67
Allowance for loan losses to total loans
at the end of year 1.17 1.26 1.26 1.27 1.28
Nonperforming loans to total loans
at the end of year (2) 0.37 0.90 0.66 1.03 0.60
Net loans charged off to average total loans 0.21 0.18 0.36 0.26 0.28
Tier 1 risk-based capital 11.11 13.47 9.60 9.57 7.64
Total risk-based capital 12.20 14.64 10.78 10.76 8.66
19
22
DECEMBER 31,
---------------------------------------------------------------------------
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
BALANCE SHEET DATA:
Total assets $ 1,256,462 $ 1,071,314 $ 908,642 $ 786,070 $ 660,315
Total earning assets 1,184,546 1,014,691 855,675 737,338 611,597
Average assets (3) 1,148,675 1,002,848 841,707 725,420 589,102
Total loans 646,455 521,880 488,099 420,655 359,639
Allowance for loan losses 7,567 6,576 6,143 5,342 4,603
Total deposits 970,954 869,152 794,362 701,205 590,671
Notes payable and other borrowings (4) 177,150 107,800 42,575 27,495 16,077
Shareholders' equity 67,694 77,629 52,960 42,962 38,387
Tangible book value 65,320 75,019 50,536 40,344 35,554
(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.
(4) Borrowings do not include short-term Federal funds purchased or securities
sold under agreements to repurchase.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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
Financial Condition and Results of Operations 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 discussed elsewhere in this report.
OVERVIEW
The Company's principal business is conducted by the Banks and consists
of a full range of community-based financial services, including commercial and
retail banking. 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 securities 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,
mortgage origination fees, insurance and brokerage commissions, trust fees and
other income. Other expenses include salaries and employee benefits, occupancy
and equipment expenses, professional services, marketing expenses, and other
noninterest expenses.
Net interest income is dependent on the amounts of and yields on
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 upon
management's assessment of the collectibility of the loan portfolio under
current economic conditions. Other expenses are 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.
20
23
CONSOLIDATED RESULTS OF OPERATIONS
Total assets increased $185.1 million or 17.3% to $1.26 billion as of
December 31, 1999 from $1.07 billion as of December 31, 1998. Net income
increased $1.5 million or 14.3% to $11.9 million for the year ended December 31,
1999 compared to $10.4 million for the year ended December 31, 1998. The return
on average assets was 1.04% for both 1999 and 1998. The return on average equity
increased to 16.39% in 1999 from 14.60% in 1998.
1999 COMPARED TO 1998
Net Interest Income. Net interest income on a tax-equivalent basis
increased $6.4 million or 18.4% to $40.9 million in 1999 from $34.5 million in
1998. Interest income on total earning assets increased $9.6 million in 1999
from 1998. Interest income on loans increased $5.1 million in 1999 from 1998 due
to a $75.2 million increase in average loans outstanding, offsetting a decrease
in average loan rates from 9.39% to 8.99%. Interest expense on interest-bearing
liabilities increased $3.2 million in 1999 from 1998, as a result of a $2.5
million increase in interest expense on other borrowings and a $692,000 increase
in interest expense on deposits. The increase in interest expense was due
primarily to a combination of a $79.0 million increase in average deposits
offset in part by a decrease in the average rate paid on deposits from 4.91% in
1998 to 4.52% in 1999. The increase in interest expense on other borrowings was
due primarily to a $50.0 million increase in average FHLB advances and $4.6
million increase in average fed funds purchased and repurchase agreements. The
increase was offset, in part, by a $1.0 million decrease in average borrowings
under lines of credit, and a decrease in overall interest rates on borrowings
from 5.46% in 1998 to 5.20% in 1999. The net interest margin on a tax-equivalent
basis increased from 3.61% in 1998 to 3.75% for 1999. The primary reason for the
increase in net interest margin was the increase in average yields on securities
from 6.24% in 1998 to 6.47% in 1999 and the decrease in the average rate on
interest-bearing liabilities from 4.97% in 1998 to 4.62% in 1999.
Provision for Loan Losses. The provision for loan losses increased
$877,000 or 66.1% to $2.2 million in 1999 from $1.3 million in 1998. As of
December 31, 1999, the allowance for loan losses totaled $7.6 million, or 1.17%
of total loans, and was equal to 319% 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 decreased $53,000 or
0.78% to $6.7 million in 1999 from $6.8 million in 1998. Other income as a
percentage of average assets was 0.59% for the year ended 1999 compared to 0.68%
for the year ended 1998. The $53,000 decrease in total other income in 1999 from
1998 was primarily due to a $676,000 decrease in gains from all securities
transactions, a $365,000 decrease in mortgage origination fees and a $5,000
decrease in trust income. The decrease in mortgage origination fees was due to
the overall increase in mortgage rates and the reduction in refinancing volume
in 1999 compared to 1998. These decreases were offset, in part, by a $258,000
increase in service charges on deposit accounts resulting from increased volume
and pricing, a $354,000 increase in insurance and brokerage fees, and a $381,000
increase in other income, including a $300,000 gain on the sale of other real
estate during 1999. The growth in insurance and brokerage fees was primarily due
to the full year impact of the Porter Insurance Agency, Inc. acquisition in
November 1998 and increased retail brokerage volumes during 1999.
Other Expenses. The Company's total other expenses increased $2.9
million or 12.6% to $25.8 million in 1999 from $22.9 million in 1998. Other
expenses as a percentage of average assets were 2.24% for the year ended 1999
compared to 2.28% for the year ended 1998. Net overhead expenses were 1.66% and
1.61% as a percentage of average assets in 1999 and 1998, respectively. The
increase in total other expenses in 1999 was primarily due to the following
factors. Salaries increased $1.5 million in 1999 compared to 1998 due to
additional staffing to support new Midwest Bank of McHenry County banking
centers, growth in existing banking centers, the full year impact of the Porter
Insurance Agency, Inc. acquisition in November 1998, and annual merit increases.
Occupancy expenses increased $620,000 due to the construction of new banking
centers for Midwest Bank of McHenry County, higher depreciation levels related
to the renovation of the flagship banking center of Midwest Bank and Trust
Company in 1998, and hardware and software systems upgrades at the Banks and
First Midwest Data Corp. Other expenses rose $772,000 as a result of increases
in legal costs and other real estate costs related to loan collection and
workout activities, increased marketing expenses, acquisition costs related to
the purchase of the
21
24
Aledo Banking Center, start-up costs for Midwest One Financial Services, LLC,
outsourcing services 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 $6.8
million in 1999 compared to $6.0 million in 1998 due to changes in income.
1998 COMPARED TO 1997
Net Interest Income. Net interest income on a tax-equivalent basis
increased $1.9 million or 5.8% to $34.5 million in 1998 from $32.6 million in
1997. Interest income on total earning assets increased $7.6 million in 1998
from 1997. Interest income on loans increased $3.7 million in 1998 from 1997 due
to a $47.8 million increase in average loans outstanding, offsetting a decrease
in average loan rates from 9.56% to 9.39%. Interest expense on interest-bearing
liabilities increased $5.7 million in 1998 from 1997, as a result of a $3.4
million increase in interest expense on deposits and a $2.3 million increase in
interest expense on other borrowings. The increase in interest expense was due
primarily to a combination of a $71.3 million increase in average deposits and a
decrease in the average rate paid on deposits to 4.91% from 4.92%. The increase
in interest expense on other borrowings was due primarily to a $57.6 million
increase in average FHLB advances. The increase was offset, in part, by a $9.4
million decrease in average borrowings under lines of credit, and a decrease in
overall interest rates on borrowings from 6.24% in 1997 to 5.46% in 1998. The
net interest margin on a tax-equivalent basis decreased to 3.61% in 1998 from
4.11% for 1997. The primary reason for the decrease in net interest margin was
the decrease in average yields on securities from 7.23% in 1997 to 6.24% in
1998.
Provision for Loan Losses. The provision for loan losses decreased $1.2
million or 46.0% to $1.3 million in 1998 from $2.5 million in 1997. The decrease
in the provision for loan losses was due to a general improvement in the credit
quality of the loan portfolio in 1998 compared to 1997. As of December 31, 1998,
the allowance for loan losses totaled $6.6 million, or 1.26% of total loans, and
was equal to 139% of nonperforming loans.
Other Income. The Company's total other income increased $1.2 million
or 22.0% to $6.8 million in 1998 from $5.6 million in 1997. Other income as a
percentage of average assets was 0.68% for the year ended 1998 compared to 0.66%
for the year ended 1997. The $1.2 million increase in total other income in 1998
from 1997 was primarily due to a $269,000 increase in service charges on deposit
accounts due to increased volume and pricing, a $247,000 increase in gains from
securities transactions, a $494,000 increase in mortgage origination fees, a
$107,000 increase in insurance and brokerage fees and a $96,000 increase in
trust service fees.
Other Expenses. The Company's total other expenses increased $1.8
million or 8.6% to $22.9 million in 1998 from $21.1 million in 1997. Other
expenses as a percentage of average assets were 2.28% for the year ended 1998
compared to 2.50% for the year ended 1997. Net overhead expenses were 1.61% and
1.84% as a percentage of average assets in 1998 and 1997, respectively. The
increase in total other expenses in 1998 was primarily due to the following
factors. Salaries increased $1.1 million in 1998 compared to 1997 because of
additional staffing and commissions at Midwest One Mortgage Services, Inc. due
to an increase in volume, additional staffing to support a new Midwest Bank of
McHenry County banking center, growth in existing banking centers, and annual
merit increases. Occupancy expenses increased $473,000 due to the construction
of the new banking center for Midwest Bank of McHenry County, renovation of the
flagship banking center of Midwest Bank and Trust Company, and hardware and
software systems upgrades at the Banks and First Midwest Data Corp. Other
expenses rose $258,000 as a result of increases in legal costs and other real
estate costs related to loan collection and workout activities, increased
marketing expenses, acquisition costs related to the purchase of the Porter
Insurance Agency, Inc. and general increases in other categories.
Federal and State Income Tax. The Company recorded income tax expense
of $6.0 million in 1998 compared to $5.5 million in 1997 due to changes in
income.
22
25
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.
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------------------
1999 1998 1997
------------------------------ ----------------------------- -----------------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
------- -------- ------- ------- -------- ------- ------- -------- -------
(DOLLARS IN THOUSANDS)
INTEREST-EARNING ASSETS:
Federal funds sold $ 7,186 $ 363 5.05% $ 8,964 $ 481 5.37% $ 8,014 $ 444 5.54%
Securities:
Taxable 465,134 30,003 6.45 410,459 25,267 6.16 300,684 21,792 7.25
Exempt from
federal income
taxes(1) 34,124 2,285 6.70 27,498 2,050 7.46 22,496 1,579 7.02
---------- ------- -------- ------- -------- -------
Total securities 499,258 32,288 6.47 437,957 27,317 6.24 323,180 23,371 7.23
Loans:
Commercial loans 169,339 14,771 8.72 143,911 13,216 9.18 129,678 12,125 9.35
Commercial
real estate loans 264,896 24,702 9.33 221,550 21,419 9.67 205,852 20,368 9.89
Agricultural loans 37,093 3,106 8.37 30,023 2,652 8.83 19,292 1,739 9.01
Consumer
real estate loans 96,677 8,124 8.40 96,510 8,269 8.57 86,206 7,732 8.97
Consumer
installment loans 15,678 1,766 11.26 16,471 2,170 13.17 19,504 2,084 10.68
---------- ------- -------- ------- -------- -------
Total loans 583,683 52,469 8.99 508,465 47,726 9.39 460,532 44,048 9.56
---------- ------- -------- ------- -------- -------
Total interest-
earning assets $1,090,127 $85,120 7.81 $955,386 $75,524 7.91 $791,726 $67,863 8.57
========== ======= ======== ======= ======== =======
23
26
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------------------
1999 1998 1997
------------------------------ ----------------------------- -----------------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
------- -------- ------- ------- -------- ------- ------- -------- -------
(DOLLARS IN THOUSANDS)
INTEREST-BEARING LIABILITIES:
Deposits:
Interest-bearing
demand deposits $ 97,823 $ 2,887 2.95% $ 84,591 $ 2,614 3.09% $ 70,047 $ 2,108 3.01%
Money-market
demand accounts
and savings accounts 232,308 8,579 3.69 196,417 7,486 3.81 199,364 7,444 3.73
Time deposits less
than $100,000 371,160 19,698 5.31 370,718 21,418 5.78 315,763 18,589 5.89
Time deposits of
$100,000 or more 64,369 3,309 5.14 56,614 3,132 5.53 47,714 2,857 5.99
Public funds 47,208 2,257 4.78 25,488 1,388 5.45 29,667 1,619 5.46
-------- -------- -------- -------- -------- --------
Total interest-
bearing deposits 812,868 36,730 4.52 733,828 36,038 4.91 662,555 32,617 4.92
Borrowings:
Federal funds and
repurchase agreements 12,167 651 5.35 7,522 416 5.53 7,821 443 5.66
FHLB advances 126,444 6,463 5.11 76,424 4,031 5.27 18,836 1,085 5.76
Notes payable and
other borrowings 6,112 418 6.84 7,108 529 7.44 16,514 1,166 7.06
-------- -------- -------- -------- -------- --------
Total borrowings 144,723 7,532 5.20 91,054 4,976 5.46 43,171 2,694 6.24
-------- -------- -------- -------- -------- --------
Total interest-
bearing liabilities $957,591 $ 44,262 4.62 $824,882 $ 41,014 4.97 $705,726 $ 35,311 5.00
======== ======== ======== ======== ======== ========
Net interest income
(tax equivalent) $ 40,858 3.19% $ 34,510 2.94% $ 32,552 3.57%
======== ==== ======== ==== ======== ====
Net interest margin 3.75% 3.61% 4.11%
==== ==== ====
(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 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 interest rate constant) and the changes related
to average interest rates (changes in average rate holding the 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.
24
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FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------
1999 COMPARED TO 1998 1998 COMPARED TO 1997
CHANGE DUE TO CHANGE DUE TO
---------------------------------- ----------------------------------
NET VOLUME RATE NET VOLUME RATE
-------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
INTEREST-EARNING ASSETS:
Federal funds sold $ (118) $ (91) $ (27) $ 37 $ 51 $ (14)
Securities taxable 4,736 3,484 1,252 3,475 7,108 (3,633)
Securities exempt from
federal income taxes 235 459 (224) 471 368 103
Commercial loans 1,555 2,244 (689) 1,091 1,310 (219)
Commercial real estate loans 3,283 4,065 (782) 1,051 1,526 (475)
Agricultural loans 454 598 (144) 913 949 (36)
Consumer real estate loans (145) 14 (159) 537 894 (357)
Consumer installment loans (403) (102) (303) 86 (354) 440
-------- -------- -------- -------- -------- --------
Total interest-earning
assets $ 9,597 $ 10,671 $ (1,076) $ 7,661 $ 11,852 $ (4,191)
======== ======== ======== ======== ======== ========
INTEREST-BEARING LIABILITIES:
Interest-bearing demand
deposits $ 273 $ 395 $ (122) $ 506 $ 448 $ 58
Money market demand
accounts and savings accounts 1,093 1,332 (239) 42 (111) 153
Time deposits of less
than $100,000 (1,720) 26 (1,746) 2829 3,181 (352)
Time deposits of $100,000
or more 177 409 (232) 275 504 (229)
Public funds 869 1,057 (188) (231) (228) (3)
Federal funds and repurchase
agreements 235 249 (14) (27) (17) (10)
FHLB advances 2,432 2,560 (128) 2,946 3,045 (99)
Notes payable and other
borrowings (111) (70) (41) (637) (697) 60
-------- -------- -------- -------- -------- --------
Total interest-bearing
liabilities $ 3,248 $ 5,958 $ (2,710) $ 5,703 $ 6,125 $ (422)
======== ======== ======== ======== ======== ========
Net interest $ 6,349 $ 4,713 $ 1,634 $ 1,958 $ 5,727 $ (3,769)
======== ======== ======== ======== ======== ========
25
28
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.
DECEMBER 31,
-----------------------------------------------------------------
1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
(IN THOUSANDS)
Commercial $ 187,822 $ 148,081 $ 140,815 $ 118,475 $ 107,590
Commercial real estate 300,071 229,489 212,184 180,519 144,346
Agricultural 41,745 33,231 24,065 20,079 15,875
Consumer real estate 103,681 95,604 93,338 81,007 73,336
Consumer installment 13,889 16,128 18,811 21,542 20,051
--------- --------- --------- --------- ---------
Total loans, gross 647,208 522,533 489,213 421,622 361,198
Unearned discount (753) (653) (1,114) (967) (1,559)
--------- --------- --------- --------- ---------
Total loans 646,455 521,880 488,099 420,655 359,639
Allowance for loan losses (7,567) (6,576) (6,143) (5,342) (4,603)
--------- --------- --------- --------- ---------
Net loans $ 638,888 $ 515,304 $ 481,956 $ 415,313 $ 355,036
========= ========= ========= ========= =========
Loans held for sale:(1)
Consumer real estate $ 449 $ 3,829 $ 6,627 $ 1,555 $ 1,137
========= ========= ========= ========= =========
(1) Included in consumer real estate above.
Total loans increased $124.6 million to $646.5 million as of December
31, 1999 from $521.9 million as of December 31, 1998. The increase in total
loans was principally due to increased commercial, commercial real estate, and
agricultural loans.
Commercial loans increased $39.7 million to $187.8 million as of
December 31, 1999 from $148.1 million as of December 31, 1998. The increase
reflects increased demand due to a strong economy, and increased working capital
and equipment requirements both by existing borrowers and new customer
relationships.
Commercial real estate loans increased $70.6 million to $300.1 million
as of December 31, 1999 from $229.5 million as of December 31, 1998. The
increase in commercial real estate loans reflects the strong economy, continued
growth in the commercial real estate market, increased commitments with existing
borrowers and market penetration and market share growth of new banking centers.
Agricultural loans increased $8.5 million to $41.7 million as of
December 31, 1999 from $33.2 million as of December 31, 1998. The increase in
agricultural loans reflects increased market share in West Central Illinois.
Consumer real estate loans increased $8.1 million to $103.7 million as
of December 31, 1999 from $95.6 million as of December 31, 1998. The Company
originates medium-term fixed-rate and adjustable rate residential loans for its
own portfolio. Prior to its dissolution in the third quarter of 1999, most
long-term, fixed-rate residential loan requests were referred to Midwest One
Mortgage Services, Inc. for sale into the secondary market with servicing rights
released. The Banks hold a small percentage of long-term, fixed-rate consumer
real estate loans. The increase in consumer real estate loans has been limited
since 1996 due to secondary market activities and represents a decreasing
percentage of total loans. Consumer real estate loans were 16.0% and 18.3% of
total loans as of December 31, 1999 and 1998, respectively.
26
29
Consumer installment loans decreased $2.2 million to $13.9 million as
of December 31, 1999 from $16.1 million as of December 31, 1998. The decreases
in 1999 was due to the runoff of other installment loans, including indirect
auto loans by Midwest Bank of Western Illinois. As of December 31, 1999 and
1998, the Company's consumer loan portfolio included $1.7 million and $2.5
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 most credits 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 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, 1999.
1-5 YEARS OVER 5 YEARS
ONE YEAR ---------------------- ---------------------
OR LESS FIXED VARIABLE FIXED VARIABLE TOTAL
--------- --------- --------- --------- --------- ---------
(IN THOUSANDS)
Commercial $ 129,432 $ 22,280 $ 28,278 $ 3,125 $ 4,707 $ 187,822
Commercial real estate 114,740 115,871 48,759 9,180 11,521 300,071
Agricultural 15,552 3,721 1,716 4,678 16,078 41,745
Consumer real estate 17,887 35,679 16,878 23,050 10,187 103,681
Consumer installment 3,090 10,082 -- 717 -- 13,889
--------- --------- --------- --------- --------- ---------
Total loans, gross 280,701 187,633 95,631 40,750 42,493 647,208
Unearned discount (753) -- -- -- -- (753)
--------- --------- --------- --------- --------- ---------
Total loans $ 279,948 $ 187,633 $ 95,631 $ 40,750 $ 42,493 $ 646,455
========= ========= ========= ========= ========= =========
Nonperforming Loans
The Company discontinues the accrual of interest income on all loan
types 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.
27
30
The following table sets forth information on the Company's
nonperforming loans and other nonperforming assets as of the indicated dates.
DECEMBER 31,
-------------------------------------------------
1999 1998 1997 1996 1995
------ ------ ------ ------ ------
(DOLLARS IN THOUSANDS)
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