Back to GetFilings.com
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2001
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:
10.0% CUMULATIVE TRUST PREFERRED SECURITIES
(And Guarantee with Respect Thereto)
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.
YES [ ] NO [ ]
As of March 22, 2002, the aggregate market value of the registrant's common
stock held by nonaffiliates of the registrant was approximately $137,326,000
based upon the last sales price of the common stock on that date.(1)
As of March 22, 2002, the number of shares outstanding of the registrant's
common stock, par value $0.01 per share, was 10,740,956.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's Proxy Statement for the 2002 Annual Meeting of
Stockholders are incorporated by reference into Part III.
- ----------
(1) Based upon the closing price of the registrant's common stock on March 22,
2002, and reports of beneficial ownership filed by directors and executive
officers of the 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.
================================================================================
MIDWEST BANC HOLDINGS, INC.
FORM 10-K
INDEX
PAGE NO.
--------
PART I
Item 1. Business 1
Item 2. Properties 18
Item 3. Legal Proceedings 19
Item 4. Submission of Matters to a Vote of Stockholders 19
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters 20
Item 6. Selected Consolidated Financial Data 21
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 22
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 43
Item 8. Consolidated Financial Statements and Supplementary Data 43
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 43
PART III
Item 10. Directors and Executive Officers of the Registrant 44
Item 11. Executive Compensation 44
Item 12. Security Ownership of Certain Beneficial Owners and Management 44
Item 13. Certain Relationships and Related Transactions 44
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 44
Signature(s) Page 47
Contents of Consolidated Financial Statements F-1
PART I
ITEM 1. BUSINESS
THE COMPANY
Midwest Banc Holdings, Inc. (the "Company") is a community-based bank
holding company headquartered in Melrose Park, Illinois. The Company, through
its wholly-owned banking subsidiaries, 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 of
Hinsdale, 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.
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 18 locations, with 12 banking centers in the greater Chicago
metropolitan area and six 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. First Midwest Data Corp., a
subsidiary of the Company, provides data processing services to the Company and
all of the Banks except Midwest Bank of Western Illinois. Midwest Financial and
Investment Services, Inc., a subsidiary of the Company, provides securities
brokerage services to customers of each of the Banks.
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
subsidiaries as of December 31, 2001, is set forth below:
1
NUMBER OF
BANKING
COMPANY SUBSIDIARIES HEADQUARTERS MARKET AREA CENTERS OR OFFICES
- -------------------- ------------ ----------- ------------------
Banks:
Midwest Bank and Trust Company Elmwood Park, IL Chicago, Elmwood 5
Park, Melrose Park,
Oak Park, River
Forest, Forest Park,
Franklin Park, River
Grove and Maywood
Midwest Bank of Hinsdale Hinsdale, IL Hinsdale, Downers 3
Grove, Burr Ridge,
Westmont, Oak
Brook, Clarendon
Hills, Roselle and
Bloomingdale
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, 6
Galesburg, Oquawka,
Kirkwood,
and Aledo
Nonbanks:
Porter Insurance Agency, Inc. Alexis, IL Western Illinois 2
First Midwest Data Corp Melrose Park, IL * 1
MBHI Capital Trust I Melrose Park, IL ** --
Midwest Financial and Investment Elmwood Park, IL *** 4
Services, Inc.
- ----------
* Performs data processing services for the Company and all of the Banks,
except Midwest Bank of Western Illinois.
** The trust is a statutory business trust formed as a financing subsidiary
of the Company.
*** Provides securities brokerage services to consumers and commercial
business; commenced operations in March 2002.
2
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 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.
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 1991 in Hinsdale.
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. Midwest Bank of Hinsdale 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. In January 2001, Midwest Bank of Western Illinois
opened a full service banking center in a grocery store in Monmouth. Midwest
Bank of Western Illinois currently has a network of six banking centers in
Monmouth, Galesburg, Oquawka, Kirkwood, and Aledo.
3
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.
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
85% of its current premiums and commissions.
In May 2000, the Company formed MBHI Capital Trust I (the "Trust"). The
Trust is a statutory business trust formed under the laws of the State of
Delaware and is wholly owned by the Company. In June 2000, the Trust issued
10.0% preferred securities with an aggregate liquidation amount of $20,000,000
($25 per preferred security) to third-party investors in an underwritten public
offering.
In March 2002, the Company acquired the assets of Service 1st Financial
Corp. through its newly formed subsidiary, Midwest Financial and Investment
Services, Inc. This subsidiary provides securities brokerage services to both
bank and non-bank customers.
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, securities management, retail sales, training, and
regulatory compliance. The Banks, except Midwest Bank of Western Illinois, have
centralized at Midwest Bank and Trust Company their bookkeeping and loan
operations functions.
Set forth below is selected financial and other information for each Bank
for the year ended December 31, 2001.
TOTAL TOTAL NET
ASSETS EQUITY INCOME
------ ------ ------
(IN THOUSANDS)
Midwest Bank and Trust Company $755,103 $50,226 $10,370
Midwest Bank of Hinsdale 425,478 25,841 4,454
Midwest Bank of McHenry County 370,131 24,080 4,061
Midwest Bank of Western Illinois(1) 253,249 18,273 2,077
- ----------
(1) Includes net income of Porter Insurance Agency, Inc.
The Banks accounted for nearly 99.7% of the assets and virtually all the
net income of the Company as of and for the years ended 2001, 2000, and 1999.
4
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,
DuPage and McHenry Counties 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 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 12 full-service locations in the Chicago metropolitan area and six
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.
STRATEGY
The Company believes that its continued success is dependent on its ability
to provide 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 new markets and diversify the financial services it offers. The
Company's strategy includes the following objectives: (i) maintain high levels
of customer service; (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 competitive 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.
The Company has established the following performance goals for the years
2001 - 2003: (1) annual growth in earning assets of 8.0% to 12.0%; (2) annual
growth in income of 12.0% to 15.0%; (3) average annual growth in diluted
earnings per share of 12.0% to 15.0%; (4) return on average assets of 1.05% to
1.15%; and (5) return on average equity of 16.0% to 18.0%. For 2001, the Company
either met or exceeded each of these five performance goals. The Company has
revised and extended through 2004 its performance goals as follows: (1) annual
growth of earning assets of 10.0% to 12.0%; (2) annual growth in income of 12.0%
to 15.0%; (3) average annual growth in diluted earnings per share of 12.0% to
15.0%; (4) return on average assets of 1.10% to 1.20%; and (5) return on average
equity of 16.0 to 20.0%. The Company has established the following specific
goals for fiscal 2002: (1) diluted earnings per share of $2.00; (2) total assets
of $2 billion; (3) net interest margin on a tax-equivalent basis of 3.50%; and
(4) return on average equity of 20.0%. Management anticipates that without any
material deterioration in asset quality and economic conditions, these targets
are attainable, though it cannot make any guarantee that actual results will
meet or exceed these goals.
5
PRODUCTS AND SERVICES
Deposit Products
Management believes the Company and the Banks offer competitive deposit
products and programs which address the needs of customers in each of the local
markets served. These products include:
Checking and NOW Accounts. The Company has developed a range of different
checking account products designed and priced to meet specific target segments
(e.g., Free Checking and Small Business Checking) of the local markets served by
each Bank. The Company offers several types of premium rate NOW accounts with
interest rates indexed to the prime rate or the 91-day U.S. Treasury bill rate.
Savings and Money Market Accounts. The Company offers multiple types of
money market accounts with interest rates indexed to the 91-day U.S. Treasury
bill rate as well as various types of savings accounts.
Time Deposits. The Company offers a wide range of innovative time deposits
(including traditional and Roth Individual Retirement Accounts), usually offered
at premium rates with special features to protect the customer's interest
earnings in changing interest rate environments.
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 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. Management requires personal guarantees of the principals except on
cash secured, state or political subdivision, or non-for-profit loans. The
Company has focused its efforts on building its lending business in the
following areas:
Commercial Loans. Commercial and individual loans are made to small- to
medium-sized businesses that are sole proprietorships, partnerships and
corporations. Generally, these loans are secured with collateral including
accounts receivable, inventory and equipment, and require personal guarantees of
the principals. Frequently, these loans are further secured with real estate
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 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 Freddie
Mac guidelines are sold in the secondary market. In the normal course of
business, the
6
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 26 ATM sites generally located within the
Banks' local markets. All except two off-site ATMs are owned by the Banks.
Eighteen of the ATM sites are located at various banking centers and are
maintained off-site at hotels, supermarkets, and schools.
Trust Activities
Midwest Bank and Trust Company and Midwest Bank of Western Illinois offer
land trusts, personal trusts, custody accounts, retirement plan services, and
corporate trust services. As of December 31, 2001, the Trust Department of
Midwest Bank and Trust Company maintained trust relationships representing an
aggregate market value of $135.8 million in assets with an aggregate book value
of $131.0 million. In addition, the Trust Department of Midwest Bank and Trust
Company administered 1,974 land trust accounts as of December 31, 2001. Midwest
Bank of Western Illinois also provides trust services to its customers and
maintained trust accounts with an aggregate market value of $49.0 million and an
aggregate book value of $35.7 million as of December 31, 2001.
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. Its services
also include individual health care contracts and homeowners' insurance, as well
as commercial and retail automobile insurance for individuals, new car
dealerships, and commercial trucking fleets.
7
Securities Brokerage
Securities brokerage services have been provided through arrangements with
an independent regional brokerage firm, Service 1st Financial Corp., which has
been operating for 13 years in our banking franchise. Licensed brokers are
located at four banking centers and provide investment-related services,
including securities trading, financial planning, mutual funds sales, fixed and
variable rate annuities, and tax-exempt and conventional unit trusts. In March
2002, the Company's newly formed subsidiary, Midwest Financial and Investment
Services, Inc., purchased certain assets of Service 1st Financial Corp. and
commenced brokerage activities through the banks' investment centers. The
projected income from the addition of this brokerage line of business is
expected to increase the Company's overall other income. This acquisition is
expected to further one of the Company's strategic goals of increasing revenues
from non-traditional sources and to enhance the Company's net income in the
current year, though there is no guaranty that actual results will be attained.
COMPETITION
The Company competes in the financial services industry through the Banks,
Porter Insurance Agency, Inc., and Midwest Financial and Investment Services,
Inc. The financial services business is highly competitive. The Company
encounters strong direct competition for deposits, loans and other financial
services. The Company's principal competitors include other commercial banks,
savings banks, savings and loan associations, mutual funds, money market funds,
finance companies, credit unions, mortgage companies, 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, 2001, the Company and its subsidiaries had 364 full-time
equivalent employees. Management considers its relationship with its employees
to be good.
8
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.
Finally, please remember that the supervision, regulation and examination of
banks and bank holding companies by bank regulatory agencies are intended
primarily for the protection of depositors rather than stockholders of banks and
bank holding companies.
BANK HOLDING COMPANY REGULATION
The Company is registered as a "bank holding company" with the Federal
Reserve and, accordingly, is subject to supervision and regulation by the
Federal Reserve under the Bank Holding Company Act (the Bank Holding Company Act
and the regulations issued thereunder are collectively referred to as 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 Porter Insurance Agency, Inc., MBHI Capital Trust I, Midwest Financial
and Investment Services, Inc. and First Midwest Data Corp.
The BHC Act requires prior Federal Reserve approval for, among other
things, the acquisition by a bank holding company of direct or indirect
ownership or control of more than 5% of the voting shares or substantially all
the assets of any bank, 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. That means that,
except with respect to traditional banking products, the Company may not
condition a customer's purchase of one of its services on the purchase of
another service. The passage of the Gramm-Leach-Bliley Act, however, allows bank
holding companies to become financial holding companies. Financial holding
companies do not face the same prohibitions on entering into certain business
transactions that bank holding companies currently face.
Under the Illinois Banking Act, any person who acquires more than 10% of
the Company's stock may be required to obtain the prior approval of the
Commissioner of the Illinois Office of Banks and Real Estate (the "Illinois
Commissioner"). Under the Change in Bank Control Act, a person may be required
to obtain the prior approval of the Federal Reserve before acquiring the power
to directly or indirectly control the management, operations or policies of the
Company or before acquiring 10% or more of any class of its outstanding voting
stock.
It is the policy of the Federal Reserve that the Company is expected to act
as a source of financial strength to the Banks and to commit resources to
support the Banks. The Federal Reserve takes the position that in implementing
this policy, it may require the Company to provide such support when the Company
otherwise would not consider itself able to do so.
The Federal Reserve has adopted risk-based capital requirements for
assessing bank holding company capital adequacy. These standards define
regulatory capital and establish minimum capital
9
ratios in relation to assets, both on an aggregate basis and as adjusted for
credit risks and off-balance sheet exposures. 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, qualifying
noncumulative perpetual preferred stock (including related surplus), qualifying
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, and specified intangible
assets ("Tier 1 Capital"). Tier 2, or "supplementary" capital consists of the
allowance for loan and lease losses, perpetual preferred stock and related
surplus, "hybrid capital instruments," unrealized holding gains on equity
securities, perpetual debt and mandatory convertible debt securities, and term
subordinated debt and intermediate-term preferred stock, including related
surplus.
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 8%, of which at least 4% 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 3% for strong bank holding (those rated a composite
"1" under the Federal Reserve's rating system). For all other bank holding
companies, the minimum ratio of Tier 1 capital to total assets is 4%. 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 growth, whether
internally or by making acquisitions, are expected to maintain strong capital
positions substantially above the minimum levels.
As of December 31, 2001, the Company had regulatory capital in excess of
the Federal Reserve's minimum requirements. The Company had a total capital to
risk-weighted assets ratio of 10.8% and a Tier 1 capital to risk-weighted assets
ratio of 9.9% and a leverage ratio of 6.6% as of December 31, 2001.
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 revenues 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.
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 to affiliate with
one another. The GLB Act establishes a comprehensive framework to permit
affiliations among commercial banks, insurance companies and securities firms.
Further, the GLB Act expanded the range of activities in which bank holding
companies may engage by allowing certain well managed and well capitalized
10
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
non-affiliated third parties, subject to certain exceptions. Final regulations
implementing the new financial privacy regulations become effective during 2001.
Similar to most other consumer-oriented laws, the regulations contain some
specific prohibitions and require timely disclosures of certain information. The
Company has devoted what it believes are sufficient resources to comply with
these new requirements. 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. However, to the extent the GLB Act permits banks, securities firms
and insurance companies to affiliate, the financial services industry may
experience further consolidation. This consolidation could result in a growing
number of larger financial institutions that offer a wider variety of financial
services than the Company currently offers and that can aggressively compete in
the markets the Company currently serves.
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 and Porter Insurance Agency,
Inc. 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. The FDIA also gives
the Federal Reserve and other federal bank regulatory agencies power to issue
cease and desist orders against either banks, holding companies or person
regarded as "institution affiliated parties." A cease and desist order can
either prohibit such entities from engaging in certain unsafe and unsound bank
activity or can require them to take certain affirmative action.
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.
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 state member banks, none of the Banks may, without
the approval of the Federal Reserve, declare a dividend if the total of all
dividends declared in a calendar year exceeds the total of its net income for
that year, combined with its retained net income of the preceding two years,
less any required transfers to the surplus account. Under Illinois law, none of
the Banks may pay dividends in an amount greater than its net profits then on
hand, after deducting losses and bad debts.
11
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.
Capital Requirements. State member banks are required by the Federal
Reserve to maintain a minimum primary capital to total asset ratio of 5.5% and a
minimum total capital to total assets ratio of 6%. Primary capital consists of
common stock, perpetual preferred stock, surplus (excluding surplus relating to
limited-life preferred stock), undivided profits, contingency and other capital
reserves, mandatory convertible instruments, allowance for loan and lease
losses, and minority interests in equity accounts of consolidated subsidiaries.
Total capital consists of primary capital as well as limited-life preferred
stock, and bank subordinated notes and debentures and unsecured long-term debt
of a parent company and its subsidiaries. The Federal Reserve has created three
different zones into which a bank's total capital ratio may fall. Total capital
ratios exceeding 7% fall into Zone 1, total capital ratios ranging from 6% to 7%
fall into Zone 2, and total capital ratios below 6% fall into Zone 3. The nature
and intensity of Federal Reserve supervisory action over a bank will be
determined by a bank's primary capital ratio as well as the zone in which a
bank's total capital ratio falls. Banks with total capital ratios in Zone 2 and
Zone 3 will be more closely monitored and banks with total capital ratios in
Zone 3 have to submit a comprehensive capital plan to the Federal Reserve. Banks
with either a primary capital ratio below 5.5% or a total capital ratio in Zone
3 will be considered undercapitalized, unless they can show clear extenuating
circumstances.
Each of the Banks has a Tier 1 capital to risk-weighted assets ratio and a
total capital to risk-weighted assets ratio which meets the above requirements.
Midwest Bank and Trust Company has a Tier 1 capital to risk-weighted assets
ratio of 10.3% and a total capital to risk-weighted assets ratio of 11.2%.
Midwest Bank of Hinsdale has a Tier 1 capital to risk-weighted assets ratio of
9.2% and a total capital to risk-weighted assets ratio of 10.1%. Midwest Bank of
McHenry County has a Tier 1 capital to risk-weighted assets ratio of 10.6% and a
total capital to risk-weighted assets ratio of 11.6%. Midwest Bank of Western
Illinois has a Tier 1 capital to risk-weighted assets ratio of 10.7% and a total
capital to risk-weighted assets ratio of 11.6%.
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 have adopted 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
12
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.
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 addition, the Federal Reserve, FDIC and other federal banking agencies
adopted a final rule , which modified the risk-based capital standards to
provide for consideration of interest rate risk when assessing the capital
adequacy of a bank. Under this 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 minimum 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 statutorily required
reserve ratios in the insurance funds and to impose special additional
assessments. Each depository institution is assigned to one of three capital
groups: "well capitalized," "adequately capitalized" or "undercapitalized" An
institution is considered well capitalized if it has a total risk-based capital
ratio of 10% or greater, has a Tier 1 risk-based capital ratio of 6% or greater,
has leverage ratio of 5% or greater and is not subject to any order or written
directive to meet and maintain a specific capital level. An "adequately
capitalized" institution is defined as one that has a total risk-based capital
ratio of 8% or greater, has a Tier 1 risk-based capital ratio of 4% or greater,
has a leverage rate of 4% or greater and does not meet the definition of a well
capitalized bank. An institution is considered "undercapitalized" if it does not
meet the definition of "well-capitalized" or "adequately capitalized." Within
each capital group, institutions are assigned to one of three supervisory
subgroups: "A" (institutions with few minor weaknesses), "B" (institutions which
demonstrate weaknesses which, if not
13
corrected, could result in significant deterioration of the institution and
increased risk of loss to BIF), and "C" (institutions that pose a substantial
probability of loss to BIF unless effective corrective action is taken).
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 2001, the Banks were assessed deposit insurance in the aggregate
amount of $205,000. Deposit insurance may be terminated by the FDIC upon a
finding that an institution has engaged in unsafe or unsound practices, is in an
unsafe or unsound condition or has violated any applicable law, regulation,
rule, order or condition imposed by the FDIC. Such terminations can only occur,
if contested, following judicial review through the federal courts. The
management of each of the Banks does not know of any practice, condition or
violation that might lead to termination of deposit insurance.
The Economic Growth and Regulatory Paperwork Reduction Act of 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 were assessed at a
rate of 20% of the assessment rate applicable to SAIF deposits until December
31, 1999. After December 31, 1999, full pro rata sharing of FICO assessments
began. 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 3% reserves on the
first $44.3 million of transaction accounts and 10% on the remainder. The first
$5.0 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. However, institutions are rated
on their performance in meeting the needs of their communities. Performance is
judged in three areas: (a) a lending test, to evaluate the institution's record
of making loans in its assessment areas; (b) 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 business;
and (c) a service test to evaluate the institution's delivery of services
through its branches, ATMs and other offices. 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.
Consumer Compliance. Each Bank has been examined for consumer compliance on
a regular basis. As a result of these exams, Midwest Bank and Trust Company has
reached a mutual understanding with the Federal Reserve as to certain remedial
steps the Bank will take to address its less than satisfactory performance with
respect to several consumer statutes and regulations. The Bank's board of
directors has
14
directed the management of the Bank to correct any identified deficiencies and
to comply with the Federal Reserve's recommendations for improving the Bank's
consumer compliance systems. Management of the Bank and the Company believe they
have initiated the necessary actions to appropriately address any identified
deficiencies and to improve the performance of the Bank to a satisfactory level.
The failure to appropriately address these identified deficiencies, over time,
could impact the Company's ability to implement all of its growth strategies.
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 civil money
penalties, cease and desist orders, receivership, conservatorship or the
termination of deposit insurance.
Interstate Banking and Branching Legislation. Under the Interstate Banking
and Efficiency Act of 1994 (the "Interstate Banking Act"), adequately
capitalized and adequately managed bank holding companies are allowed to acquire
banks across state lines subject to certain limitations. In addition, under the
Interstate Banking Act, banks are 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.
Insurance Powers. Under state law, a state bank is authorized 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. Porter Insurance
Company, Inc. is 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.
15
Securities Brokerage. Midwest Financial and Investment Services, Inc., a
subsidiary of the Company, is licensed as a retail securities broker and is
subject to regulation by the Securities and Exchange Commission, state
securities authorities, and National Association of Securities Dealers.
MONETARY POLICY AND ECONOMIC CONDITIONS
The earnings of banks and bank holding companies are affected by general
economic conditions and 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
company 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 Litigation 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 effect on the
operations and future prospects of the Company and its subsidiaries, including
its ability to implement its growth strategies, include, but are not limited to,
changes in interest rates; general economic conditions; legislative or
regulatory changes; monetary and fiscal policies of the U.S. government,
including policies of the U.S. Treasury and the Federal Reserve Board; possible
administrative or enforcement action or similar direction of federal or state
banking regulators in connection with any material failure of any of the Banks
to comply with applicable banking laws, rules, and regulations; 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 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.
16
EXECUTIVE OFFICERS OF THE REGISTRANT
Listed below are the executive officers of the Company and its subsidiaries
as of March 22, 2002.
Brad A. Luecke (51) was named President and Chief Executive Officer of the
Company effective July 1, 2000. He had served previously as Executive Vice
President of the Company since 2000. Mr. Luecke became Vice Chairman of Midwest
Bank and Trust Company in 2000 and continues to serve as Chief Executive Officer
and a director since 1991. He also served as President of Midwest Bank and Trust
Company from 1991 to 2000. Mr. Luecke has been a director of Midwest Bank of
Hinsdale and First Midwest Data Corp since 2000.
Sheldon Bernstein (54) was named a Senior Vice President of the Company in
2001. Mr. Bernstein has served as President, Chief Operating Officer and a
director of Midwest Bank and Trust Company since 2000. Previously, Mr. Bernstein
served as Executive Vice President-Lending of Midwest Bank and Trust Company
since 1993. Mr. Bernstein has been a director of First Midwest Data Corp since
2001.
Mary M. Henthorn (44) was named a Senior Vice President of the Company in
2001. Ms. Henthorn was named President and Chief Executive Officer of Midwest
Bank of Hinsdale in 2000. Previously, she served as Executive Vice President and
continues as a director of Midwest Bank of Hinsdale since 1996. She has served
in various management capacities at Midwest Bank of Hinsdale and Midwest Bank
and Trust Company since 1992.
Stephen M. Karaba (44) was named a Senior Vice President of the Company in
2000 and has served as President of Midwest Bank of McHenry County since 1994.
Previously, Mr. Karaba held various 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.
Christopher J. Gavin (40) 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.
Michelle T. Holman (42) was named Senior Vice President - Risk Management
in 2000. Ms. Holman has served as a director of First Midwest Data Corp. since
2000. Previously, she served as Vice President of Loan Review since 1988 and in
various management capacities at the Company and Midwest Bank and Trust Company
since 1985.
Daniel R. Kadolph, CPA (39) was named Senior Vice President and Chief
Financial Officer in 2000. He has served as Comptroller since 1994 and Treasurer
since 1997. Mr. Kadolph has served as a director of First Midwest Data Corp.
since 2000 and has served in various management capacities at the Company and
Midwest Bank and Trust Company since 1988.
Edward H. Sibbald (53) was named Executive Vice President, Director of
Marketing and Director of Investor Relations in 2000. Previously he served as a
Senior Vice President of the Company in 2000 and as Chief Financial Officer of
the Company from 1997 to 2000. 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 a director of Midwest Bank of McHenry County
and Midwest Bank of Western Illinois.
Mary C. Ceas, SPHR (44) was named Senior Vice President - Human Resources
of the Company in 2000. Previously, Ms. Ceas was Vice President - Human
Resources in 1997 and served as Director -Training and Development from 1995 to
1997.
17
ITEM 2. PROPERTIES
The following table sets forth certain information regarding the Company's
principal office and bank subsidiary facilities.
NET BOOK VALUE AT
DECEMBER 31, 2001 LEASED OR
LOCATION DATE ACQUIRED (IN THOUSANDS) OWNED
- -------- ------------- -------------- ---------
Principal Office
501 West North Avenue
Melrose Park, Illinois 60160 1987 $1,707 Owned
Midwest Bank and Trust Company Banking Offices
1606 North Harlem Avenue
Elmwood Park, Illinois 60607 1959 1,771 Owned
300 South Michigan Avenue
Chicago, Illinois 60604 1986 -- Leased
4012 North Pulaski Road
Chicago, Illinois 60641 1993 1,124 Owned
7227 West Addison Street
Chicago, Illinois 60634 1996 1,223 Owned
Midwest Bank of Hinsdale Banking Offices
500 West Chestnut Street
Hinsdale, Illinois 60521 1991 1,722 Owned
927 Curtiss Street
Downers Grove, Illinois 60515 1996 -- Leased
505 N. Roselle Road
Roselle, Illinois 60172 1999 2,210 Owned
Midwest Bank of McHenry County Banking Offices
17622 Depot Street
Union, Illinois 60180 1987 50 Owned
2045 East Algonquin Road
Algonquin, Illinois 60102 1994 850 Owned
204 E. State Road
Island Lake, Illinois 60042 1998 351 Owned
5555 Bull Valley Road
McHenry, Illinois 60050 1998 1,337 Owned
Midwest Bank of Western Illinois Banking Offices
200 East Broadway
Monmonth, Illinois 61462 1993 2,471 Owned
18
NET BOOK VALUE AT
DECEMBER 31, 2001 LEASED OR
LOCATION DATE ACQUIRED (IN THOUSANDS) OWNED
- -------- ------------- -------------- ---------
612 West Main Street
Galesburg, Illinois 61401 1996 $548 Owned
Schuyler Street
Oquawka, Illinois 61469 1991 85 Owned
104 S.E. 3rd Avenue
Aledo, Illinois 61231 1999 143 Owned
106 South Kirk
Kirkwood, Illinois 61473 1993 -- Owned
1120 North 6th Street
Monmouth, Illinois 61462 2001 -- Leased
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 STOCKHOLDERS
None.
19
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
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 22, 2002, the
Company had 1,430 stockholders. The table below sets forth the high and low sale
prices of the common stock during the periods indicated.
HIGH LOW
---- ---
2000
First Quarter $15.19 $13.00
Second Quarter 15.00 11.63
Third Quarter 14.75 13.00
Fourth Quarter 15.50 14.00
2001
First Quarter $18.00 $15.00
Second Quarter 22.00 15.50
Third Quarter 21.38 18.51
Fourth Quarter 21.55 18.87
The Company has declared per share cash dividends with respect to its
common stock in the last two fiscal years as follows:
2000
First Quarter $0.125
Second Quarter 0.125
Third Quarter 0.125
Fourth Quarter 0.150
2001
First Quarter $0.150
Second Quarter 0.150
Third Quarter 0.150
Fourth Quarter 0.150
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 therefore. Because the Company's consolidated net income
consists largely of net income of the Banks, the Company's ability to pay
dividends depends 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 and
limitations imposed by the terms of the Company's outstanding junior
subordinated debentures. 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.
20
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth certain selected consolidated financial data
at or for the periods indicated. This information should be read in conjunction
with the Company's Consolidated Financial Statements and notes thereto included
herein. See "Item 8, Consolidated Financial Statements and Supplementary Data."
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------
2001 2000 1999 1998 1997
-------- -------- ------- ------- -------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF INCOME DATA:
Total interest income $113,132 $109,792 $84,146 $74,827 $67,326
Total interest expense 65,665 64,032 44,262 41,014 35,311
-------- -------- ------- ------- -------
Net interest income 47,467 45,760 39,884 33,813 32,015
Provision for loan losses 2,220 1,850 2,203 1,326 2,454
Other income 12,802 7,695 6,734 6,787 5,563
Other expenses 31,463 29,360 25,774 22,895 21,076
-------- -------- ------- ------- -------
Income before income taxes 26,586 22,245 18,641 16,379 14,048
Provision for income taxes 8,704 7,632 6,750 5,974 5,537
-------- -------- ------- ------- -------
Net income $ 17,882 $ 14,613 $11,891 $10,405 $ 8,511
======== ======== ======= ======= =======
PER SHARE DATA:
Earnings per share (basic) $ 1.66 $ 1.36 $ 1.08 $ 0.94 $ 0.85
Earnings per share (diluted) 1.64 1.35 1.07 0.94 0.85
Cash dividends declared 0.600 0.525 0.350 0.145 0.055
Book value at end of year 8.98 7.69 6.22 6.88 5.29
Tangible book value at end of year 8.80 7.49 6.00 6.65 5.05
SELECTED FINANCIAL RATIOS:
Return on average assets 1.12% 1.07% 1.04% 1.04% 1.01%
Return on average equity 19.50 20.57 16.39 14.60 18.36
Dividend payout ratio 36.02 38.64 32.28 15.72 6.47
Average equity to average assets 5.75 5.18 6.31 7.11 5.51
Tier 1 risk-based capital 9.93 11.02 11.11 13.47 9.60
Total risk-based capital 10.82 11.94 12.20 14.64 10.78
Net interest margin (tax equivalent) 3.31 3.65 3.75 3.61 4.11
Loan to deposit ratio 82.82 75.95 66.58 60.04 61.45
Net overhead expense to average assets (1) 1.40 1.66 1.70 1.72 1.95
Efficiency ratio (1) 52.21 53.90 55.84 58.01 57.44
Allowance for loan losses to total loans
at the end of year 1.01 1.04 1.17 1.26 1.26
Provision for loan losses to total loans 0.22 0.22 0.34 0.25 0.50
Net loans charged off to average total loans 0.07 0.11 0.21 0.18 0.36
Nonperforming loans to total loans
at the end of year (2) 0.24 0.26 0.37 0.90 0.66
Nonperforming assets to total assets 0.15 0.23 0.40 0.56 0.44
Allowance for loan losses to
nonperforming loans 4.28x 3.82x 3.19x 1.39x 1.91x
DECEMBER 31,
---------------------------------------------------------------
2001 2000 1999 1998 1997
-------- -------- ------- ------- -------
(DOLLARS IN THOUSANDS)
BALANCE SHEET DATA:
Total assets $1,810,422 $1,467,770 $1,256,462 $1,071,314 $908,642
Total earning assets 1,711,030 1,371,519 1,184,546 1,014,691 855,675
Year-to-date average assets 1,593,939 1,370,386 1,148,675 1,002,848 841,707
Total loans 1,003,386 824,632 646,455 521,880 488,099
Allowance for loan losses 10,135 8,593 7,567 6,576 6,143
Total deposits 1,211,520 1,085,786 970,954 869,152 794,362
Borrowings 442,150 289,093 196,075 118,449 55,567
Stockholders' equity 96,214 82,576 67,694 77,629 52,960
Tangible stockholders' equity 94,272 80,463 65,320 75,019 50,536
- ----------
(1) Excludes security gains and trading account profits or losses.
(2) Includes total nonaccrual, impaired and all other loans 90 days or more past
due.
21
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.
During 2001, the economic expansion ended, and the economy entered a
recession. The Federal Reserve cut key interest rates eleven times resulting in
a 475 basis points reduction in interest rates. The sharp decline in interest
rates adversely impacted the Company's net interest income as its prime rate
based loans were immediately repriced downward with each cut in interest rates
while its deposit interest rates lagged in the repricing cycle. In addition,
falling mortgage interest rates and prepayment of both mortgage loans and
mortgage-backed securities resulted in lower yields earned on the Company's
investment portfolio due in part to an acceleration of premium amortization. The
tragic events of September 11th have further aggravated the economy. The
Company's net income is dependent in part on stable interest rates.
CONSOLIDATED RESULTS OF OPERATIONS
Total assets increased $342.7 million, or 23.3%, to $1.8 billion as of
December 31, 2001 from $1.5 billion as of December 31, 2000. Net income
increased $3.3 million, or 22.4%, to $17.9 million for the year ended December
31, 2001 compared to $14.6 million for the year ended December 31, 2000. The
return on average assets was 1.12% for 2001 and 1.07% for 2000. The return on
average equity decreased to 19.50% in 2001 from 20.57% in 2000 due to the
increase in equity attributed to additional retained earnings and the decrease
in accumulated comprehensive loss. The return on average assets was 1.07% and
1.04% for both 2000 and 1999, respectively. The return on average equity
increased to 20.57% in 2000 from 16.39% in 1999.
22
2001 COMPARED TO 2000
Net Interest Income. Net interest income on a tax-equivalent basis
increased $3.0 million, or 6.4%, to $50.1 million in 2001 from $47.1 million in
2000. Interest income on total earning assets increased $4.7 million in 2001
from 2000. This was primarily due to interest income on loans, which increased
$4.7 million in 2001 from 2000 resulting from a $172.5 million increase in
average loans outstanding despite a decrease in average rates paid on loans from
9.69% to 8.37%. Interest expense on interest-bearing liabilities increased $1.6
million in 2001 from 2000, or 2.6%, as a result of an $1.8 million increase in
interest expense on other borrowings. Interest expense on deposits declined by
$161,000 in 2001. The interest expense on interest-bearing liabilities increased
due to the $62.0 million increase in total average borrowings. Average rate on
total borrowings for 2001 was 5.49% compared to 6.09% in 2000. The increase in
interest expense on other borrowings was due primarily to an $28.1 million
increase in average fed funds purchased and repurchase agreements during 2001
and $27.5 million increase in average FHLB advances. In addition, the Company
issued $20.0 million in junior subordinated debentures in June 2000 at a rate of
10.0% with a maturity of 30 years. The net interest margin on a tax-equivalent
basis decreased from 3.65% in 2000 to 3.31% for 2001. In 2001, the interest
expense on the junior subordinated debentures for a full year was recognized.
The primary reason for the decrease in net interest margin was that yields on
earnings assets decreased more than the yields on interest bearing liabilities.
Repricing opportunities on core deposits and certificates of deposits are
expected to offset any unfavorable impact from future interest rate reductions
in the near term. In the first quarter of 2002, $257.3 million in certificates
of deposit at a weighted average rate of 4.60% will mature and are expected to
reprice at lower rates assuming no spike in interest rates. The Company expects
net interest income and net interest margin to improve during 2002.
Provision for Loan Losses. The provision for loan losses increased
$370,000, or 20.0%, to $2.2 million in 2001 from $1.9 million in 2000. As of
December 31, 2001, the allowance for loan losses totaled $10.1 million, or 1.01%
of total loans, and was equal to 428% of nonperforming loans. The amount of the
provision for loan losses is based on quarterly evaluations of the loan
portfolio, with particular attention directed toward nonperforming and other
potential problem loans. During these evaluations, consideration is also given
to such factors as management's evaluation of specific loans, the level and
composition of impaired and other nonperforming loans, historical loss
experience, results of examinations by regulatory agencies, independent loan
review, the market value of collateral, the estimate of discounted cash flows,
the strength and availability of guaranties, concentrations of credits, and
other factors.
Other Income. The Company's total other income increased $5.1 million, or
66.4%, to $12.8 million in 2001 from $7.7 million in 2000. Other income as a
percentage of average assets was 0.80% for the year ended 2001 compared to 0.56%
for the year ended 2000. The increase in total other income in 2001 from 2000
was primarily due to a $2.6 million increase in net securities gains and trading
profits, a $1.4 million increase in service charges on deposits, a $492,000
increase in cash surrender value of life insurance, and a $408,000 increase in
mortgage loan origination fees.
Other Expenses. The Company's total other expenses increased $2.1 million,
or 7.2%, to $31.5 million in 2001 from $29.4 million in 2000. Other expenses as
a percentage of average assets were 1.97% for the year ended 2001 compared to
2.14% for the year ended 2000. Net overhead expenses were 1.17% and 1.57% as a
percentage of average assets in 2001 and 2000, respectively. The increase in
total other expenses in 2001 was primarily due to the following factors:
salaries and employee benefits increased $2.2 million or 13.5% compared to the
similar period in 2000; and professional services increased $351,000 for 2001
compared to 2000 due to higher ATM charges and outsourced engagements. The
efficiency ratio was 52.2% for the year ended December 31, 2001 compared to
53.9% in 2000.
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
23
income tax expense of $8.7 million in 2001 compared to $7.6 million in 2000, an
increase of 14.0%, due to changes in income. The effective tax rate in 2001 was
32.7% compared to 34.3% in 2000.
2000 COMPARED TO 1999
Net Interest Income. Net interest income on a tax-equivalent basis
increased $6.2 million, or 15.2%, to $47.1 million in 2000 from $40.9 million in
1999. Interest income on total earning assets increased $26.0 million in 2000
from 1999. This was primarily due to interest income on loans, which increased
$19.6 million in 2000 from 1999 resulting from a $161.4 million increase in
average loans outstanding and an increase in average rates paid on loans from
8.99% to 9.69%. Interest expense on interest-bearing liabilities increased $19.8
million in 2000 from 1999, or 44.7%, as a result of an $8.8 million increase in
interest expense on other borrowings and a $11.0 million increase in interest
expense on deposits. The increase in interest expense was due primarily to a
combination of a $97.4 million increase in average deposits and an increase in
the average rate paid on deposits from 4.52% in 1999 to 5.27% in 2000. The
increase in interest expense on other borrowings was due primarily to an $89.7
million increase in average FHLB advances outstanding during 2000 and $20.4
million increase in average fed funds purchased and repurchase agreements. In
addition, the Company issued $20.0 million in junior subordinated debentures in
June 2000 at a rate of 10.0% with a maturity of 30 years. The average interest
rate paid for borrowings increased to 6.09% in 2000 from 5.20% in 1999 due to
increased interest rates on FHLB advances and the issuance of the Company's
junior subordinated debentures. The net interest margin on a tax-equivalent
basis decreased from 3.75% in 1999 to 3.65% for 2000. The primary reason for the
decrease in net interest margin was that yields on interest bearing liabilities
increased more than the yields on earning assets. Average yields on interest
bearing liabilities increased from 4.62% in 1999 to 5.46% in 2000.
Provision for Loan Losses. The provision for loan losses decreased
$353,000, or 16.0%, to $1.9 million in 2000 from $2.2 million in 1999. As of
December 31, 2000, the allowance for loan losses totaled $8.6 million, or 1.04%
of total loans, and was equal to 382% of nonperforming loans.
Other Income. The Company's total other income increased $961,000, or
14.3%, to $7.7 million in 2000 from $6.7 million in 1999. Other income as a
percentage of average assets was 0.56% for the year ended 2000 compared to 0.59%
for the year ended 1999. The increase in total other income in 2000 from 1999
was primarily due to a $611,000 increase in net securities gains and trading
profits, a $445,000 increase in cash surrender value of life insurance, a
$306,000 increase in service charges, and a $174,000 increase in insurance and
investment commissions. This was offset by a $17,000 decrease in trust income
and a $496,000 decrease in mortgage loan origination fees in 2000 following the
dissolution of Midwest One Mortgage Services, Inc. in September 1999.
Other Expenses. The Company's total other expenses increased $3.6 million,
or 13.9%, to $29.4 million in 2000 from $25.8 million in 1999. Other expenses as
a percentage of average assets were 2.14% for the year ended 2000 compared to
2.24% for the year ended 1999. Net overhead expenses were 1.57% and 1.66% as a
percentage of average assets in 2000 and 1999, respectively. The increase in
total other expenses in 2000 were primarily due to the following factors.
Salaries increased $1.7 million in 2000 compared to 1999 due to additional
staffing to support a new Midwest Bank of Hinsdale banking center, growth in
existing banking centers and annual merit increases. Occupancy expenses
increased $588,000 due to the construction of new banking centers for Midwest
Bank of Hinsdale, a new main office for Midwest Bank of Western Illinois and the
acquisition of the Aledo Banking Center for Midwest Bank of Western Illinois in
December 1999. Other expenses rose $1.3 million as a result of increases in
other real estate expenses, legal expenses associated with problem loans,
increased marketing expenses, increased premium paid to the FDIC for deposit
insurance, and amortization expense related to the purchase of the Aledo Banking
Center.
Federal and State Income Tax. The Company recorded income tax expense of
$7.6 million in 2000 compared to $6.8 million in 1999, an increase of 13.1%, due
to changes in income.
24
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 35% tax rate for 2001 and 2000 and 34% tax rate
for 1999.
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------------------------------------------
2001 2000 1999
--------------------------------- ------------------------------- -------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
------- -------- ------- ------- -------- ------- ------- -------- -------
(DOLLARS IN THOUSANDS)
INTEREST-EARNING ASSETS:
Federal funds sold $ 6,132 $ 250 4.08% $ 10,476 $ 661 6.31% $ 7,186 $ 363 5.05%
Securities:
Taxable (1) 555,053 36,362 6.55 494,791 35,412 7.16 465,134 30,003 6.45
Exempt from
federal income
taxes (1) 33,255 2,320 6.98 40,747 2,853 7.00 34,124 2,285 6.70
---------- ------- ---------- -------- ---------- -------
Total securities 588,308 38,682 6.58 535,538 38,265 7.15 499,258 32,288 6.47
Loans (2):
Commercial
loans (1) 215,722 17,067 7.91 193,053 18,948 9.81 169,339 14,771 8.72
Commercial
real estate
loans (1) 526,309 45,145 8.58 385,538 38,371 9.95 264,896 24,702 9.33
Agricultural
loans (1) 49,332 3,994 8.10 45,758 3,997 8.74 37,093 3,106 8.37
Consumer
real estate
loans 112,053 9,291 8.29 106,768 9,545 8.94 96,677 8,124 8.40
Consumer
installment
loans 14,194 1,327 9.35 13,967 1,309 9.37 15,678 1,766 11.26
---------- ------- ---------- -------- ---------- -------
Total loans 917,610 76,824 8.37 745,084 72,170 9.69 583,683 52,469 8.99
---------- ------- ---------- -------- ---------- -------
Total interest-
earning assets $1,512,050 $115,756 7.66% $1,291,098 $111,096 8.60% $1,090,127 $85,120 7.81%
========== ======== ========== ======== ========== =======
25
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------------------------------------------
2001 2000 1999
--------------------------------- ------------------------------- -------------------------------
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 $ 129,116 $ 3,409 2.64% $ 112,714 $ 3,942 3.50% $ 97,823 $ 2,887 2.95%
Money-market
demand accounts
and savings
accounts 264,603 8,369 3.16 248,214 11,151 4.49 232,308 8,579 3.69
Time deposits less
than $100,000 480,036 27,372 5.70 423,721 25,262 5.96 371,160 19,698 5.31
Time deposits of
$100,000 or more 95,389 4,991 5.23 62,075 3,762 6.06 64,369 3,309 5.14
Public funds 69,137 3,378 4.89 58,525 3,563 6.09 47,208 2,257 4.78
---------- ------- ---------- -------- ---------- -------
Total interest-
bearing deposits 1,038,281 47,519 4.58 905,249 47,680 5.27 8 12,868 36,730 4.52
Borrowings:
Federal funds and
repurchase
agreements 60,674 2,221 3.66 32,587 2,020 6.20 12,167 651 5.53
FHLB advances 243,706 13,528 5.55 216,173 12,549 5.81 126,444 6,463 5.11
Notes payable and
other borrowings 26,146 2,397 9.17 19,731 1,783 9.03 6,112 418 6.84
---------- ------- ---------- -------- ---------- -------
Total borrowings 330,526 18,146 5.49 268,491 16,352 6.09 144,723 7,532 5.20
---------- ------- ---------- -------- ---------- -------
Total interest-
bearing liabilities $1,368,807 $65,665 4.80 $1,173,740 $ 64,032 5.46 $ 957,591 $44,262 4.62
========== ======= ========== ======== ========== =======
Net interest income
(tax equivalent) $50,091 2.86% $ 47,064 3.14% $40,858 3.19%
======= ======== =======
Net interest
margin 3.31% 3.65% 3.75%
- ----------
(1) Adjusted for 35% tax rate in 2001 and 2000 and 34% tax rate in 1999 and
adjusted for the dividends-received deduction where applicable.
(2) Nonaccrual loans are included in the average balance, however these loans
are not earning any interest.
26
CHANGES IN INTEREST INCOME AND EXPENSE
The changes in net interest income from period to period are reflective of
changes in the interest rate environment, changes in the composition of assets
and liabilities as to type and maturity (and the inherent interest 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 35% tax rate in 2001 and 2000 and 34% tax rate
in 1999. 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.
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------
2001 COMPARED TO 2000 2000 COMPARED TO 1999
CHANGE DUE TO CHANGE DUE TO
---------------------------------- ---------------------------------
NET VOLUME RATE NET VOLUME RATE
------- ------- --------- ------- ------- ------
INTEREST-EARNING ASSETS:
Federal funds sold $ (411) $ (222) $ (189) $ 298 $ 193 $ 105
Securities taxable 950 4,098 (3,148) 5,409 1,990 3,419
Securities exempt from
federal income taxes (533) (523) (10) 568 460 108
Commercial loans (1,881) 2,062 (3,943) 4,177 2,205 1,972
Commercial real estate loans 6,774 12,606 (5,832) 13,669 11,910 1,759
Agricultural loans (3) 300 (303) 891 752 139
Consumer real estate loans (254) 459 (713) 1,421 882 539
Consumer installment loans 18 21 (3) (457) (180) (277)
------- ------- --------- ------- ------- ------
Total interest-earning
assets $ 4,660 $18,801 $ (14,141) $25,976 $18,212 $7,764
======= ======= ========= ======= ======= ======
INTEREST-BEARING LIABILITIES:
Interest-bearing demand
deposits $ (533) $ 521 $ (1,054) $ 1,055 $ 476 $ 579
Money market demand
accounts and savings accounts (2,782) 697 (3,479) 2,572 618 1,954
Time deposits of less
than $100,000 2,110 3,247 (1,137) 5,564 2,973 2,591
Time deposits of $100,000
or more 1,229 1,799 (570) 453 (121) 574
Public funds (185) 587 (772) 1,306 608 698
Federal funds and repurchase
agreements 201 1,258 (1,057) 1,369 1,251 118
FHLB advances 979 1,546 (567) 6,086 5,109 977
Notes payable and other
borrowings 614 646 (32) 1,365 1,193 172
------- ------- --------- ------- ------- ------
Total interest-bearing
liabilities $ 1,633 $10,301 $ (8,668) $19,770 $12,107 $7,663
======= ======= ========= ======= ======= ======
Net interest $ 3,027 $ 8,500 $ (5,473) $ 6,206 $ 6,105 $ 101
======= ======= ========= ======= ======= ======
27
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,
-------------------------------------------------------------------
2001 2000 1999 1998 1997
---------- --------- --------- --------- ---------
(IN THOUSANDS)
Commercial $ 220,801 $ 205,698 $ 187,822 $ 148,081 $ 140,815
Commercial real estate 612,687 448,988 300,071 229,489 212,184
Agricultural 48,772 47,773 41,745 33,231 24,065
Consumer real estate (1) 109,329 108,780 103,681 95,604 93,338
Consumer installment 13,375 14,529 13,889 16,128 18,811
---------- --------- --------- --------- ---------
Total loans, gross 1,004,964 825,768 647,208 522,533 489,213
Unearned discount (1,578) (1,136) (753) (653) (1,114)
---------- --------- --------- --------- ---------
Total loans 1,003,386 824,632 646,455 521,880 488,099
Allowance for loan losses (10,135) (8,593) (7,567) (6,576) (6,143)
---------- --------- --------- --------- ---------
Net loans $ 993,251 $ 816,039 $ 638,888 $ 515,304 $ 481,956
========== ========= ========= ========= =========
Loans held for sale:
Consumer real estate $ 3,414 $ 616 $ 449 $ 3,829 $ 6,627
========== ========= ========= ========= =========
- ----------
(1) Includes loans held for sale.
Total loans increased $178.8 million to $1.0 billion as of December 31,
2001 from $824.6 million as of December 31,2000, an increase of 21.7%. The
Company expects loan growth for 2002 to remain stable despite the ongoing
economic difficulties.
Commercial loans increased $15.1 million to $220.8 million as of December
31, 2001 from $205.7 million as of December 31, 2000, an increase of 7.3%. The
increase reflects increased demand due to increased working capital and
equipment requirements both by existing borrowers and new customer
relationships.