MIDWEST BANC HOLDINGS INC - 10-Q Quarterly Report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the Quarterly Period ended June 30, 2004

Commission File Number: 001-13735

MIDWEST BANC HOLDINGS, INC.

(Exact name of Registrant as specified in its charter.)


Delaware		36-3252484
(State or other jurisdiction of		(I.R.S. Employer Identification Number)
incorporation or organization)

501 W. North Ave.
Melrose Park, Illinois		60160
(Address of principal executive offices)		(ZIP code)

(708) 865-1053
(Registrant’s telephone number, including area code)

Indicate by checkmark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]

Indicate by checkmark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ]

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.


Class		Outstanding at August 9, 2004

Common, par value $.01		17,898,132

MIDWEST BANC HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS (Unaudited)
(In Thousands)


	June 30,			December 31,
	2004			2003
ASSETS
Cash and cash equivalents	$	85,378		$	196,157
Securities available-for-sale		701,200			796,140
Securities held-to-maturity (fair value: $104,400 at June 30, 2004 and $57,239 at December 31, 2003)		105,409			56,074
Loans		1,140,219			1,081,296
Allowance for loan losses		(16,088	)		(15,714	)

Net loans		1,124,131			1,065,582
Cash value of life insurance		25,633			24,906
Premises and equipment, net		28,028			27,376
Other real estate		6,469			6,942
Core deposit and other intangibles, net		2,431			2,790
Goodwill		4,360			4,360
Due from broker		149,543			40,477
Other assets		50,501			43,345

Total assets	$	2,283,083		$	2,264,149

LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES
Deposits
Non-interest-bearing	$	162,917		$	160,668
Interest-bearing		1,443,732			1,425,743

Total deposits		1,606,649			1,586,411
Securities sold under agreements to repurchase		199,386			202,699
Advances from the Federal Home Loan Bank		250,031			253,461
Junior subordinated debt owed to unconsolidated trusts		55,672			54,000
Note payable		—			2,000
Other liabilities		31,379			22,497

Total liabilities		2,143,117			2,121,068

STOCKHOLDERS’ EQUITY
Preferred stock		—			—
Common stock		187			187
Surplus		64,480			64,330
Retained earnings		105,758			102,041
Accumulated other comprehensive loss		(23,150	)		(15,824	)
Treasury stock, at cost (771,308 shares at June 30, 2004 and 806,934 shares at December 31, 2003)		(7,309	)		(7,653	)

Total stockholders’ equity		139,966			143,081

Total liabilities and stockholders’ equity	$	2,283,083		$	2,264,149

See accompanying notes to unaudited consolidated financial statements.

PAGE 1

MIDWEST BANC HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
THREE MONTHS ENDED JUNE 30, 2004 AND 2003

(In Thousands, Except Per Share Data)


	2004			2003
Interest Income
Loans	$	16,324		$	17,784
Securities
Taxable		7,692			8,979
Exempt from federal income taxes		167			795
Trading securities		352			—
Federal funds sold and other short-term investments		469			18

Total interest income		25,004			27,576
Interest Expense
Deposits		7,243			7,647
Federal funds purchased		16			55
Securities sold under agreements to repurchase		1,305			1,476
Advances from the Federal Home Loan Bank		2,491			2,875
Junior subordinated debt owed to unconsolidated trusts		859			658
Note payable		—			38

Total interest expense		11,914			12,749

Net interest income		13,090			14,827
Provision for loan losses		756			755

Net interest income after provision for loan losses		12,334			14,072
Other Income
Service charges on deposits		1,544			1,434
Net gains (losses) on securities transactions		(750	)		2,701
Net trading profits		1,051			2,305
Gains on sales of loans		169			377
Insurance and brokerage commissions		484			556
Trust income		158			169
Increase in cash surrender value of life insurance		264			234
Other income		208			163

Total other income		3,128			7,939
Other Expenses
Salaries and employee benefits		6,585			5,999
Occupancy and equipment		1,677			1,465
Professional services		1,101			1,279
Other expenses		2,072			1,929

Total other expenses		11,435			10,672

Income before income taxes		4,027			11,339
Provision for income taxes		843			3,548

Net Income	$	3,184		$	7,791

Basic earnings per share	$	0.18		$	0.44

Diluted earnings per share	$	0.17		$	0.43

Cash dividend declared per common share	$	0.12		$	0.10

See accompanying notes to unaudited consolidated financial statements.

PAGE 2

MIDWEST BANC HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
SIX MONTHS ENDED JUNE 30, 2004 AND 2003

(In Thousands, Except Per Share Data)


	2004			2003
Interest Income
Loans	$	32,842		$	38,184
Securities
Taxable		16,508			17,718
Exempt from federal income taxes		464			1,589
Trading securities		352			—
Federal funds sold and other short-term investments		931			67

Total interest income		51,097			57,558
Interest Expense
Deposits		14,400			15,672
Federal funds purchased		18			101
Securities sold under agreements to repurchase		2,705			2,891
Advances from the Federal Home Loan Bank		4,985			5,722
Junior subordinated debt owed to unconsolidated trusts		1,712			1,305
Notes payable		20			74

Total interest expense		23,840			25,765

Net interest income		27,257			31,793
Provision for loan losses		1,512			1,745

Net interest income after provision for loan losses		25,745			30,048
Other Income
Service charges on deposits		2,980			2,901
Net gains on securities transactions		2,116			2,803
Net trading profits (losses)		(781	)		3,459
Gains on sales of loans		322			665
Insurance and brokerage commissions		969			1,014
Trust income		307			304
Increase in cash surrender value of life insurance		727			491
Other income		431			364

Total other income		7,071			12,001
Other Expenses
Salaries and employee benefits		13,066			12,051
Occupancy expense and equipment		3,369			3,226
Professional services		1,982			2,467
Other expenses		4,059			3,711

Total other expenses		22,476			21,455

Income before income taxes		10,340			20,594
Provision for income taxes		2,331			6,409

Net Income	$	8,009		$	14,185

Basic earnings per share	$	0.45		$	0.80

Diluted earnings per share	$	0.44		$	0.78

Cash dividends declared per common share	$	0.24		$	0.20

See accompanying notes to unaudited consolidated financial statements.

PAGE 3

MIDWEST BANC HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Unaudited)
SIX MONTHS ENDED JUNE 30, 2004 AND 2003

(In Thousands, Except Per Share Data)


								Accumulated
								Other						Total
								Compre-						Stock-
	Common				Retained			hensive			Treasury			holders’
	Stock		Surplus		Earnings			Income (Loss)			Stock			Equity
Balance, January 1, 2003	$	171	$	29,366	$	87,105		$	7,145		$	(8,836	)	$	114,951
Cash dividends declared ($0.20 per share)		—		—		(3,559	)		—			—			(3,559	)
Issuance of 1,599,088 shares of common stock upon acquisition of Big Foot Financial Corp.		16		30,448		—			—			—			30,464
Issuance of common stock upon exercise of 60,513 stock options, net of tax benefit		—		231		—			—			575			806
Capital contribution from loan payoff by related parties		—		4,033		—			—			—			4,033
Comprehensive income
Net income		—		—		14,185			—			—			14,185
Net decrease in fair value of securities classified as available- for-sale, net of income taxes and reclassification adjustments		—		—		—			(1,012	)		—			(1,012	)

Total comprehensive income															13,173

Balance, June 30, 2003	$	187	$	64,078	$	97,731		$	6,133		$	(8,261	)	$	159,868

Balance, January 1, 2004	$	187	$	64,330	$	102,041		$	(15,824	)	$	(7,653	)	$	143,081
Cash dividends declared ($0.24 per share)		—		—		(4,292	)		—			—			(4,292	)
Issuance of common stock upon exercise of 35,626 stock options, net of tax benefit		—		150		—			—			344			494
Comprehensive income
Net income		—		—		8,009			—			—			8,009
Net decrease in fair value of securities classified as available- for-sale, net of income taxes and reclassification adjustments		—		—		—			(7,326	)		—			(7,326	)

Total comprehensive income															683

Balance, June 30, 2004	$	187	$	64,480	$	105,758		$	(23,150	)	$	(7,309	)	$	139,966

See accompanying notes to unaudited consolidated financial statements.

PAGE 4

MIDWEST BANC HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
SIX MONTHS ENDED JUNE 30, 2004 AND 2003

(In Thousands)


	2004			2003
Cash flows from operating activities
Net income	$	8,009		$	14,185
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation		1,275			1,191
Provision for loan losses		1,512			1,745
Amortization of other intangibles		148			247
Amortization of premiums and discounts on securities, net		1,788			5,556
Net gain on sales of securities		(2,116	)		(2,803	)
Net gain on sales of mortgage loans		(330	)		(4,006	)
Federal Home Loan Bank stock dividend		(555	)		(647	)
Net change in real estate loans originated held for sale		(104	)		(186	)
Increase in cash surrender value of life insurance		(727	)		(491	)
Deferred income taxes		144			(2,300	)
Loss on other real estate		59			—
Change in other assets		(4,216	)		592
Change in other liabilities		8,962			15,277

Net cash from operating activities		13,849			28,360
Cash flows from investing activities
Sales of securities available-for-sale		433,266			301,521
Maturities of securities available-for-sale		37,470			—
Principal payments on securities available-for-sale		46,684			196,078
Purchase of securities available-for-sale		(525,406	)		(766,976	)
Purchase of securities held-to-maturity		(66,669	)		(4,437	)
Maturities of securities held-to-maturity		1,175			1,900
Futures contracts		(450	)		—
Purchase of mortgage loans		(31,215	)		—
Net (increase) decrease in loans		(28,683	)		67,066
Proceeds from sale of mortgage loans		—			146,552
Cash received, net of cash and cash equivalents in acquisition and stock issuance		—			17,783
Proceeds from sale of other real estate		584			1,517
Property and equipment expenditures, net		(2,288	)		(706	)

Net cash used in investing activities		(135,532	)		(39,832	)
Cash flows from financing activities
Net increase in deposits		20,238			52,278
Borrowings		—			5,500
Repayment of borrowings		(2,000	)		—
Dividends paid		(4,292	)		(3,396	)
Change in securities sold under agreements to repurchase and federal funds purchased		(3,313	)		(8,990	)
Proceeds from exercised stock options		271			554

Net cash from financing activities		10,904			45,946

Increase (decrease) in cash and cash equivalents		(110,779	)		34,474
Cash and cash equivalents at beginning of period		196,157			49,687

Cash and cash equivalents at end of period	$	85,378		$	84,161

See accompanying notes to unaudited consolidated financial statements.

PAGE 5

MIDWEST BANC HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(Continued)


	2004		2003
Supplemental disclosures
Cash paid during the year for
Interest	$	23,792	$	26,146
Income Taxes		3,731		3,575
Supplemental schedule of noncash investing activities
Amount due to broker for purchases of securities	$	149,543	$	18,038
Real estate acquired in settlement of loans		170		2,707
Acquisitions
Noncash assets acquired:
Investment securities available for sale	$	—	$	17,065
Loans, net		—		157,477
Premises and equipment, net		—		9,257
Goodwill, net		—		1,852
Other intangibles, net		—		3,361
Other assets		—		5,930

Total noncash assets acquired	$	—	$	194,942

Liabilities assumed:
Deposits	$	—	$	137,729
FHLB advances		—		36,727
Accrued expenses and other liabilities		—		8,188

Total liabilities assumed		—		182,644

Net noncash assets acquired	$	—	$	12,103

Cash and cash equivalents acquired	$	—	$	19,688

See accompanying notes to unaudited consolidated financial statements.

PAGE 6

NOTE 1 — BASIS OF PRESENTATION

The consolidated financial information of Midwest Banc Holdings, Inc. (the “Company”) included herein is unaudited; however, such information reflects all adjustments (consisting only of normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation for the interim periods. The financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X.

The annualized results of operations for the six months ended June 30, 2004 are not necessarily indicative of the results expected for the full year ending December 31, 2004.

NOTE 2 – BUSINESS COMBINATION AND MERGER TERMINATION

On January 3, 2003, the Company acquired Big Foot Financial Corp. (“BFFC”) through the issuance of approximately 1,599,088 shares of common stock valued at $18.81 per share and cash paid of $1.4 million, and incurred acquisition costs of $557,000, resulting in total consideration of $32.0 million. BFFC was merged into the Company, and its banking subsidiary was merged into and its offices became branches of Midwest Bank and Trust Company. At closing, the Company transferred $3.4 million of securities categorized as held-to-maturity to available-for-sale under permissible provisions of FASB Statement No. 115. During the first quarter of 2003, the Company sold the mortgage loans and mortgage servicing rights of $141.9 million of the acquired loans on a non-recourse basis.

The business combination is accounted for under the purchase method of accounting. Accordingly, the results of operations of BFFC have been included in the Company’s results of operations since January 3, 2003, the date of acquisition. Under this method of accounting, the purchase price is allocated to the respective assets acquired and liabilities assumed based on their estimated fair values. The excess of purchase price over the net assets acquired is recorded as goodwill.

NOTE 3 — GOODWILL AND INTANGIBLES

On January 1, 2002, the Company implemented Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets. Under the provisions of SFAS No. 142, goodwill is no longer subject to amortization over its estimated useful life, but instead is subject to at least annual assessments for impairment by applying a fair-value based test. SFAS No. 142 also requires that an acquired intangible asset be separately recognized if the benefit of the intangible asset is obtained through contractual or other legal rights, or if the asset can be sold, transferred, licensed, rented or exchanged, regardless of the acquirer’s intent to do so.

PAGE 7

Intangible asset disclosures are as follows (in thousands):


	June 30, 2004					December 31, 2003
	Gross Carrying		Accumulated			Gross Carrying		Accumulated
	Amount		Amortization			Amount		Amortization
Amortized intangible assets:
Core deposit and other intangibles	$	3,130	$	(699	)	$	3,341	$	(551	)
Aggregate intangible amortization expense:
For the three months ending June 30, 2004	$	107
For the six months ending June 30, 2004		148
Estimated intangible amortization expense:
For the year ending December 31, 2004	$	362
For the year ending December 31, 2005		429


		Page Number
	PART I
Item 1.	Financial Statements		1
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations		15
Item 3.	Quantitative and Qualitative Disclosures about Market Risk		33
Item 4.	Controls and Procedures		34
	PART II
Item 1.	Legal Proceedings		37
Item 2.	Changes in Securities, Use of Proceeds, and Issuer Purchases of Equity Securities		37
Item 3.	Defaults Upon Senior Securities		37
Item 4.	Submission of Matters to a Vote of Security Holders		37
Item 5.	Other Information		38
Item 6.	Exhibits and Reports on Form 8-K		38
Form 10-Q	Signature Page		39
Certification of Chief Executive Officer
Certification of Chief Financial Officer
Certification of CEO and CFO

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