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, 2002
Commission File Number: 0-29598
------------------------
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
incorporation or organization) Identification Number)
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 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 14, 2002
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Common, par value $.01 16,157,434
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MIDWEST BANC HOLDINGS, INC.
FORM 10-Q
TABLE OF CONTENTS
Page Number
-----------
PART I
Item 1. Financial Statements............................................ 1
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................... 12
Item 3. Quantitative and Qualitative Disclosures about Market Risk...... 25
PART II
Item 1. Legal Proceedings............................................... 27
Item 2. Changes in Securities and Use of Proceeds....................... 27
Item 3. Defaults Upon Senior Securities................................. 27
Item 4. Submission of Matters to a Vote of Security Holders............. 27
Item 5. Other Information............................................... 28
Item 6. Exhibits and Reports on Form 8-K................................ 28
Form 10-Q Signature Page.................................................. 29
i
MIDWEST BANC HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN THOUSANDS)
JUNE 30, DECEMBER 31,
2002 2001
---- ----
ASSETS
Cash and cash equivalents $ 91,782 $ 49,812
Securities available-for-sale 624,612 683,474
Securities held-to-maturity 20,505 21,445
Loans 1,086,499 1,003,386
Allowance for loan losses (11,210) (10,135)
--------------- --------------
Net loans 1,075,289 993,251
Cash value of life insurance 20,022 19,554
Premises and equipment, net 19,012 19,477
Other real estate 246 355
Goodwill 4,467 3,524
Other assets 20,650 19,530
--------------- --------------
Total assets $ 1,876,585 $ 1,810,422
=============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits
Non-interest-bearing $ 129,697 $ 134,707
Interest-bearing 1,206,220 1,076,813
--------------- --------------
Total deposits 1,335,917 1,211,520
Federal funds purchased - 24,350
Securities sold under agreements to repurchase 142,952 146,800
Advances from the Federal Home Loan Bank 237,500 244,500
Junior subordinated debt 20,000 20,000
Note payable 8,800 6,500
Due to broker - 46,432
Other liabilities 19,903 14,106
--------------- --------------
Total liabilities 1,765,072 1,714,208
--------------- --------------
STOCKHOLDERS' EQUITY
Preferred stock - -
Common stock 114 114
Surplus 29,509 29,587
Retained earnings 86,730 77,256
Accumulated other comprehensive income (loss) 3,865 (1,057)
Treasury stock, at cost (8,705) (9,686)
--------------- --------------
Total stockholders' equity 111,513 96,214
--------------- --------------
Total liabilities and stockholders' equity $ 1,876,585 $ 1,810,422
=============== ==============
See accompanying notes to unaudited consolidated financial statements.
PAGE 1
MIDWEST BANC HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
THREE MONTHS ENDED JUNE 30, 2002 AND 2001
(IN THOUSANDS, EXCEPT PER SHARE DATA)
2002 2001
---- ----
INTEREST INCOME
Loans $ 18,695 $ 19,495
Securities
Taxable 9,561 8,289
Exempt from federal income taxes 605 391
Federal funds sold and other short-term investments 43 129
----------- -----------
Total interest income 28,904 28,304
INTEREST EXPENSE
Deposits 8,537 12,495
Advances from the Federal Home Loan Bank 3,290 3,377
Notes payable 51 113
Federal funds purchased and
securities sold under agreements to repurchase 1,154 428
Junior subordinated debt 374 500
----------- -----------
Total interest expense 13,406 16,913
----------- -----------
Net interest income 15,498 11,391
Provision for loan losses 815 695
----------- -----------
Net interest income after provision for loan losses 14,683 10,696
OTHER INCOME
Service charges on deposits 1,403 1,199
Net gains on securities transactions 757 1,268
Net trading account profits 3 336
Option income 122 58
Mortgage banking fees 89 187
Insurance and brokerage commissions 394 145
Trust income 147 153
Increase in cash surrender value of life insurance 234 234
Other income 174 164
----------- -----------
Total other income 3,323 3,744
OTHER EXPENSES
Salaries and employee benefits 5,243 4,560
Occupancy and equipment 1,229 1,286
Professional services 615 628
Marketing 195 213
Other expenses 1,182 1,127
----------- -----------
Total other expenses 8,464 7,814
----------- -----------
Income before income taxes 9,542 6,626
Provision for income taxes 3,154 2,390
----------- -----------
NET INCOME $ 6,388 $ 4,236
=========== ===========
Basic earnings per share $ 0.40 $ 0.26
=========== ===========
Diluted earnings per share $ 0.39 $ 0.26
=========== ===========
See accompanying notes to unaudited consolidated financial statements.
PAGE 2
MIDWEST BANC HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
THREE MONTHS ENDED JUNE 30, 2002 AND 2001
(IN THOUSANDS, EXCEPT PER SHARE DATA)
2002 2001
---- ----
Net income $ 6,388 $ 4,236
Net increase (decrease) in fair value of securities classified
as available-for-sale, net of income taxes and
reclassification adjustments 6,107 (2,075)
----------- -----------
Comprehensive income $ 12,495 $ 2,161
=========== ===========
See accompanying notes to unaudited consolidated financial statements.
PAGE 3
MIDWEST BANC HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 2002 AND 2001
(IN THOUSANDS, EXCEPT PER SHARE DATA)
2002 2001
---- ----
INTEREST INCOME
Loans $ 36,540 $ 39,115
Securities
Taxable 19,382 16,841
Exempt from federal income taxes 991 794
Federal funds sold and other short-term investments 73 200
----------- -----------
Total interest income 56,986 56,950
INTEREST EXPENSE
Deposits 17,113 25,462
Advances from the Federal Home Loan Bank 6,593 6,699
Notes payable 104 219
Federal funds purchased and
securities sold under agreements to repurchase 2,097 857
Junior subordinated debt 748 1,000
----------- -----------
Total interest expense 26,655 34,237
----------- -----------
Net interest income 30,331 22,713
Provision for loan losses 1,477 1,204
----------- -----------
Net interest income after provision for loan losses 28,854 21,509
OTHER INCOME
Service charges on deposits 2,709 2,156
Net gains on securities transactions 1,295 1,538
Net trading account profits 348 496
Option income 654 58
Mortgage banking fees 231 274
Insurance and brokerage commissions 540 280
Trust income 295 366
Increase in cash surrender value of life insurance 468 468
Other income 343 308
----------- -----------
Total other income 6,883 5,944
OTHER EXPENSES
Salaries and employee benefits 10,242 9,010
Occupancy expense and equipment 2,385 2,519
Professional services 1,276 1,037
Marketing 466 404
Other expenses 2,293 2,214
----------- -----------
Total other expenses 16,662 15,184
----------- -----------
Income before income taxes 19,075 12,269
Provision for income taxes 6,374 4,171
----------- -----------
NET INCOME $ 12,701 $ 8,098
=========== ===========
Basic earnings per share $ 0.79 $ 0.50
=========== ===========
Diluted earnings per share $ 0.77 $ 0.50
=========== ===========
See accompanying notes to unaudited consolidated financial statements.
PAGE 4
MIDWEST BANC HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 2002 AND 2001
(IN THOUSANDS, EXCEPT PER SHARE DATA)
2002 2001
---- ----
Net income $ 12,701 $ 8,098
Net increase in fair value of securities classified as
available-for-sale, net of income taxes and
reclassification adjustments 4,922 1,149
----------- -----------
Comprehensive income $ 17,623 $ 9,247
=========== ===========
See accompanying notes to unaudited consolidated financial statements.
PAGE 5
MIDWEST BANC HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 2002 AND 2001
(IN THOUSANDS, EXCEPT PER SHARE DATA)
ACCUMULATED
OTHER TOTAL
COMPRE- STOCK-
COMMON RETAINED HENSIVE TREASURY HOLDERS'
STOCK SURPLUS EARNINGS GAIN (LOSS) STOCK EQUITY
Balance, January 1, 2001 $ 114 $ 29,654 $ 65,814 $ (3,861) $ (9,145) $ 82,576
Cash dividends declared ($0.20
per share) - - (3,222) - - (3,222)
Issuance of common stock
upon exercise of stock options,
net of tax benefit - (96) - - - (96)
Comprehensive income
Net income - - 8,098 - - 8,098
Net increase in fair value of
securities classified as available-
for-sale, net of income taxes and
reclassification adjustments - - - 1,149 - 1,149
---------
Total comprehensive income 9,247
--------- --------- --------- -------- -------- ---------
Balance, June 30, 2001 $ 114 $ 29,558 $ 70,690 $ (2,712) $ (9,145) $ 88,505
========= ========= ========= ======== ======== =========
Balance, January 1, 2002 $ 114 $ 29,587 $ 77,256 $ (1,057) $ (9,686) $ 96,214
Cash dividends declared ($0.20
per share) - - (3,227) - - (3,227)
Purchase of 15,000 shares of
treasury stock - - - - (204) (204)
Issuance of common stock
upon acquisition and exercise of
stock options, net of tax benefit - (78) - - 1,185 1,107
Comprehensive income
Net income - - 12,701 - - 12,701
Net increase in fair value of
securities classified as available-
for sale, net of income taxes and
reclassification adjustments - - - 4,922 - 4,922
---------
Total comprehensive income 17,623
--------- --------- --------- -------- -------- ---------
Balance, June 30, 2002 $ 114 $ 29,509 $ 86,730 $ 3,865 $ (8,705) $ 111,513
========= ========= ========= ======== ======== =========
See accompanying notes to unaudited consolidated financial statements.
PAGE 6
MIDWEST BANC HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 2002 AND 2001
(IN THOUSANDS)
2002 2001
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 12,701 $ 8,098
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation 1,136 1,317
Provision for loan losses 1,477 1,204
Proceeds from sales of trading account securities, net 348 496
Net gain on sale of securities available-for-sale (1,295) (1,538)
Net gain on sale of trading account securities (348) (496)
Federal Home Loan Bank stock dividend (360) (371)
Net change in real estate loans held for sale 2,666 (795)
Increase in cash surrender value of life insurance (468) (468)
Loss (gain) on sale of other real estate (9) 4
Change in other assets (2,323) 1,469
Change in other liabilities 5,797 7,280
----------- -----------
Net cash from operating activities 19,323 16,200
CASH FLOWS FROM INVESTING ACTIVITIES
Sales and maturities of securities available-for-sale 187,945 108,246
Principal payments on securities 82,409 58,583
Purchase of securities available-for-sale (249,764) (213,637)
Maturities of securities held-to-maturity 900 1,150
Net increase in loans (86,181) (92,449)
Acquisition, net (1,008) -
Proceeds from sale of other real estate 118 995
Property and equipment expenditures, net (671) (465)
----------- -----------
Net cash from investing activities (66,252) (137,577)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 124,397 91,774
Borrowings 3,800 10,000
Repayment of borrowings (8,500) (2,300)
Dividends paid (3,219) (3,222)
Change in securities sold under agreements to repurchase
and federal funds purchased (28,198) 26,092
Treasury stock activity, net 620 (96)
----------- -----------
Net cash from financing activities 88,900 122,248
----------- -----------
Increase in cash and cash equivalents 41,970 871
Cash and cash equivalents at beginning of period 49,812 46,556
----------- -----------
Cash and cash equivalents at end of period $ 91,782 $ 47,427
=========== ===========
Supplemental disclosures
Cash paid during the year for
Interest $ 25,595 $ 34,095
Income Taxes 5,678 3,872
Amount due to broker for purchases of securities - 6,000
See accompanying notes to unaudited consolidated financial statements.
PAGE 7
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 three months and six
months ended June 30, 2002 are not necessarily indicative of the results
expected for the full year ending December 31, 2002.
NOTE 2 - STOCK DIVIDEND
On July 9, 2002, the Company paid a three-for-two stock split
payable in the form of a three-for-two stock dividend. All references to number
of shares issued, outstanding (basic and diluted) and held in treasury, earnings
per share, and book value per share, for all periods presented have been
restated as if the three-for-two stock split had actually occurred on January 1,
2001.
NOTE 3 - EARNINGS PER SHARE
The Company had 16,156,000 and 16,110,000 shares of common stock
outstanding at June 30, 2002 and 2001, respectively. Basic earnings per share
for the three months and six months ended June 30, 2002 and 2001 were computed
by dividing net income by the weighted average number of shares outstanding.
Diluted earnings per share for the three and six months ended June 30, 2002 and
2001 were computed by dividing net income by the weighted average number of
shares outstanding, adjusted for the dilutive effect of the stock options.
Computations for basic and diluted earnings per share are provided below.
IN THOUSANDS 2002 QTD 2001 QTD 2002 YTD 2001 YTD
-------- -------- -------- --------
Basic
Net income $ 6,388 $ 4,236 $ 12,701 $ 8,098
=========== =========== =========== ===========
Weighted average common shares outstanding 16,127 16,110 16,102 16,110
=========== =========== =========== ===========
Basic earnings per common share $ 0.40 $ 0.26 $ 0.79 $ 0.50
=========== =========== =========== ===========
Diluted
Net income $ 6,388 $ 4,236 $ 12,701 $ 8,098
=========== =========== =========== ===========
Weighted average common shares outstanding 16,127 16,110 16,102 16,110
Diluted effect of stock options 472 222 392 171
----------- ----------- ----------- -----------
Dilutive average common shares 16,599 16,332 16,494 16,281
=========== =========== =========== ===========
Diluted earnings per common share $ 0.39 $ 0.26 $ 0.77 $ 0.50
=========== =========== =========== ===========
All outstanding options were included in the computation of diluted
earnings per share for the quarters ended June 30, 2002 and 2001 and the six
months ended June 30, 2002. Options to purchase 194,438 shares at $11.92 were
not included in the computation of diluted earnings per share for the six months
ended June 30, 2001 because the option's exercise price was greater than the
average market price of the common stock and were, therefore, antidilutive.
PAGE 8
NOTE 4 - STOCK OPTIONS
During the first six months of 2002, 235,500 stock options were granted
at an exercise price of $14.90. In addition, during 2002, there were 102,948
options exercised. The total stock options outstanding were 1,145,093 at June
30, 2002 with exercise prices ranging between $5.42 and $14.90 and expiration
dates between 2006 and 2012.
NOTE 5 - ISSUANCE OF TRUST PREFERRED SECURITIES
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%
preferred securities with an aggregate liquidation amount of $20,000,000 ($25
per preferred security) to third-party investors. The Company then issued 10%
junior subordinated debentures aggregating $20,000,000 to the Trust. The junior
subordinated debentures are the sole assets of the Trust. The junior
subordinated debentures and the preferred securities pay distributions and
dividends, respectively, on a quarterly basis, which are included in interest
expense. The junior subordinated debentures will mature on June 7, 2030, at
which time the preferred securities must be redeemed. The junior subordinated
debentures and preferred securities can be redeemed contemporaneously, in whole
or in part, beginning June 7, 2005 at a redemption price of $25 per preferred
security. The Company has provided a full, irrevocable and unconditional
guarantee on a subordinated basis of the obligations of the Trust under the
preferred securities in the event of the occurrence of an event of default, as
defined in such guarantee. Debt issuance costs totaling $270,000 and
underwriting fees of $700,000 were capitalized related to the offering and are
being amortized over the estimated life of the junior subordinated debentures.
NOTE 6 - HEDGING ACTIVITIES
The Company is involved in certain derivative transactions that are
intended to protect the fair value of certain assets or liabilities and to
improve the predictability of certain future transactions. The Company's Board
has implemented policy guidelines and parameters for these types of
transactions. All derivative instruments are recorded at their fair values and
the change in the fair value of a derivative is included in other income. If
derivative instruments are designated as hedges of fair values, both the change
in the fair value of the hedge and the hedged item are included in current
earnings. Fair value adjustments related to cash flow hedges are recorded in
other comprehensive income and reclassified to earnings when the hedged
transaction is reflected in earnings. Ineffective portions of hedges are
reflected in earnings as they occur.
In January 2002, the Company entered into a plain vanilla interest rate
swap with a counterparty in order to convert its $20 million trust preferred
securities and related junior subordinated debentures from a 10% fixed rate
instrument into floating rate debt. The plain vanilla interest rate swap has a
notional amount of $20 million and was written to the call date on the trust
preferred securities, which is June 7, 2005. The Company will pay the interest
quarterly at a rate equal to the three-month LIBOR. The counterparty will pay a
fixed rate of 4.59% for the term of the agreement. The Company has documented
this to be a fair value hedge of the junior subordinated debentures and reflects
the change in the fair value of the swap as an adjustment to income, which, to
the extent of its effectiveness, offsets the change in the fair value of the
debentures. There was no income or expense recorded for ineffectiveness during
the period ended June 30, 2002. The average yield on the debentures was reduced
from 10.00% to 7.48% during the six and three months ended June 30, 2002,
respectively, resulting in a reduction of interest expense of $252,000 and
$127,000, respectively.
During July of 2002, the Company decided to terminate the fair value
hedge in exchange for $718,000. This receipt of cash results in the value of the
trust preferred liability increasing by $718,000,
PAGE 9
and this amount being accreted into income, as a reduction of interest expense,
over the estimated life of the junior subordinated debentures.
From time to time, the Company also buys and sells various covered put
and call options, with terms less than 90 days, on mortgage-backed securities.
The Company had no covered put or call options outstanding at June 30, 2002.
NOTE 7 - RECENT REGULATORY DEVELOPMENTS
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 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 became effective July 1,
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.
NOTE 8 - NEW ACCOUNTING STANDARDS
In 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets," which requires that goodwill no longer be amortized to earnings, but
instead be reviewed for impairment. The amortization of goodwill ceases upon
adoption of SFAS No. 142, which for most companies, was January 1, 2002. At June
30, 2002 the Company had $4.5 million of goodwill. Approximately $1.5 million of
the goodwill recorded by the Company is related to a branch acquisition. This
goodwill will continue to be accounted for under SFAS No. 72, "Accounting for
Certain Acquisitions of Banking or Thrift Institutions," (excluded from the
scope from SFAS No. 142) and continue to be amortized to expense.
The Company has completed the first step of its impairment testing to
determine if goodwill is impaired. The Company's conclusion is that there is no
impairment at June 30, 2002. The impact of this standard on the three and
six-month periods ended June 30, 2002 and 2001 is as follows:
2002 2001 2002 2001
QTD QTD YTD YTD
--- --- --- ---
Reported net income $ 6,388 $ 4,236 $ 12,701 $ 8,098
Add back: goodwill amortization - 55 - 110
-------- --------- --------- ---------
Adjusted net income $ 6,388 $ 4,291 $ 12,701 $ 8,208
======== ========= ========= =========
BASIC EARNINGS PER SHARE
Reported net income $ 0.40 $ 0.26 $ 0.79 $ 0.50
PAGE 10
Goodwill amortization - - - 0.01
-------- --------- --------- ---------
Adjusted net income $ 0.40 $ 0.26 $ 0.79 $ 0.51
======== ========= ========= =========
DILUTED EARNINGS PER SHARE
Reported net income $ 0.39 $ 0.26 $ 0.77 $ 0.50
Goodwill amortization - - - 0.01
-------- --------- --------- ---------
Adjusted net income $ 0.39 $ 0.26 $ 0.77 $ 0.51
======== ========= ========= =========
NOTE 9 - ACQUISITION
On July 22, 2002, the Company jointly announced with Big Foot Financial
Corp (BFFC), that the parties have entered into a definitive agreement providing
for the Company to acquire BFFC in a stock merger transaction. The Company will
issue 1.104 shares of its common stock for each share of BFFC common stock
outstanding on the effective date resulting in a deal value of approximately
$33.4 million, based on closing prices of each of the Company's and BFFC's
common stock on July 19, 2002. The price is a 25.5% premium to BFFC's closing
price of $16.95 on that date. BFFC had 1,509,168 shares outstanding as of June
30, 2002. The exchange ratio is fixed and BFFC has the right to terminate the
transaction if the Company's stock falls below an average of $17.12 over 20
trading days prior to closing, subject to certain provisions. The transaction,
which is subject to approval by regulators and BFFC's shareholders, is expected
to close in the first quarter of 2003.
PAGE 11
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS - THREE MONTHS AND SIX MONTHS
ENDED JUNE 30, 2002 AND 2001
Consolidated net income for the second quarter of 2002 was $6.4 million
or $0.40 and $0.39 per basic and diluted share, respectively, a 50.8% increase
compared to $4.2 million or $0.26 per basic and diluted share for the second
quarter of 2001. Diluted earnings per share for the three months ended June 30,
2002 was 50.0% higher than for the comparable period in 2001. Consolidated net
income for the six months ended June 30, 2002 was $12.7 million or $0.79 and
$0.77 per basic and diluted share, respectively, a 56.8% increase compared to
$8.1 million or $0.50 per basic and diluted share for the similar period in
2001. Diluted earnings per share for the six months ended June 30, 2002 was
54.0% higher than for the comparable period in 2001. The return on average
assets for the three months ended June 30, 2002 was 1.38% compared to 1.10% for
the similar period in 2001. For the six months ended June 30, 2002, the return
on average assets was 1.39% compared to 1.08% for the similar period in 2001.
The return on average equity for the three months ended June 30, 2002 was 24.19%
compared to 19.24% for the similar period in 2001. For the six months ended June
30, 2002, the return on average equity was 24.86% compared to 18.76% for the
similar period in 2001.
Net interest income increased 36.1% to $15.5 million in the second
quarter of 2002 compared to $11.4 million in the second quarter of 2001. During
the six months ended June 30, 2002, net interest income increased 33.5% to $30.3
million compared to $22.7 million for the comparable period in 2001. Excluding
gains on securities and trading account profits, other income increased 19.8% to
$2.6 million and other expenses increased 8.3% to $8.5 million in the second
quarter of 2002. Other income, excluding gains on securities and trading account
profits, increased 34.0% to $5.2 million for the six months ended June 30, 2002
compared to the similar period in 2001. Other expenses for the six months ended
June 30, 2002 increased by $1.5 million or 9.7% compared to the similar period
in 2001.
Net Interest Income
- -------------------
Net interest income was $15.5 million and $11.4 million during the
three months ended June 30, 2002 and 2001, respectively, an increase of $4.1
million, or 36.1%. During the six months ended June 30, 2002, net interest
income increased $7.6 million or 33.5% to $30.3 million compared to $22.7
million for the similar period in 2001. The Company's net interest margin (tax
equivalent net interest income as a percentage of earning assets) was 3.64% for
the three months ended June 30, 2002 compared to 3.28% for the comparable period
in 2001. During the six months ended June 30, 2002, the net interest margin was
3.61% compared to 3.35% for the similar period in 2001. Net interest income
increased because the decrease in average rates paid on deposits and borrowings
was greater than the decrease in the yields on earning assets. This decrease in
yields was a result of the 11 rate reductions by the Federal Reserve during
2001. The lower interest rate environment has brought about lower yields on
earning assets and interest-bearing liabilities, especially certificates of
deposit that have been repriced at current market rates.
The average loan yield was 7.00% during the second quarter of 2002, a
decrease of 19.4% from 8.68% during the comparable period in 2001. For the six
months ended June 30, 2002, the average loan yield was 7.00%, a decrease of
21.9% from 8.96% during the comparable period in 2001. Average loan balances
increased $173.4 million, or 19.2%, to $1.1 billion during the second quarter of
2002 from $902.0 million during the similar period in 2001. During the first six
months of 2002, average loan balances increased $174.6 million, or 19.9%, to
$1.1 billion from $876.8 million during the similar period
PAGE 12
of 2001. The Company's net interest income and net income is dependent in part
on stable interest rates. Interest rates were stable during the first and second
quarters of 2002.
Yields on securities were 6.20% during the second quarter of 2002, a
decrease of 7.2% from 6.68% during the comparable period in 2001. During the six
months ended June 30, 2002, securities yields decreased 9.1% to 6.22% from 6.84%
in the comparable period in 2001. A decrease in mortgage loan rates has sparked
an increase in mortgage loan refinancing which has accelerated the prepayments
speeds of the Company's mortgage-backed securities and increased amortization
expense on these securities.
Yields on earning assets decreased 15.2% to 6.68% during the second
quarter of 2002 compared to 7.88% for the second quarter of 2002. During the
first six months of 2002, yields on earning assets decreased to 6.66%, or 18.0%,
from 8.12% for the similar period in 2001. Average earning assets, however,
increased to $1.8 billion for both the three months and six months ended June
30, 2002 from $1.5 billion and $1.4 billion for the three months and six months
ended June 30, 2001, respectively. The decrease in yields on earning assets was
offset by a decrease in rates paid on deposits and borrowings. Average rates
paid on deposits decreased 41.0% to 2.88% for the three months ended June 30,
2002 from 4.88% for the comparable period in 2001. For the first six months of
2002, average rates paid on deposits decreased 42.0% to 2.96% from 5.10% for the
similar period of 2001. Average rates paid on borrowings were 4.44% for the
second quarter of 2002 compared to 5.80% for the second quarter of 2001. During
the six months ended June 30, 2002, average rates paid on borrowings were 4.34%
compared to 5.84% for the similar period in 2001.
In January 2002, the Company entered into a plain vanilla interest rate
swap with a counterparty in order to convert its $20 million trust preferred
securities and related junior subordinated debentures from a 10.00% fixed rate
instrument into floating rate debt. The average yield on the $20 million trust
preferred securities and related junior subordinated debentures was 7.48% for
the first six months of 2002. See Note 6 to the unaudited consolidated financial
statements. During July of 2002, the Company decided to terminate the fair value
hedge. This termination will result in the value of the trust preferred
liability increasing by $718,000, and this amount being accreted into income, as
a reduction of interest expense, over the estimated life of the junior
subordinated debentures.
The quarter-to-date net interest margin calculation for June 30, 2002
and 2001 is shown below (interest income and average rate on non-taxable
securities and loans are reflected on a tax equivalent basis, assuming a 35%
federal tax rate for 2002 and 2001 and adjusted for the dividend received
deduction where applicable):
JUNE 30, 2002 JUNE 30, 2001
------------- -------------
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE
------- -------- ---- ------- -------- ----
INTEREST-EARNING ASSETS
- -----------------------
Federal funds sold $ 9,434 $ 43 1.78% $ 11,964 $ 129 4.31%
Securities taxable 632,606 9,741 6.16 516,788 8,611 6.67
Securities tax-exempt 55,033 929 6.76 34,145 601 7.04
Commercial loans(1) 225,129 3,545 6.30 220,586 4,539 8.23
Commercial real estate loans (1) 677,665 12,159 7.18 506,031 11,356 8.98
Agriculture loans(1) 51,386 879 6.84 48,584 994 8.18
Consumer real estate loans(1) 108,107 1,964 7.27 112,017 2,358 8.42
Consumer installment loans(1) 13,072 254 7.77 14,763 342 9.27
----------- --------- ---- ----------- --------- ----
$ 1,772,432 $ 29,514 6.68% $ 1,464,878 $ 28,930 7.88%
=========== ========= ==== =========== ========= ====
INTEREST-BEARING LIABILITIES
- ----------------------------
Interest-bearing demand
deposits $ 136,149 $ 523 1.54% $ 128,579 $ 913 2.84%
Money-market demand deposits
and savings deposits 258,588 1,100 1.70 264,799 2,249 3.40
PAGE 13
Time deposits less than $100,000 583,889 5,299 3.63 472,807 7,101 6.01
Time deposits greater than $100,000 130,585 1,013 3.10 89,632 1,296 5.78
Public funds 70,757 602 3.40 67,227 936 5.58
Federal funds purchased
and repurchase agreements 173,393 1,154 2.66 33,840 428 5.06
FHLB advances 237,500 3,290 5.54 244,500 3,377 5.52
Notes payable and other borrowings 28,800 425 5.90 26,945 613 9.10
----------- --------- ---- ----------- --------- ----
$ 1,619,661 $ 13,406 3.32% $ 1,328,329 $ 16,913 5.08%
=========== ========= ==== =========== ========= ====
Net Interest Income $ 16,108 3.36% $ 12,017 2.80%
========= ==== ========= ====
Net Interest Margin 3.64% 3.28%
==== ====
(1) Nonaccrual loans are included in the average balances, however these
loans are not earning any interest.
The year-to-date net interest margin calculation for June 30, 2002 and
2001 is shown below (interest income and average rate on non-taxable securities
and loans are reflected on a tax equivalent basis, assuming a 35% federal tax
rate for 2002 and 2001 and adjusted for the dividend received deduction where
applicable):
JUNE 30, 2002 JUNE 30, 2001
------------- -------------
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE
------- -------- ---- ------- -------- ----
INTEREST-EARNING ASSETS
Federal funds sold $ 8,657 $ 73 1.66% $ 8,670 $ 200 4.61%
Securities taxable 645,726 19,944 6.18 512,110 17,482 6.83
Securities tax-exempt 45,065 1,524 6.77 34,726 1,221 7.03
Commercial loans(1) 225,720 7,094 6.29 214,009 9,325 8.71
Commercial real estate loans(1) 653,679 23,457 7.18 488,384 22,489 9.21
Agriculture loans(1) 50,533 1,753 6.94 48,464 2,027 8.36
Consumer real estate loans(1) 108,472 3,907 7.20 111,357 4,776 8.58
Consumer installment loans(1) 12,979 541 8.34 14,542 677 9.31
----------- --------- ---- ----------- --------- ----
$ 1,750,831 $ 58,293 6.66% $ 1,432,262 $ 58,197 8.12%
=========== ========= ==== =========== ========= ====
INTEREST-BEARING LIABILITIES
Interest-bearing demand deposits $ 135,734 $ 1,039 1.53% $ 126,432 $ 1,930 3.05%
Money-market demand deposits
and savings deposits 259,855 2,196 1.69 265,540 4,987 3.76
Time deposits less than $100,000 556,216 10,453 3.76 463,783 14,245 6.14
Time deposits greater than $100,000 130,410 2,111 3.24 82,843 2,486 6.00
Public funds 75,401 1,314 3.49 60,821 1,814 5.97
Federal funds purchased
and repurchase agreements 171,906 2,097 2.44 31,189 857 5.50
FHLB advances 239,445 6,593 5.51 242,898 6,699 5.52
Notes payable and other borrowings 27,822 852 6.12 26,036 1,219 9.36
----------- --------- ---- ----------- --------- ----
$ 1,596,789 $ 26,655 3.34% $ 1,299,542 $ 34,237 5.26%
=========== ========= ==== =========== ========= ====
Net Interest Income $ 31,638 3.32% $ 23,960 2.86%
========= ==== ========= ====
Net Interest Margin 3.61% 3.35%
==== ====
(1) Nonaccrual loans are included in the average balances, however these loans
are not earning any interest.
Other Income
- ------------
Other income, excluding securities gains and trading account profits,
was $2.6 million for the three months ended June 30, 2002, an increase of
$423,000, or 19.8% over the comparable period in
PAGE 14
2001. For the six months ended June 30, 2002, other income, excluding securities
gains and trading account profits, was $5.2 million, an increase of $1.3
million, or 34.0%, compared to $4.0 million for the comparable period in 2001.
The other income to average assets ratio was 0.55% for the three months ended
June 30, 2002 compared to 0.56% for the same period in 2001. For the six months
ended June 30, 2002, the other income to average assets ratio was 0.57% compared
to 0.52% for the same period in 2001. The increase in other income is due to
increases in service charges on deposits, option income, and insurance and
brokerage commissions.
Service charges and fees increased 17.0%, or $204,000, to $1.4 million
in the second quarter of 2002 from $1.2 million in the second quarter of 2001.
Year-to-date, service charges and fees increased 25.7%, or $553,000, to $2.7
million in 2002 compared to $2.2 million for the comparable period in 2001. This
increase in service charges and fees, which include service charges on deposit
accounts, is mainly due to deposit growth. Management expects service charges
and fees to increase with future deposit growth.
Insurance and brokerage commissions increased $249,000 from $145,000 in
the second quarter of 2001 to $394,000 for the second quarter of 2002. For the
six months ended June 30, 2002, insurance and brokerage commissions increased
$260,000 to $540,000 compared to $280,000 for the first six months of 2001.
During the second quarter of 2002, the Company recognized the full benefit of
brokerage commissions related to the March 2002 acquisition of Service 1st
Financial Corp. by the Company's subsidiary, Midwest Financial and Investment
Services, Inc. This subsidiary provides securities brokerage services to both
bank and non-bank customers. Brokerage activities are expected to be expanded to
many of the Company's banking center locations in the near future. The Company
anticipates that brokerage commissions will increase in the future through this
subsidiary.
Mortgage banking fees decreased 52.4% to $89,000 during the second
quarter of 2002 compared to $187,000 for the similar period in 2001.
Year-to-date, mortgage banking fees decreased $43,000 to $231,000 in 2002
compared to $274,000 for the similar period in 2001. The Company places most
mortgages originated into the secondary market.
Trust income decreased by 3.9% or $6,000 to $147,000 for the second
quarter of 2002 compared to $153,000 for the similar period in 2001. For the six
months ended June 30, 2002, trust income decreased by $71,000 compared to the
six months ended June 30, 2001. The Company sold a portion of its trust business
in 1999 and the three-year payout period will expire through 2002. Trust income
is derived from the market value of trust assets under management. The market
value of trust assets is subject to fluctuations in the stock and bond markets.
The value of these trust assets has been negatively impacted during 2002 due to
the overall weakness and deterioration in the U.S. equity and fixed income
markets. Trust assets under management approximated $183.0 million as of June
30, 2002.
The Company purchased bank-owned life insurance ("BOLI") policies in
June 2000. The increase in cash surrender value of life insurance was $234,000
and $468,000 during the second quarter and first six months of 2002,
respectively. The increase in cash surrender value of life insurance is not
included in interest income. Management currently intends to use the increase in
cash surrender value of life insurance to offset increased employee benefits
expense.
The Company manages its securities available-for-sale portfolio and
trading account portfolio on a total return basis. In this respect, management
regularly reviews the performance of its securities and sells specific
securities to provide opportunities to enhance net interest income and net
interest margin, and when possible it will recognize gains on the sale of
securities. The Company has a long history of managing its securities in this
manner. Trading account profits result from trading strategies that are utilized
to supplement narrowing bond yields during periods of interest rate volatility.
Net trading account profits were $3,000 and $336,000 during the second quarter
of 2002 and 2001, respectively. Year-to-date, net trading account profits were
$348,000 and $496,000 in 2002 and 2001, respectively.
PAGE 15
Sales of securities available-for-sale resulted in net gains of $757,000 in the
second quarter of 2002 compared to $1.3 million for the comparable period in
2001. For the six months ended June 30, 2002, gains on sales of securities
available-for-sale were $1.3 million compared to $1.5 million for the similar
period in 2001. Securities available-for-sale are held in a manner which allows
for their sale in response to changes in interest rates, liquidity needs, or
significant prepayment risk. Market fluctuations may create opportunities to
either purchase or sell securities. The Company looks for opportunities to
enhance its revenues by purchasing and/or selling as deemed appropriate by
management.
Periodically, the Company has bought or sold various covered put and
call options, with terms less than 90 days, on mortgage-backed securities. These
covered options have either expired or have been exercised, and the associated
income or expense has been recognized in the corresponding period. Option income
increased $64,000 to $122,000 during the second quarter of 2002 compared to the
second quarter of 2001. For the six months ended June 30, 2002, option income
increased $596,000 to $654,000 compared to the similar period in 2001. The
Company had no covered put or call options outstanding at June 30, 2002. See
Note 6 to the unaudited consolidated financial statements.
Other Expenses
- --------------
Total other expenses increased 8.3%, or $650,000, to $8.5 million
during the second quarter of 2002 compared to $7.8 million for the comparable
period in 2001. For the six months ended June 30, 2002, total other expenses
increased 9.7%, or $1.5 million, to $16.7 million from $15.2 million in the
first six months of 2001. The other expenses to average assets ratio was 1.82%
for the three months ended June 30, 2002 compared to 2.03% for the same period
in 2001. For the six months ended June 30, 2002, the other expenses to average
assets ratio was 1.83% compared to 2.02% for the similar period in 2001. The net
overhead expenses to average assets ratio was 1.27% for the three months ended
June 30, 2002 compared to 1.47% for the same period in 2001. For the six months
ended June 30, 2002, the net overhead expenses to average assets ratio was 1.25%
compared to 1.50% for the similar period in 2001. The efficiency ratio was
44.84% for the three months ended June 30, 2002 compared to 54.23% for the same
period in 2001. The efficiency ratio was 44.74% for the six months ended June
30, 2002 compared to 53.49% for the similar period in 2002.
Salary and benefit expenses increased 15.0% or $683,000 to $5.2 million
for the second quarter of 2002 compared to $4.6 million for the similar period
in 2001. For the six months ended June 30, 2002, salary and benefit expenses
increased $1.2 million or 13.7% to $10.2 million from $9.0 million for the
comparable period in 2001. The full-time equivalent number of employees was 383
as of June 30, 2002 compared to 355 as of June 30, 2001. Increased full-time
staff positions, including investment brokerage staff, enhanced benefit
programs, and increased health insurance costs have resulted in the increase in
salaries and employee benefits.
Occupancy expenses decreased $57,000 or 4.4% to $1.2 million during the
second quarter of 2002 compared to $1.3 million for the comparable period in
2001. For the six months ended June 30, 2002, occupancy expenses decreased
$134,000 or 5.3% to $2.4 million from $2.5 million in the six months of 2001.
This decrease was due to the decrease in furniture and equipment depreciation
during the first six months of 2002 compared to the similar period in 2001.
Expenses, other than salary and employee benefits and occupancy,
increased $24,000 or 1.2% to $2.0 million in the second quarter of 2002 compared
to the similar period in 2001. Other expenses increased $380,000 or 10.4% to
$4.0 million for the six months ended June 30, 2002 from $3.7 million for the
comparable period in 2001. The increase in expenses was due primarily to
outsourcing arrangements, marketing expenses, and other loan related expenses.
PAGE 16
Income Taxes
- ------------
The Company recorded income tax expense of $3.2 million, or 33.1% of
income, and $2.4 million, or 36.1% of income, for the quarters ended June 30,
2002 and 2001, respectively. Year-to-date, the provision for income taxes
increased $2.2 million or 52.8%. The increase in income taxes was due to the
increase in pre-tax income to date in 2002.
Internal Reorganization
- -----------------------
Effective August 19, 2002, Midwest Bank of Hinsdale and Midwest Bank of
McHenry County will merge into Midwest Bank and Trust Company. Immediately
following the merger, the Company will contribute to Midwest Bank and Trust
Company 100% of the capital stock of First Midwest Data Corp., and thereafter,
First Midwest Data Corp. will be liquidated. This internal reorganization is the
final phase of a multi-phase effort to consolidate backroom functions, reduce
duplicative processes, streamline customer service, and enhance marketing
efforts and product delivery. Management believes that this merger will assist
the Company in meeting its revenue growth expectations and controlling its
overhead costs.
FINANCIAL CONDITION
Loans
- -----
Total loans increased $83.1 million or 8.3% to $1.1 billion as of June
30, 2002 from $1.0 billion as of December 31, 2001. This increase is partly due
to an overall increase in draws on commercial and commercial real estate lines
of credit. Commercial loans increased $7.4 million or 3.3% to $228.1 million as
of June 30, 2002 compared to $220.7 million as of December 31, 2001. Commercial
real estate loans increased 12.1% or $73.9 million to $685.5 million as of June
30, 2002 from $611.6 million as of December 31, 2001. Agricultural loans
increased 5.9% or $2.9 million to $51.6 million as of June 30, 2002 from $48.8
million as of December 31, 2001.
Consumer real estate loans decreased $1.3 million or 1.2% to $107.9
million as of June 30, 2002 from $109.3 million as of December 31, 2001.
Consumer loans increased 2.6% to $13.4 million as of June 30, 2002 compared to
$13.0 million as of December 31, 2001.
Most mortgage loans are sold in the secondary market. At any point in
time, loans will be at various stages of the mortgage banking process. Included
as part of consumer real estate loans are loans held for sale, which were $3.4
million as of December 31, 2001 and $748,000 at June 30, 2002. The carrying
value of these loans approximated their market value at that time.
Allowance for Loan Losses
- -------------------------
An allowance for loan losses has been established by management to
provide for those loans that may not be repaid in their entirety for a variety
of reasons. The allowance is maintained at a level considered by management to
be adequate to provide for probable incurred losses. The allowance is increased
by provisions charged to earnings and is reduced by chargeoffs, net of
recoveries. The provision for loan losses is based upon past loan loss
experience and management's evaluation of the loan portfolio under current
economic conditions. Loans are charged to the allowance for loan losses when,
and to the extent, they are deemed by management to be uncollectible. The
allowance for loan losses is composed of allocations for specific loans and a
historical portion for all other loans.
PAGE 17
Following is a summary of changes in the allowance for loan losses for
the six months ended June 30:
2002 2001
---- ----
(DOLLARS IN THOUSANDS)
Balance, January 1 $ 10,135 $ 8,593
Provision charged to operations 1,477 1,204
Loans charged-off (568) (279)
Recoveries 166 92
---------- -----------
Balance, June 30 $ 11,210 $ 9,610
========== ===========
The Company recognizes that credit losses will be experienced and the
risk of loss will vary with, among other things, general economic conditions;
the type of loan being made; the creditworthiness of the borrower over the term
of the loan and in the case of a collateralized loan, the quality of the
collateral for such loan. The allowance for loan losses represents the Company's
estimate of the allowance necessary to provide for probable incurred losses in
the portfolio. In making this determination, the Company analyzes the ultimate
collectibility of the loans in its portfolio by incorporating feedback provided
by internal loan staff, an independent loan review function, and information
provided by examinations performed by regulatory agencies. The Company makes
quarterly evaluations as to the adequacy of the allowance for loan losses.
On a quarterly basis, management of each of the Banks meets to review
the adequacy of the allowance for loan losses. Each bank loan officer grades
these individual credits, and the Company's independent loan review function
validates the officers' grades. In the event that loan review downgrades a loan,
it is included in the allowance analysis at the lower grade. The grading system
is in compliance with applicable regulatory classifications, and the allowance
is allocated to the loans based on the regulatory grading, except in instances
where there are known differences (e.g. collateral value is nominal).
The analysis of the allowance for loan losses is comprised of three
components: specific credit allocation; general portfolio allocation; and
subjectively by determined allocation. The specific credit allocation includes a
detailed review of the credit in accordance with SFAS Nos. 114 and 118, and an
allocation is made based on this analysis. The general portfolio allocation
consists of an assigned reserve percentage based on the credit rating of the
loan. The subjective portion is determined based on loan history and the
Company's evaluation of various factors including current economic conditions
and trends in the portfolio including delinquencies and impairments, as well as
changes in the composition of the portfolio.
The allowance for loan losses is based on estimates, and ultimate
losses will vary from current estimates. These estimates are reviewed quarterly,
and as adjustments, either positive or negative, become necessary, a
corresponding increase or decrease is made in the provision for loan losses. The
methodology used to determine the adequacy of the allowance for possible loan
losses for the second quarter of 2002 is consistent with prior periods.
The Company's provision for loan losses was $815,000 for the second
quarter of 2002 compared to $695,000 for the similar period in 2001. For the six
months ended June 30, 2002, the provision for losses was $1.5 million compared
to $1.2 million for the comparable period in 2001. This increase is due to
probable incurred losses on problem loans.
PAGE 18
The allowance for loan losses as a percentage of total loans was 1.03%
as of June 30, 2002 and 1.01% as of December 31, 2001. In management's judgment,
an adequate allowance for loan losses has been established.
Nonaccrual and Nonperforming Loans
- ----------------------------------
Nonaccrual loans increased to $2.9 million as of June 30, 2002 from
$1.8 million as of December 31, 2001. Most of the nonaccrual loans are related
to several commercial loans which are being addressed by specific workout plans
at this time.
Nonperforming loans include nonaccrual loans and accruing loans which
are 90 days or more delinquent. Typically, these loans have adequate collateral
protection and/or personal guaranties to provide a source of repayment to the
Bank. Nonperforming loans were $5.7 million as of June 30, 2002 compared to $2.4
million at December 31, 2001 and $3.2 million at June 30, 2001. Nonperforming
loans were 0.53%, 0.24%, and 0.35% of total loans as of June 30, 2002, December
31, 2001 and June 30, 2001, respectively. Nonperforming loans were 0.30%, 0.13%
and 0.20% of total assets as of June 30, 2002, December 31, 2001 and June 30,
2001, respectively. The allowance for loan losses to nonperforming loans was
1.96x, 4.28x, and 2.97x at June 30, 2002, December 31, 2001, and June 30, 2001,
respectively.
Other real estate owned was $246,000 on June 30, 2002, and $355,000 and
$154,000 at December 31, 2001 and June 30, 2001, respectively. Nonperforming
assets were 0.32%, 0.15% and 0.21% of total assets at June 30, 2002, December
31, 2001 and June 30, 2001.
Securities
- ----------
The Company manages its securities portfolio to provide a source of
both liquidity and earnings. Each Bank has its own asset/liability committee,
which develops current investment policies based upon its operating needs and
market circumstances. Each Bank's investment policy is formally reviewed and
approved annually by its board of directors. The asset/liability committee of
each Bank is responsible for reporting and monitoring compliance with the
investment policy. Reports are provided to each Bank's board of directors and
the Board of Directors of the Company on a regular basis. The investment policy
of each Bank is reviewed by senior financial management of the Company in terms
of its objectives, investment guidelines and consistency with overall Company
performance and risk management goals.
Securities available-for-sale are carried at fair value, with related
unrealized net gains or losses, net of deferred income taxes, recorded as an
adjustment to equity capital. As of June 30, 2002, net unrealized losses on
securities available-for-sale decreased $4.9 million from an unrealized loss of
$1.1 million at December 31, 2001 to an unrealized gain of $3.9 million. This
change resulted in a $4.9 million increase in book equity.
Securities available-for-sale decreased to $624.6 million as of June
30, 2002 from $683.5 million as of December 31, 2001. U.S. government agency
mortgage-backed securities decreased 12.5% or $74.3 million from $596.1 million
as of December 31, 2001 to $521.8 million as of June 30, 2002. Equity securities
decreased $31.3 from $72.2 million at December 31, 2001 to $41.0 million as of
June 30, 2002. Equity securities at June 30, 2002 included capital securities of
United States agencies, bond-rated or credit equivalent community banks, and the
Federal Home Loan Bank and Federal Reserve Bank stock. Obligations of state and
political subdivisions increased $44.2 million to $57.2 million at June 30, 2002
from $13.0 million at December 31, 2001.
All fixed and adjustable rate mortgage pools contain a certain amount
of risk related to the uncertainty of prepayments of the underlying mortgages.
Interest rate changes have a direct impact upon prepayment rates. The Company
uses computer simulation models to test the average life, duration and
PAGE 19
yield volatility of adjustable rate mortgage pools under various interest rate
assumptions to monitor volatility. Stress tests are performed quarterly.
Securities held-to-maturity decreased $940,000 or 4.4% from December
31, 2001 to June 30, 2002 as a result of bond maturities and net amortization
expense.
There were no trading account securities held at June 30, 2002 or
December 31, 2001. The Company holds trading account securities on a short-term
basis based on market and liquidity conditions.
Other Assets
- ------------
The Company's investment in Bank-Owned Life Insurance ("BOLI")
increased by $468,000 as the cash surrender value of the insurance increased
from December 31, 2001 to June 30, 2002. Management currently intends to use the
BOLI to fund future employee benefit expense.
Pending Acquisition
- -------------------
On July 22, 2002, the Company jointly announced with Big Foot Financial
Corp (NASDAQ: BFFC), the execution of a definitive agreement providing for the
acquisition of BFFC by the Company in a stock merger transaction.
The Company will issue 1.104 shares of its common stock for each share
of BFFC common stock outstanding on the effective date of the merger, resulting
in a deal value of approximately $33.4 million, based on closing prices of the
Company's and BFFC's common stock on July 19, 2002. The price is a 25.5% premium
to BFFC's closing price of $16.95 on that date. BFFC had 1,509,168 shares
outstanding as of June 30, 2002. The exchange ratio is fixed, and BFFC has the
right to terminate the transaction if the Company's stock falls below an average
of $17.12 over 20 trading days prior to closing, subject to certain provisions.
It is currently anticipated that Fairfield Savings Bank. F.S.B., BFFC's
subsidiary, will merge into Midwest Bank and Trust Company, and current plans
call for the retention of all branches. The transaction is expected to be
accretive to the Company's earnings per share and capital ratios. The
transaction, which is subject to approval by regulators and BFFC's shareholders,
is expected to close in the first quarter of 2003.
None of the senior management of BFFC are expected to continue in their
positions after completion of the transaction. Identified cost savings as a
result of the merger are anticipated to be approximately $2.0 million annually,
which represents 42.7% of BFFC's other expenses. Total merger related expenses
of $6.1 million, or $4.3 million after-tax, are anticipated.
Deposits and Borrowed Funds
- ---------------------------
Total deposits of $1.3 billion as of June 30, 2002 represented an
increase of $124.4 million or 10.3% from $1.2 billion as of December 31, 2001.
Non-interest-bearing deposits were $129.7 million as of June 30, 2002,
approximately $5.0 million lower than the $134.7 million level as of December
31, 2001. Over the same period, interest-bearing deposits increased 12.0% or
$129.4 million. Certificates of deposit under $100,000 increased $120.7 million
from December 31, 2001 to June 30, 2002. Certificates of deposit over $100,000
and public funds increased by $12.4 million from December 31, 2001 to June 30,
2002.
The Company's membership in the Federal Home Loan Bank System gives it
the ability to borrow funds from the Federal Home Loan Bank of Chicago for
short- or long-term purposes under a
PAGE 20
variety of programs. The loans are used to fund growth and permit the Banks to
extend term maturities, reduce funding costs and manage interest rate risk
exposures more effectively.
Federal Home Loan Bank advances were $237.5 million at June 30, 2002
and $244.5 million at December 31, 2001. The weighted average rate for Federal
Home Loan Bank advances was 5.51% during the six months ended June 30, 2002,
with a range of maturities between one and ten years.
Borrowed funds are listed below:
JUNE 30, DECEMBER 31,
2002 2001
---- ----
(DOLLARS IN THOUSANDS)
Federal Home Loan Bank (FHLB) advances
to bank subsidiaries $ 237,500 $ 244,500
Revolving line of credit to Midwest Banc
Holdings, Inc. ($25,000,000 available) 8,800 6,500
------------ ------------
Total notes payable $ 246,300 $ 251,000
============ ============
The Company has a credit agreement with a correspondent bank (the
"Credit Agreement"), which provides the Company with a revolving line of credit
with a maximum availability of $25.0 million. This revolving line of credit
matures on January 30, 2004.
Amounts outstanding under the Company's revolving line of credit
represent borrowings incurred to provide capital contributions to the Banks to
support their growth. The Company makes interest payments, at its option, at the
30-, 60-, 90-, or 180-day London Inter-Bank Offered Rate ("LIBOR") plus 95 basis
points, or the prime rate less 25 basis points.
The Company also utilizes securities sold under repurchase agreements
as a source of funds. Most local municipalities and some other organizations
must have funds insured or collateralized pursuant to their own policies.
Repurchase agreements provide a source of funds and do not increase the
Company's reserve requirement. Although the balance of repurchase agreements is
subject to variation, particularly seasonal variation, the account relationships
represented by these balances are principally local and have been maintained for
relatively long periods of time. The Company had $143.0 million in securities
sold under repurchase agreements at June 30, 2002 compared to $146.8 million at
December 31, 2001. The Company had no federal funds purchased at June 30, 2002
compared to $24.4 million at December 31, 2001.
In addition, in June 2000, the Company issued 10% junior subordinated
debentures aggregating $20,000,000 to MBHI Capital Trust I, a wholly-owned
subsidiary of the Company. The junior subordinated debentures pay interest on a
quarterly basis and will mature on June 7, 2030. The junior subordinated
debentures can be redeemed in whole or in part, beginning June 7, 2005. In
January 2002, the Company entered into a plain vanilla interest rate swap
converting the junior subordinated debentures from a fixed rate instrument to
floating rate debt. See Note 6 to unaudited consolidated financial statements.
During July of 2002, the Company decided to terminate the fair value hedge.
Capital Resources
- -----------------
Stockholders' equity increased $15.3 million or 15.9% to $111.5 million
at June 30, 2002 from $96.2 million at December 31, 2001. The increase was due
to 2002 cumulative earnings exceeding
PAGE 21
dividends declared as well as a $4.9 million increase in the fair value of
securities available-for-sale, net of tax.
The Company and its four subsidiary banks are subject to regulatory
capital requirements administered by federal banking agencies. Capital adequacy
guidelines and prompt corrective action regulations involve quantitative
measures of assets, liabilities and certain off-balance-sheet items calculated
under regulatory accounting practices. Capital amounts and classifications are
also subject to qualitative judgments by regulators about components, risk
weightings and other factors, and the regulators can lower classifications in
certain areas. Failure to meet various capital requirements can initiate
regulatory action that could have a direct material effect on the financial
statements.
The prompt corrective action regulations provide five classifications,
including well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized and critically undercapitalized, although these
terms are not used to represent overall financial condition. If adequately
capitalized, regulatory approval is required to accept brokered deposits. If
undercapitalized, capital distributions are limited, as is asset growth and
expansion, and plans for capital restoration are required.
The Company and each of the Banks were considered well capitalized
as of June 30, 2002. Management is not aware of any conditions or events since
the most recent regulatory notification that would change the Company's or the
Banks' categories.
Capital levels and minimum required levels (dollars in thousands):
AS OF JUNE 30, 2002
----------------------------------------------------------------------------
MINIMUM REQUIRED
MINIMUM REQUIRED TO BE WELL
ACTUAL FOR CAPITAL ADEQUACY CAPITALIZED
------ -------------------- -----------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------ ----- ------ ----- ------ -----
(DOLLARS IN THOUSANDS)
Total capital to risk-weighted
assets
Company $ 134,190 10.9% $ 98,049 8.0% $ 122,561 10.0%
Midwest Bank and
Trust Company 59,180 11.0 42,971 8.0 53,714 10.0
Midwest Bank of Hinsdale 33,013 10.8 24,390 8.0 30,488 10.0
Midwest Bank of McHenry
County 28,791 12.2 18,843 8.0 23,554 10.0
Midwest Bank of Western
Illinois 17,978 12.4 11,604 8.0 14,505 10.0
Tier I capital to risk-weighted
assets
Company 122,980 10.0 49,024 4.0 73,537 6.0
Midwest Bank and
Trust Company 54,596 10.2 21,486 4.0 32,229 6.0
Midwest Bank of Hinsdale 30,206 9.9 12,195 4.0 18,293 6.0
Midwest Bank of McHenry
County 26,477 11.2 9,422 4.0 14,133 6.0
Midwest Bank of Western
Illinois 16,473 11.4 5,802 4.0 8,703 6.0
PAGE 22
AS OF JUNE 30, 2002
----------------------------------------------------------------------------
MINIMUM REQUIRED
MINIMUM REQUIRED TO BE WELL
ACTUAL FOR CAPITAL ADEQUACY CAPITALIZED
------ -------------------- -----------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------ ----- ------ ----- ------ -----
(DOLLARS IN THOUSANDS)
Tier I capital to average assets
Company $ 122,980 6.6% $ 74,536 4.0% $ 93,170 5.0%
Midwest Bank and
Trust Company 54,596 6.8 32,331 4.0 40,414 5.0
Midwest Bank of Hinsdale 30,206 7.2 16,852 4.0 21,065 5.0
Midwest Bank of McHenry
County 26,477 7.1 14,859 4.0 18,574 5.0
Midwest Bank of Western
Illinois 16,473 6.4 10,266 4.0 12,833 5.0
AS OF DECEMBER 31, 2001
----------------------------------------------------------------------------
MINIMUM REQUIRED
MINIMUM REQUIRED TO BE WELL
ACTUAL FOR CAPITAL ADEQUACY CAPITALIZED
------ -------------------- -----------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------ ----- ------ ----- ------ -----
(DOLLARS IN THOUSANDS)
Total capital to risk-weighted
assets
Company $ 123,984 10.8% $ 91,628 8.0% $ 114,535 10.0%
Midwest Bank and
Trust Company 55,041 11.2 39,307 8.0 49,134 10.0
Midwest Bank of Hinsdale 28,610 10.1 22,724 8.0 28,404 10.0
Midwest Bank of McHenry
County 26,345 11.6 18,244 8.0 22,803 10.0
Midwest Bank of Western
Illinois 16,307 11.6 11,256 8.0 14,069 10.0
Tier I capital to risk-weighted
assets
Company 113,747 9.9 45,814 4.0 68,721 6.0
Midwest Bank and
Trust Company 50,648 10.3 19,654 4.0 29,480 6.0
Midwest Bank of Hinsdale 26,095 9.2 11,362 4.0 17,043 6.0
Midwest Bank of McHenry
County 24,265 10.6 9,122 4.0 13,683 6.0
Midwest Bank of Western
Illinois 15,004 10.7 5,628 4.0 8,442 6.0
Tier I capital to average assets
Company 113,747 6.6 68,652 4.0 85,815 5.0
Midwest Bank and
Trust Company 50,648 7.0 29,110 4.0 36,388 5.0
Midwest Bank of Hinsdale 26,095 6.7 15,484 4.0 19,354 5.0
Midwest Bank of McHenry
County 24,265 6.8 14,254 4.0 17,818 5.0
Midwest Bank of Western
Illinois 15,004 6.3 9,589 4.0 11,986 5.0
PAGE 23
Liquidity
- ---------
Liquidity measures the ability of the Company to meet maturing
obligations and its existing commitments, to withstand fluctuations in deposit
levels, to fund its operations and to provide for customers' credit needs. The
liquidity of the Company principally depends on cash flows from operating
activities, investment in and maturity of assets, changes in balances of
deposits and borrowings and its ability to borrow funds in the money or capital
markets.
Net cash inflows provided by operations were $19.3 million for the six
months ended June 30, 2002 compared to $16.2 million a year earlier. Net cash
outflows from investing activities were $66.3 million in the first six months of
2002 compared to a net cash outflow of $137.6 million a year earlier. Cash
inflows from financing activities for the six months ended June 30, 2002 were
$88.9 million compared to a net inflow of $122.2 million in 2001.
In the event of short-term liquidity needs, the Banks may purchase
federal funds from correspondent banks. In addition, the Company has established
repurchase agreements and brokered certificates of deposit arrangements with
various financial sources. The Company's membership in the Federal Home Loan
Bank System gives it the ability to borrow funds from the Federal Home Loan Bank
of Chicago for short- or long-term purposes under a variety of programs. The
Company also has a $25.0 million revolving line of credit of which $16.2 million
is available.
The Banks also have various funding arrangements with commercial and
investment banks providing up to $2.0 billion of available funding sources in
the form of Federal funds lines, repurchase agreements, and brokered certificate
of deposit programs. Unused capacity under these lines was $1.5 billion at June
30, 2002. The Banks maintain these funding arrangements to achieve favorable
costs of funds, manage interest rate risk, and enhance liquidity in the event of
deposit withdrawals.
Interest received net of interest paid was a principal source of
operating cash inflows for the three and six months ended June 30, 2002 and June
30, 2001, respectively. Management of investing and financing activities and
market conditions determine the level and the stability of net interest cash
flows. Management's policy is to mitigate the impact of changes in market
interest rates to the extent possible so that balance sheet growth is the
principal determinant of growth in net interest cash flows.
PAGE 24
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Sensitivity Analysis
- ----------------------------------
The Company's overall interest rate sensitivity is demonstrated by net
interest income analysis. Net interest income analysis measures the change in
net interest income in the event of hypothetical changes in interest rates. This
analysis assesses the risk of change in net interest income in the event of
sudden and sustained 1.0% to 2.0% increases and decreases in market interest
rates. The table below presents the Company's projected changes in net interest
income for the various rate shock levels at June 30, 2002.
NET INTEREST INCOME
-------------------------------------------------------
AMOUNT $ CHANGE % CHANGE
------ -------- --------
(DOLLARS IN THOUSANDS)
+200 bp $ 70,834 $ 447 0.64%
+100 bp 69,562 (825) (1.17)
Base 70,386 - -
-100 bp 71,906 1,520 2.16
-200 bp 71,879 1,492 2.12
As shown above, at June 30, 2002, the effect of an immediate 200 basis
point decrease in interest rates would increase the Company's net interest
income by 2.12% or $1.5 million. The effect of an immediate 200 basis point
increase in rates would increase the Company's net interest income by 0.64% or
$447,000.
The projected changes in the Company's net interest income for the
various rate shock levels at December 31, 2001 were as follows:
NET INTEREST INCOME
-------------------------------------------------------
AMOUNT $ CHANGE % CHANGE
------ -------- --------
(DOLLARS IN THOUSANDS)
+200 bp $ 64,675 $ (2,951) (4.36)%
+100 bp 64,550 (3,076) (4.55)
Base 67,626 - -
-100 bp 69,487 1,861 2.75
-200 bp 69,191 1,565 2.31
Computations of the prospective effects of hypothetical interest rate
changes are based on numerous assumptions, including relative levels of market
interest rates, loan prepayments and deposit decay rates, and should not be
relied upon as indicative of actual results. Actual values may differ from those
projections set forth above should market conditions vary from assumptions used
in preparing the analyses. Further, the computations do not contemplate any
actions the Company may undertake in response to changes in interest rates.
PAGE 25
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. Important factors which could cause actual events to
differ from the Company's expectations include, but are not limited to,
fluctuations in interest rates and loan and deposit pricing, which could reduce
the Company's net interest margins, asset valuations and expense expectations; a
deterioration in the economy or business conditions, either nationally or in the
Company's market areas, that could increase credit-related losses and expenses;
increases in defaults by borrowers and other loan delinquencies resulting in
increases in the Company's provision for loan losses and related expenses;
higher than anticipated costs related to the Company's new banking centers or
slower than expected earning assets growth which could extend anticipated
breakeven periods at these locations; significant increases in competition;
legislative or regulatory changes applicable to bank holding companies or the
Company's banking or other subsidiaries; and possible changes in tax rates, tax
laws, or tax law interpretation.
PAGE 26
PART II
ITEM 1. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Company or
its subsidiaries are a party other than ordinary routine litigation
incidental to their respective businesses.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On March 15, 2002, the Company completed its asset acquisition of
Service 1st Financial Corp. In connection with the acquisition and as
partial payment of the purchase price, the Company issued 12,846 shares
(then valued at $192,262) of common stock to the selling shareholder of
Service 1st Financial Corp. All of these shares were issued in reliance
on the exemption from registration pursuant to Section 4(2) of the
Securities Act of 1933.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of stockholders of the Company was held on May 8,
2002. Three proposals were submitted to a vote of the stockholders as
described in the Company's proxy statement dated April 1, 2002. The
following is a brief description of the matters voted upon, as well as
the outcome of the vote:
1. To elect two members to serve on the Company's Board of Directors
for a term of three years: The nominees were Messrs. Brad A.
Luecke and Robert D. Small.
To elect Brad A. Luecke for a three year term:
Votes For: 9,260,625
Abstain: 360,069
To elect Robert D. Small for a three year term:
Votes For: 9,536,022
Abstain: 84,672
2. To amend the Company's 1996 Stock Option Plan to increase the
number of shares of the Company's common stock available for
awards under the Plan from 950,000 to 1,150,000.
Votes For: 9,237,469
Votes Against: 223,504
Abstain: 159,721
3. To ratify the appointment of Crowe, Chizek and Company LLP as
independent auditors for the fiscal year ending December 31,
2002.
Votes For: 9,589,447
Votes Against: 22,000
Abstain: 9,247
PAGE 27
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The following exhibits are either filed as part of this report
or are incorporated herein by reference:
3.1 Restated Certificate of Incorporation, as amended
(incorporated by reference to Registrant's Registration
Statement on Form S-1, Registration No. 333-42827).
3.2 Certificate of Amendment of Restated Certificate of
Incorporation.
3.3 Restated By-laws, as amended (incorporated by reference to
Registrant's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1998, File No. 0-29652).
3.4 Amendment of Restated By-laws (incorporated by reference to
Registrant's Quarterly Report on Form 10-Q for the quarter
ended June 30, 2000, File No. 0-29652).
4.1 Specimen Common Stock Certificate (incorporated by reference
to Registrant's Registration Statement on Form S-1,
Registration No. 333-042827).
4.2 Certain instruments defining the rights of the holders of
long-term debt of the Company and certain of its subsidiaries,
none of which authorize a total amount of indebtedness in
excess of 10% of the assets of the Company and its
subsidiaries on a consolidated basis, have not been filed as
Exhibits. The Company hereby agrees to furnish a copy of any
of these agreements to the SEC upon request.
10.1 Amended and Restated 1996 Stock Option Plan (filed as Appendix
A to the Company's Proxy Statement for its 2002 Annual Meeting
of Stockholders and incorporated herein by reference).
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 from
the Company's Chief Executive Officer.
99.2 Certification Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 from
the Company's Chief Financial Officer.
(b) Reports on Form 8-K
Current Report on Form 8-K dated April 17, 2002,
filed with the SEC on April 17, 2002.
Current Report on Form 8-K dated June 4, 2002, filed
with the SEC on June 4, 2002.
PAGE 28
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August 14, 2002
MIDWEST BANC HOLDINGS, INC.
(Registrant)
By: /s/ Brad A. Luecke
---------------------------------------
Brad A. Luecke,
President and
Chief Executive Officer
By: /s/ Daniel R. Kadolph
---------------------------------------
Daniel R. Kadolph,
Senior Vice President
and Chief Financial Officer
PAGE 29
EXHIBITS
3.1 Restated Certificate of Incorporation, as amended
(incorporated by reference to Registrant's Registration
Statement on Form S-1, Registration No. 333-42827).
3.2 Certificate of Amendment of Restated Certificate of
Incorporation.
3.3 Restated By-laws, as amended (incorporated by reference to
Registrant's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1998, File No. 0-29652).
3.4 Amendment of Restated By-laws (incorporated by reference to
Registrant's Quarterly Report on Form 10-Q for the quarter
ended June 30, 2000, File No. 0-29652).
4.1 Specimen Common Stock Certificate (incorporated by reference
to Registrant's Registration Statement on Form S-1,
Registration No. 333-042827).
4.2 Certain instruments defining the rights of the holders of
long-term debt of the Company and certain of its subsidiaries,
none of which authorize a total amount of indebtedness in
excess of 10% of the assets of the Company and its
subsidiaries on a consolidated basis, have not been filed as
Exhibits. The Company hereby agrees to furnish a copy of any
of these agreements to the SEC upon request.
10.1 Amended and Restated 1996 Stock Option Plan (filed as Appendix
A to the Company's Proxy Statement for its 2002 Annual Meeting
of Stockholders and incorporated herein by reference).
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 from
the Company's Chief Executive Officer.
99.2 Certification Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 from
the Company's Chief Financial Officer.