SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C.
20549
Form 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal
year ended December 31,
2009
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OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission file number
001-13735
Midwest Banc Holdings,
Inc.
(Exact name of Registrant as
specified in its charter)
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Delaware
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36-3252484
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(State of
Incorporation)
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(I.R.S. Employer Identification
Number)
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501 West North Avenue, Melrose Park, Illinois 60160
(Address of principal executive
offices including ZIP Code)
(708) 865-1053
(Registrants telephone
number including Area Code)
Securities registered pursuant to Section 12(b) of the
Act:
Depositary Shares each representing
1/100th
of a Share of Series A
Noncumulative Redeemable Convertible Preferred Stock,
$25.00 liquidation preference, NASDAQ Capital Market
(Title of Class)
Securities registered pursuant to Section 12(g) of the
Act:
Common Stock, $0.01 par value, NASDAQ Capital Market
(Title of Class)
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports) and (2) has been subject
to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such
files). Yes o No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by Reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. þ
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in Rule
12b-2 of the
Exchange Act. (Check one):
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Large accelerated filer o
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Accelerated filer o
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Non-accelerated filer þ
(Do not check if a smaller reporting company)
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Smaller reporting company o
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Indicate by check mark whether the Registrant is a shell company
(as defined in
Rule 12b-2
of the
Act). Yes o No þ
The aggregate market value of the voting and nonvoting common
equity held by nonaffiliates of the registrant on June 30,
2009, based on the last sales price quoted on the NASDAQ Global
Market System on that date, the last business day of the
registrants most recently completed second fiscal quarter,
was approximately $21.0 million.
As of March 30, 2010, the number of shares outstanding of
the registrants common stock, par value $0.01 per share,
was 38,176,225.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the Companys Proxy Statement for the 2010
Annual Meeting of Stockholders are incorporated by reference
into Part III.
MIDWEST
BANC HOLDINGS, INC.
FORM 10-K
INDEX
PART I
The
Company
Midwest Banc Holdings, Inc. (the Company), a
Delaware corporation founded in 1983, is a community-based bank
holding company headquartered in Melrose Park, Illinois. Through
its wholly owned subsidiaries, the Company provides a wide range
of services, including traditional banking services, personal
and corporate trust services, and insurance brokerage and retail
securities brokerage services. The Companys principal
operating subsidiary is Midwest Bank and Trust Company (the
Bank), an Illinois state bank that operates 26
banking centers in the Chicago metropolitan area. The Company
operates in one business segment, community banking, providing a
full range of services to individual and corporate customers.
Midwest Financial and Investment Services, Inc., a subsidiary of
the Bank, is a Financial Industry Regulatory Authority
(FINRA), registered broker/dealer that provides
securities brokerage and insurance services to customers of the
Bank.
The Company focuses on establishing and maintaining long-term
relationships with customers and is committed to providing for
the financial services needs of the communities it serves. In
particular, the Company continues to emphasize its relationships
with individual customers and
small-to-medium-sized
businesses. The Company actively evaluates the credit needs of
its markets, including low- and moderate-income areas, and
offers products that are responsive to the needs of its customer
base. The markets served by the Company provide a mix of real
estate, commercial and industrial, and consumer lending
opportunities, as well as a stable core deposit base.
Recent
Developments
Outlook
for 2010
Regulatory Capital: As a result of significant
credit quality deterioration during 2009, the Bank was
undercapitalized for regulatory capital ratio
purposes at December 31, 2009. Credit quality continued to
deteriorate in early 2010 and, as a result, the Banks
interim capital position was significantly
undercapitalized as of January 31, 2010. The Company
expects the Bank to be critically undercapitalized
at March 31, 2010. See Item 1.
Business Supervision and
Regulation Capital Requirements. In addition,
the Company was undercapitalized at
December 31, 2009 and is expected to remain
undercapitalized at March 31, 2010.
Any failure by the Company to improve the Banks regulatory
capital ratios in a timely manner will result in material
adverse consequences, including the possibility that the Company
may become subject to a voluntary or involuntary bankruptcy
filing, the Bank could be placed into FDIC receivership by its
regulators, or the Bank could be acquired by a third party in a
transaction in which the Company receives no value for its
interest in the Bank, any of which events would be expected to
result in a loss of all or a substantial portion of the value of
the Companys outstanding securities.
The Company and the Bank were notified on March 25, 2010 by
the Federal Reserve Bank of Chicago (the Federal Reserve
Bank) that the Banks capital plan, submitted on
March 15, 2010, was not accepted. According to the Federal
Reserve Bank, the plan was not accepted because, among other
things, the Company has not yet raised $125 million of new
equity, which is a condition to the Companys ability to
convert to common stock the new convertible preferred stock,
Series G, that the Company issued to the
U.S. Department of the Treasury (the U.S.
Treasury) in March 2010 in exchange for all outstanding
preferred stock, Series T, previously held by the
U.S. Treasury.
On March 29, 2010, as a result of the Banks significantly
undercapitalized status, the Bank consented to the issuance of a
Prompt Corrective Action Directive (PCA) by the
Federal Reserve Bank. The PCA provides that the Bank, in
conjunction with the Company, must within 45 days of
March 29, 2010 either: (i) increase the Banks
capital so that it becomes adequately capitalized;
(ii) enter into and close on an agreement to sell the Bank
subject to regulatory approval and customary closing conditions;
or (iii) take other necessary measures to make the Bank
adequately capitalized. The PCA also prohibits the Bank from
making any capital distributions, including dividends and from
soliciting and accepting new deposits bearing an interest rate
that exceeds the prevailing effective rates on deposits of
comparable amounts and maturities in the Banks market
area. The Bank must submit to the Federal
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Reserve Bank within 30 days a plan and timetable for
conforming the rates of interest paid on existing non-time
deposit accounts to these levels.
The PCA also subjects the Bank to other operating restrictions,
including payment of bonuses to senior executive officers and
increasing their compensation, restrictions on asset growth and
branching, and ensuring that all transactions between the Bank
and any affiliates comply with Section 23A of the Federal
Reserve Act. The Bank was already in compliance with certain of
these guidelines as the Bank is already significantly
undercapitalized. For example, the Bank has been complying with
the FDICs rules relating to the payment of interest on
deposits. The Company and the Bank continue to be subject to the
Written Agreement entered into with the Federal Reserve Bank and
the Illinois Division of Banking in December 2009 as further
described under Recent Developments Written
Agreement with Regulators.
Forbearance Agreement: On October 22,
2009, the Company entered into a Forbearance Agreement with its
lender pursuant to which, among other things, the lender agreed
to forbear from exercising the rights and remedies available to
it as a consequence of certain existing events of default under
the Companys loan agreements (the Loan
Agreements) through March 31, 2010 (the
Forbearance Agreement). When the Forbearance
Agreement expires on March 31, 2010, the lender could
declare all amounts owed under the Loan Agreements immediately
due and payable. Should the lender demand payment at that time,
or any time thereafter, the Company presently would be unable to
repay the amounts due. As a result, the lender could, among
other remedies, foreclose on outstanding shares of the
Banks capital stock, which would have a material adverse
effect on the Companys business, operations and ability to
continue as a going concern and could result in a loss of all or
a substantial portion of the value of the Companys
outstanding securities.
Although the lender has the right to foreclose on the common
stock of the Bank, the Company has not received any indication
from the lender through the date of filing that it intends to
exercise its rights to foreclose. Should the lender exercise
such rights, the Bank could become a wholly-owned subsidiary of
the lender or another potential buyer, through a sale of the
collateral by the lender. Such a transaction would not likely
have an impact on the operations of the Bank or its customers,
and customer deposits would continue to be subject to FDIC
insurance. If such actions were taken by the lender to exercise
its rights to the collateral, the Companys ability to
continue to generate sufficient cash flows to fund its
operations and obligations would be significantly limited, which
may force the Company into bankruptcy. See
Managements Discussion and Analysis of Financial
Condition and Results of Operations
Borrowings. Upon the expiration of the forbearance period,
the principal and interest payments that were due under the
revolving line of credit and the term note, as modified by the
covenant waivers, at the time the Forbearance Agreement was
entered into will once again become due and payable, along with
such other amounts as may have become due during the forbearance
period. Absent successful completion of all or a significant
portion of the Capital Plan, the Company expects that it would
not be able to meet any demands for payment of amounts then due
at the expiration of the forbearance period. If the Company is
unable to renegotiate, renew, replace or expand its sources of
financing on acceptable terms, it may have a material adverse
effect on the Companys business and results of operations.
See Note 5 Summary of Significant Accounting
Policies, Going Concern of the notes to the consolidated
financial statements.
Capital Plan: As announced in 2009, the
Company has developed a detailed capital plan in order to, among
other things, increase the Companys common equity capital
and raise additional capital. Subsequent to year end, the
Company exchanged approximately 82% of its outstanding
depositary shares representing interests in the Companys
Series A preferred stock for newly issued shares of common
stock, thereby increasing the Companys common equity
capital, and exchanged all outstanding shares of the
U.S. Treasurys Series T preferred stock for
shares of a new class of convertible preferred stock,
Series G, which provides an opportunity to further increase
the Companys common equity if certain conditions are met,
as further discussed under Recent Developments
Capital Plan Exchange Transaction with the
U.S. Treasury.
Raising new equity capital is also required by the
Companys and the Banks regulators pursuant to recent
actions taken by such regulators, as more fully described under
Recent Developments Written Agreement with
Regulators. While the Company continues to pursue new
equity capital, it has not yet received any commitment for a new
equity capital investment, and there can be no assurance that
the Company will be able to raise a sufficient
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amount of new equity capital in a timely manner, on acceptable
terms or at all. If the Company ultimately is unsuccessful in
raising a sufficient amount of new equity capital or,
alternatively, executing another strategic initiative, the
Company may become subject to a voluntary or involuntary
bankruptcy filing, the Bank could be placed into FDIC
receivership by its regulators, or the Bank could be acquired by
a third party in a transaction in which the Company receives no
value for its interest in the Bank. Any such event could be
expected to result in a loss of all or a substantial portion of
the value of the Companys outstanding securities.
Going Concern: The Company incurred net losses
of $248.8 million and $162.0 million for the years
ended December 31, 2009 and 2008, respectively, primarily
due to provisions for credit losses and goodwill impairment
charges during both years, tax charges related to a valuation
allowance on deferred tax assets in 2009, and impairment charges
and realized losses on the preferred stock of FNMA and FHLMC in
2008. Due to the resulting deterioration in capital levels of
the Bank and the Company, combined with the current uncertainty
as to the Companys ability to raise sufficient amounts of
new equity capital, recent regulatory actions with respect to
the Company and the Bank, and the current inability of the
Company to repay amounts owed under its Loan Agreements with its
primary lender if, upon or subsequent to the expiration of the
Forbearance Agreement on March 31, 2010, its primary lender
were to declare the amounts outstanding thereunder immediately
due and payable, there is substantial doubt about the
Companys ability to continue as a going concern.
The Companys independent registered public accounting firm
has included in its report on the Companys consolidated
financial statements for the year ended December 31, 2009
an explanatory paragraph with respect to the substantial doubt
as to the Companys ability to continue as a going concern.
Managements plans to address the Companys ability to
continue as a going concern are described in detail in
Note 2 Regulatory Capital of the notes to the
consolidated financial statements. The Companys financial
statements do not include any adjustments that might result from
the outcome of this uncertainty.
Existence of substantial doubt as to the Companys ability
to continue as a going concern may have a material adverse
impact on the Company and the Banks business, financial
condition and results of operations and the ability to raise
necessary new equity capital. Moreover, relationships with third
parties with whom the Company and the Bank do business or on
whom they rely, including depositors (particularly those with
deposit accounts in excess of FDIC insurance limits), customers
and clients, vendors, employees and financial counter-parties
could be significantly adversely impacted because these
individuals and entities may react adversely to events leading
to the conclusion that there is a substantial doubt about the
Companys ability to continue as a going concern, making it
more difficult for the Company to address the issues giving rise
to the substantial doubt about its ability to continue as a
going concern.
Liquidity Bank: The Bank depends
on access to a variety of funding sources, including deposits,
to provide sufficient liquidity to meet its commitments and
business needs and to accommodate the transaction and cash
management needs of its clients, including funding loans. The
Bank also must have sufficient funds available to satisfy its
obligation to repay any wholesale borrowings it has outstanding,
including brokered deposits and other obligations, when they
come due. Although management currently believes the Bank has
the ability and the available liquidity to meet its near-term
potential and actual obligations, if in the future additional
cost-effective funding is not available on terms satisfactory to
the Bank or at all, the Bank may not be able to meet its funding
obligations, which could adversely affect the Companys
results of operations. See Managements Discussion
and Analysis of Financial Condition and Results of
Operations Liquidity.
Liquidity Company: As a holding
company without independent operations, the Companys
liquidity (on an unconsolidated basis) is primarily dependent
upon the Companys ability to raise debt or equity capital
from third parties and the receipt of dividends from its
operating subsidiary. The Company is currently in default under
its Loan Agreements with its primary lender, and its revolving
credit facility has matured and is no longer available. Despite
its recent efforts to obtain new equity capital, the Company has
not yet obtained a commitment for new equity capital. As a
result of recent regulatory actions, the Companys
principal operating subsidiary, the Bank, is prohibited from
paying any dividends or making any loans to the Company. At
December 31, 2009, the Companys cash and cash
equivalents, on an unconsolidated basis amounted to
$3.4 million. Presently, the Company does not have
sufficient liquidity on an unconsolidated basis to meet its
short-term obligations, which include the approximately
$63.6 million in outstanding debt that its lender could
accelerate and demand payment for upon the
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expiration of the Forbearance Agreement on March 31, 2010.
Assuming continued receipt of management fees from the Bank,
which are subject to approval the Banks regulators, the
Company believes that, if the lender does not exercise its right
to demand payment of amounts owed under the Loan Agreements,
that it has adequate liquidity to meet its near-term
commitments. See Managements Discussion and Analysis
of Financial Condition and Results of Operations
Liquidity.
Goodwill Impairment; Increase in Valuation
Allowance: The Company is in the process of
assessing the carrying value of goodwill and it is possible that
the Company may be required to recognize an impairment in the
quarter ended March 31, 2010, as it believes that the
events and changes in circumstances noted above represent
trigger events under the authoritative guidance, indicating
potential impairment of goodwill. As of December 31, 2009,
the carrying amount of goodwill was $64.9 million. See
Managements Discussion and Analysis of Financial
Condition and Results of Operations Goodwill.
The Company is in the process of assessing the realizability of
its deferred tax assets and it is possible that the Company may
be required to recognize an additional impairment in the quarter
ended March 31, 2010.
Repurchase Agreements: The agreements with one
of the Banks repurchase agreement counterparties could
permit that counterparty to terminate the repurchase agreements
if the Bank does not maintain its well-capitalized status.
Because the Bank is currently not well-capitalized, there is a
risk that the counterparty could exercise its option to
terminate one or more of these repurchase agreements prior to
maturity. See Managements Discussion and Analysis of
Financial Condition and Results of Operations
Borrowings.
Written
Agreement with Regulators
As a result of a safety and soundness examination of the Bank by
the Federal Reserve Bank of Chicago (the Federal Reserve
Bank) and the Illinois Department of Financial and
Professional Regulation, Division of Banking (the Illinois
Division of Banking), the Company and the Bank entered
into a written agreement (the Written Agreement)
with the Federal Reserve Bank and the Illinois Division of
Banking on December 18, 2009, that is intended to
strengthen the Bank and improve the Companys overall
financial condition. As disclosed in previous documents filed
with the Securities and Exchange Commission, the Company had
anticipated entering into a formal supervisory action following
the completion of the examination and was already taking many of
the steps referenced in the Written Agreement.
The Written Agreement establishes timeframes for the completion
of measures which have been previously identified by the Company
and the regulators as important to improve the Companys
financial performance. Under the Written Agreement, the Company
was required to prepare and file with the regulators within
specified timeframes (generally, 60 days from the date of
the Written Agreement) various specific plans designed to
improve (i) board oversight over the management and
operations of the Bank, (ii) credit risk management
practices, (iii) management of problem loans, (iv) the
allowance for loan losses, (v) the Banks earnings and
budget, (vi) liquidity and funds management and
(vii) interest rate risk management.
The Written Agreement requires, among other things, that the
Company and the Bank obtain prior approval in order to pay
dividends. In addition, the Company must obtain prior approval
of the Federal Reserve Bank to (i) take any other form of
payment from the Bank representing a reduction in capital of the
Bank; (ii) make any distributions of interest, principal or
other sums on subordinated debentures or trust preferred
securities; (iii) incur, increase or guarantee any debt; or
(iv) purchase or redeem any shares of the Companys
stock. Pursuant to the terms of the Written Agreement, the
Company and the Bank were also required, within 60 days of
the date of the Written Agreement, to submit an acceptable
written plan to the regulators to maintain sufficient capital at
the Company, on a consolidated basis, and at the Bank on a
standalone basis. The Company submitted its written plan in
February 2010. In addition, the Written Agreement also provides
that the Company and the Bank must notify the Federal Reserve
Bank and the Illinois Division of Banking if the capital ratios
of either fall below those set forth in the capital plans that
are approved by the Federal Reserve Bank and the Illinois
Division of Banking. The Company must also notify the regulators
before appointing any new directors or senior executive officers
or changing the responsibilities of any senior executive officer
position. The Written Agreement also requires the Company and
the Bank to comply with certain restrictions regarding
indemnification and severance payments.
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The Bank must furnish periodic progress reports to the Illinois
Division of Banking and the Federal Reserve Bank regarding its
compliance with the Written Agreement. The Written Agreement
will remain in effect until stayed, modified, terminated or
suspended by the Federal Reserve Bank and the Illinois Division
of Banking.
There can be no assurance that the Company will be able to
satisfy, in a timely manner or at all, the requirements set
forth in the Written Agreement, or that the plans adopted in
response to the Written Agreements requirements will have
their intended effect. The Company believes that the successful
completion of all or a significant portion of its capital plan,
as defined below, which includes executing transactions that
seek to improve the Companys and the Banks capital
position, increase its common equity and Tier 1 capital and
raise additional capital, will help the Bank and the Company to
meet the requirements of the Written Agreement. The Company
believes that a new equity raise of approximately
$250 million in conjunction with the Companys primary
lender restructuring its debt to common equity will position the
Company and Bank to remain well capitalized through at least
December 31, 2010. However, the successful completion of
all or any portion of the Capital Plan is not assured, and if
the Company or the Bank is unable to timely comply with the
terms of the Written Agreement or any other applicable
regulations or regulatory directives, including the recently
issued PCA, the Company and the Bank could become subject to
additional, heightened supervisory actions and orders, which
could, among other things, mandate additional capital, require
the sale of certain assets and liabilities, and otherwise have a
material adverse effect on the business of the Bank and the
Company. Failure of the Company and the Bank to meet these
conditions could lead to further enforcement action by the
regulators, including the appointment of a receiver for the
Bank, and any such appointment could be expected to result in a
loss of the entire value of the Companys outstanding
securities. See also Recent Developments
Outlook for 2010 for a discussion of the PCA
recently issued by the Federal Reserve Bank.
Regulatory
Capital
As of December 31, 2009, the Company and the Bank did not
meet all regulatory capital adequacy requirements administered
by the federal banking agencies. Under capital adequacy
guidelines and the regulatory framework for prompt corrective
action, banks must meet specific capital guidelines that involve
quantitative measures of assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory
accounting practices. Prompt corrective action provisions are
not applicable to bank holding companies.
Quantitative measures established to ensure capital adequacy
require banks and bank holding companies to maintain minimum
amounts and ratios of total and Tier 1 capital to
risk-weighted assets and Tier 1 capital to average assets.
If a bank does not meet these minimum capital requirements, as
defined, bank regulators can initiate certain actions that could
have a direct material adverse effect on the banks
financial condition and ongoing operations.
As of December 31, 2009, the most recent Federal Deposit
Insurance Corporation notification categorized the Bank as
undercapitalized under the regulatory framework for prompt
corrective action. As a result of the Banks
undercapitalized status for regulatory capital purposes as of
December 31, 2009, the Bank is no longer able to accept or
renew brokered deposits, whether wholesale or retail, secure
deposits rates that are 75 basis points higher than the
prevailing effective rates on insured deposits of comparable
amounts or maturities in the Banks normal market area or
the national rates periodically release by the FDIC, pay
dividends or make other capital distributions, or obtain funds
through Federal funds lines.
In addition, the agreements with one of the Banks
repurchase agreement counterparties could permit that
counterparty to terminate the repurchase agreements as a result
of the Bank being categorized as less than well capitalized. At
December 31, 2009, the Banks repurchase agreements
with those provisions totaled $262.7 million with fixed
interest rates ranging from 2.76% to 4.65%, maturities ranging
from approximately 7.5 to 8.5 years, and quarterly call
provisions (at the counterpartys option). Due to the
relatively high fixed rates on these borrowings as compared to
currently low market rates of interest, the Bank would incur
substantial costs to unwind these repurchase agreements if
terminated prior to their maturities. These associated unwind
costs could have a material adverse effect on the Companys
results of operations and financial condition in the period of
payment. The associated unwind costs would be the difference
between the fair value and carrying value of the repurchase
agreements on the date of termination. Because the repurchase
agreements are collateralized at an amount sufficient
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to cover any such unwind costs which may be incurred, any such
costs would result in a charge in the statement of operations
but would not expect to have an adverse effect on the
Banks liquidity.
Based on current trends, the Company projects the Bank will be
critically undercapitalized at March 31, 2010. See
Recent Developments Outlook for
2010.
See Note 19 Capital Requirements of the notes
to the consolidated financial statements for a further
discussion of the Companys and Banks capital
requirements.
Capital
Plan
In July 2009, the Company announced that it had developed a
detailed capital plan and timeline for execution (the
Capital Plan). The Capital Plan was adopted in order
to, among other things, improve the Companys common equity
capital and raise additional capital to enable it to better
withstand and respond to adverse market conditions. Management
has completed, or is in the process of completing a number of
significant steps as part of the Capital Plan.
Steps already completed include the following:
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Exchanging 82% of the Companys outstanding depositary
shares, each representing 1/100th fractional interest in a
share of the Companys Series A noncumulative
redeemable convertible perpetual preferred stock, for shares of
the Companys common stock (the Exchange Offer);
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Exchange by the U.S. Treasury of the Companys
outstanding Series T preferred stock for a new series of
fixed rate cumulative mandatorily convertible preferred stock,
Series G;
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Cost reduction initiatives, including a reduction in force of
over 100 employees, completed on September 30, 2009,
salary reductions, suspension of certain benefits, elimination
of discretionary projects and initiatives and an increased focus
on expense control;
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Retaining independent consultants to refine cumulative credit
loss projections;
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Engaging investment banking support to assist with the Capital
Plan;
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Exchange Transaction with the
U.S. Treasury. On March 8, 2010, the
U.S. Treasury exchanged the 84,784 shares of
Series T preferred stock, having an aggregate approximate
liquidation preference of $84.8 million, plus approximately
$4.6 million in cumulative dividends not declared or paid
on such preferred stock, for a new series of fixed rate
cumulative mandatorily convertible preferred stock,
Series G, with the same liquidation preference. The warrant
dated December 5, 2008 to purchase 4,282,020 shares of
common stock was also amended to re-set the strike price of the
warrant to be consistent with the conversion price of the
Series G preferred stock. The U.S. Treasury has the
authority to convert the new preferred stock into the
Companys common stock at any time. In addition, the
Company can compel a conversion of the new preferred stock into
common stock, subject to the following conditions: (i) the
Company receives appropriate approvals from the Federal Reserve;
(ii) approximately $78.6 million principal amount of
the Companys revolving, senior, and subordinated debt
shall have previously been converted into common stock on terms
acceptable to the U.S. Treasury in its sole discretion;
(iii) the Company shall have completed a new cash equity
raise of not less than $125 million on terms acceptable to
the U.S. Treasury in its sole discretion; and (iv) the
Company has made the anti-dilution adjustments to the new
preferred stock, if any, as required by the terms thereof.
Unless earlier converted, the new preferred stock converts
automatically into shares of the Companys common stock on
March 8, 2017.
Having successfully completed the Exchange Offer and the
exchange with the U.S. Treasury, management is now
concentrating on the restructuring of the Companys
outstanding senior debt and certain subordinated debt with its
primary lender along with raising significant new equity
capital. Accomplishing both of these components is essential to
the successful completion of the overall Capital Plan because
the inability to complete one of these components will
significantly jeopardize the ability to realize the achievement
of the other principal components. Accordingly, the Company
expects that any failure to complete either one of these two
final components will affect its ability to continue as a going
concern.
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Capital Raising Activities. The Company is
involved in discussions and information sharing with several
potential strategic and financial investors that are conducting
due diligence reviews of the Company and its business.
Restructuring of Debt with Primary Lender. The
Company continues to be in discussions with its primary lender
concerning its willingness to restructure the Companys
outstanding debt or convert all or a portion of such debt into
common stock. The Company currently has $8.6 million
outstanding on a revolving line of credit together with
$55.0 million outstanding under a separate term note with
its primary lender. These loans are secured by all of the
outstanding shares of stock of the Bank. On October 22,
2009, the Company entered into a forbearance agreement (the
Forbearance Agreement) with the lender, pursuant to
which, among other things, the lender agreed to forbear from
exercising the rights and remedies available to it as a
consequence of certain existing events of default (except for
continuing to impose default rates of interest) until
March 31, 2010, or earlier in the event of certain breaches
or defaults or upon the occurrence of certain receivership or
insolvency events. The Company has not breached or defaulted
under any of its representations, warranties or obligations
contained in either the Forbearance Agreement or credit
agreements. The Company has received no commitment from its
lender that it will pursue a debt restructuring or conversion
transaction with the Company.
Other
Recent Developments
The Company had a net loss of $242.7 million for the year
ended December 31, 2009. Basic and diluted loss per share
for the year ended December 31, 2009 were both $8.89. This
loss was mainly attributed to the $170.2 million provision
for credit losses as the Company continued to address credit
issues, tax charges including $116.3 million related to a
valuation allowance on deferred tax assets and $8.1 million
related to the liquidation of bank-owned life insurance, and a
goodwill impairment charge of $14.0 million. Margin was
also negatively impacted by repositioning of the securities
portfolio which achieved a $107.2 million reduction in
risk-weighted assets along with several other liquidity
preservation steps but at a cost of reduced earning asset yields
for 2009. Noninterest expense was also negatively affected by
higher Federal Deposit Insurance Corporation (FDIC)
insurance costs and professional fees incurred to perform
independent cumulative loan loss studies under various
methodologies and assumptions, including highly stressed
scenarios, in order to determine the Companys capital
needs, as well as execute the Capital Plan. Operating expenses
increased further to manage impaired loans within the special
assets group, and carrying costs of foreclosed properties. The
increases were partially offset by the impact of staff
reductions, suspension of the 401(k) match and other expense
control initiatives estimated at $15.9 million on an annual
basis.
Executive management was expanded to add additional talent with
specific skills essential to work on mission critical tasks.
Stephen L. Eastwood was named Executive Vice President and Chief
Risk Officer of the Bank in November 2009. Alberto J. Paracchini
was named Executive Vice President, Planning and Development of
the Bank in January 2010. Darrin R. Bacon was named Executive
Vice President, Head of Commercial and Industrial Lending of the
Bank in February 2010.
On July 28, 2009, the Board of Directors of the Bank and
the Company accepted the resignation of three directors,
reducing the Boards from eleven to eight members. On
September 21, 2009, the Company announced the death of
director Thomas A. Rosenquist. The boards of the Company and the
Bank now have seven members.
On May 15, 2009, Roberto R. Herencia assumed the role of
president and Chief Executive Officer of the Company and the
Bank, replacing J. J. Fritz, who became senior executive vice
president of the Company. Mr. Herencia, who also was
appointed to the board of directors of the Company, was formerly
president and director of Banco Popular North America based in
Chicago and executive vice president of Popular, Inc., the
parent company. Under Mr. Herencias direction, the
Company immediately tightened its loan underwriting and pricing
criteria, began aggressive balance sheet repositioning
activities, and developed a comprehensive capital plan. Actions
the Company has taken to tighten its loan underwriting include
tightening debt coverage capacity and loan to value advance
rates; enhancing stress testing of new loans assuming both
interest rate and credit risk changes; determining the adequacy
of prior loan repayment sources in both the current market and
potential future more adverse markets; increasing the focus on
secondary source of repayment capacity over and above
collateral; requiring increased equity for lending transactions;
and strengthening credit risk review of guarantor liquidity and
7
financial net worth to support potential additional needs for
equity or capital to support loan transactions. In addition, the
Bank has identified select industries where there are perceived
higher levels of increased risk or less stability to determine
current loan exposure to these markets and determine proactive
steps to mitigate risk or exit certain industries or credit
relationships. These activities are designed to right-size the
Company by reducing the loan portfolio, both in the aggregate
and within the select industry portfolios noted above, thereby
reducing risk-weighted assets commensurate with the decreasing
amount of available capital. As a result of these activities,
the Company reported asset reductions since the second quarter
of 2009 and reductions in risk-weighted assets as defined for
regulatory capital purposes.
The Company also announced on May 6, 2009, that the Board
of Directors made the decision to suspend the dividend on the
$43.1 million of Series A Preferred Stock; defer the
dividend on the $84.8 million of Series T Preferred
Stock; and defer interest payments on $60.8 million of its
junior subordinated debentures as permitted by the terms of such
debentures. The Written Agreement requires the Company to obtain
prior approval to resume dividend payments in respect of the
Series A Preferred Stock or interest payments in respect of
its junior subordinated debentures.
In response to the financial crises affecting the overall
banking system and financial markets, on October 3, 2008,
the Emergency Economic Stabilization Act of 2008
(EESA), was enacted. Under the EESA, the
U.S. Treasury has the authority to, among other things,
purchase mortgages, mortgage backed securities and certain other
financial instruments from financial institutions for the
purpose of stabilizing and providing liquidity to the
U.S. financial markets.
The EESA included a provision for an increase in the amount of
deposits insured by the FDIC to $250,000 until December 2009. On
October 14, 2008, the FDIC announced a new program, the
Temporary Liquidity Guarantee Program, that provides unlimited
deposit insurance on funds in noninterest-bearing transaction
deposit accounts not otherwise covered by the existing deposit
insurance limit of $250,000. The Company has elected to
participate in the Temporary Liquidity Guarantee Program and
incur a 10 basis point surcharge as a cost of
participation. The behavior of depositors in regard to the level
of FDIC insurance could cause the Companys existing
customers to reduce the amount of deposits held at the Company,
or could cause new customers to open deposit accounts. The level
and composition of the Companys deposit portfolio directly
impacts its funding cost and net interest margin.
The EESA followed, and has been followed by, numerous actions by
the Federal Reserve, the U.S. Congress, U.S. Treasury,
the FDIC, the Securities and Exchange Commission
(SEC) and others to address the current liquidity
and credit crisis that has followed the
sub-prime
meltdown that commenced in 2007. These measures include
homeowner relief that encourage loan restructuring and
modification; the establishment of significant liquidity and
credit facilities for financial institutions and investment
banks; the lowering of the federal funds rate; emergency action
against short selling practices; a temporary guaranty program
for money market funds; the establishment of a commercial paper
funding facility to provide back-stop liquidity to commercial
paper issuers; and coordinated international efforts to address
illiquidity and other weaknesses in the banking sector.
On February 17, 2009, President Barack Obama signed the
American Recovery and Reinvestment Act of 2009
(ARRA), more commonly known as the economic stimulus
or economic recovery package. ARRA includes a wide variety of
programs intended to stimulate the economy and provide for
extensive infrastructure, energy, health and education needs. In
addition, ARRA imposes new executive compensation and corporate
governance limits on current and future participants in Troubled
Asset Relief Program (TARP), including the Company,
which are in addition to those previously announced by
U.S. Treasury. The new limits remain in place until the
participant has redeemed the preferred stock sold to
U.S. Treasury, which is now permitted under ARRA without
penalty and without the need to raise new capital, subject to
U.S. Treasurys consultation with the recipients
appropriate federal regulator.
Among the provisions in the ARRA are restrictions affecting
financial institutions that are participating in the Capital
Purchase Program (CPP). These provisions are set
forth in the form of amendments to the EESA. The amendments
provide that during the period in which any TARP obligation is
outstanding (other than those relating to warrants), TARP
recipients are subject to standards for executive compensation
and corporate governance to be set forth in regulations to be
issued by the U.S. Treasury. A discussion of the EESA
compensation rules is set forth below at Supervision and
Regulation Participation in Capital Purchase
Program.
8
Both the Federal Reserve and the FDIC have recently proposed
rules which will affect incentive compensation plans of banks
and bank holding companies. See Supervision and
Regulation Compensation Guidelines.
In 2009, the FDIC increased premium assessments to maintain
adequate funding of the Deposit Insurance Fund. These increases
in premium assessments have increased the Companys
expenses. A discussion of FDIC premium assessments is discussed
below at Supervision and Regulation Financial
Institution Regulation.
2008
Developments
The Company recognized a non-cash, non-operating,
other-than-temporary
impairment charge of $47.8 million at September 30,
2008 on certain FNMA and FHLMC preferred equity securities
similar to the impairment charge of $17.6 million taken in
the first quarter of 2008. In September 2008, the Company sold a
portion of its FNMA and FHLMC preferred equity securities
recognizing a $16.7 million loss. It also recognized an
$80.0 million impairment charge on its goodwill intangible
asset based upon the annual test performed with the assistance
of a nationally recognized third party valuation specialist. The
decline in value was primarily the result of a decline in market
capitalization. During 2008, the Company recognized net loan
charge-offs of $54.1 million and recorded a
$71.8 million loan loss provision, reflecting
managements updated assessments of impaired loans and
concerns about the continued deterioration of economic
conditions. During the first quarter of 2008, the Company also
incurred a $7.1 million loss on the early extinguishment of
debt arising from the prepayment of $130.0 million in FHLB
advances, and recognized a $15.2 million gain on the sale
of real estate.
On December 5, 2008, for an aggregate purchase price of
$84.784 million, the Company sold 84,784 shares of
Series T Preferred stock to the U.S. Treasury and
issued a warrant to the U.S. Treasury which will allow it
to acquire 4,282,020 shares of the Companys common
stock for $2.97 per share. The proceeds of $84.8 million
were allocated between the Series T Preferred stock and the
warrant based on their relative fair values. A nationally
recognized independent valuation specialist was used to assist
in the valuation of the Series T Preferred stock and the
related warrant.
The Board of Directors of the Company and the Bank elected Percy
L. Berger Chairman of the Board of Directors of the Company and
the Bank effective December 31, 2008. Mr. Berger
replaced Homer J. Livingston, Jr. who resigned as a
Director and Chairman effective December 31, 2008.
Strategy
The year ended December 31, 2009 was the Companys
most challenging year. Like all other financial institutions, it
faced the worst economy in 75 years. The Company entered
the economic recession in a weakened financial position due to
two major issues: (1) the Company suffered an
$82.1 million loss in 2008 on investments in preferred
stock of FNMA and FHLMC substantially reducing the
Companys capital position; and (2) the Company had
financed the cash component of the bank acquisition in 2007 with
bank loans secured by the Banks stock, subordinated debt,
and a convertible preferred stock issue. These two matters left
the Company with less tangible equity and financial flexibility
to confront the economic recession. As the recession ensued, the
Company incurred net losses of $248.8 million and
$162.0 million for the years ended December 31, 2009
and 2008, respectively, primarily due to provisions for credit
losses and goodwill impairment charges during both years, tax
charges related to a valuation allowance on deferred tax assets
in 2009, and impairment charges and realized losses on the
preferred stock of FNMA and FHLMC in 2008 noted above. Due to
the resulting deterioration in capital levels of the Bank and
the Company, the Company and the Bank entered into a Written
Agreement on December 18, 2009 and a Prompt Corrective
Action on March 29, 2010, both as described in Recent
Developments Outlook for 2010.
Due to these overriding concerns, the Banks 2009 strategy
focused on Building a New Foundation. That
strategy was created and launched by the Companys new
Chief Executive Officer, Roberto R. Herencia, who joined the
Bank in May 2009. The strategy for recovery and rebuilding,
initiated through Mr. Herencias
100-Day Plan
contained the following five components:
1. Preserve capital by optimizing the use of the
Companys balance sheet;
2. Ensure credit discipline and creation of stress testing
the loan portfolio;
9
3. Reduce expenses;
4. Craft a comprehensive capital plan; and
5. Communicate, communicate, communicate with
employees, customers, and stakeholders.
In July 2009, the Company announced that it had developed a
detailed capital plan and timeline for execution in order to,
among other things, improve the Companys common equity
capital and raise additional capital to enable it to better
withstand and respond to adverse market conditions. As described
above in Recent Developments Capital
Plan, management has completed or is in the process of
completing a number of significant steps as part of the Capital
Plan. The Companys immediate priorities are to comply with
the terms of the PCA and Written Agreement, restore the capital
ratios, and preserve the value of the Bank.
The Company seeks to emerge as a strong, viable community bank
with minimal nonperforming assets and classified loans, high
capital ratios, ample liquidity, quality performance and proven
management in place. The Company is committed to building
customer relationships, delivering for stockholders, partnering
with its communities and engaging employees.
Certain information with respect to the Bank and the
Companys nonbank subsidiaries as of December 31,
2009, is set forth below:
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# of Banking
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Centers
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Company Subsidiaries
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Headquarters
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Market Area
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or Offices
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Bank:
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Midwest Bank and Trust Company
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Elmwood Park, IL
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Algonquin, Bensenville, Bloomingdale, Buffalo Grove, Chicago,
Des Plaines, Downers Grove, Elgin, Elmwood Park, Franklin Park,
Glenview, Hinsdale, Inverness, Long Grove, McHenry, Melrose
Park, Mount Prospect, Naperville, Norridge, North Barrington,
Roselle, and Union
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26
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Non-bank subsidiaries of the Bank:
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MBTC Investment Company
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Las Vegas, NV
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*
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2
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Midwest Funding, L.L.C.
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Melrose Park, IL
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**
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1
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Midwest Financial and Investment
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Services, Inc.
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Elmwood Park, IL
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****
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23
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Non-bank subsidiaries of the Company:
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MBHI Capital Trust III
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Melrose Park, IL
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***
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MBHI Capital Trust IV
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Melrose Park, IL
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***
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MBHI Capital Trust V
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Melrose Park, IL
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***
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Royal Capital Trust I
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Melrose Park, IL
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***
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Northwest Capital Trust I
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Melrose Park, IL
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***
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* |
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Provides additional investment portfolio management to the Bank. |
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** |
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Provides real estate asset management services to the Bank. |
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*** |
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The trust is a statutory business trust formed as a financing
subsidiary of the Company. |
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**** |
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Provides securities brokerage services. |
History
The
Bank
Midwest Bank and Trust Company was established in 1959 in
Elmwood Park, Illinois to provide community and commercial
banking services to individuals and businesses in the
neighboring western suburbs of Chicago. The
10
Company has pursued growth opportunities for the Bank through
acquisitions and the establishment of new branches. The most
recent are described below.
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On October 1, 2007, the Company completed its acquisition
of Northwest Suburban Bancorp, Inc. (Northwest
Suburban). The Company issued 3.7 million common
shares, paid $81.2 million in cash, and incurred $414,000
in costs which were capitalized for a total purchase price of
$136.7 million. Northwest Suburbans primary operating
subsidiary, Mount Prospect National Bank, merged into the Bank
on October 1, 2007. Northwest Suburban had total assets of
$546.2 million.
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During December 2008, the Bank closed two unprofitable branches
located in Addison and Lake Zurich, Illinois.
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During 2009, the Bank relocated its Bucktown and Michigan Avenue
Chicago branches and opened a second branch in the downtown
Chicago business district. Also, in June 2009, the Bank closed
two unprofitable branches located in Island Lake and Lakemoor,
Illinois.
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Non-bank
Subsidiaries
The Banks non-bank subsidiaries were established to
support the retail and commercial banking activities of the Bank.
In August 2002, the Bank established MBTC Investment Company.
This subsidiary was capitalized through the transfer of
investment securities from the Bank and was formed to diversify
management of that portion of the Companys securities
portfolio. In May 2006, MBTC Investment Company established
Midwest Funding, L.L.C. This subsidiary holds real estate assets.
In July 2006, the Bank acquired Midwest Financial and Investment
Services, Inc. (Midwest Financial) through the
acquisition of Royal American Corporation (Royal
American). Midwest Financial is a registered
bank-affiliated securities broker-dealer and registered
investment advisor and is registered with the SEC as a
broker-dealer and is a member of FINRA. It operates a general
securities business as an introducing broker-dealer.
The Company formed four statutory trusts between October 2002
and June 2005 to issue $54.0 million in floating-rate trust
preferred securities. Through the Royal American merger in July
2006, the Company acquired a statutory trust that in April 2004
had issued $10.0 million in trust preferred securities
which had a fixed rate until the optional redemption date of
July 23, 2009 and a floating rate thereafter until
maturity. Through the Northwest Suburban merger in October 2007,
the Company acquired a statutory trust that in May 2004 had
issued $10.0 million in floating-rate trust preferred
securities. These offerings were pooled private placements
exempt from registration under the Securities Act of 1933
pursuant to Section 4(2) thereunder. In November 2007, the
Company redeemed $15.0 million in trust preferred
securities originally issued through MBHI Capital Trust II.
The Company has provided a full, irrevocable, and unconditional
subordinated guarantee of the obligations of the five existing
trusts under the preferred securities. The Company is obligated
to fund dividends on these securities before it can pay
dividends on its shares of common and preferred stock. See
Note 16 Junior Subordinated Debentures of the
notes to the consolidated financial statements. These five
trusts and their trust preferred securities are detailed below
as follows:
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Initial
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Mandatory
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Optional
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Redemption
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Redemption
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Issuer
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Issue Date
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Amount
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Rate
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Date
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Date(1)
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(In thousands)
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MBHI Capital Trust III
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December 19, 2003
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$
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9,000
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LIBOR+3.00%
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December 30, 2033
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December 30, 2008
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MBHI Capital Trust IV
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December 19, 2003
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10,000
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LIBOR+2.85%
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January 23, 2034
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January 23, 2009
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MBHI Capital Trust V
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June 7, 2005
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20,000
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LIBOR+1.77%
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June 15, 2035
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June 15, 2010
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Royal Capital Trust I
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April 30, 2004
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10,000
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6.62% until July 23, 2009;
LIBOR+2.75% thereafter
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July 23, 2034
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July 23, 2009
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Northwest Suburban Capital Trust I
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May 18, 2004
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10,000
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LIBOR+2.70%
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July 23, 2034
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July 23, 2009
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(1) |
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Redeemable at option of the Company as of the initial optional
redemption date provided and quarterly thereafter. |
11
Markets
The largest segments of the Companys customer base live
and work in relatively mature markets in Cook, DuPage, Kane,
Lake, and McHenry Counties. The Company considers its primary
market areas to be those areas immediately surrounding its
offices for retail customers and generally within a
10-20 mile
radius for commercial relationships. The Bank operates 26
full-service locations in the Chicago metropolitan area. The
communities in which the Banks offices are located have a
broad spectrum of demographic characteristics. These communities
include a number of densely populated areas as well as suburban
areas, and some extremely high-income areas as well as many
middle-income and some
low-to-moderate
income areas.
Competition
The Company competes in the financial services industry through
the Bank and Midwest Financial. The financial services business
is highly competitive. The Company encounters strong direct
competition for deposits, loans, and other financial services
with the Companys principal competitors including other
commercial banks, savings banks, savings and loan associations,
mutual funds, money market funds, finance companies, credit
unions, mortgage companies, insurance companies and agencies,
private issuers of debt obligations and suppliers of other
investment alternatives, such as securities firms.
Several major multi-bank holding companies operate in the
Chicago metropolitan market. Generally, these financial
institutions are significantly larger than the Company and have
access to greater capital and other resources. Several hundred
new bank branches were opened in the Companys marketplace
between 2004 and 2007. Deposit pricing is competitive with
promotional rates frequently offered by competitors. In
addition, many of the Companys non-bank competitors are
not subject to the same degree of regulation as that imposed on
bank holding companies, federally insured banks, and
Illinois-chartered banks. As a result, such non-bank competitors
have advantages over the Company in providing certain services.
The Company addresses these competitive challenges by creating
market differentiation and by maintaining an independent
community bank presence with local decision-making within its
markets. The Bank competes for deposits principally by offering
depositors a variety of deposit programs, convenient office
locations and hours, and other services. The Bank competes for
loan originations primarily through the interest rates and loan
fees charged, the efficiency and quality of services provided to
borrowers, the variety of loan products, and a trained staff of
professional bankers.
The Chicago market is highly competitive making it more
difficult to retain and attract customer relationships. The
Company recognizes this and has initiatives to address the
competition. Part of the Companys marketing strategy is to
create a performance-driven sales environment, increase activity
in its branches, launch a renewed promotional image, and build
and market a strong private banking program. The Company
competes for qualified personnel by offering competitive levels
of compensation, management and employee cash incentive
programs, and by augmenting compensation with stock options
and/or
restricted stock grants pursuant to its stock and incentive
plan. Attracting and retaining high quality employees is
important in enabling the Company to compete effectively for
market share.
Products
and Services
Deposit
Products
Management believes the Bank offers competitive deposit products
and programs which address the needs of customers in each of the
local markets served. These products include:
Checking and Interest-bearing Checking
Accounts. The Company has developed a range of
different checking account products (e.g., Free Checking and
Business Advantage Checking) designed and priced to meet
specific target segments of the local markets served by each
branch.
Savings and Money Market Accounts. The Company
offers multiple types of money market accounts and savings
accounts (e.g., Relationship Savings which offers higher rates
with deeper banking relationships).
12
Time Deposits. The Company offers a wide range
of time deposits (including traditional and Roth Individual
Retirement Accounts), usually offered at premium rates with
special features to protect the customers interest
earnings in changing interest rate environments.
Lending
Services
The Companys loan portfolio consists of commercial loans,
construction loans, commercial real estate loans, consumer real
estate loans, and consumer loans. The Company generally requires
personal guarantees of the principal except on cash secured,
state or political subdivision, or
not-for-profit
organization loans. The Company offers lending services in the
following areas:
Commercial Loans. Commercial and industrial
loans are made to small-to medium-sized businesses that are sole
proprietorships, partnerships, and corporations. Generally,
these loans are secured with collateral including accounts
receivable, inventory and equipment. The personal guarantees of
the principals may also be required. Frequently, these loans are
further secured with real estate collateral. Owner-occupied
commercial real estate loans, where repayment is not dependent
on the real estate collateral, are classified as commercial
loans.
Construction Loans. Construction loans include
loans for land development and for commercial and residential
development and improvements. The majority of these loans are
in-market to known and established borrowers. During the past
three years, these types of loans decreased as a percentage of
the loan portfolio to 13.3% at December 31, 2009 from 21.8%
at December 31, 2006.
Commercial Real Estate Loans. Commercial real
estate loans are loans secured by real estate including
farmland, multifamily residential properties, and other
nonfarm-nonresidential properties. These loans are generally
short-term balloon loans, with fixed or adjustable rate
mortgages and terms of one to five years.
Consumer Real Estate Loans. Consumer real
estate loans are made to finance residential units that will
house from one to four families. The Company originates both
fixed and adjustable rate consumer real estate loans.
Home equity lines of credit, included within the Companys
consumer real estate loan portfolio, are secured by the
borrowers home and can be drawn at the discretion of the
borrower. These lines of credit are generally at variable
interest rates. Home equity lines, combined with the outstanding
loan balance of prior mortgage loans, generally do not exceed
80% of the appraised value of the underlying real estate
collateral at the time of issuance.
Consumer Loans. Consumer loans (other than
consumer real estate loans) are collateralized loans to
individuals for various personal purposes such as automobile
financing.
Lending officers are assigned various levels of loan approval
authority based upon their respective levels of experience and
expertise. Loan approval is also subject to the Companys
formal loan policy, as established by the Banks Board of
Directors. The Banks loan policies establish lending
authority and limits on an individual and committee basis. The
loan approval process is designed to facilitate timely decisions
while adhering to policy parameters and risk management targets.
ATMs
The Bank maintains a network of 30 ATM sites generally located
within the Banks local market. All ATMs are owned by the
Bank. Twenty-six of the ATM sites are located at various banking
centers and four are maintained off-site. The Bank is a member
of the STAR, Allpoint/STARsf, and MoneyPass networks. The
Banks participation in the Allpoint /STARsf and MoneyPass
networks allows customers to have surcharge free access to their
accounts at thousands of ATMs nationwide.
Trust Activities
The Bank offers personal and corporate trust, employee benefit
trust, land trust, and agencies, custody, and escrow services.
As of December 31, 2009, the Bank maintained trust
relationships holding an aggregate market value of
$154.8 million in assets and administered 1,565 land
trust accounts.
13
Insurance
and Securities Brokerage
The Banks subsidiary, Midwest Financial is registered with
the SEC as a broker-dealer and is a member of FINRA. Midwest
Financial operates a general securities business as an
introducing broker-dealer. The area served by Midwest Financial
is the Chicago metropolitan area. It holds neither customer
accounts nor customers securities. Licensed brokers serve
all branches and provide insurance and investment-related
services, including securities trading, financial planning,
mutual funds sales, fixed and variable rate annuities, and
tax-exempt and conventional unit trusts.
Employees
As of December 31, 2009, the Company and its subsidiaries
had 416 full-time equivalent employees compared to
536 full-time equivalent employees a year ago. Management
considers its relationship with its employees to be good.
Available
Information
The Companys internet address is www.midwestbanc.com.
The Company is an SEC registrant and posts its SEC filings,
including
Forms 10-K,
10-Q,
8-K, proxy
statements, and amendments thereto, on its website under
Investor Relations on the day they are filed. The Company will
also provide free copies of its filings upon written request to:
Investor Relations, 501 West North Ave., Melrose Park, IL
60160.
The public may read and copy any materials filed with the SEC at
the SECs Public Reference Room at 450 Fifth Street,
NW, Washington, DC 20549. The public may obtain information on
the operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330.
The Company is an electronic filer. The SEC maintains an
Internet site that contains reports, proxy and information
statements, and other information regarding issuers that file
electronically with the SEC at the SECs site:
http://www.sec.gov.
The Company has a Corporate Governance webpage. The public can
access information about the Companys corporate governance
at www.midwestbanc.com and by selecting About Us, then
Corporate Information and then Corporate Governance. The Company
posts the following on its Corporate Governance webpage:
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Excessive or Luxury Expenditures Policy
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Code of Business Conduct and Ethics
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Director Independence Standards
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Asset/Liability Committee Charter
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Audit Committee Charter
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Compensation Committee Charter
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Corporate Governance and Nominating Committee Charter
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Board Enterprise Risk Management Committee Charter
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SUPERVISION
AND REGULATION
Bank holding companies and banks are extensively regulated under
federal and state law. References under this heading to
applicable statutes or regulations are brief summaries of
portions thereof which do not purport to be complete and which
are qualified in their entirety by reference to those statutes
and regulations. Any change in applicable laws or regulations
may have a material adverse effect on the business of commercial
banks and bank holding companies, including the Company and the
Bank. However, management is not aware of any current
recommendations by any regulatory authority which, if
implemented, would have or would be reasonably likely to have a
material effect on the liquidity, capital resources or
operations of the Company or the Bank. Finally, please remember
that the supervision, regulation and examination of banks and
bank holding companies by bank
14
regulatory agencies are intended primarily for the protection of
depositors rather than stockholders of banks and bank holding
companies.
Bank
Holding Company Regulation
The Company is registered as a bank holding company
with the Board of Governors of the Federal Reserve System (the
Federal Reserve) and, accordingly, is subject to
supervision and regulation by the Federal Reserve under the Bank
Holding Company Act and the regulations issued thereunder,
collectively referred to as the BHC Act. The Company is required
to file with the Federal Reserve periodic reports and such
additional information as the Federal Reserve may require
pursuant to the BHC Act. The Federal Reserve examines the
Company and the Bank, and may examine the Companys other
subsidiaries.
The BHC Act requires prior Federal Reserve approval for, among
other things, the acquisition by a bank holding company of
direct or indirect ownership or control of more than 5% of the
voting shares or substantially all the assets of any bank, or
for a merger or consolidation of a bank holding company with
another bank holding company. With certain exceptions, the BHC
Act prohibits a bank holding company from acquiring direct or
indirect ownership or control of voting shares of any company
which is not a bank or bank holding company and from engaging
directly or indirectly in any activity other than banking or
managing or controlling banks or performing services for its
authorized subsidiaries. A bank holding company may, however,
engage in or acquire an interest in a company that engages in
activities which the Federal Reserve has determined, by
regulation or order, to be so closely related to banking or
managing or controlling banks as to be a proper incident
thereto, such as performing functions or activities that may be
performed by a trust company, or acting as an investment or
financial advisor. The Federal Reserve, however, expects bank
holding companies to maintain strong capital positions while
experiencing growth. In addition, the Federal Reserve, as a
matter of policy, may require a bank holding company to be
well-capitalized at the time of filing an acquisition
application and upon consummation of the acquisition.
Under the BHC Act, the Company and the Bank are prohibited from
engaging in certain tie-in arrangements in connection with an
extension of credit, lease, sale of property or furnishing of
services. This means that, except with respect to traditional
banking products, the Company may not condition a
customers purchase of one of its services on the purchase
of another service.
The Gramm-Leach-Bliley Act allows bank holding companies to
become financial holding companies. Financial holding companies
do not face the same prohibitions against the entry into certain
business transactions that bank holding companies currently face.
Under the Illinois Banking Act, any person (or person acting in
concert) who acquires 25% or more of the Companys stock
may be required to obtain the prior approval of the Illinois
Department of Financial and Professional Regulation, Division of
Banking (the Illinois Division of Banking). Under
the Change in Bank Control Act, a person may be required to
obtain the prior approval of the Federal Reserve before
acquiring the power to directly or indirectly control the
management, operations or policies of the Company or before
acquiring 10% or more of any class of its outstanding voting
stock.
It is the policy of the Federal Reserve that the Company is
expected to act as a source of financial strength to the Bank
and to commit resources to support the Bank. The Federal Reserve
takes the position that in implementing this policy, it may
require the Company to provide such support when the Company
otherwise would not consider it advisable to do so.
The Federal Reserve has adopted risk-based capital requirements
for assessing bank holding company capital adequacy. These
standards define regulatory capital and establish minimum ratios
in relation to assets, both on an aggregate basis and as
adjusted for credit risks and off-balance sheet exposures. The
Federal Reserves risk-based guidelines apply on a
consolidated basis to any bank holding company with consolidated
assets of $500 million or more. The risk-based guidelines
also apply on a consolidated basis to any bank holding company
with consolidated assets of less than $500 million if the
holding company is engaged in significant non banking activities
either directly or through a non bank subsidiary; conducts
significant off-balance sheet activities (including
securitization and asset management or administration) either
directly or through a non bank subsidiary; or has a material
amount
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of debt or equity securities outstanding (other than trust
preferred securities) that are registered with the Securities
and Exchange Commission.
Under the Federal Reserves capital guidelines, bank
holding companies are required to maintain a minimum ratio of
qualifying total capital to risk-weighted assets of 8%, of which
4% must be in the form of Tier 1 Capital. The Federal
Reserve also requires a minimum leverage ratio of Tier 1
Capital to total assets of 3% for strong bank holding companies,
defined as those bank holding companies rated a composite
1 under the rating system used by the Federal
Reserve. For all other bank holding companies, the minimum ratio
of Tier 1 capital to total assets is 4%. Bank holding
companies with supervisory, financial, operational, or
managerial weaknesses, as well as those that are anticipating or
experiencing significant growth, are expected to maintain
capital ratios well above the minimum levels.
The Federal Reserves capital guidelines classify bank
holding company capital into two categories. Tier 1, or
core capital generally is defined as the sum of
eligible core capital elements, less any amounts of goodwill and
other items that are required to be deducted in accordance with
the Federal Reserve capital guidelines. Eligible Tier 1 or
core capital elements consist of qualifying common
stockholders equity, qualifying noncumulative perpetual
preferred stock (including related surplus), senior perpetual
preferred stock issued to the U.S. Treasury under the TARP
(including related surplus), minority interests related to
qualifying common or noncumulative perpetual preferred stock
directly issued by a consolidated U.S. depository
institution or foreign bank subsidiary, and restricted core
capital elements (Tier 1 Capital). Tier 1
Capital must represent at least 50% of a bank holding
companys qualifying total capital.
For purposes of determining bank holding company Tier 1
Capital, restricted core capital elements include cumulative
perpetual preferred stock (including related surplus), minority
interests related to qualifying perpetual preferred stock
directly issued by a consolidated U.S. depository
institution or foreign bank subsidiary, minority interests
related to qualifying common stockholders equity or
perpetual preferred stock issued by a consolidated subsidiary
that is neither a US depository or a foreign bank, qualifying
trust preferred securities and subordinated debentures issued to
the Treasury under the TARP, established by the EESA by a bank
holding company that has made a valid election to be taxed under
Subchapter S of Chapter 1 of the U.S. Internal Revenue
Code or by a bank holding company organized in mutual form.
Eligible Tier 2, or supplementary capital
includes allowance for loan and lease losses (subject to
limitations), perpetual preferred stock and related surplus
(subject to conditions), hybrid capital instruments, perpetual
debt and mandatory convertible debt securities, term
subordinated debt and intermediate-term preferred stock,
including related surplus (subject to limits) and unrealized
holding gains on equity securities (subject to limitations). The
maximum amount of Tier 2 Capital that may be included in a
bank holding companys total capital is limited to 100% of
Tier 1 Capital.
The Federal Reserve capital guidelines limit the aggregate
amount of restricted core capital elements that a
bank holding company may include in Tier 1 Capital. Until
March 31, 2011, the aggregate amount of restrictive
core elements consisting of cumulative perpetual preferred
stock (including related surplus) and qualifying trust preferred
securities that a BHC may include in Tier 1 Capital is
limited to 25% of the sum of (i) qualifying common
stockholder equity, (ii) qualifying noncumulative and
cumulative perpetual preferred stock (including related
surplus), (iii) qualifying minority interest in the equity
accounts of consolidated subsidiaries and (iv) qualifying
trust preferred securities.
After March 31, 2011, these Tier 1 restrictive
core capital element limits will change. After that date,
the aggregate amount of all restricted core capital elements
that may be included by a bank holding company as Tier 1
Capital must not exceed 25% of the sum of all core capital
elements, including restricted core capital elements, net of
goodwill less any associated deferred tax liability.
The excess of restricted core capital not included in
Tier 1 may generally be included in the Tier 2 Capital
calculation. However, after March 31, 2011, the aggregate
amount of term subordinated debt (excluding mandatory
convertible debt) and limited-life preferred stock as well as
excess qualifying trust preferred securities and Class C
minority interest that may be included in Tier 2 capital is
limited to 50 percent of Tier 1 capital (net of
goodwill and other intangible assets required to be deducted).
After March 31, 2011, amounts of these instruments in
excess of
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this limit, although not included in Tier 2 capital, will
be taken into account by the Federal Reserve in its overall
assessment of a banking organizations funding and
financial condition.
In its capital adequacy guidelines, the Federal Reserve
emphasizes that the foregoing standards are supervisory minimums
and that banking organizations generally are expected to operate
well above the minimum ratios. These guidelines also provide
that banking organizations experiencing growth, whether
internally or by making acquisitions, are expected to maintain
strong capital positions substantially above the minimum levels.
As of December 31, 2009, the Companys regulatory
capital fell below the Federal Reserves minimum
requirements to be considered adequately capitalized. The
Company had a total capital to risk-weighted assets ratio of
0.4%, a Tier 1 capital to risk-weighted assets ratio of
0.2%, and a leverage ratio of 0.1%. See Managements
Discussion and Analysis of Financial Condition and Results of
Operations Capital Resources.
In response to the financial crises affecting the overall
banking system and financial markets, on October 3, 2008,
the Emergency Economic Stabilization Act of 2008
(EESA), was enacted. Under EESA, the
U.S. Treasury has the authority to, among other things,
purchase mortgages, mortgage backed securities and certain other
financial instruments from financial institutions for the
purpose of stabilizing and providing liquidity to the
U.S. financial markets.
As indicated above, on December 5, 2008, the Company sold
84,784 shares of Series T preferred stock to the
U.S. Treasury for an aggregate purchase price of
$84.784 million and issued a warrant to the
U.S. Treasury to acquire 4,282,020 shares of its
common stock for $2.97 per share pursuant to the Letter
Agreement. See Managements Discussion and Analysis
of Financial Condition and Results of Operations
Capital Resources for details regarding the exchange of
all the shares of Series T preferred stock.
On January 12, 2009, the FDIC announced that State
nonmember institutions should implement a process to monitor
their use of capital injections, liquidity support
and/or
financing guarantees obtained through recent financial stability
programs established by the Treasury, the FDIC and the Federal
Reserve. In particular, the FDIC indicated that the monitoring
processes should help to determine how participation in these
federal programs has assisted institutions in supporting prudent
lending
and/or
supporting efforts to work with existing borrowers to avoid
unnecessary foreclosures. The FDIC has encouraged institutions
to include a summary of this information in stockholder and
public reports, annual reports and financial statements, as
applicable. While the Company is not subject to this directive,
it is foreseeable that similar requirements may be imposed on
the Company by its primary banking regulator.
EESA followed, and has been followed by, numerous actions by the
Federal Reserve, the U.S. Congress, U.S. Treasury, the
FDIC, the SEC and others to address the current liquidity and
credit crisis that has followed the
sub-prime
meltdown that commenced in 2007. These measures include
homeowner relief that encourage loan restructuring and
modification; the establishment of significant liquidity and
credit facilities for financial institutions and investment
banks; the lowering of the federal funds rate; emergency action
against short selling practices; a temporary guaranty program
for money market funds; the establishment of a commercial paper
funding facility to provide back-stop liquidity to commercial
paper issuers; and coordinated international efforts to address
illiquidity and other weaknesses in the banking sector.
On February 17, 2009, President Barack Obama signed the
American Recovery and Reinvestment Act of 2009
(ARRA), more commonly known as the economic stimulus
or economic recovery package. ARRA includes a wide variety of
programs intended to stimulate the economy and provide for
extensive infrastructure, energy, health and education needs. In
addition, ARRA imposes new executive compensation and corporate
governance limits on current and future participants in TARP,
including the Company, which are in addition to those previously
announced by U.S. Treasury (see Participation in
Capital Purchase Program). The new limits remain in place
until the participant has redeemed the preferred stock sold to
U.S. Treasury, which is now permitted under ARRA without
penalty and without the need to raise new capital, subject to
U.S. Treasurys consultation with the recipients
appropriate federal regulator.
The Sarbanes-Oxley Act of 2002 implemented legislative reforms
intended to prevent corporate and accounting fraud. In addition
to the establishment of a new accounting oversight board which
enforces auditing, quality control and independence standards
and is funded by fees from all publicly traded companies, the
legislation
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and the related regulations restrict provision of both auditing
and consulting services by accounting firms. To ensure auditor
independence, any non-audit services being provided to an audit
client require pre-approval by the companys audit
committee. In addition, audit partners must be rotated. The
legislation and the related regulations require the principal
chief executive officer and the principal chief financial
officer to certify to the accuracy of periodic reports filed
with the SEC and subject them to civil and criminal penalties if
they knowingly or willfully violate this certification
requirement. In addition, legal counsel is required to report
evidence of a material violation of the securities laws or a
breach of fiduciary duty by a company to its chief executive
officer or its chief legal officer, and, if such officer does
not appropriately respond, to report such evidence to the audit
committee or other similar committee of the board of directors
or the board itself.
The Sarbanes-Oxley Act provides for disgorgement of bonuses
issued to top executives prior to restatement of a
companys financial statements if such restatement was due
to corporate misconduct. Executives are also prohibited from
insider trading during pension fund blackout
periods, and loans to company executives are restricted. The
legislation and the related regulations accelerated the time
frame for disclosures by public companies, as they must
immediately disclose any material changes in their financial
condition or operations. Directors and executive officers must
also provide information for most changes in ownership in a
companys securities within two business days of the change.
The legislation and the related regulations also increase the
oversight of, and codifies certain requirements relating to
audit committees of public companies and how they interact with
the companys registered public accounting firm. Audit
committee members must be independent and are barred from
accepting consulting, advisory or other compensatory fees from
the company. In addition, companies must disclose whether at
least one member of the committee is a financial
expert as defined by the SEC and if not, why not. The SEC
has also prescribed rules requiring inclusion of an internal
control report and assessment by management in the annual report
to stockholders. The registered public accounting firm issues an
audit report expressing an opinion on the fair presentation of
the financial statements and on the effectiveness of internal
control over financial reporting. See Item 9A.
Controls and Procedures of this Annual Report on
Form 10-K.
As a bank holding company, the Company is primarily dependent
upon dividend distributions from its operating subsidiaries for
its income. Federal and state statutes and regulations impose
restrictions on the payment of dividends by the Company and the
Bank.
Federal Reserve policy provides that a bank holding company
should not pay dividends unless (i) the bank holding
companys net income over the prior year is sufficient to
fully fund the dividends and (ii) the prospective rate of
earnings retention appears consistent with the capital needs,
asset quality and overall financial condition of the bank
holding company and its subsidiaries.
Delaware law also places certain limitations on the ability of
the Company to pay dividends. For example, the Company may not
pay dividends to its stockholders if, after giving effect to the
dividend, the Company would not be able to pay its debts as they
become due. Because a major source of the Companys cash
receipts is dividends the Company receives and expects to
receive from the Bank, the Companys ability to pay
dividends to stockholders is likely to be dependent on the
amount of dividends paid by the Bank. No assurance can be given
that the Bank can pay any such dividends to the Company on its
stock. Because the Bank had a net loss of $231.0 million in
2009, the Bank will only be able to pay dividends in 2010 upon
receipt of regulatory approval, though as stated in the Written
Agreement, the Company and the Bank must obtain prior approval
in order to pay dividends. In addition, under the terms of the
Companys Series T preferred stock sold to the
U.S. Treasury, the Company will only be able to pay
dividends with the approval of the U.S. Treasury. See
Managements Discussion and Analysis of Financial
Condition and Results of Operations Capital
Resources for details regarding the exchange of all the
shares of Series T preferred stock.
Participation
in Capital Purchase Program
On December 5, 2008, the Company issued $84.8 million
of its Series T Preferred Stock to the U.S. Treasury
under the CPP. In order to participate in the CPP, the Company
has to comply with certain executive compensation rules
contained in EESA. The ARRA includes provisions that further
regulate the executive compensation of
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financial institutions participating in the CPP. The Treasury
has adopted regulations to implement the EESA compensation rules
as amended by ARRA.
On March 8, 2010, the Series T Preferred Stock held
by the U.S. Treasury was exchanged for a new series of Fixed
Rate Cumulative Mandatorily Convertible Preferred Stock,
Series G (the Series G Preferred Stock).
For a further, discussion of the Exchange Agreement and the
Series G Preferred Stock, see Managements
Discussion and Analysis of Financial Condition and Results of
Operations Capital Resources.
Persons Subject to the Rules. Pursuant to the
terms of the Exchange Agreement, the Company will have to
continue to comply with the EESA compensation rules. These
rules, described below, apply to the senior executive officers
(the SEOs), and certain most highly compensated
employees of the Company. SEOs are the principal executive
officer, the PEO, the principal financial officer, the PFO, and
the three most highly compensated executive officers (other than
the PEO and the PFO). The determination of the three most highly
compensated executive officers and the most highly compensated
employees for a particular year is based on their annual
compensation for the last completed fiscal year (as it is
determined pursuant to Item 402(a) of
Regulation S-K).
The Companys SEOs subject to the EESA compensation rules
for 2010 are: Roberto R. Herencia, JoAnn Sannasardo Lilek, J.J.
Fritz, Jonathan P. Gilfillan, and Stephan L. Markovits.
Compensation Committee Duties Semi-annual
Reviews. The compensation committee must review
at least every six months with senior risk officers the SEO
compensation plans and all employee compensation plans and the
risks these plans pose to the Company. In this review, the
committee must identify and limit:
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the features in the SEO compensation plans so they do not
encourage SEOs to take unnecessary and excessive risks that
could threaten the value of the Company;
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any features in employee compensation plans that pose risks to
the Company to ensure that it is not unnecessarily exposed to
risks, including any features in these SEO compensation plans or
employee compensation plans that would encourage behavior
focused on short-term results rather than long-term value
creation; and
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the terms of each employee compensation plan in order to
eliminate the features in a plan that could encourage the
manipulation of reported earnings of the Company to enhance the
compensation of employees.
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Annual Narrative. The compensation committee
must annually prepare a narrative description of how it limited
the features in:
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SEO compensation plans that could encourage SEOs to take
unnecessary and excessive risks that could threaten the value of
the Company, including how these SEO compensation plans do not
encourage behavior focused on short-term results rather than
long-term value creation;
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employee compensation plans to ensure that the Company is not
unnecessarily exposed to risks, including how these employee
compensation plans do not encourage behavior focused on
short-term results rather than long-term value creation; and
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employee compensation plans that could encourage the
manipulation of reported earnings of the Company to enhance the
compensation of employees.
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Annual Certification. The compensation
committee must certify annually that the committee has reviewed:
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with senior risk officers the SEO compensation plans and has
made all reasonable efforts to ensure that these plans do not
encourage SEOs to take unnecessary and excessive risks that
threaten the value of the Company;
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with senior risk officers the employee compensation plans and
has made all reasonable efforts to limit unnecessary risks these
plans pose to the Company; and
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the employee compensation plans to eliminate any features of
these plans that would encourage the manipulation of reported
earnings of the Company to enhance the compensation of any
employee.
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Reporting of Narrative and Certification. The
Company must provide the narrative disclosure and the
certification in its annual compensation committee report
included in its annual meeting proxy statement and file a copy
of the certification with the U.S. Treasury.
Stockholder Non-Binding Say on
Pay. The Company must allow its
stockholders the opportunity to participate annually in a
non-binding vote on senior executive compensation. The
stockholder vote will not be construed as overruling a decision
by the board of directors nor does it create or imply any
additional fiduciary duty by the board. Furthermore, it does not
restrict or limit the ability of stockholders to make other
proposals related to executive compensation.
Compliance Certifications. The Companys
PEO and PFO must provide a written certification of compliance
with the provisions of Section 111 of EESA, as amended by
ARRA. The certification must be filed within 90 days of the
end of any fiscal year. The Company must include these
certifications in its annual report on
Form 10-K
and must file them with the U.S. Treasury.
Limitation on the Companys Compensation Tax
Deduction. The Company is subject to the
provisions of Section 162(m)(5) of the Internal Revenue
Code of 1986, as amended; this provision limits the deduction
for compensation paid to SEOs to $500,000 (including performance
based compensation).
Clawback. The Company must recover any bonus,
retention award or incentive compensation paid to (or accrued
for) SEOs and the next 20 most highly compensated employees if
the payments or accruals were based on materially inaccurate
financial statements or any other materially inaccurate
performance metric criteria, the Clawback. The Company must
exercise its Clawback rights unless it determines that it is
unreasonable to do so (e.g., the costs of recovery exceed the
amount involved).
Severance Prohibited. The Company may not make
golden parachute payments (defined as any payment for
departure from a company for any reason, except for
payments for services performed or benefits accrued) to
its SEOs or any of the next five most highly compensated
employees. A golden parachute payment includes a payment for
departure from the Company for any reason, other than a payment
for services performed or benefits accrued, including an amount
due upon a change in control of the Company.
Limits on Bonuses, Retention Awards and Incentive
Compensation. The Company may not pay or accrue
any bonus, retention award, or incentive compensation to or for
the Companys SEOs unless the amounts are payable as
long-term restricted stock, provided that the stock does not
fully vest until the repayment of TARP assistance and has a
value that is no greater than one-third of the total annual
compensation.
Long-Term Restricted Stock. The value of the
long-term restricted stock can be no greater than one-third of
the employees total annual compensation. For purposes of
determining annual compensation, each equity-based compensation
(including the long-term restricted stock grant ) will be
included in this calculation in the year in which it is granted
at its total fair market value on the grant date.
Except as described below, the long-term restricted stock cannot
fully vest until the repayment of all financial assistance by
the Company.
Furthermore, an employee must provide services to the Company
for at least two years after the grant date of the long-term
restricted stock (or stock unit) in order to vest in this stock
(or stock unit). However, the award may vest prior to this two
year period (but after the TARP funds have been repaid) due to
the death, disability or a change in control.
Restricted stock may become transferable (or in the case of a
restricted stock unit, payable) earlier. For each 25% of the
TARP financial assistance which is repaid, 25% of the total
long-term restricted stock may become transferable (or 25% of
the restricted stock unit may be payable).
In the case of restricted stock (but not a restricted stock
unit), the fair market value of the stock may be subject to
inclusion in income for income tax purposes before the stock
becomes transferable. As a consequence, if this occurs, the rule
permits sales to the extent necessary to pay the applicable
taxes.
Perquisites. The Company must disclose
annually to the U.S. Treasury and the Federal Reserve any
perquisites (as defined in Item 402(c)(2) of
Regulation S-K)
whose total value exceeds $25,000 provided to
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the SEOs and next 20 most highly compensated employees. The
filing must include the amount and nature of the perquisite and
a justification for offering the perquisite (including a
justification for all perquisites offered to the individual).
The filing must be made within 120 days of the end of the
fiscal year.
Tax
Gross-Ups. The
Company is prohibited from providing tax
gross-ups or
other reimbursements for the payment of taxes to any of the SEOs
and next twenty most highly compensated employees relating to
any form of compensation, including severance payments and
perquisites.
Compensation Consultant. The Company must
disclose annually to the U.S. Treasury and the Federal
Reserve whether the Company, the board, or the compensation
committee has engaged a compensation consultant. This disclosure
must include all of the types of services the compensation
consultant has provided during the past three years, including
any benchmarking or comparisons employed to identify
certain percentile levels of compensation (for example, other
peer group companies used for benchmarking and a justification
for using these companies, and the lowest percentile level of
other companies employee compensation considered for
compensation proposals). The filing must be made within
120 days of the end of the fiscal year.
Limits on Luxury Expenditures. The board of
directors of the Company must adopt an excessive or luxury
expenditures policy, file this policy with the
U.S. Treasury and the Federal Reserve, and post the text of
this policy on its Internet website. The policy must cover,
among other things (i) entertainment or events;
(ii) office and facility renovations; (iii) aviation
or other transportation services; and (iv) other similar
items, activities or events. The policy (1) must identify
the types and categories of expenses prohibited or requiring
prior approval; (2) include approval procedures for those
expenses requiring prior approval; (3) mandate PEO and PFO
certification of the prior approval of any expenditures
requiring the prior approval of any SEO, other similar executive
officers, or the board of directors; (4) mandate prompt
internal reporting of any violation of this policy; and
(5) require accountability for adherence to this policy.
This policy was adopted in August 2009 and is posted on the
Companys website at www.midwestbanc.com. If a material
amendment is made to the policy it must be provided to the
U.S. Treasury and Federal Reserve and it must be posted on
the Companys website within ninety days.
Compensation
Guidelines
In October 2009, the Federal Reserve issued a comprehensive
proposal on incentive compensation policies (the Incentive
Compensation Proposal) intended to ensure that the
incentive compensation policies of banking organizations do not
undermine their safety and soundness by encouraging excessive
risk-taking. The Incentive Compensation Proposal, which covers
all employees that have the ability to materially affect a
banks risk profile, either individually or as part of a
group, is based upon the key principles that incentive
compensation arrangements should (i) provide incentives
that do not encourage risk-taking beyond the organizations
ability to effectively identify and manage risks, (ii) be
compatible with effective internal controls and risk management,
and (iii) be supported by strong corporate governance,
including active and effective oversight by the board of
directors. Banks were instructed to begin an immediate review of
their incentive compensation policies to ensure that they do not
encourage excessive risk-taking and implement corrective
programs as needed. Where deficiencies in incentive compensation
arrangements exist, they must be immediately addressed.
The Federal Reserve will review, as part of its regular,
risk-focused examination process, the incentive compensation of
banks, such as the Bank, that are not large, complex
banking organizations. These reviews will be tailored
based on the scope and complexity of the banks activities
and the prevalence of incentive compensation arrangements. The
findings of the supervisory initiatives will be included in its
examination reports and deficiencies will be incorporated into
the banks supervisory ratings, which can affect the
banks ability to make acquisitions and take other actions.
Enforcement actions may be taken against a bank if its incentive
compensation arrangements, or related risk-management control or
governance processes, pose a risk to the organizations
safety and soundness and it is not taking prompt and effective
measures to correct the deficiencies.
In January 2010, the FDIC announced that it would seek public
comment on whether banks with compensation plans that encourage
risky behavior should be charged with higher deposit assessment
rates than such banks would otherwise be charged. The scope and
content of the U.S. banking regulators policies on
executive compensation are
21
continuing to develop and are likely to continue evolving in the
near future. It cannot be determined at this time whether
compliance with such policies will adversely affect the
Companys ability to hire, retain and motivate its key
employees.
Bank
Regulation
Under Illinois law, the Bank is subject to supervision and
examination by Illinois Division of Banking. The Bank is a
member of the Federal Reserve System and as such is also subject
to examination by the Federal Reserve. The Federal Reserve also
supervises compliance with the provisions of federal law and
regulations, which place restrictions on loans by member banks
to their directors, executive officers and other controlling
persons. The Bank is also a member of the FHLB of Chicago and
may be subject to examination by the FHLB of Chicago. Any
affiliates of the Bank and the Company are also subject to
examination by the Federal Reserve and the Illinois Division of
Banking.
The deposits of the Bank are insured by the Deposit Insurance
Fund (the DIF), under the provisions of the Federal
Deposit Insurance Act (the FDIA), and the Bank is,
therefore, also subject to supervision and examination by the
FDIC. The FDIA requires that the appropriate federal regulatory
authority approve any merger
and/or
consolidation by or with an insured bank, as well as the
establishment or relocation of any bank or branch office. The
FDIA also gives the Federal Reserve and other federal bank
regulatory agencies power to issue cease and desist orders
against banks, holding companies or persons regarded as
institution affiliated parties. A cease and desist
order can either prohibit such entities from engaging in certain
unsafe and unsound bank activity or can require them to take
certain affirmative action.
Furthermore, banks are affected by the credit policies of the
Federal Reserve, which regulates the national supply of bank
credit. Such regulation influences overall growth of bank loans,
investments and deposits and may also affect interest rates
charged on loans and paid on deposits. The monetary policies of
the Federal Reserve have had a significant effect on the
operating results of commercial banks in the past and are
expected to continue to do so in the future.
As discussed above, under Illinois law, the Bank is subject to
supervision and examination by Illinois Division of Banking,
and, as a member of the Federal Reserve System, by the Federal
Reserve. Each of these regulatory agencies conducts routine,
periodic examinations of the Bank and the Company.
Financial
Institution Regulation
Transactions with Affiliates. Transactions
between a bank and its holding company or other affiliates are
subject to various restrictions imposed by state and federal
regulatory agencies. Such transactions include loans and other
extensions of credit, purchases of securities and other assets
and payments of fees or other distributions. In general, these
restrictions limit the amount of transactions between a bank and
an affiliate of such bank, as well as the aggregate amount of
transactions between a bank and all of its affiliates, impose
collateral requirements in some cases and require transactions
with affiliates to be on terms comparable to those for
transactions with unaffiliated entities.
Dividend Limitations. As a state member bank,
the Bank may not declare or pay a dividend if the total of all
dividends declared during the calendar year, including the
proposed dividend, exceeds the sum of the Banks net income
(as reportable in its Reports of Condition and Income) during
the current calendar year and the retained net income of the
prior two calendar years, unless the dividend has been approved
by the Federal Reserve. Under Illinois law, the Bank may not pay
dividends in an amount greater than its net profits then on
hand, after deducting losses and bad debts. For the purpose of
determining the amount of dividends that an Illinois
state-chartered bank may pay, bad debts are defined as debts
upon which interest is past due and unpaid for a period of six
months or more, unless such debts are well-secured and in the
process of collection.
In addition to the foregoing, the ability of the Company and the
Bank to pay dividends may be affected by the various minimum
capital requirements and the capital and noncapital standards
established under the Federal Deposit Insurance Corporation
Improvements Act of 1991 (FDICIA) as described
below. The right of the Company, its stockholders and its
creditors to participate in any distribution of the assets or
earnings of its subsidiaries is further subject to the prior
claims of creditors of the respective subsidiaries.
22
Capital Requirements. State member banks are
required by the Federal Reserve to maintain certain minimum
capital levels. The Federal Reserves capital guidelines
for state member banks require state member banks to maintain a
minimum ratio of qualifying total capital to risk-weighted
assets of 8%, of which at least 4% must be in the form of
Tier 1 Capital. In addition, the Federal Reserve requires a
minimum leverage ratio of Tier 1 Capital to total assets of
3% for strong banking institutions (those rated a composite
1 under the Federal Reserves rating system)
and a minimum leverage ratio of Tier 1 Capital to total
assets of 4% for all other banks.
At December 31, 2009, the Bank has a Tier 1 capital to
risk-weighted assets ratio and a total capital to risk-weighted
assets ratio which fall below the above requirements. The Bank
has a total capital to risk-weighted assets ratio of 6.4%, a
Tier 1 capital to risk-weighted assets ratio of 5.1%, and a
Tier 1 leverage ratio of 3.4%. See Capital
Resources for additional details including the impact on
the Bank.
Standards for Safety and Soundness. The
Federal Reserve and the other federal bank regulatory agencies
have adopted a set of guidelines prescribing safety and
soundness standards pursuant to FDICIA. The guidelines establish
general standards relating to internal controls and information
systems, internal audit systems, loan documentation, credit
underwriting, interest rate exposure, asset growth and
compensation, fees and benefits. In general, the guidelines
require, among other things, appropriate systems and practices
to identify and manage the risks and exposures specified in the
guidelines. The guidelines prohibit excessive compensation as an
unsafe and unsound practice and describe compensation as
excessive when the amounts paid are unreasonable or
disproportionate to the services performed by an executive
officer, employee, director or principal shareholder. In
addition, the Federal Reserve adopted regulations that
authorize, but do not require, the Federal Reserve to order an
institution that has been given notice by the Federal Reserve
that it is not satisfying any of such safety and soundness
standards to submit a compliance plan. If, after being so
notified, an institution fails to submit an acceptable
compliance plan or fails in any material respect to implement an
accepted compliance plan, the Federal Reserve must issue an
order directing action to correct the deficiency and may issue
an order directing other actions of the types to which an
undercapitalized association is subject under the prompt
corrective action provisions of FDICIA. If an institution
fails to comply with such an order, the Federal Reserve may seek
to enforce such order in judicial proceedings and to impose
civil money penalties. The Federal Reserve and the other federal
bank regulatory agencies also adopted guidelines for asset
quality and earnings standards.
A range of other provisions in FDICIA include requirements
applicable to closure of branches; additional disclosures to
depositors with respect to terms and interest rates applicable
to deposit accounts; uniform regulations for extensions of
credit secured by real estate; restrictions on activities of and
investments by state-chartered banks; modification of accounting
standards to conform to generally accepted accounting principles
including the reporting of off-balance-sheet items and
supplemental disclosure of estimated fair market value of assets
and liabilities in financial statements filed with the banking
regulators; increased penalties in making or failing to file
assessment reports with the FDIC; greater restrictions on
extensions of credit to directors, officers and principal
stockholders; and increased reporting requirements on
agricultural loans and loans to small businesses.
In addition, the federal banking agencies adopted a final rule,
which modified the risk-based capital standards to provide for
consideration of interest rate risk when assessing the capital
adequacy of a bank. Under this rule, the Federal Reserve and the
FDIC must explicitly include a banks exposure to declines
in the economic value of its capital due to changes in interest
rates as a factor in evaluating a banks capital adequacy.
On January 7, 2010, the federal banking agencies adopted a
joint agency policy statement providing guidance to banks for
managing interest rate risk. The policy statement emphasizes the
importance of adequate oversight by management and a sound risk
management process. The assessment of interest rate risk
management made by the banks examiners will be
incorporated into the banks overall risk management rating
and used to determine the effectiveness of management.
As part of their ongoing supervisory monitoring process, the
federal regulatory agencies use certain criteria to identify
institutions that are potentially exposed to significant loan
concentration risks. In 2007, the regulatory agencies issued new
guidelines relating to commercial real estate (CRE)
lending risks. An institution experiencing rapid growth in CRE
lending, having notable exposure to a specific type of CRE, or
approaching or exceeding the specified CRE supervisory criteria
may be subjected to further supervisory analysis. Because these
are guidelines, the supervisory monitoring criteria do not
constitute limits on an institutions lending activity but
rather serve as high-level
23
indicators to identify institutions potentially exposed to CRE
concentration risk. The criteria do not constitute a safe
harbor for institutions if other risk indicators are
present. Existing capital adequacy guidelines require an
institution to hold capital commensurate with the level and
nature of the risks to which it is exposed. Regulatory agencies
may consider the level and nature of inherent risk in an
institutions CRE portfolio along with other factors to
determine if an institution is maintaining an adequate capital
level to serve as a buffer against unexpected losses and can
require such an institution to develop a plan for reducing its
CRE concentrations or for increasing or maintaining capital
appropriate to the level and nature of its lending concentration
risk.
Prompt Corrective Action. Pursuant to the
Federal Reserve regulations implementing the prompt corrective
action provisions of FDICIA, a bank will be deemed to be:
(i) well-capitalized if the bank has a total risk-based
capital ratio of 10% or greater, Tier 1 risk-based capital
ratio of 6% or greater and leverage ratio of 5% or greater;
(ii) adequately capitalized if the bank has a total
risk-based capital ratio of 8% or greater, Tier 1
risk-based capital ratio of 4% or greater and leverage ratio of
4% or greater (3% for the most highly rated banks);
(iii) undercapitalized if the bank has a total risk-based
capital ratio of less than 8%, Tier 1 risk-based capital
ratio of less than 4% or leverage ratio of less than 4% (less
than 3% for the most highly rated banks);
(iv) significantly undercapitalized if the bank has a total
risk-based capital ratio of less than 6%, Tier 1 risk-based
capital ratio of less than 3% or leverage ratio of less than 3%;
and (v) critically undercapitalized if the bank has a ratio
of tangible equity to total assets of 2% or less.
Under certain circumstances, a well-capitalized, adequately
capitalized or undercapitalized institution may be treated as if
the institution were in the next lower capital category. A
depository institution is generally prohibited from making
capital distributions, including paying dividends, or paying
management fees to a holding company if the institution would
thereafter be undercapitalized. Institutions that are adequately
but not well-capitalized cannot accept, renew or rollover
brokered deposits except with a waiver from the FDIC and are
subject to restrictions on the interest rates that can be paid
on such deposits. Undercapitalized institutions may not accept,
renew or rollover brokered deposits.
The banking regulatory agencies are permitted or, in certain
cases, required to take certain actions with respect to
institutions falling within one of the three undercapitalized
categories. Depending on the level of an institutions
capital, the agencies corrective powers include, among
other things:
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prohibiting the payment of principal and interest on
subordinated debt;
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prohibiting the holding company from making distributions
without prior regulatory approval;
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placing limits on asset growth and restrictions on activities;
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placing additional restrictions on transactions with affiliates;
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restricting the interest rate the institution may pay on
deposits;
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prohibiting the institution from accepting deposits from
correspondent banks; and
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in the most severe cases, appointing a conservator or receiver
for the institution.
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A banking institution that is in any of the three
undercapitalized categories is required to submit a capital
restoration plan, and such a plan will not be accepted unless,
among other things, the banking institutions holding
company guarantees the plan up to a certain specified amount.
Any such guarantee from a depository institutions holding
company is entitled to a priority of payment in bankruptcy.
FDICIA also contains a variety of other provisions that may
affect the Companys operations, including reporting
requirements, regulatory standards for real estate lending,
truth in savings provisions, and the requirement
that a depository institution give 90 days prior notice to
customers and regulatory authorities before closing any branch.
The capital-based prompt corrective action provisions of FDICIA
and their implementing regulations apply to FDIC-insured
depository institutions. However, federal banking agencies have
indicated that, in regulating bank holding companies, the
agencies may take appropriate action at the holding company
level based on their
24
assessment of the effectiveness of supervisory actions imposed
upon subsidiary insured depository institutions pursuant to the
prompt corrective action provisions of FDICIA.
FDIC Insurance Premiums on Deposit
Accounts. The Bank is required to pay deposit
insurance premiums based on the risk it poses to the DIF. The
FDIC has authority to raise or lower assessment rates on insured
deposits in order to achieve statutorily required reserve ratios
in the insurance funds and to impose special additional
assessments.
On February 8, 2006, President Bush signed into law the
Federal Deposit Insurance Reform Act of 2005, the Reform Act.
The FDIC merged the Bank Insurance Fund and the Savings
Association Insurance fund to form the DIF on March 31,
2006 in accordance with the Reform Act. The FDIC maintains the
DIF by assessing depository institutions an insurance premium.
The FDIC annually sets the reserve level of the DIF within a
statutory range between 1.15% and 1.50% of insured deposits. If
the reserve level of the insurance fund falls below 1.15%, or is
expected to do so within six months, the FDIC must adopt a
restoration plan that will restore the DIF to a 1.15% ratio
generally within five years. If the reserve level exceeds 1.35%,
the FDIC may return some of the excess in the form of dividends
to insured institutions.
Effective January 1, 2007 the FDIC introduced a new risk
based system for deposit insurance premium assessments. This
risk based assessment system established four Risk Categories.
Risk Category I includes well-capitalized institutions that are
financially sound with only a few minor weaknesses.
Due to disruptions in the financial markets and the large
numbers of bank failures in the last several years, the DIF
reserve ratio has fallen below 1.15%. In response to these
circumstances, the FDIC on October 7, 2008 established a
Restoration Plan for the DIF which was implemented immediately.
The 2008 Restoration Plan called for the FDIC to set assessment
rates such that the reserve ratio would return to 1.15% within
five years. On February, 27, 2009, the FDIC Board of Directors
adopted a new final rule that modified the risk-based assessment
fee system applied to FDIC insured financial institutions. The
final rule established new base assessment rates beginning on
April 1, 2009. The new initial base assessment rates are as
follows:
Initial
Base Assessment Rates (in basis points)
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Risk
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Risk
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Risk
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Risk
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Category
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Category
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Category
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Category
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I
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II
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III
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IV
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12-16
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22
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32
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45
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In addition, the final rule introduced three possible
adjustments to the base assessment rates. The final rule
provided for adjustments that decrease the base assessment rate
up to five basis points for long term unsecured debt, including
senior unsecured debt (other than debt guaranteed under the
Temporary Liquidity Guarantee Program) and subordinated debt
and, for small institutions, a portion of Tier 1 capital.
The new rule also provides for a potential adjusted increase of
the base assessment rate in an amount of up to 50% of an
institutions prior assessment rate for secured liabilities
that exceed 25% of its domestic deposits. In addition, a
possible adjustment to the base rate assessment was provided
under the final rule based upon brokered deposits in excess of
10% of domestic deposits.
25
After applying all possible adjustments, minimum and maximum
total assessment rates under the final rule for each risk
category are as follows:
Total
Base Assessment Rates
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Risk
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Risk
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Risk
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Risk
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Category
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Category
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Category
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Category
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I
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II
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III
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IV
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Initial Base Assessment Rate
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12-16
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22
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32
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45
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Unsecured Debt Adjustment
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-5-0
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-5-0
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-5-0
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-5-0
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Secured Liability Adjustment
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0-8
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0-11
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0-16
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0-22.5
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Brokered Deposit Adjustment
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0-10
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0-10
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0-10
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Total Base Assessment Rate
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7-24.0
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17-43.0
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27-58.0
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40-77.5
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On May 22, 2009, the FDIC adopted a final rule imposing a
5 basis point special assessment on each insured depository
institutions assets minus Tier 1 capital as of
June 30, 2009. The amount of the special assessment for any
institution will not exceed 10 basis points times the
institutions assessment base for the second quarter 2009.
The special assessment was collected on September 30, 2009.
At that time, an additional special assessment of up to
5 basis points to be assessed later in 2009 was identified
as probable.
On October 2, 2009, the FDIC amended the DIF Restoration
Plan adopted on February 27, 2009. The October 2009
amendments provided that the time period to restore the DIF to
the statutory range between 1.15% and 1.50% of insured deposits
was extended to eight years. Further, the FDIC determined that
it would not impose any further special assessments under the
authority of the final rule adopted in May 2009 and that the
assessment rates would remain at their current levels through
the end of 2010. Further the FDIC adopted a uniform 3 basis
point increase in assessment rates effective January 1,
2011, to ensure that the fund returns to 1.15 percent
within the Amended Restoration Plan period of eight years.
On November 17, 2009 the FDIC issued a final rule requiring
insured institutions to prepay their estimated quarterly
risk-based assessments for the fourth quarter of 2009, and for
all of 2010, 2011, and 2012. Under the FDIC final rule,
assessments for these periods were collected on
December 30, 2009, along with each institutions
regular quarterly risk-based deposit insurance assessment for
the third quarter of 2009. For purposes of estimating an
institutions assessments for the fourth quarter of 2009,
and for all of 2010, 2011, and 2012, and calculating the amount
that an institution would prepay on December 30, 2009, the
institutions assessment rate was based on its total base
assessment rate in effect on September 30, 2009. However
certain financial institutions, including the Bank, were
exempted from the new prepayment regulations and will continue
to pay their risk-based assessments on a quarterly basis.
In addition to the FDIC insurance program, the Bank is required
to pay a Financing Corporation (FICO) assessment (on
a semi-annual basis) in order to share in the payment of
interest due on bonds used to provide liquidity to the savings
and loan industry in the 1980s. During 2009, the Banks
FICO assessment totaled $266,000, or 1.04 basis points of
its insured deposits.
The FDIC may terminate the deposit insurance of any insured
depository institution, including the Bank, if it determines
after a hearing that the institution has engaged or is engaging
in unsafe or unsound practices, is in an unsafe or unsound
condition to continue operations, or has violated any applicable
law, regulation, order or any condition imposed by an agreement
with the FDIC. It also may suspend deposit insurance temporarily
during the hearing process for the permanent termination of
insurance, if the institution has no tangible capital. If
insurance of accounts is terminated, the accounts at the
institution at the time of the termination, less subsequent
withdrawals, shall continue to be insured for a period of six
months to two years, as determined by the FDIC. There are no
pending proceedings to terminate the deposit insurance of the
Bank. The management of the Bank does not know of any practice,
condition or violation that might lead to termination of deposit
insurance.
On October 3, 2008, EESA was signed into law and included a
provision for an increase in the amount of deposits insured by
the FDIC to $250,000 until December 2009. On October 14,
2008, the FDIC announced a new program, the Temporary Liquidity
Guarantee Program (the TLGP) where all
noninterest-bearing transaction
26
deposit accounts, including all personal and business checking
deposit accounts, and NOW accounts, which are capped at a rate
no higher than 0.50%, are fully guaranteed, through
June 30, 2010, regardless of dollar amount. The Company has
elected to participate in the program and has been assessed a
10 basis point surcharge.
On May 20, 2009, the Helping Families Save Their Homes Act
was signed into law. Provisions of this act extended the dates
for the increase in the amount of deposits insured by the FDIC
to $250,000 until December 2013. The act also extended the TLGP
coverage until June 30, 2010, for those institutions that
had previously agreed to participate and who have made an
election to not opt out from the program as of December 31,
2009. The Company has elected to continue participating in the
extended TLGP coverage.
Another component of the TLGP is a voluntary program whereby the
FDIC will temporarily guarantee newly issued senior unsecured
debt of an eligible financial institution up to 125% of the par
or face value of a debt that is scheduled to mature before
June 30, 2009. The FDIC implemented an additional
assessment for institutions that elected to participate in the
Debt Guarantee program. The Debt Guarantee Program also allowed
for financial institutions to opt out from coverage. The Company
elected to participate in the Debt Guarantee Program. The
Company has not issued any such debt and currently does not plan
to issue, any such debt.
Federal Reserve System. The Bank is subject to
Federal Reserve regulations requiring depository institutions to
maintain non-interest-earning reserves against their transaction
accounts (primarily NOW and regular checking accounts). The
Federal Reserve regulations generally require 3% reserves on the
first $44.4 million of transaction accounts and 10% on the
remainder. The first $10.3 million of otherwise reservable
balances (subject to adjustments by the Federal Reserve) are
exempted from the reserve requirements. The Bank is in
compliance with the foregoing requirements.
Community Reinvestment. Under the Community
Reinvestment Act (CRA), a financial institution has
a continuing and affirmative obligation, consistent with the
safe and sound operation of such institution, to help meet the
credit needs of its entire community, including low-and
moderate-income neighborhoods. The CRA does not establish
specific lending requirements or programs for financial
institutions nor does it limit an institutions discretion
to develop the types of products and services that it believes
are best suited to its particular community, consistent with the
CRA. However, institutions are rated on their performance in
meeting the needs of their communities. Performance is judged in
three areas: (a) a lending test, to evaluate the
institutions record of making loans in its assessment
areas; (b) an investment test, to evaluate the
institutions record of investing in community development
projects, affordable housing and programs benefiting low or
moderate income individuals and business; and (c) a service
test to evaluate the institutions delivery of services
through its branches, ATMs and other offices. The CRA requires
each federal banking agency, in connection with its examination
of a financial institution, to assess and assign one of four
ratings to the institutions record of meeting the credit
needs of its community and to take such record into account in
its evaluation of certain applications by the institution,
including applications for charters, branches and other deposit
facilities, relocations, mergers, consolidations, acquisitions
of assets or assumptions of liabilities and savings and loan
holding company acquisitions. The CRA also requires that all
institutions make public disclosure of their CRA ratings. The
Bank received a satisfactory rating on its most
recent CRA performance evaluation.
Brokered Deposits. Well-capitalized
institutions are not subject to limitations on brokered
deposits, while an adequately capitalized institution is able to
accept, renew or rollover brokered deposits only with a waiver
from the FDIC and subject to certain restrictions on the yield
paid on such deposits. Undercapitalized institutions are not
permitted to accept or renew brokered deposits.
Enforcement Actions. Federal and state
statutes and regulations provide financial institution
regulatory agencies with great flexibility to undertake
enforcement action against an institution that fails to comply
with regulatory requirements, particularly capital requirements.
Possible enforcement actions range from the imposition of a
capital plan and capital directive to civil money penalties,
cease and desist orders, receivership, conservatorship or the
termination of deposit insurance.
Bank Secrecy Act and USA Patriot Act. In 1970,
Congress enacted the Currency and Foreign Transactions Reporting
Act, commonly known as the Bank Secrecy Act (the
BSA). The BSA requires financial institutions to
maintain records of certain customers and currency transactions
and to report certain domestic and foreign currency
27
transactions, which may have a high degree of usefulness in
criminal, tax, or regulatory investigations or proceedings.
Under this law, financial institutions are required to develop a
BSA compliance program. In 2001, the President signed into law
comprehensive anti-terrorism legislation commonly known as the
USA Patriot Act. The USA Patriot Act requires financial
institutions to assist in detecting and preventing international
money laundering and the financing of terrorism.
The U.S. Treasury has adopted additional rules and
regulations in order to implement the USA Patriot Act. Under
these regulations, law enforcement officials communicate names
of suspected terrorists and money launderers to financial
institutions so as to enable financial institutions to promptly
locate accounts and transactions involving those suspects.
Financial institutions receiving names of suspects must search
their account and transaction records for potential matches and
report positive results to the U.S. Department of the
Treasury Financial Crimes Enforcement Network
(FinCEN). Each financial institution must designate
a point of contact to receive information requests. These
regulations outline how financial institutions can share
information concerning suspected terrorist and money laundering
activity with other financial institutions under the protection
of a statutory safe harbor if each financial institution
notifies FinCEN of its intent to share information.
The U.S. Treasury has also adopted regulations intended to
prevent money laundering and terrorist financing through
correspondent accounts maintained by U.S. financial
institutions on behalf of foreign banks. Financial institutions
are required to take reasonable steps to ensure that they are
not providing banking services directly or indirectly to foreign
shell banks. In addition, banks must have procedures in place to
verify the identity of the persons with whom they deal, and
financial institutions must undertake additional due diligence
when circumstances warrant and in the case of money service
businesses.
Interstate Banking and Branching
Legislation. Under the Interstate Banking and
Efficiency Act of 1994 (theInterstate Banking Act),
bank holding companies are allowed to acquire banks across state
lines subject to various requirements of the Federal Reserve. In
addition, under the Interstate Banking Act, banks are permitted,
under some circumstances, to merge with one another across state
lines and thereby create a main bank with branches in separate
states. After establishing branches in a state through an
interstate merger transaction, a bank may establish and acquire
additional branches at any location in the state where any bank
involved in the interstate merger could have established or
acquired branches under applicable federal and state law.
The State of Illinois has adopted legislation opting
in to interstate bank mergers, and allows out of state
banks to enter the Illinois market through de novo
branching or through branch-only acquisitions if Illinois
state banks are afforded reciprocal treatment in the other
state. It is anticipated that this interstate merger and
branching ability will increase competition and further
consolidate the financial institutions industry.
Insurance Powers. Under state law, a state
bank is authorized to act as agent for any fire, life or other
insurance company authorized to do business in the State of
Illinois. Similarly, the Illinois Insurance Code was amended to
allow a state bank to form a subsidiary for the purpose of
becoming a firm registered to sell insurance. Such sales of
insurance by a state bank may only take place through
individuals who have been issued and maintain an insurance
producers license pursuant to the Illinois Insurance Code.
State banks are prohibited from assuming or guaranteeing any
premium on an insurance policy issued through the bank.
Moreover, state law expressly prohibits tying the provision of
any insurance product to the making of any loan or extension of
credit and requires state banks to make disclosures of this fact
in some instances. Other consumer oriented safeguards are also
required.
Insurance products are sold through Midwest Financial, a
subsidiary of the Bank acquired in 2006 through the acquisition
of Royal American Corporation. Midwest Financial is registered
with, and subject to examination by, the Illinois Department of
Insurance.
Securities Brokerage. Midwest Financial, a
registered bank-affiliated securities broker-dealer and
registered investment advisor, operates a general securities
business as an introducing broker-dealer. It is registered with
the SEC as a broker-dealer and is a member of FINRA.
Consumer Compliance. The Bank has been
examined for consumer compliance on a regular basis. The Bank is
subject to many federal consumer protection statutes and
regulations including the Equal Credit Opportunity Act,
28
the Fair Housing Act, the Truth in Lending Act, the Truth in
Savings Act, the Real Estate Settlement Procedures Act and the
Home Mortgage Disclosure Act. Among other things, these acts:
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require lenders to disclose credit terms in meaningful and
consistent ways;
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prohibit discrimination against an applicant in any consumer or
business credit transaction;
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prohibit discrimination in housing-related lending activities;
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require certain lenders to collect and report applicant and
borrower data regarding loans for home purchases or improvement
projects;
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require lenders to provide borrowers with information and a
written good faith estimate regarding the nature and cost of
real estate settlements;
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prohibit certain lending practices and limit escrow account
amounts with respect to real estate transactions; and
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prescribe possible penalties for violations of the requirements
of consumer protection statutes and regulations.
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Federal Fair Lending Laws. The federal fair
lending laws prohibit discriminatory lending practices. The
Equal Credit Opportunity Act prohibits discrimination against an
applicant in any credit transaction, whether for consumer or
business purposes, on the basis of race, color, religion,
national origin, sex, marital status, age (except in limited
circumstances), receipt of income from public assistance
programs or good faith exercise of any rights under the Consumer
Credit Protection Act. Under the Fair Housing Act, it is
unlawful for any lender to discriminate in its housing-related
lending activities against any person because of race, color,
religion, national origin, sex, handicap or familial status.
Among other things, these laws prohibit a lender from denying or
discouraging credit on a discriminatory basis, making
excessively low appraisals of property based on racial
considerations, or charging excessive rates or imposing more
stringent loan terms or conditions on a discriminatory basis. In
addition to private actions by aggrieved borrowers or applicants
for actual and punitive damages, the U.S. Department of
Justice and other regulatory agencies can take enforcement
action seeking injunctive and other equitable relief for alleged
violations.
Home Mortgage Disclosure Act. The Federal Home
Mortgage Disclosure Act (HMDA), grew out of public
concern over credit shortages in certain urban neighborhoods.
One purpose of the HMDA is to provide public information that
will help show whether financial institutions are serving the
housing credit needs of the neighborhoods and communities in
which they are located. The HMDA also includes a fair
lending aspect that requires the collection and disclosure
of data about applicant and borrower characteristics as a way of
identifying possible discriminatory lending patterns and
enforcing anti-discrimination statutes. The HMDA requires
institutions to report data regarding applications for loans for
the purchase or improvement of one-to four-family and
multi-family dwellings, as well as information concerning
originations and purchases of such loans. Federal bank
regulators rely, in part, upon data provided under the HMDA to
determine whether depository institutions engage in
discriminatory lending practices.
The appropriate federal banking agency, or in some cases,
U.S. Department of Housing and Urban Development, enforces
compliance with the HMDA and implements its regulations.
Administrative sanctions, including civil money penalties, may
be imposed by supervisory agencies for violations of this act.
Real Estate Settlement Procedures Act. The
Federal Real Estate Settlement Procedures Act
(RESPA), requires lenders to provide borrowers with
disclosures and a written good faith estimate regarding the
nature and cost of real estate settlements. RESPA also prohibits
certain abusive practices, such as kickbacks, places limitations
on the amount that certain settlement charges can exceed the
written good faith estimate of those charges and limits the
amount of escrow accounts. Violations of RESPA may result in
imposition of penalties, including: (1) civil liability
equal to three times the amount of any charge paid for the
settlement services or civil liability of up to $1,000 per
claimant, depending on the violation; (2) awards of court
costs and attorneys fees; and (3) fines of not more
than $10,000 or imprisonment for not more than one year, or both.
29
Truth in Lending Act. The federal Truth in
Lending Act is designed to ensure that credit terms are
disclosed in a meaningful way so that consumers may compare
credit terms more readily and knowledgeably. As result of the
act, all creditors must use the same credit terminology and
expressions of rates, and disclose the annual percentage rate,
the finance charge, the amount financed, the total of payments
and the payment schedule for each proposed loan.
On July 14, 2008, the Federal Reserve Board approved a
final rule, which was effective on October 1, 2009,
amending Regulation Z (Truth in Lending) to prohibit
unfair, abusive or deceptive home mortgage lending practices and
restricts certain other mortgage practices. The final rule also
establishes advertising standards and requires certain mortgage
disclosures to be given to consumers earlier in the transaction.
The final rule adds four new protections for a newly defined
category of higher-priced mortgage loans secured by
a consumers principal dwelling. For loans in this
category, these protections will: (1) prohibit a lender
from making a loan without regard to borrowers ability to
repay the loan from income and assets other than the homes
value; (2) require creditors to verify the income and
assets they rely upon to determine repayment ability;
(3) ban any prepayment penalty if the payment can change in
the initial four years (and for certain other higher-priced
loans, the prepayment penalty period cannot last for more than
two years); and (4) require creditors to establish escrow
accounts for property taxes and homeowners insurance for
all first-lien mortgage loans.
In addition to the rules governing higher-priced loans, the
rules adopted the new protections for loans secured by a
consumers principal dwelling, regardless of whether the
loan is considered to be a higher-priced mortgage
loan. Under the new rules: (1) creditors and mortgage
brokers are prohibited from coercing a real estate appraiser to
misstate a homes value; (2) companies that service
mortgage loans are prohibited from engaging in certain
practices, such as pyramiding late fees; (3) servicers are
required to credit consumers loan payments as of the date
of receipt and provide a payoff statement within a reasonable
time of request; (4) creditors must provide a good faith
estimate of the loan costs, including a schedule of payments,
within three days after a consumer applies for any mortgage loan
secured by a consumers principal dwelling, such as a home
improvement loan or a loan to refinance an existing loan; and
(5) consumers cannot be charged any fee until after they
receive the early disclosures, except a reasonable fee for
obtaining the consumers credit history.
For all mortgages, the new rules also set additional advertising
standards. Advertising rules now require additional information
about rates, monthly payments, and other loan features. The
final rule bans seven deceptive or misleading advertising
practices, including representing that a rate or payment is
fixed when it can change.
The new rules took effect on October 1, 2009. The single
exception is the escrow requirement, which will be phased in
during 2010 to allow lenders to establish new systems as needed.
Violations of the Truth in Lending Act may result in regulatory
sanctions and in the imposition of both civil and, in the case
of willful violations, criminal penalties. Under certain
circumstances, the Truth in Lending Act and Regulation Z of
the Federal Reserve Act also provide a consumer with a right of
rescission, which if exercised would require the creditor to
reimburse any amount paid by the consumer to the creditor or to
a third party in connection with the offending transaction,
including finance charges, application fees, commitment fees,
title search fees and appraisal fees. Consumers may also seek
actual and punitive damages for violations of the Truth in
Lending Act.
Fair and Accurate Credit Transactions Act. In
connection with the passage of the Fair and Accurate Credit
Transactions (FACT) Act, the Banks financial
regulator issued final rules and guidelines, effective
November 1, 2008, requiring the Bank to adopt and implement
a written identity theft prevention program, paying particular
attention to 26 identified red flag events. The
program must also assess the validity of address change requests
for card issuers and for users of consumer reports to verify the
subject of a consumer report in the event of notice of an
address discrepancy.
The FACT Act gives consumers the ability to challenge the Bank
with respect to credit reporting information provided by the
Bank. The new rule also prohibits the Bank from using certain
information it may acquire from an affiliate to solicit the
consumer for marketing purposes unless the consumer has been
give notice and an opportunity to opt out of such solicitation
for a period of five years.
30
Federal Home Loan Bank System. The Bank is a
member of the Federal Home Loan Bank System, which consists of
12 regional FHLBs. The FHLB system provides a central credit
facility primarily for member institutions. The Bank, as a
member of the FHLB of Chicago (FHLBC) is required to
acquire and hold shares of capital stock in the FHLBC in an
amount at least equal to 1% of the aggregate principal amount of
its unpaid residential mortgage loans and similar obligations at
the beginning of each year, or
1/20
of its advances (borrowings) from the FHLBC, whichever is
greater. At December 31, 2009, the Bank had advances from
the FHLBC with aggregate outstanding principal balances of
$340.0 million, and the Banks investment in the FHLBC
stock of $17.0 million was at its minimum requirement. FHLB
advances must be secured by specified types of collateral and
are available to member institutions primarily for funding
purposes.
Regulatory directives, capital requirements and net income of
the FHLBs affect their ability to pay dividends to the Bank. In
addition, FHLBs are required to provide funds to cover certain
obligations and to fund the resolution of insolvent thrifts and
to contribute funds for affordable housing programs. These
requirements could reduce the amount of dividends that the FHLBs
pay to their members and could also result in the FHLBs imposing
a higher rate of interest on advances to their members.
In October 2007, the FHLBC announced that it entered into a
consensual cease and desist order with its regulator which
prohibits it from redeeming or repurchasing any capital stock
from members or declaring dividends on its capital stock without
prior approval. The FHLBC announced in October 2007 that it
would suspend dividends on its stock and no dividends have been
declared or paid since that time. In July 2008, the FHLBC
announced that it had received regulatory approval to make
limited redemptions of its capital stock. The redemptions are
limited to capital stock purchased in connection with member
borrowing advances which will be redeemed when the advances are
paid.
Monetary
Policy and Economic Conditions
The earnings of banks and bank holding companies are affected by
general economic conditions and by the fiscal and monetary
policies of federal regulatory agencies, including the Federal
Reserve. Through open market transactions, variations in the
discount rate and the establishment of reserve requirements, the
Federal Reserve exerts considerable influence over the cost and
availability of funds obtainable for lending or investing.
The above monetary and fiscal policies and resulting changes in
interest rates have affected the operating results of all
commercial banks in the past and are expected to do so in the
future. Banks and their respective holding company cannot fully
predict the nature or the extent of any effects which fiscal or
monetary policies may have on their business and earnings.
31
EXECUTIVE
OFFICERS OF THE REGISTRANT
Listed below are the executive officers of the Company as of
March 30, 2010.
Roberto R. Herencia (50) assumed the roles of President and
Chief Executive Officer of the Company and the Bank, and was
appointed to the board of directors of the Company on
May 15, 2009. He was formerly president and director of
Banco Popular North America based in Chicago and executive vice
president of Popular, Inc., the parent company.
Mr. Herencia spent 17 years at Banco Popular. In
addition to serving as executive vice president of Popular, Inc.
since 1997, and president and director of Banco Popular North
America since December 2001, he served as chief operating
officer, senior credit officer and reported to Populars
CFO in charge of capital markets, M&A and rating agencies
between 1991 and 2001. Prior to joining Popular,
Mr. Herencia spent 10 years in a variety of senior
positions at The First National Bank of Chicago, including
serving as head of the emerging markets division and operations
in Latin America. He was directly involved in the restructure,
workout and debt for equity swaps of public and private sector
credits in Latin America.
JoAnn Sannasardo Lilek (53) was named Executive Vice
President and Chief Financial Officer of the Company and the
Bank in March 2008. Ms. Lilek was chief financial officer
for DSC Logistics, a Chicago-based national supply chain
management firm. Before joining DSC, Lilek had a 23 year
career at ABNAmro North American Inc. where her positions
included executive vice president reporting directly to the
chairman, executive vice president and chief financial officer
Wholesale Banking North America and group senior vice president
and corporate controller.
Jan R. Thiry, CPA (57) was named Chief Accounting Officer
of the Company and the Bank in March 2007. Mr. Thiry has
been a director of Midwest Financial since June 2007., He has
been director and secretary of MBTC Investment Company since
March 2008 and president since February 2009. Mr. Thiry was
hired in December 2006 as Senior Vice President and Controller
of the Company and the Bank. He served as senior vice president
and controller of CIB Marine Bancshares in Pewaukee,
Wisconsin from 1999 to 2006. Mr. Thiry has also held senior
positions at M&I Corporation and Security Bank in
Milwaukee, Wisconsin. Additionally, he was a senior auditor at
KPMG LLP.
Darrin R. Bacon (46) was named Executive Vice President
Head of Commercial and Industrial Lending of the Bank in
February 2010. Mr. Bacon has been in commercial banking for
23 years. He joined the Bank in 2006 as Senior Vice
President running the Naperville commercial banking group.
Mr. Bacon came to the Bank through the acquisition of Royal
American where he served as senior vice president since 2001.
Prior to this, he spent 10 years with First Chicago
Bank/American National Bank. The latter three years he ran a
commercial banking division out of American National Banks
Wheaton office. Mr. Bacon began his banking career in 1986
with Boulevard Bank, N.A. in Chicago, IL. He completed his
formal credit training during his four years at Boulevard Bank,
N.A.
Sheldon Bernstein (63) was named Executive Vice President
of the Bank in January 2005. He previously served as Senior Vice
President of the Company from 2001 to 2005. Mr. Bernstein
has served as President of the Bank, Cook County Region from
2000 to 2004. From 2000 through 2002, he served as Chief
Operating Officer of the Bank. Previously, Mr. Bernstein
served as Executive Vice President-Lending of the Bank since
1993. He was also served as director of Midwest Financial and
Investment Services, Inc. from 2002 to 2005. Mr. Bernstein
was a director of First Midwest Data Corp from 2001 to 2002.
Thomas J. Bell, III (43) was named Executive Vice
President and Chief Investment Officer of the Company and the
Bank in December 2008. He was named Treasurer of the Bank in
September 2009. Mr. Bell previously served as Senior Vice
President for ABN AMRO North America Inc., a Chicago-based bank
holding company for the LaSalle Banks. In his fourteen years of
service at ABN AMRO, Mr. Bell contributed to multiple
disciplines within the asset and liability management, capital
markets and treasury functions. Prior to ABN AMRO/LaSalle,
Mr. Bell spent several years with the Federal Reserve Bank
of Chicago.
Thomas A. Caravello (61) was named Executive Vice President
and Chief Credit Officer of the Bank in January 2005.
Mr. Caravello was named manager, president, and chief
executive officer of Midwest Funding, L.L.C. in May 2006. He has
served as Senior Vice President Credit
Administration from 2003 to 2005. Previously he served as Vice
President Credit Administration from 1998 to 2003.
32
Mary C. Ceas, SPHR, (52) was named Senior Vice
President Human Resources of the Company and the
Bank in 2000. Previously, Ms. Ceas was Vice
President Human Resources since 1997 and served as
Director Training and Development from 1995 to 1997.
Bruno P. Costa (49) was named Executive Vice President and
Chief Operations and Technology Officer of the Bank in January
2005. He served as President of the Information Services
Division of the Bank from 2002 to 2005. Mr. Costa served as
President and Chief Executive Officer of First Midwest Data
Corp. from 1995 to 2002. He held various management positions at
the Bank since 1983.
Stephen L. Eastwood (61) was named Executive Vice President
and Chief Risk Officer of the Bank in November 2009. Prior,
Mr. Eastwood was an independent consultant specializing in
financial reorganizations. From 2004 to 2006, Mr. Eastwood
served as the deputy chief education officer of the Chicago
Public Schools. Prior to 2004, Mr. Eastwood held a variety
of leadership positions over a
32-year
career in Chicago banking units that merged with JPMorgan Chase.
While at JPMorgan Chase he served as president of Banc One
Capital Holdings Corporation and as chief credit officer of
American National Bank.
J. J. Fritz (61) was named Senior Executive Vice
President of the Company and the Bank in May 2009. He previously
served as President and Chief Executive Officer of the Company
and Chief Executive Officer of the Bank since January 29,
2009. He was named Director and Executive Vice President of the
Company and Director, President, and Chief Operating Officer of
the Bank in July 2006. Mr. Fritz was also named director,
president, and chief executive officer of Midwest Financial in
July 2006. Mr. Fritz and other investors founded Royal
American in 1991, where he served as chairman and chief
executive officer, after he served as chief executive officer of
First Chicago Bank of Mt. Prospect. His lengthy career in the
Chicago metropolitan area also includes positions at Northern
Trust, First National Bank of Libertyville and Continental
Illinois National Bank.
Jonathan P. Gilfillan (49) was named Executive Vice
President and Division Head of Commercial Real Estate
Lending of the Bank in July 2008. Mr. Gilfillan previously
served as Senior Vice President for Park National Bank since
2007. Prior to joining Park National, Mr. Gilfillan spent
his career at LaSalle Bank NA, where he had been specializing in
CRE lending since 1992.
Thomas H. Hackett (62) was named Executive Vice President
of the Bank in November 2003. Mr. Hackett was named manager
and vice president of Midwest Funding, L.L.C. in May 2006. He
previously was division manager at Banc One, Chicago, Illinois
from 2002 to 2003. Prior, he was first vice president of
American National Bank of Chicago from 1997 to 2002. He has also
served in similar capacities at First Chicago/NBD, Park Ridge,
IL, NBD of Woodridge and Heritage Bank of Woodridge, Illinois.
Stephan L. Markovits (60) was named Executive Vice
President of the Bank in October 2007. Mr. Markovits
previously was president of Northwest Suburban Bancorp, Inc.
from 2003 to 2007. He also held various management positions at
Plains Bank of Illinois from 1998 to 2003.
Dennis M. Motyka (60) was named Executive Vice President of
the Bank and director of Midwest Financial in October 2005. He
previously was senior vice president and director of banking
centers for Cole Taylor Bank in Rosemont from 2002 to 2005. He
served as senior vice president and Illinois regional manager
for LaSalle Bank in Chicago from 1996 to 2002. He also held
positions with Comerica Bank and Affiliated Bank, both in
Franklin Park, as well as with Western National Bank in Cicero.
Alberto J. Paracchini (39) was named Executive Vice
President and Head of Planning and Development of the Bank in
January 2010. Prior, Mr. Paracchini spent 16 years at
Popular, Inc. where he held leadership positions in both banking
and mortgage subsidiaries. From 2006 through 2008,
Mr. Paracchini served as president and chief financial
officer of Popular Financial Holdings and chief financial
officer of
E-Loan, an
internet banking and mortgage company. Prior to 2006,
Mr. Paracchini headed all operational and technology
functions at Banco Popular North America and also served as
chief financial officer where he was responsible for all
financial and treasury activities.
David Taylor (44) was named Executive Vice President of the
Banks wealth management group in August 2008.
Mr. Taylor was named chief executive officer of Midwest
Financial and Investment Services, Inc. in November 2009.
Mr. Taylor previously held management positions at Bank of
America US Trust Wealth Management (formerly LaSalle Bank)
for 11 years. Mr. Taylor began his career in 1989 with
Pioneer Bank & Trust Company.
33
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 and its representatives may,
from time to time, make written or oral statements that are
forward-looking and provide information other than
historical information, including statements contained in the
Form 10-K,
the Companys other reports and documents filed with the
Securities and Exchange Commission or in communications to its
stockholders. These statements involve known and unknown risks,
uncertainties and other factors that may cause actual results to
be materially different from any results, levels of activity,
performance or achievements expressed or implied by any
forward-looking statement. These factors include, among other
things, the factors listed below.
In some cases, the Company has identified forward-looking
statements by such words or phrases as will likely
result, is confident that,
expects, should, could,
may, will continue to,
believes, anticipates,
predicts, forecasts,
estimates, projects,
potential, intends, or similar
expressions identifying forward-looking statements
within the meaning of the Private Securities Litigation Reform
Act of 1995, including the negative of those words and phrases.
These forward-looking statements are based on managements
current views and assumptions regarding future events, future
business conditions, and the outlook for the Company based on
currently available information. These forward-looking
statements are subject to certain risks and uncertainties that
could cause actual results to differ materially from those
expressed in, or implied by, these statements. The Company
cautions readers not to place undue reliance on any such
forward-looking statements, which speak only as of the date made.
In connection with the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995, the Company is hereby
identifying important factors that could affect the
Companys financial performance and could cause the
Companys actual results for future periods to differ
materially from any opinions or statements expressed with
respect to future periods in any forward-looking statements.
Among the factors that could have an impact on the
Companys ability to achieve the plans, goals, and future
events and conditions expressed or implied in forward-looking
statements are:
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The Company and Banks ability to timely comply with the
terms of the PCA and the Written Agreement with their regulators
pursuant to which the Company and Bank agreed to take certain
corrective actions to improve their capital positions and
financial condition;
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Possible administrative or enforcement actions of banking
regulators in connection with any material failure of the
Company or the Bank to comply with banking laws, rules or
regulations, or terms of the PCA and the Written Agreement;
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The potential call by the Banks repurchase agreement
counterparty to terminate the repurchase agreements since the
Bank has not maintained its well-capitalized status and the
substantial costs the Bank would incur to unwind these
repurchase agreements prior to their maturities;
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Uncertainties regarding the Companys ability to raise a
sufficient amount of new equity capital in a timely manner in
order to increase its regulatory capital ratios as required by
the PCA, facilitate a possible restructuring or equity
conversion of its senior and subordinated debt, permit a
conversion of the U.S. Treasurys preferred equity
investment into common stock and otherwise successfully
implement and achieve the goals of the Capital Plan, and whether
the Company will need to materially modify its Capital Plan in
the future;
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The expiration of the Forbearance Agreement with our primary
lender on March 31, 2010, which will permit the lender to
exercise all its rights in full as a result of certain existing
events of default, including taking possession of all of the
Banks capital stock held by the Company and pledged to the
lender as collateral;
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The Companys ability to address its own liquidity problem;
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Managements ability to effectively manage interest rate
risk and the impact of interest rates in general on the
volatility of the Companys net interest income;
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the effect of the Emergency Economic Stabilization Act of 2008,
the American Recovery and Reinvestment Act of 2009, the
implementation by the U.S. Department of the Treasury (the
U.S. Treasury) and federal banking regulators
of a number of programs to address capital and liquidity issues
in the banking system and additional programs that will apply to
us in the future, all of which may have significant effects on
us and the financial services industry;
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The effect on the Companys profitability if interest rates
fluctuate as well as the effect of the Banks
customers changing use of deposit products;
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The possibility that the Companys wholesale funding
sources may prove insufficient to replace deposits at maturity
and support potential growth;
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Inaccessibility of funding sources on the same terms on which
the Company has historically relied, due to its current capital
ratings;
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The decline in commercial and residential real estate sales
volume and the likely potential for continuing illiquidity in
the real estate market, including within the Chicago
metropolitan area;
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The risks associated with the high concentration of commercial
real estate loans in the Companys portfolio;
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The uncertainties in estimating the fair value of developed real
estate and undeveloped land in light of declining demand for
such assets and continuing illiquidity in the real estate market;
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Uncertainties with respect to the future utilization of the
Companys deferred tax assets;
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Negative developments and disruptions in the credit and lending
markets, including the impact of the ongoing credit crisis on
the Companys business and on the businesses of its
customers as well as other banks and lending institutions with
which the Company has commercial relationships;
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A continuation of the recent unprecedented volatility in the
capital markets;
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The risks associated with implementing the Companys
business strategy, including its ability to preserve and access
sufficient capital to execute on its strategy;
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Rising unemployment and its impact on the Companys
customers savings rates and their ability to service debt
obligations;
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Fluctuations in the value of the Companys investment
securities;
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The ability to attract and retain senior management experienced
in banking and financial services;
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The risks associated with management changes and employee
turnover;
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Credit risks and risks from concentrations (by geographic area
and by industry) within the Banks loan portfolio and
individual large loans;
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The risk that the allowance for loan losses may prove
insufficient to absorb actual losses in the loan portfolio;
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Possible volatility in loan charge-offs and recoveries between
periods;
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The imprecision of assumptions underlying the establishment of
the allowance for loan losses and change in estimated values of
collateral or cash flow projections and various financial assets
and liabilities;
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The Companys ability to adapt successfully to
technological changes to compete effectively in the marketplace;
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The effects of competition from other commercial banks, thrifts,
mortgage banking firms, consumer finance companies, credit
unions, securities brokerage firms, insurance companies, money
market and other mutual funds, and other financial institutions
operating in the Companys market or elsewhere or providing
similar services;
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Volatility of rate sensitive deposits;
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Operational risks, including data processing system failures or
fraud;
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Liquidity risks;
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The possibility that the Bank would experience deposit erosion
caused by the expiration of the FDICs Temporary Liquidity
Guarantee Program;
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The ability to successfully acquire low cost deposits or funding;
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Changes in the economic environment, competition, or other
factors that may influence loan demand, deposit flows, and the
quality of the loan portfolio and loan and deposit pricing;
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The impact from liabilities arising from legal or administrative
proceedings on the financial condition of the Company;
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The inability of the Bank to pay dividends to the Company;
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The Companys inability to pay cash dividends on its common
and preferred stock and interest on its junior subordinated
debentures;
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Governmental monetary and fiscal policies, as well as
legislative and regulatory changes, that may result in the
imposition of costs and constraints on the Company through
higher FDIC insurance premiums, significant fluctuations in
market interest rates, increases in capital requirements, and
operational limitations;
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Changes in general economic or capital market conditions,
interest rates, debt credit ratings, deposit flows, loan demand,
including loan syndication opportunities;
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Changes in legislation or regulatory and accounting
requirements, principles, policies, or guidelines affecting the
business conducted by the Company, including the results of
regulatory examinations;
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The impact of possible future goodwill and other material
impairment charges;
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The effects of increased deposit insurance premiums;
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The delisting of the Companys common stock from Nasdaq;
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Acts of war or terrorism; and
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Other economic, competitive, governmental, regulatory, and
technological factors affecting the Companys operations,
products, services, and prices.
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The Company wishes to caution that the foregoing list of
important factors may not be all-inclusive and specifically
declines to undertake any obligation to publicly revise any
forward-looking statements that have been made to reflect events
or circumstances after the date of such statements or to reflect
the occurrence of anticipated or unanticipated events.
With respect to forward-looking statements set forth in the
notes to consolidated financial statements, including those
relating to contingent liabilities and legal proceedings, some
of the factors that could affect the ultimate disposition of
those contingencies are changes in applicable laws, the
development of facts in individual cases, settlement
opportunities, and the actions of plaintiffs, judges, and juries.
The Companys business, financial condition or results of
operations could be materially adversely affected by any of
these risks.
The Bank
was undercapitalized under regulatory guidelines at
December 31, 2009, and continued losses and deterioration
in credit quality are likely to cause the Banks capital
levels to further decline in the near term.
The Bank was undercapitalized for regulatory capital
ratio purposes at December 31, 2009 as compared to
well-capitalized at September 30, 2009. Credit
quality continued to deteriorate in early 2010 and, as a result,
the Banks interim capital position was significantly
undercapitalized as of January 31, 2010, and the
Company
36
expects the Bank to be critically undercapitalized
at March 31, 2010. A bank is considered critically
undercapitalized when it has a tangible equity to total assets
ratio of equal to or less than 2.00%. See Item 1.
Business Supervision and
Regulation Capital Requirements. In addition,
the Company was undercapitalized at
December 31, 2009 and is expected to remain
undercapitalized at March 31, 2010. Failure by the Company
to improve the Banks regulatory capital ratios within the
timeframe required under the Prompt Correction Act discussed
below will result in material adverse consequences, including
the possibility that the Company may become subject to a
voluntary or involuntary bankruptcy filing, the Bank could be
placed into FDIC receivership by its regulators, or the Bank
could be acquired by a third party in a transaction in which the
Company receives no value for its interest in the Bank, any of
which events would be expected to result in a loss of all or a
substantial portion of the value of the Companys
outstanding securities.
Due to
the Banks significantly undercapitalized status, the
Federal Reserve Bank has issued a Prompt Corrective Action
Directive (PCA) pursuant to which the Bank must
either become adequately capitalized or be sold within
45 days of the PCA. Any failure to comply with the terms of
the PCA will have a material adverse effect on the business of
the Company.
The PCA consented to by the Bank provides that the Bank, in
conjunction with the Company, must within 45 days of
March 29, 2010 either: (i) increase the Banks
capital so that it becomes adequately capitalized;
(ii) enter into and close an agreement to sell the Bank
subject to regulatory approval and customary closing conditions;
or (iii) take other necessary measures to make the Bank
adequately capitalized. The PCA also prohibits or restricts the
Bank from taking certain other actions and subjects the Bank to
other operating restrictions. In addition, the Company and the
Bank continue to be subject to the written agreement (the
Written Agreement) with the Federal Reserve Bank and
the Illinois Division of Banking that requires the Company and
the Bank to take certain steps intended to improve their overall
condition, as further described under Business
Recent Developments Written Agreement with
Regulators.
There can be no assurance that the Company or the Bank will be
able to satisfy, in a timely manner or at all, the requirements
set forth in the PCA and the Written Agreement, or that the
plans adopted in response to the requirements of the PCA and the
Written Agreement will have their intended effect. As further
described under Business Recent
Developments Outlook for 2010, the
Company and the Bank were notified on March 25, 2010 by the
Federal Reserve Bank that the Banks capital plan
previously submitted as required under the Written Agreement was
not accepted. Moreover, the PCA does not prevent bank regulators
from increasing the amount or composition of capital required to
be raised, denying any sale of the Bank or imposing other
directives restricting the Companys or the Banks
business.
If the Company or the Bank is unable to comply with the terms of
the PCA, the Written Agreement or any other applicable
regulations, the Company and the Bank will become subject to
additional, heightened supervisory actions and orders, including
further enforcement action by the regulators that may, among
other things, result in the appointment of a receiver for the
Bank or the acquisition of the Bank in a transaction in which
the Company receives no value. Any such appointment or sale of
the Bank could be expected to result in a loss of all or a
substantial portion of the value of the Companys
outstanding securities.
The
Company does not have the ability to pay amounts that will
become immediately due and payable upon the expiration of the
Forbearance Agreement with the Companys primary lender on
March 31, 2010.
The Company has been in violation of certain financial covenants
under its revolving line of credit and term note and the related
loan documents (collectively, the Loan Agreements)
since September 30, 2009. The lender under the Loan
Agreements advised the Company that such noncompliance
constituted a continuing event of default. As a result, the
lender possesses certain rights and remedies, including the
ability to demand immediate payment of amounts owed under the
Loan Agreements totaling approximately $63.6 million plus
accrued interest or to foreclose on 100% of the stock of the
Bank which was pledged as collateral to support the
Companys obligations under the Loan Agreements. On
October 22, 2009, the Company entered into a Forbearance
Agreement with its lender under the Loan Agreements, pursuant to
which, among other things, the lender agreed to forbear from
exercising the rights and remedies available to it as a
consequence of certain existing events of default, other than
37
continuing to impose default rates of interest (the
Forbearance Agreement). The Forbearance Agreement
expires on March 31, 2010, at which time the lender could
declare immediately due and payable all amounts owed under the
Loan Agreements. Should the lender demand payment at or after
that time, the Company presently would be unable to repay the
amounts due. As a result, the lender could, among other
remedies, foreclose on outstanding shares of the Banks
capital stock, which would have a material adverse effect on the
Companys business, operations and ability to continue as a
going concern and could result in a loss of all or a substantial
portion of the value of the Companys outstanding
securities.
If the
Company fails to raise additional capital in a timely manner,
the Company may be forced to seek bankruptcy protection and/or
the Bank could be placed under FDIC receivership.
A principal component of the Companys overall capital plan
has been to raise new equity capital necessary in order to
improve the regulatory capital ratios of the Company and the
Bank. The timely raising of new equity capital is also critical
in order to increase the Banks capital as required by the
PCA. While the Company continues to pursue new equity capital,
it has not received any commitment for a new equity capital
investment, and there can be no assurance that the Company will
be able to raise a sufficient amount of new equity capital in a
timely manner, on acceptable terms or at all. If the Company
ultimately is unsuccessful in raising a sufficient amount of new
equity capital or, alternatively, executing another strategic
initiative, the Company may become subject to a voluntary or
involuntary bankruptcy filing, the Bank could be placed into
FDIC receivership by its regulators, or the Bank could be
acquired by a third party in a transaction in which the Company
receives no value for its interest in the Bank. Any such event
could be expected to result in a loss of all or a substantial
portion of the value of the Companys outstanding
securities.
As a
result of the above-described events and circumstances, the
Company has determined that there is substantial doubt as to the
Companys ability to continue as a going concern.
Due to the deterioration in the capital ratios of the Bank and
the Company, the uncertainty as to the Companys ability to
raise sufficient amounts of new equity capital, recent
regulatory actions with respect to the Company and the Bank,
including the PCA, and the current inability of the Company to
repay amounts owed under the Loan Agreements if, after the
expiration of the Forbearance Agreement, its lender were to
declare the amounts owed thereunder immediately due and payable,
the Company has determined that there is substantial doubt as to
the Companys ability to continue as a going concern.
Although the Company believes that the raising of additional
capital, if timely achieved, will alleviate the substantial
doubt about the Companys ability to continue as a
going-concern, there can be no assurance that such actions will
be achieved in a timely manner or at all, or if achieved, that
they will be sufficient to alleviate the uncertainty about the
Companys ability to continue as a going concern. The
Companys independent registered public accounting firm has
included in its report on the Companys consolidated
financial statements for the year ended December 31, 2009
an explanatory paragraph with respect to the substantial doubt
as to the Companys ability to continue as a going concern.
The Company is undercapitalized at December 31, 2009, as
defined by the regulatory capital requirements administered by
the federal banking agencies, and does not have sufficient
liquidity to meet the potential demand for all amounts due under
its lending arrangements upon termination of the Forbearance
Agreement that expires on March 31, 2010. The
Companys financial statements do not include any
adjustments that might result from the outcome of this
uncertainty.
A substantial doubt as to the Companys ability to continue
as a going concern may have a material adverse impact on the
Company and the Banks business, financial condition and
results of operations and the ability to raise necessary new
equity capital. Moreover, relationships with third parties with
whom the Company and the Bank do business or on whom they rely,
including depositors (particularly those with deposit accounts
in excess of FDIC insurance limits), customers and clients,
vendors, employees and financial counter-parties could be
significantly adversely impacted because these individuals and
entities may react adversely to the going concern issue, making
it more difficult for the Company to address the issues giving
rise to the going concern.
38
The
Company has incurred cumulative losses since January 1,
2008 and expect to incur losses in the future.
Since January 1, 2008, the Company has incurred losses of
$401.0 million through December 31, 2009. These losses
are due to the goodwill impairment charges, a substantial
increase in provision for credit losses, and the losses on the
preferred stock of FNMA and GNMA.
The Company expects to incur losses through 2010. The Company
cannot provide any assurances that it will not incur additional
losses, especially in light of economic conditions that continue
to adversely affect the Companys borrowers and local
markets. Further losses in 2010 could require the Company to
access additional capital, which may or may not be available.
Losses subsequent to December 31, 2009, will reduce the
Companys capital and may require it to write down or write
off its deferred tax assets and goodwill.
The
Companys results of operations, financial condition and
business may be materially, adversely affected if it fails to
successfully implement the Capital Plan.
The Companys Capital Plan it announced in July 2009
contemplates a number of different strategies intended to
increase common equity capital and raise additional capital as
further described under Capital Plan of Part I
Item 1 above. There can be no assurances, however, that the
Company will be able to successfully execute on each or every
component of the Capital Plan, in a timely manner or at all, and
a number of events and conditions must occur in order for the
plan to achieve its intended effect. For instance, one of the
key elements of the Capital Plan is to raise a significant
amount of new equity capital. The Companys ability to
raise additional equity capital is subject to a number of
factors and there can be no assurance that the Company can raise
additional capital in a timely manner, on acceptable terms or at
all.
If the Company is not able to successfully complete the Capital
Plan, the Company could be adversely impacted by negative
assessments regarding its ability to withstand continued adverse
economic conditions. Moreover, the Companys business, and
the value of its securities would be materially and adversely
affected, it would be more difficult for the Company to meet the
capital requirements of the Companys primary banking
regulators, it would likely become increasingly difficult to
seek further forbearance or waivers from the Companys
primary lender for continuing or any new events of default and
it would be difficult to obtain forbearance or waivers, if
necessary, from the counterparties to the repurchase agreements,
any of which circumstances may make it difficult for the Company
in the future to demonstrate its ability to continue as a going
concern. If the Company is unable to successfully complete its
Capital Plan and were to continue to suffer further
deterioration of its loan portfolio, the Company may consider
with a strategic or financial partner a plan of reorganization
to recapitalize the Bank pursuant to chapter 11 of the
bankruptcy code or become subject to an involuntary bankruptcy
petition
and/or the
Bank could be placed into FDIC receivership by its regulators.
Any such event could be expected to result in a loss of the
entire value of the Companys outstanding common stock and
all or substantially all of the value of any depositary shares
outstanding.
Changes
in economic conditions, in particular a continued economic
slowdown in Chicago, Illinois, has hurt and could continue to
hurt the Companys business materially.
The Companys business is directly affected by factors such
as economic, political and market conditions, broad trends in
industry and finance, legislative and regulatory changes,
changes in government monetary and fiscal policies and
inflation, all of which are beyond its control. A continued
deterioration in economic conditions, in particular a continuing
economic slowdown in Chicago, Illinois, and surrounding areas,
has resulted and may continue to result in the following
consequences, any of which could hurt or continue to hurt the
Companys business materially:
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loan delinquencies may continue to increase or remain at
elevated levels;
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problem assets and foreclosures may continue to increase or
remain at elevated levels;
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unemployment may continue to increase;
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demand for the Companys products and services may decline;
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39
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low cost or noninterest bearing deposits may decrease; and
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collateral for loans made by the Company, especially residential
and commercial real estate, may decline or continue to decline
in value, in turn reducing customers borrowing power, and
reducing the value of assets and collateral associated with the
Companys existing loans.
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A large
percentage of the Companys loans are collateralized by
real estate, including construction loans, and adverse changes
in the real estate market may result in continued or increased
losses and continue adversely affect the Companys
profitability.
A majority of the Companys loan portfolio is comprised of
loans at least partially collateralized by real estate; a
substantial portion of this real estate collateral is located in
the Chicago market.
As of December 31, 2009, collateral-based classification
basis, commercial real estate loans totaled $1.2 billion,
or 52.5% of the Companys total loan portfolio, and
construction loans, including land acquisition and development,
totaled an additional $308.6 million, or 13.3% of its total
loan portfolio.
Adverse changes in the economy affecting real estate values
generally or in the Chicago market specifically could
significantly impair the value of the Companys collateral
and its ability to sell the collateral upon foreclosure. In the
event of a default with respect to any of these loans, amounts
received upon sale of the collateral may be insufficient to
recover outstanding principal and interest on the loans. As a
result, the Companys profitability could be negatively
impacted by an adverse change in the real estate market.
Construction and land acquisition and development lending
involve additional risks because funds may be advanced based
upon values associated with the completed project, which is
uncertain. Because of the uncertainties inherent in estimating
construction costs, as well as the market value of the completed
project and the effects of governmental regulation of real
property, it is relatively difficult to evaluate accurately the
total funds required to complete a project and the related
loan-to-value
ratio. As a result, construction loans often involve the
disbursement of substantial funds with repayment dependent, in
part, on the success of the ultimate project and the ability of
the borrower to sell or lease the property, rather than the
ability of the borrower or guarantor to repay principal and
interest. If the appraisal of the anticipated value of the
completed project proves to be overstated, the Company may have
inadequate security for the loan.
Nonperforming
assets take significant time to resolve and adversely affect the
Companys results of operations and financial
condition.
At December 31, 2009, the Companys nonperforming
loans were $285.5 million, or 12.3% of its loan portfolio,
and the nonperforming assets (which include nonperforming loans,
troubled-debt restructured loans, and foreclosed properties)
were $312.4 million, or 9.06% of total assets. In addition,
the Company had approximately $62.9 million in accruing
loans that were 30 to 89 days delinquent at
December 31, 2009.
The Companys nonperforming assets adversely affect its net
income in various ways. Until economic and market conditions
improve, the Company expects to continue to incur additional
losses relating to an increase in nonperforming loans. The
Company does not record interest income on nonaccrual loans,
thereby adversely affecting its income, and increasing its loan
administration costs. The Company does incur the costs of
funding problem assets and foreclosed properties, however. When
the Company takes collateral in foreclosures and similar
proceedings, its is required to mark the collateral to its then
fair value less expected selling costs, which, when compared to
the principal amount of the loan, may result in a loss. These
nonperforming loans and foreclosed properties also increase the
Companys risk profile. There can be no assurance that:
(i) the Company will be able to reduce its nonperforming
assets timely; or (ii) that it will not experience further
increases in nonperforming loans in the future. Any of these
actions may result in additional future credit losses and
additional regulatory enforcement actions.
40
The
Companys allowance for loan losses may not be sufficient
to cover actual loan losses, which could adversely affect its
results of operations or its financial condition.
As a lender, the Company is exposed to the risk that its loan
customers may not repay their loans according to their terms and
that the collateral securing the payment of these loans may be
insufficient to assure repayment. The Company has and may
continue to experience significant loan losses, which could
continue to have a material adverse effect on its operating
results. Management makes various assumptions and judgments
about the collectibility of the Companys loan portfolio,
which are based in part on:
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current economic conditions and their estimated effects on
specific borrowers;
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an evaluation of the existing relationships among loans,
potential loan losses and the present level of the allowance;
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managements internal review of the loan portfolio; and
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results of examinations of its loan portfolio by regulatory
agencies.
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The Company maintains an allowance for loan losses in an attempt
to cover probable incurred loan losses inherent in its loan
portfolio. Additional loan losses will likely continue to occur
in the future and may occur at a rate greater than experienced
historically. In determining the amount of the allowance, the
Company relies on an analysis of its loan portfolio, experience,
and evaluation of general economic conditions. If the
Companys assumptions and analysis prove to be incorrect,
its current allowance may not be sufficient. In addition,
adjustments may be necessary to allow for unexpected volatility
or deterioration in the local or national economy or other
factors such as changes in interest rates that may be beyond its
control. The results of examination from regulatory agencies are
also considered. Any increase in the Companys loan
allowance or loan charge-offs could have a material adverse
effect on its results of operations.
The level of the Companys nonperforming assets, which
consist of nonaccrual loans, troubled debt restructured loans,
foreclosed real estate and other repossessed assets, may also
impact the sufficiency of the Companys allowance for loan
losses. Nonperforming assets totaled $312.4 million as of
December 31, 2009, an increase of $228.3 million, or
271.3%, from $84.1 million at December 31, 2008.
In addition to those loans currently identified and classified
as nonperforming loans, management is aware that other possible
credit problems may exist with some borrowers. These include
loans that are migrating from grades with lower risk of loss
probabilities into grades with higher risk of loss probabilities
as performance and potential repayment issues surface. The
Company monitors these loans and adjusts loss rates in its
allowance for loan losses accordingly. The most severe of these
loans are credits that are classified as substandard assets due
to either less than satisfactory performance history, lack of
borrowers paying capacity, or inadequate collateral.
While the
Company attempts to manage the risk from changes in market
interest rates, interest rate risk management techniques are not
exact. In addition, the Company may not be able to economically
hedge its interest rate risk. A rapid or substantial increase or
decrease in interest rates could adversely affect its net
interest income and results of operations.
The Companys net income depends primarily upon its net
interest income. Net interest income is income that remains
after deducting, from total income generated by earning assets,
the interest expense attributable to the acquisition of the
funds required to support earning assets. Income from earning
assets includes income from loans, investment securities and
short-term investments. The amount of interest income is
dependent on many factors, including the volume of earning
assets, the general level of interest rates, the dynamics of
changes in interest rates and the level of nonperforming loans.
The cost of funds varies with the amount of funds required to
support earning assets, the rates paid to attract and hold
deposits, rates paid on borrowed funds and the levels of
non-interest-bearing demand deposits and equity capital.
Different types of assets and liabilities may react differently,
and at different times, to changes in market interest rates. The
Company expects that it will periodically experience
gaps in the interest rate sensitivities of its
assets and liabilities. That means either its interest-bearing
liabilities will be more sensitive to changes in market interest
rates than its interest earning assets, or vice versa. When
interest-bearing liabilities mature or reprice more
41
quickly than interest earning assets, an increase in market
rates of interest could reduce the Companys net interest
income. Likewise, when interest-earning assets mature or reprice
more quickly than interest-bearing liabilities, falling interest
rates could reduce net interest income. The Company is unable to
predict changes in market interest rates which are affected by
many factors beyond its control including inflation, recession,
unemployment, money supply, domestic and international events
and changes in the United States and other financial markets.
Based on its net interest income simulation model, if market
interest rates were to increase immediately by 100 or
200 basis points (a parallel and immediate shift of the
yield curve) net interest income would be expected to increase
by 8.29% and 18.12%, respectively, from what it would be if
rates were to remain at December 31, 2009 levels. The
actual amount of any increase or decrease may be higher or lower
than that predicted by the Companys simulation model. Net
interest income is not only affected by the level and direction
of interest rates, but also by the shape of the yield curve,
credit spreads, relationships between interest sensitive
instruments and key driver rates, balance sheet growth, client
loan and deposit preferences and the timing of changes in these
variables.
As result of current market conditions, the Companys net
interest income simulation model did not test the effects of 100
and 200 basis point decreases in market interest rates at
December 31, 2008 or December 31, 2009 as those
decreases would result in some deposit interest rate assumptions
falling below zero. Nonetheless, the Companys net interest
income could decline in those scenarios as yields on earning
assets could continue to adjust downward. Although the Company
is seeking to mitigate this risk by instituting interest rate
floors into its variable-rate loan products, continuation of the
existing interest rate environment, featuring an historically
low absolute level of market rates of interest, could have a
material adverse effect on the Company.
The Company attempts to manage risk from changes in market
interest rates, in part, by controlling the mix of interest
rate-sensitive assets and interest rate-sensitive liabilities.
The Company continually reviews its interest rate risk position
and modifies its strategies based on projections to minimize the
impact of future interest rate changes. The Company also uses
financial instruments with optionality to modify its exposure to
changes in interest rates. However, interest rate risk
management techniques are not exact. A rapid increase or
decrease in interest rates could adversely affect results of
operations and financial performance.
The
Company and the Bank may not be able to access sufficient and
cost-effective sources of liquidity necessary to fund operations
and meet payment obligations under their existing funding
commitments, including the repayment of brokered
deposits.
The Bank depends on access to a variety of funding sources,
including deposits, to provide sufficient liquidity to meet its
commitments and business needs and to accommodate the
transaction and cash management needs of its clients, including
funding loans. The Bank also must have sufficient funds
available to satisfy its obligation to repay any wholesale
borrowings its has outstanding, including brokered deposits and
other obligations, when they come due. Currently, the
Banks primary sources of liquidity are clients
deposits, as well as brokered deposits, Federal Home Loan Bank
advances, and repayments and maturities of loans and securities.
To the extent deposit growth is not commensurate with its
funding needs, the Bank may need to access alternative, more
expensive funding sources. Addressing these funding needs in the
future will be even more challenging given that the Bank is
undercapitalized for regulatory capital purposes, and as a
result, the Bank is no longer able to accept or renew brokered
deposits, whether wholesale or retail, secure deposits at rates
that are 75 basis points higher than the prevailing
effective rates on insured deposits of comparable amounts or
maturities in the Banks normal market area or the national
rates periodically release by the FDIC. In addition, the Bank is
not knowingly accepting deposits in excess of FDIC insurance
coverage limits, and believes it has sufficient liquidity to
fund its near-term potential and actual obligations. Scheduled
maturities of brokered deposits are $60.1 million in the
first quarter 2010, $64.9 million in the second quarter
2010, $206.4 million in the third quarter 2010,
$76.5 million in the fourth quarter 2010 and
$46.6 million thereafter.
Although the Bank experienced an increase in deposits that has
allowed it to reduce to some extent its reliance on wholesale
funding sources during 2009, there can be no assurance that this
level of deposit growth will continue. There is also no way to
determine with any degree of certainty whether these deposits
are, in whole or in part, permanent or transitory. If the
returns in the equity markets continue to improve or FDIC
insurance coverage is reduced, some of the Banks deposits
could move to higher yielding investment alternatives outside of
the Bank,
42
thus causing a reduction in the Banks deposits and
increased reliance on wholesale funding sources. Although
management currently believes the Bank has the ability and the
available liquidity to meet its near-term potential and actual
obligations, if in the future additional cost-effective funding
is not available on terms satisfactory to the Bank or at all,
the Bank may not be able to meet its funding obligations, which
could adversely affect the Companys results of operations
and earnings.
In addition, as further described below, several of the
Banks repurchase agreements could permit the counterparty
to terminate the repurchase agreements prior to maturity because
the Bank is not currently well-capitalized. Due to the
relatively high fixed rates on these borrowings as compared to
currently low market rates of interest, the Bank would incur
substantial costs to unwind these repurchase agreements if
terminated prior to their maturities, which could have a
material adverse effect on the Companys results of
operations and financial condition in the period of payment. As
a result of the Banks capital position, it had to increase
the amount of collateral securing the existing FHLBC advances,
and the wholesale funding market is no longer available to the
Bank.
As a holding company without independent operations, the
Companys liquidity (on an unconsolidated basis) is
primarily dependent upon the Companys ability to raise
debt or equity capital from third parties and the receipt of
dividends from its operating subsidiaries. The Company is
currently in default under its Loan Agreements and its revolving
credit facility has matured and is no longer available. Despite
its recent efforts to obtain new equity capital, the Company has
not yet obtained a commitment for new equity capital. As a
result of recent regulatory actions, the Companys
principal operating subsidiary, the Bank, is prohibited from
paying any dividends or making any loans to the Company. At
December 31, 2009, the Companys cash and cash
equivalents on an unconsolidated basis amounted to
$3.4 million. The Companys liquidity position on an
unconsolidated basis can be adversely affected by, among other
things, decreases in the amount of cash and other liquid assets
on hand due to increased expenses or otherwise; the payment of
interest or principal on debt issued by the Company (including
any amounts demanded upon expiration of the Forbearance
Agreement); any payment of dividends on equity securities issued
by the holding company (all of which have been suspended or
deferred); any capital it injects into the Bank; and any
redemption of debt for cash issued by the holding company. The
Companys unconsolidated liquidity position also may be
adversely affected if the Bank continues to be unable or
prohibited by its regulators to pay a dividend to the Company
sufficient to satisfy the Companys cash flow needs; if it
is required by the Federal Reserve to use cash at the holding
company to support the capital position of the Bank; or if it
continues to have difficulty raising cash at the holding company
level through the issuance of debt or equity instruments or
accessing additional sources of credit. Although the Company
receives a management fee from the Bank for services provided by
the Company in support of the Banks operations, the timing
and amount of such management fees are subject to approval by
the Banks regulators, and there can be no assurances that
such fees will be approved in the future or that the amounts of
such fees will be sufficient to meet the Companys costs of
providing services to the Bank.
Presently, the Company does not have sufficient liquidity on an
unconsolidated basis to meet its short-term obligations, which
include the approximately $63.6 million in outstanding debt
that its lender could accelerate and demand payment for upon the
expiration of the Forbearance Agreement on March 31, 2010.
The Company believes that, if the lender does not exercise its
right to demand payment of amounts owed under the Loan
Agreements, that it has adequate liquidity to meet its near-term
commitments.
The
Companys cost of funds for banking operations may increase
as a result of general economic conditions, interest rates and
competitive pressures.
The Bank has traditionally obtained funds principally through
deposits and borrowings. As a general matter, deposits are a
cheaper source of funds than borrowings, because interest rates
paid for deposits are typically less than interest rates charged
for borrowings. Historically and in comparison to commercial
banking averages, the Bank has had a higher percentage of its
time deposits in denominations of $100,000 or more and brokered
certificates of deposit. Within the banking industry, the
amounts of such deposits are generally considered more likely to
fluctuate than deposits of smaller denominations. If, as a
result of general economic conditions, market interest rates,
competitive pressures or otherwise, the value of deposits at the
Bank decrease relative to its overall banking operations, the
Bank may have to rely more heavily on borrowings as a source of
funds in the future.
43
Changes in the mix of the Companys funding sources could
have an adverse effect on its income. 33.7% of the
Companys funding sources as of December 31, 2009 are
in lower-rate transactional deposit accounts. Market rate
increases or competitive pricing could heighten the risk of
moving to higher-rate funding sources, which would cause an
adverse impact on the Companys results of operations.
The
Company is in breach of certain financial covenants under its
Loan Agreements and its lender has the right to take certain
courses of action that would, if exercised, have a material
adverse effect on the Companys operations and ability to
continue as a going concern.
At December 31, 2009, the Company had approximately
$78.6 million outstanding under the Loan Agreements.
Approximately $63.6 million of the amounts outstanding
under the Loan Agreements are secured by all of the outstanding
shares of stock of the Bank. The Company has breached certain
financial covenants under the Loan Agreements, certain of which
breaches constitute events of default. See
Managements Discussion and Analysis of Financial
Condition and Results of Operations
Borrowings. Due to the occurrence and the continuance of
such events of default, the interest rate on the revolving line
of credit increased to the default interest rate of 7.25%, and
the interest rate under the term loan agreement increased to the
default interest rate of 30 day LIBOR plus 455 basis
points.
On October 22, 2009, the Company entered into the
Forbearance Agreement with the lender, pursuant to which, among
other things, the lender agreed to forbear from exercising the
rights and remedies available to it as a consequence of the
existing events of default, except for continuing to impose
default rates of interest. The Forbearance Agreement expires on
March 31, 2010, or earlier if, among other things, the
Company breaches representations and warranties contained in, or
defaults on its obligations under, the Forbearance Agreement, or
the Company defaults on certain obligations under its loan
agreements (other than with respect to certain financial and
regulatory covenants) or the Bank becomes subject to
receivership by the FDIC or the Company becomes subject to other
bankruptcy or insolvency type proceedings. The Forbearance
Agreement did not waive any of the Companys events of
default or any other default or event of default, and the lender
has not committed to waive any of the existing and continuing
events of default following the expiration of the Forbearance
Agreement.
Upon the expiration of the Forbearance Agreement, the principal
and interest amounts that were owed under the Loan Agreements,
as modified by earlier covenant waivers, at the time the
Forbearance Agreement was entered into will once again become
due and payable, along with such other amounts as may have
become due during the forbearance period. The Company will not
be able to meet any demands for payment of amounts then due at
the expiration of the Forbearance Agreement. As a result of the
events of default, the lender may, among other remedies, seize
the outstanding shares of the Banks capital stock held by
the Company that have been pledged as collateral for borrowings
under the Loan Agreements.
If the lender were to take one or more of the above actions, or
if the Company is unable to renegotiate, renew, replace or
expand its sources of financing on acceptable terms, it could
have a material adverse effect on the Companys business,
operations and ability to continue as a going concern, and
investors could lose all or a substantial portion of their
investment in the securities of the Company they hold. Upon a
liquidation, holders of the Companys debt securities
(including subordinated debt securities underlying the
Companys trust preferred securities) and lenders with
respect to other borrowings would be entitled to receive a
distribution of the available assets, if any, prior to holders
of the Companys preferred stock and common stock, and
holders of preferred stock would be entitled to receive
distribution of the available assets, if any, prior to holders
of the Companys common stock. Any decisions by investors
and lenders to enter into equity and financing and refinancing
transactions with the Company will depend upon a number of
factors, including the Companys historical and projected
financial performance, the degree of non-compliance with the
terms of its current loan arrangements, industry and market
trends, the availability of capital and its investors and
lenders policies and rates applicable thereto, and the
relative attractiveness of alternative investment or lending
opportunities. There can be no assurance that the Company will
be able to raise sufficient capital to return to compliance
under its existing debt arrangements or pay the loans in full.
44
There is
a risk that the counterparty to certain of the Banks
existing repurchase agreements may have the right to terminate
the repurchase agreements, which could materially and adversely
affect the Companys financial position and earnings in the
period of termination.
The agreements with one of the Banks repurchase agreement
counterparty could permit that counterparty to terminate the
repurchase agreements if the Bank does not maintain its
well-capitalized status. Because the Bank is not
well-capitalized, there is a risk that the counterparty could
exercise its option to terminate one or more of these repurchase
agreements prior to maturity. At December 31, 2009, the
Banks repurchase agreements with those provisions totaled
$262.7 million with fixed interest rates ranging from 2.76%
to 4.65%, maturities ranging from approximately 7.5 to
8.5 years, and quarterly call provisions (at the
counterpartys option). Due to the relatively high fixed
rates on these borrowings as compared to currently low market
rates of interest, the Bank would incur substantial costs to
unwind these repurchase agreements if terminated prior to their
maturities, which could have a material adverse effect on the
Companys results of operations and financial condition in
the period of payment. The associated unwind costs would be the
difference between the fair value and carrying value of the
repurchase agreements on the date of termination. Because the
repurchase agreements are collateralized at an amount sufficient
to cover any such unwind costs which may be incurred, any such
costs would result in a charge in the statement of operations
but would not be expected to have a material adverse effect on
the Banks liquidity.
The
Companys common stock could be delisted from
Nasdaq.
The Companys common stock is currently listed on Nasdaq.
On September 15, 2009, the Company received a letter
notifying the Company of failure to maintain a minimum closing
bid price of $1.00 per share on Company common stock over the
preceding 30 consecutive business days as required by Nasdaq
rules. The letter stated that the Company had until
March 15, 2010 to demonstrate compliance by maintaining a
minimum closing bid price of at least $1.00 for a minimum of ten
consecutive business days. The Company was not able to satisfy
this requirement.
On March 11, 2010, Nasdaq notified the Company that it had
approved the Companys application to transfer its common
stock from the Nasdaq Global Market to the Nasdaq Capital Market
effective March 16, 2010. Nasdaq has advised the Company
that it has been granted an additional 180
calendar-day
compliance period which will end on September 13, 2010.
If the Company does not maintain a minimum closing bid price of
at least $1.00 for a minimum of ten consecutive business days by
September 13, 2010, Nasdaq will notify the Company that its
common stock is subject to delisting from Nasdaq. At that time,
the Company may appeal Nasdaqs determination to delist its
common stock to a Listing Qualifications Panel.
Although the Company was allowed to transfer to the Nasdaq
Capital Market, the perception or possibility that the
Companys common stock could be delisted in the future
could negatively affect the liquidity and price of its common
stock. Delisting would have an adverse effect on the liquidity
of the common stock and, as a result, the market price for the
common stock might become more volatile. Delisting could also
make it more difficult for the Company to raise additional
capital. Although the Company expects that quotes for its common
stock would continue to be available on the OTC
Bulletin Board or, if it were delisted from Nasdaq, on the
Pink Sheets, such alternatives are generally
considered to be less efficient markets, and the stock price, as
well as the liquidity of the common stock, may be adversely
impacted as a result.
Also, in the future the Company could fall out of compliance
with other minimum criteria for continued listing, including
minimum market capitalization, minimum stockholders equity
and minimum public float. A failure to meet any of these other
continued listing requirements could result in delisting of the
Companys common stock.
Markets
have experienced, and may continue to experience, periods of
high volatility accompanied by reduced liquidity.
Financial markets are susceptible to severe events evidenced by
rapid depreciation in asset values accompanied by a reduction in
asset liquidity. Under these extreme conditions, hedging and
other risk management strategies may not be as effective at
mitigating trading losses as they would be under more normal
market
45
conditions. Moreover, under these conditions market participants
are particularly exposed to trading strategies employed by many
market participants simultaneously and on a large scale, such as
crowded trades. The Companys risk management and
monitoring processes seek to quantify and mitigate risk to more
extreme market moves. Severe market events have historically
been difficult to predict, however, and the Company could
realize significant losses if unprecedented extreme market
events were to occur, such as the recent conditions in the
global financial markets and global economy.
Concern
of the Companys customers over deposit insurance may cause
a decrease in deposits.
With recent increased concerns about bank failures, customers
increasingly are concerned about the extent to which their
deposits are insured by the FDIC. Customers may withdraw
deposits in an effort to ensure that the amount they have on
deposit with their bank is fully insured. On October 14,
2008, the FDIC announced a new program, the Temporary Liquidity
Guarantee Program (the TLGP) where all
noninterest-bearing transaction deposit accounts, including all
personal and business checking deposit accounts, and NOW
accounts, which are capped at a rate no higher than 0.50%, are
fully guaranteed, through June 30, 2010, regardless of
dollar amount. The Company has elected to participate in the
program. If this program is not extended beyond June 30,
2010, the Company may experience a decrease in deposits.
Decreases in deposits may adversely affect the Companys
funding costs, net income, and liquidity.
The
Banks deposit insurance premium could be substantially
higher in the future, which could have a material adverse effect
on the Companys future earnings.
The FDIC insures deposits at FDIC insured financial
institutions, including the Bank. The FDIC charges the insured
financial institutions premiums to maintain the Deposit
Insurance Fund at a certain level. Current economic conditions
have increased bank failures and expectations for further
failures, in which case the FDIC ensures payments of deposits up
to insured limits from the Deposit Insurance Fund.
On October 7, 2008, the FDIC released a five-year
recapitalization plan and a proposal to raise premiums to
recapitalize the fund. In order to implement the restoration
plan, the FDIC proposed to change both its risk-based assessment
system and its base assessment rates. In December 2008, the FDIC
adopted its rule, uniformly increasing the risk-based assessment
rates by seven basis points, annually, resulting in a range of
risk-based assessment of 12 basis points to 50 basis
points. Changes to the risk-based assessment system would
include increasing premiums for institutions that rely on
excessive amounts of brokered deposits, increasing premiums for
excessive use of secured liabilities, and lowering premiums for
smaller institutions with very high capital levels.
On May 22, 2009, the FDIC board agreed to impose an
emergency special assessment of five basis points on all banks
to restore the Deposit Insurance Fund to an acceptable level.
The assessment, which was payable on September 30, 2009, is
in addition to a planned increase in premiums and a change in
the way regular premiums are assessed, which the FDIC board
previously approved. The cost of this emergency special
assessment to the Company was approximately $1.7 million.
On November 12, 2009, the FDIC issued new assessment
regulations that require FDIC-insured institutions to prepay on
December 30, 2009 their estimated quarterly risk-based
assessments for the fourth quarter 2009 and for all of 2010,
2011 and 2012; however certain financial institutions, including
the Bank, were exempted from the new prepayment regulations and
will continue to pay their risk-based assessments on a quarterly
basis.
The recent assessment increases and special assessments
discussed above, along with any future further assessment
increases and special assessments applicable to the Bank, have
increased and may continue to increase Banks expenses and
adversely impact the Companys earnings. Future assessments
are also expected to increase as a result of the Bank being
undercapitalized as of December 31, 2009.
FDIC insurance expense has increased substantially, from
$2.6 million in 2008 to $9.3 million in 2009, which
includes a special assessment. The Company expects to pay
significantly higher FDIC premiums in the future, especially
until its regulatory capital and risk profile improve. Bank
failures have significantly depleted the FDICs DIF and
reduced its ratio of reserves to insured deposits. The FDIC has
adopted a revised risk-based deposit insurance assessment
schedule which raised deposit insurance premiums, and the FDIC
has also implemented a special assessment on all depository
institutions. Additional special assessments may be imposed by
the FDIC for
46
future periods. The Bank participates in the TLGPs
noninterest-bearing transaction account guarantee and pays the
FDIC a fee for such guarantee. These actions significantly
increased the Companys noninterest expense in 2009 and are
expected to increase its costs for the foreseeable future. The
Banks insurance premiums will also increase as a result of
becoming less than well capitalized. TLGPs
noninterest-bearing transaction account guarantee program has
been extended to June 30, 2010. Institutions, such as the
Bank, that participate in the extended program are required to
pay 15 to 25 basis points annualized fee in accordance with
its risk category rating assigned by the FDIC.
Defaults
by another financial institution could adversely affect
financial markets generally.
Since mid-2007, the financial services industry as a whole, as
well as the securities markets generally, have been materially
and adversely affected by very significant declines in the
values of nearly all asset classes and by a very serious lack of
liquidity. Financial institutions in particular have been
subject to increased volatility and an overall loss in investor
confidence.
The commercial soundness of many financial institutions may be
closely interrelated as a result of credit, trading, clearing,
or other relationships between the institutions. As a result,
concerns about, or a default or threatened default by, one
institution could lead to significant market-wide liquidity and
credit problems, losses, or defaults by other institutions. This
is sometimes referred to as systemic risk and may
adversely affect financial intermediaries, such as clearing
agencies, clearing houses, banks, securities firms and
exchanges, with which the Company interacts on a daily basis,
and therefore could adversely affect the Company.
The Companys ability to engage in routine funding
transactions could be adversely affected by the actions and
commercial soundness of other financial institutions. As a
result, defaults by, or even rumors or questions about, one or
more financial services companies, or the financial services
industry generally, have led to market-wide liquidity problems
and could lead to losses or defaults by the Company or by other
institutions. Many of these transactions expose the Company to
credit risk in the event of default of the Companys
counterparty or client. In addition, the Companys credit
risk may be exacerbated when its collateral held cannot be
realized or is liquidated at prices not sufficient to recover
the full amount of the loan or derivative exposure due the
Company. There is no assurance that any such losses would not
materially and adversely affect the Companys business,
financial condition or results of operations.
The
widespread effect of falling housing prices on financial markets
has adversely affected and could continue to adversely affect
the Companys profitability, liquidity, and financial
condition.
Turmoil in the financial markets, precipitated by falling
housing prices and rising delinquencies and foreclosures, has
negatively impacted the valuation of securities supported by
real estate collateral, including certain securities owned by
the Company. In 2008, the Company has experienced losses of
$82.1 million on investments in government sponsored
enterprises, such as Fannie Mae and Freddie Mac, which has
materially adversely impacted its capital base. The Company
relies on its investment securities portfolio as a source of net
interest income and as a means to manage its funding and
liquidity needs. If defaults in the underlying collateral are
such that the security can no longer meet its debt service
requirements, the Companys net interest income, cash
flows, and capital will be reduced.
The value
of securities in the Companys investment securities
portfolio may be negatively affected by continued disruptions in
securities markets.
The market for some of the investment securities held in the
Companys portfolio has become extremely volatile over the
past twelve months. Generally, assets required to be carried at
fair value are valued based on quoted market prices or on
valuation models that use market data inputs. Because the
Companys carries these assets on its books at their fair
values, the Company may incur losses even if the assets in
question present minimal credit risk. Volatile market conditions
may detrimentally affect the value of these securities, such as
through reduced valuations due to the perception of heightened
credit and liquidity risks. There can be no assurance that the
declines in market value associated with these disruptions will
not result in other than temporary impairments of these assets,
which
47
would lead to accounting charges that could have a material
adverse effect on the Companys net income and capital
levels.
If the
Company is required to write down goodwill or other intangible
assets or if it is required to
mark-to-market
certain of its assets or further reduce its deferred tax assets
by a valuation allowance, its financial condition and results of
operations would be negatively affected.
When the Company acquires a business, a portion of the purchase
price of the acquisition may be allocated to goodwill and
identifiable intangible assets. The amount of the purchase price
which is allocated to goodwill is determined by the excess of
the purchase price over the fair value of the net tangible and
identifiable intangible assets acquired. At December 31,
2009, the Companys goodwill and identifiable intangible
assets were approximately $77.3 million. Under generally
accepted accounting principles, if the Company determines that
the carrying value of its goodwill or identifiable intangible
assets is impaired, the Company is required to write down the
value of these assets. The Company conducts an annual review to
determine whether goodwill and identifiable intangible assets
are impaired and updates this analysis on an interim basis,
under certain circumstances.
Under the authoritative guidance for intangibles
goodwill and other (ASC 350), goodwill must be tested for
impairment annually and, under certain circumstances, at
intervening interim dates. A goodwill impairment test also could
be triggered between annual testing dates if an event occurs or
circumstances change that would more likely than not reduce the
fair value below the carrying amount. Examples of those events
or circumstances would include the following:
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significant adverse change in business climate;
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significant unanticipated loss of clients/assets under
management;
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unanticipated loss of key personnel;
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sustained periods of poor investment performance;
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significant loss of deposits or loans;
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significant reductions in profitability; or
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significant changes in loan credit quality.
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The Companys goodwill and intangible assets are reviewed
annually for impairment as of September 30th of each
year. This review in 2009 was conducted with the assistance of a
third party valuation specialist. Based upon that review, the
Company determined that the $78.9 million of goodwill
recorded on the September 30, 2009 balance sheet was not
impaired. The Company determined that activities in the fourth
quarter of 2009, including the Written Agreement with the
regulators, the decline in the Banks regulatory capital
position to undercapitalized, and the significant deterioration
in the market price of the Companys common stock,
constituted triggering events requiring an interim goodwill
impairment test. As a result of that test, the Company recorded
a $14.0 million goodwill impairment as of December 31,
2009. The Company cannot assure that it will not be required to
take goodwill impairment charges in the future. See
Managements Discussion and Analysis of Financial
Condition and Results of Operation Financial
Condition Goodwill for a discussion of the
methodologies employed and assumptions used in conducting the
Companys annual impairment test.
The Company will continue to assess the shortfall in the
Companys equity fair value relative to its total book
value and tangible book value, which management currently
attributes to both industry-wide and Company-specific factors,
and to evaluate whether any additional adjustments are required
in the carrying value of goodwill. The Company may be required
in a future period to recognize an impairment of all, or some
portion, of its remaining goodwill.
Any impairment charge would have a negative effect on its
stockholders equity and financial results. If an
impairment charge is significant enough to result in or
significantly contribute to negative net income for the period,
it could affect the ability of the Bank to upstream dividends to
the Company, which could have a material adverse effect on the
Companys liquidity.
48
If the Company decides to sell a loan or a portfolio of loans it
is required to classify those loans as held for sale, which
requires it to carry such loans at the lower of cost or market.
If it decides to sell loans at a time when the fair market value
of those loans is less than their carrying value, the adjustment
will result in a loss. The Company may from time to time decide
to sell particular loans or groups of loans, for example to
resolve classified loans, and the required adjustment could
negatively affect its financial condition or results of
operations.
The Company also is required, under generally accepted
accounting principles, to assess the need for a valuation
allowance on its deferred tax assets. If, based on the weight of
available evidence, it is more likely than not that some portion
or all of the deferred tax assets will not be realized, the
Company would be required to reduce its deferred tax assets by a
valuation allowance and increase income tax expense. The Company
recently established a valuation allowance of $60.0 million
related to its deferred tax assets, which contributed
significantly to the net loss for the quarter ended
June 30, 2009. At December 31, 2009, the valuation
allowance increased to $117.1 million and the net deferred
tax asset was $4.3 million. The Company may be required to
reduce this remaining amount in the future, which would
adversely affect the Companys earnings or exacerbate any
net loss.
Companies are subject to a change of ownership test under
Section 382 of the Internal Revenue Code of 1986, as
amended, that, if met, would limit the annual utilization of the
pre-change of ownership carryforward as well as the ability to
use certain unrealized built-in losses. Under the Companys
planned capital restructuring, it is likely that a change of
ownership under Section 302 will occur. Generally, under
Section 382, the yearly limitation on the Companys
ability to utilize such deductions will be equal to the product
of the applicable long-term tax exempt rate and the sum of the
values of the Companys common stock and Series G
preferred stock immediately before the ownership change. The
Companys ability to utilize deductions related to credit
losses during the twelve-month period following such an
ownership change would also be limited under Section 382,
together with net operating loss carryforwards, to the extent
that such deductions reflect a net loss that was
built-in to the Companys assets immediately
prior to the ownership change.
If the
Companys investment in the common stock of the Federal
Home Loan Bank of Chicago is other than temporarily impaired,
its financial condition and results of operations could be
materially impaired.
The Bank owns common stock of the Federal Home Loan Bank of
Chicago (FHLBC). The common stock is held to qualify
for membership in the Federal Home Loan Bank System and to be
eligible to borrow funds under the FHLBCs advance program.
The aggregate cost and fair value of the Companys FHLBC
common stock as of December 31, 2009 was $17.0 million
based on its par value. There is no market for the FHLBC common
stock.
On October 10, 2007, the FHLBC entered into a consensual
cease and desist order with the Federal Housing Finance Board,
now known as the Federal Housing Finance Agency
(FHFA). Under the terms of the order, capital stock
repurchases and redemptions, including redemptions upon
membership withdrawal or other termination, are prohibited
unless the FHLBC receives the prior approval of the Director of
the Office of Supervision of the FHFA (the
Director). The order also provides that dividend
declarations are subject to the prior written approval of the
Director and required the FHLBC to submit a capital structure
plan to the FHFA. The FHLBC has not declared any dividends since
the order was issued and it has not received approval of a
capital structure plan. In July of 2008, the FHFA amended the
order to permit the FHLBC to repurchase or redeem newly-issued
capital stock to support new advances, subject to certain
conditions set forth in the order. The Companys FHLBC
common stock is not newly-issued and is not affected by this
amendment.
Recent published reports indicate that certain member banks of
the Federal Home Loan Bank System could have materially lower
regulatory capital levels due to the application of certain
accounting rules and asset quality issues. In an extreme
situation, it is possible that the capitalization of a Federal
Home Loan Bank, including the FHLBC, could be substantially
diminished or reduced to zero. The Companys FHLBC common
stock is accounted for in accordance with the authoritative
guidance for financial services depository and
lending (ASC
942-325-35).
This guidance provides that, for impairment testing purposes,
the value of long term investments such as FHLBC common stock is
based on the ultimate recoverability of the par
value of the security without regard to temporary declines in
value. Consequently, if events occur that give rise to
substantial doubt about the ultimate recoverability of the par
value of the Companys FHLBC common stock, this investment
could be deemed to be
49
other-than-temporarily
impaired, and the impairment loss that would be required to be
recorded would cause the Companys earnings to decrease by
the after-tax amount of the impairment loss.
As a bank
holding company that conducts substantially all of the
Companys operations through its subsidiaries, its ability
to pay dividends, repurchase its shares, or to repay its
indebtedness depends upon liquid assets held by the bank holding
company, as well as the results of operations of the
Companys subsidiaries. The Company and its subsidiaries
are subject to other restrictions.
The Company is a separate and distinct legal entity from its
subsidiaries and it receives substantially all of its revenue
from dividends from its subsidiaries. The Companys net
income depends primarily upon its net interest income. Net
interest income is income that remains after deducting from
total income generated by earning assets the interest expense
attributable to the acquisition of the funds required to support
earning assets. Income from earning assets includes income from
loans, investment securities and short-term investments. The
amount of interest income is dependent on many factors,
including the volume of earning assets, the general level of
interest rates, the dynamics of changes in interest rates and
the levels of nonperforming loans. The cost of funds varies with
the amount of funds necessary to support earning assets, the
rates paid to attract and hold deposits, rates paid on borrowed
funds and the levels of noninterest-bearing demand deposits and
equity capital.
Most of the Companys ability to pay dividends and make
payments on its debt securities comes from amounts paid to it by
the Bank. Under applicable banking law, the total dividends
declared in any calendar year by the Bank may not, without the
approval of the Federal Reserve, exceed the aggregate of the
Banks net profits and retained net profits for the
preceding two years. The Bank is also subject to limits on
dividends under the Illinois Banking Act. Because of its lack of
earnings, the PCA and the Written Agreement, the Bank is
prohibited from paying any dividends or making any loans to the
Company.
If, in the opinion of the federal bank regulatory agency, a
depository institution under its jurisdiction is engaged in or
is about to engage in an unsafe or unsound practice (which,
depending on the financial condition of the depository
institution, could include the payment of dividends), the agency
may require that the bank cease and desist from the practice.
The Federal Reserve has similar authority with respect to bank
holding companies. In addition, the federal bank regulatory
agencies have issued policy statements which provide that
insured banks and bank holding companies should generally only
pay dividends out of current operating earnings. Finally, these
regulatory authorities have established guidelines with respect
to the maintenance of appropriate levels of capital by a bank,
bank holding company or savings association under their
jurisdiction. Compliance with the standards set forth in these
guidelines has restricted and will continue to restrict the
amount of dividends, if any, that the Company and its affiliates
can pay in the future.
The Companys ability to declare and pay dividends or to
repurchase its shares is also subject to:
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the terms of junior subordinated debentures of the Company,
pursuant to which it can not declare or pay any dividends or
distributions on, or redeem, purchase, acquire or make a
liquidation payment with respect to, any of its common stock or
preferred stock if, at that time, there is a default under the
junior subordinated debentures or a related guarantee or it has
delayed interest payments on the securities issued under the
junior indenture; and
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the Companys outstanding Series A and Series G
Preferred Stock, which have preference over the Companys
common stock with respect to the payment of dividends as well as
distributions of assets upon liquidation, and no dividends on
the common stock may be declared and paid unless and until
dividends have been paid on its preferred stock. Furthermore,
the Company cannot repurchase its common stock until all
dividends have been paid on the Series G Preferred Stock.
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The
Company must seek additional capital in the future, but capital
may not be available when it is needed.
The Company is required by federal and state regulatory
authorities to maintain adequate levels of capital to support
its operations. A number of financial institutions have recently
raised considerable amounts of capital as a result of
deterioration in their results of operations and financial
condition arising from the turmoil in the mortgage loan market,
deteriorating economic conditions, declines in real estate
values and other factors, which may diminish the Companys
ability to raise additional capital. As discussed under
Business Recent Developments
50
Outlook for 2010 and Capital
Plan, the Company also is seeking to raise capital in
an effort to improve the Companys capital position and
comply with the PCA.
The Companys ability to raise additional capital will
depend on conditions in the capital markets, economic conditions
and a number of other factors, many of which are outside its
control, and on its current and anticipated financial
performance. Accordingly, the Company cannot be assured of its
ability to raise, sufficient amount of additional capital, as
part of its Capital Plan or otherwise, or on terms acceptable to
it. If the Company cannot raise, sufficient amount of additional
capital it may have a material adverse effect on its financial
condition, results of operations and prospects, as further
described under Risk Factors-If the Company fails to raise
additional capital in a timely manner, the Company may be forced
to seek bankruptcy and/or the Bank could be placed under FDIC
receivership.
The
Companys effective tax rates may be adversely affected by
changes in federal and state tax laws.
The Companys effective tax rates may be adversely affected
by changes in federal or state tax laws, regulations and agency
interpretations. In this regard, recent changes in Illinois laws
may adversely affect the Companys results of operations.
Under prior tax law, the Company enjoyed favorable tax treatment
with respect to the dividends it received from Midwest Funding,
L.L.C., a captive real estate investment trust, or a REIT. A
change in Illinois tax law relating to the deductibility of
captive REIT dividends eliminated this tax benefit beginning
January 1, 2009, and increased the Companys effective
tax rate beginning in that year.
In addition, in connection with the determination of the
Companys provision for income and other taxes and during
the preparation of its tax returns, management makes certain
judgments based upon reasonable interpretations of tax laws,
regulations and agency interpretations which are inherently
complex. Managements interpretations are subject to
challenge upon audit by the tax authorities, which have become
increasingly aggressive in challenging tax positions taken by
financial institutions, including certain positions that the
Company has taken. If the Company is not successful in defending
the tax positions that it has taken, the Companys
financial condition and results of operations may be adversely
affected.
An
interruption in or breach in security of the Companys
information systems may result in a loss of customer
business.
The Company relies heavily on communications and information
systems to conduct its business. Any failure or interruptions or
breach in security of these systems could result in failures or
disruptions in its customer relationship management, general
ledger, deposits, servicing, or loan origination systems. The
occurrence of any failures or interruptions or breach in
security could result in a loss of customer business, costly
remedial actions, or legal liabilities and have a material
adverse effect on the Companys results of operations and
financial condition.
Management regularly reviews and updates the Companys
internal controls, disclosure controls and procedures, and
corporate governance policies and procedures. Any system of
controls, however well designed and operated, is based in part
on certain assumptions and can provide only reasonable, not
absolute, assurances that the objectives of the system are met.
Any failure or circumvention of the Companys controls and
procedures or failure to comply with regulations related to
controls and procedures could have a material adverse effect on
the Companys business, results of operations, cash flows
and financial condition.
The Company relies heavily on communications and information
systems to conduct its business. Any failure, interruption or
breach in security of these systems could result in failures or
disruptions in the Companys customer relationship
management, general ledger, deposit, loan and other systems.
While the Company has policies and procedures designed to
prevent or limit the effect of the failure, interruption or
security breach of the Companys information systems, there
can be no assurance that any such failures, interruptions or
security breaches will not occur or, if they do occur, that they
will be adequately addressed. Additionally, the Company
outsources a portion of its data processing to a third party. If
the Companys third party provider encounters difficulties
or if the Company has difficulty in communicating with such
third party, it will significantly affect the Companys
ability to adequately process and account for customer
transactions, which would significantly affect the
Companys business operations. Furthermore, breaches of
such third partys technology may also cause reimbursable
loss to the Companys consumer and business customers,
through no fault of its own. The occurrence of any failures,
51
interruptions or security breaches of information systems used
to process customer transactions could damage the Companys
reputation, result in a loss of customer business, subject the
Company to additional regulatory scrutiny, or expose the Company
to civil litigation and possible financial liability, any of
which could have a material adverse effect on the Companys
financial condition, results of operations and cash flows.
The
Company continually encounters technological change.
The financial services industry is continually undergoing rapid
technological change with frequent introductions of new
technology-driven products and services. The effective use of
technology increases efficiency and enables financial
institutions to better serve customers and to reduce costs. The
Companys future success depends, in part, upon its ability
to address the needs of its customers by using technology to
provide products and services that will satisfy customer
demands, as well as to create additional efficiencies in the
Companys operations. Many competitors have substantially
greater resources to invest in technological improvements. The
Company may not be able to effectively implement new
technology-driven products and services or be successful in
marketing these products and services to its customers. Failure
to successfully keep pace with technological change affecting
the financial services industry could have a material adverse
impact on the Companys business and, in turn, its
financial condition, results of operations and cash flows.
The
Company is subject to various reporting requirements that
increase compliance costs, and failure to comply timely could
adversely affect its reputation and the value of its
securities.
The Company is required to comply with various corporate
governance and financial reporting requirements under the
Sarbanes-Oxley Act of 2002, as well as rules and regulations
adopted by the Securities and Exchange Commission, the Public
Company Accounting Oversight Board and Nasdaq. In particular,
the Company is required to include management and independent
auditor reports on internal controls as part of its Annual
Report on
Form 10-K
pursuant to Section 404 of the Sarbanes-Oxley Act. The
Company expects to continue to spend significant amounts of time
and money on compliance with these rules. In addition, pursuant
to the Written Agreement, the Company is required to prepare and
submit various reports to its regulators and may face further
reporting obligations in the future due to its financial
condition. Compliance with various regulatory reporting requires
significant commitments of time from management and its
directors, which reduces the time available for the performance
of their other responsibilities. The Companys failure to
track and comply with the various rules may materially adversely
affect its reputation, ability to obtain the necessary
certifications to financial statements, lead to additional
regulatory enforcement actions, and could adversely affect the
value of its securities.
The
Companys ability to attract and retain management and key
personnel may affect future growth and earnings and may be
adversely affected by compensation and employment restrictions
to which it may be subject.
The Companys success is largely dependent on the personal
contacts of its officers and employees in its market areas. If
the Company loses key employees, temporarily or permanently, its
business could be hurt. The Company could be particularly hurt
if its key employees leave to work for the Companys
competitors. The Companys future success depends on the
continued contributions of its existing senior management
personnel.
Both the Company and the Bank are currently required to obtain
regulatory approval to add new executive officers or directors
or to enter into any agreement to provide indemnification or
severance payments. The personal and financial disclosures
required by the regulators of prospective executives and
directors are detailed and invasive. For this reason, the
Company may not be able to attract qualified candidates who are
willing to provide the necessary disclosures.
The Federal Reserve and the FDIC have indicated they are
considering policies to change financial institutions
compensation to avoid promoting undue risk taking. The terms of
these policies are unknown, and the timing and effects of any
such policies on the Company are also unknown.
52
The
Companys business may be adversely affected by the highly
regulated environment in which it operates.
The Company is subject to extensive federal and state
legislation, regulation and supervision. The burden of
regulatory compliance has increased under current legislation
and banking regulations and is likely to continue to have a
significant impact on the financial services industry. Recent
legislative and regulatory changes, as well as changes in
regulatory enforcement policies and capital adequacy guidelines,
are increasing the Companys costs of doing business and,
as a result, may create an advantage for its competitors who may
not be subject to similar legislative and regulatory
requirements. In addition, future regulatory changes, including
changes to regulatory capital requirements, could have an
adverse impact on the Companys future results. In
addition, the federal and state bank regulatory authorities who
supervise the Company have broad discretionary powers to take
enforcement actions against banks for failure to comply with
applicable regulations and laws. If the Company fails to comply
with applicable laws or regulations, it could become subject to
enforcement actions that have a material adverse effect on its
future results.
There can
be no assurance that the recently enacted Emergency Economic
Stabilization Act of 2008, the American Recovery and
Reinvestment Act of 2009 and other recently enacted government
programs will help stabilize the U.S. financial
system.
On October 3, 2008, the Emergency Economic Stabilization
Act of 2008, EESA, was enacted. The U.S. Treasury and
banking regulators have implemented and may continue to
implement a number of programs under this legislation and
otherwise to address capital and liquidity issues in the banking
system, including the TARP Capital Purchase Program. In
addition, other regulators have taken steps to attempt to
stabilize and add liquidity to the financial markets, such as
the FDIC Temporary Liquidity Guarantee Program, TLG Program,
which the Company did not opt-out of. However, there
can be no assurance that the Company will issue any guaranteed
debt under the TLG Program, or that the Company will participate
in any other stabilization programs in the future.
The EESA followed, and has been followed by, numerous actions by
the Federal Reserve, the U.S. Congress, U.S. Treasury,
the FDIC, the SEC and others to address recent liquidity and
credit instability crises. These measures include homeowner
relief that encourage loan restructuring and modification; the
establishment of significant liquidity and credit facilities for
financial institutions and investment banks; the lowering of the
federal funds rate; emergency action against short selling
practices; a temporary guaranty program for money market funds;
the establishment of a commercial paper funding facility to
provide back-stop liquidity to commercial paper issuers; and
coordinated international efforts to address illiquidity and
other weaknesses in the banking sector.
On February 17, 2009, President Barack Obama signed the
American Recovery and Reinvestment Act of 2009, ARRA, more
commonly known as the economic stimulus or economic recovery
package. ARRA includes a wide variety of programs intended to
stimulate the economy and provide for extensive infrastructure,
energy, health and education needs. In addition, ARRA imposes
new executive compensation and corporate governance limits on
current and future participants in TARP, including the Company,
which are in addition to those previously announced by
U.S. Treasury. The new limits remain in place until the
participant has redeemed the preferred stock sold to
U.S. Treasury, subject to U.S. Treasurys
consultation with the recipients appropriate federal
regulator.
There can also be no assurance as to the ultimate impact that
the EESA, the ARRA, the programs promulgated under these acts
and other programs will have on the financial markets, including
the extreme levels of volatility and limited credit availability
currently being experienced. The failure of the EESA, the ARRA
and other programs to stabilize the financial markets and a
continuation or worsening of current financial market conditions
could materially and adversely affect the Companys
business, financial condition, results of operations, access to
credit or the trading price of the Companys common stock.
The EESA, the ARRA and the programs enacted under these acts are
relatively new legislation and regulations and, as such, are
subject to change and evolving interpretation. There can be no
assurances as to the effects that such changes will have on the
effectiveness of the EESA, the ARRA or on the Companys
business, financial condition or results of operations.
53
The purpose of these legislative and regulatory actions is to
stabilize the U.S. banking system. The EESA, the ARRA and
the other regulatory initiatives described above and which may
be proposed in the future may not have their desired effects. If
the volatility in the markets continues and economic conditions
fail to improve or worsen, the Companys business,
financial condition, results of operations and cash flows could
be materially and adversely affected.
The
limitations on incentive compensation contained in the ARRA may
adversely affect the Companys ability to retain its
highest performing employees.
The ARRA imposes new executive compensation limits on
participants in TARP, including the Company, which are in
addition to those previously announced by U.S. Treasury.
The ARRA and regulations promulgated under the ARRA contain
numerous limitations on the amount and form of compensation that
may be paid to the highest paid employees, including
restrictions on bonus and other incentive compensation payable
to the five executives named in a companys proxy
statement, restrictions on severance payments to the ten highest
paid employees, and requirements for the repayment of bonuses in
certain circumstances by the 25 highest paid employees. It is
possible that the Company may be unable to create a compensation
structure that permits it to retain its highest performing
employees. If this were to occur, the Companys business
and results of operations could be adversely affected, perhaps
materially.
The
Company is subject to claims and litigation pertaining to
fiduciary responsibility.
From time to time, customers make claims and take legal action
pertaining to the Companys performance of its fiduciary
responsibilities. Whether customer claims and legal action
related to the Companys performance of its fiduciary
responsibilities are founded or unfounded, if such claims and
legal actions are not resolved in a manner favorable to the
Company, they may result in significant financial liability
and/or
adversely affect the market perception of the Company and its
products and services as well as impact customer demand for the
Companys products and services. Any financial liability or
reputation damage could have a material adverse effect on the
Companys business, which, in turn, could have a material
adverse effect on the Companys financial condition,
results of operations and cash flows.
Future
sales of the Companys common stock or other securities
will dilute the ownership interests of its existing stockholders
and could depress the market price of the Companys common
stock.
The Company will need to issue additional shares of common stock
in the near future to meet its capital needs and regulatory
requirements. The Company can issue common stock without
stockholder approval, up to the number of authorized shares set
forth in its amended and restated certificate of incorporation,
as amended (the Certificate of Incorporation). The
Companys Board of Directors may determine from time to
time a need to obtain additional capital through the issuance of
additional shares of common stock or other securities including
securities convertible into or exchangeable for shares of the
Companys common stock, subject to limitations imposed by
Nasdaq and the Federal Reserve. There can be no assurance that
such shares can be issued at prices or on terms better than or
equal to the terms obtained by the Companys current
stockholders. The issuance of any additional shares of common
stock or convertible or exchangeable securities by the Company
in the future may result in a reduction of the book value or
market price, if any, of the then-outstanding common stock.
Issuance of additional shares of common stock or convertible or
exchangeable securities will reduce the proportionate ownership
and voting power of the Companys existing stockholders.
In addition, sales of a substantial number of shares of the
Companys common stock or convertible or exchangeable
securities in the public market by its stockholders, or the
perception that such sales are likely to occur, could cause the
market price of the Companys common stock to decline. The
Company cannot predict the effect, if any, that future sales of
its common stock in the market, or availability of shares of its
common stock for sale in the market, will have on the market
price of its common stock. Therefore, the Company can give no
assurance sales of substantial amounts of its common stock in
the market, or the potential for large amounts of sales in the
market, would not cause the price of its common stock to decline
or impair the Companys ability to raise capital through
sales of its common stock.
54
The Company cannot guarantee whether such financing will be
available to it on acceptable terms or at all. If the Company is
unable to obtain future financing, it may not have the capital
and financial resources it requires for its business or that are
necessary to meet regulatory requirements.
Shares of
the Companys preferred stock may be issued in the future
which could materially adversely affect the rights of the
holders of the Companys common stock.
The Company has the authority under its Certificate of
Incorporation to issue additional series of preferred stock and
to determine the designations, preferences, rights and
qualifications or restrictions of those shares without any
further vote or action of its stockholders. The rights of the
holders of the Companys common stock will be subject to,
and may be materially adversely affected by, the rights of the
holders of any preferred stock that may be issued by the Company
in the future.
Offerings
of debt, which could be senior to the Companys common
stock upon liquidation, or preferred equity securities, which
may be senior to its common stock for purposes of dividend
distributions or upon liquidation, may adversely affect the
market price of the Companys common stock.
The Company may attempt to increase its capital resources or, it
could be forced to raise additional capital through other
securities offerings, including trust preferred securities,
senior or subordinated notes and preferred stock. Holders of the
Companys debt securities and other lenders, as well as
holders of the Companys preferred securities generally
will be entitled to receive distributions of its available
assets prior to distributions to the holders of its common stock
upon the Companys bankruptcy, dissolution or liquidation.
Additional equity offerings may dilute the holdings of the
Companys existing stockholders or reduce the market price
of the Companys common stock, or both. Holders of the
Companys common stock are not entitled to preemptive
rights or other protections against dilution.
The
outstanding shares of the Companys Series G preferred
stock may be converted by the U.S. Treasury at any time or will
be converted if certain conditions are met, which will dilute
the Companys existing stockholders in the case of
conversion. In addition, the Companys ability to pay
dividends on those shares is restricted.
On March 8, 2010, the U.S. Treasury exchanged the
84,784 shares of Series T preferred stock, having an
aggregate approximate liquidation preference of
$84.8 million, plus approximately $4.6 million in
cumulative dividends not declared or paid on such preferred
stock, for a new series of fixed rate cumulative mandatorily
convertible preferred stock, Series G, with the same
liquidation preference. The warrant dated December 5, 2008
to purchase 4,282,020 shares of common stock was also
amended to re-set the strike price of the warrant to be
consistent with the conversion price of the Series G
preferred stock. The U.S. Treasury has the authority to
convert the new preferred stock into the Companys common
stock at any time. In addition, the Company can compel a
conversion of the new preferred stock into common stock, subject
to the following conditions: (i) the Company receives
appropriate approvals from the Federal Reserve;
(ii) approximately $78.6 million principal amount of
the Companys revolving, senior, and subordinated debt
shall have previously been converted into common stock on terms
acceptable to the U.S. Treasury in its sole discretion;
(iii) the Company shall have completed a new cash equity
raise of not less than $125 million on terms acceptable to
the U.S. Treasury in its sole discretion; and (iv) the
Company has made the anti-dilution adjustments to the new
preferred stock, if any, as required by the terms thereof.
Unless earlier converted, the new preferred stock converts
automatically into shares of the Companys common stock on
March 8, 2017. If the outstanding shares of the
Companys Series G preferred stock are converted by
the U.S. Treasury, it will dilute the Companys
existing stockholders. In addition, the Companys ability
to pay dividends on those shares is restricted.
The
Company is exposed to risk of environmental liabilities with
respect to properties to which it takes title.
In the course of the Companys business, the Company may
own or foreclose and take title to real estate, and could be
subject to environmental liabilities with respect to these
properties. The Company may be held liable to a governmental
entity or to third parties for property damage, personal injury,
investigation and
clean-up
costs
55
incurred by these parties in connection with environmental
contamination, or may be required to investigate or clean up
hazardous or toxic substances, or chemical releases at a
property. The costs associated with investigation or remediation
activities could be substantial. In addition, as the owner or
former owner of a contaminated site, the Company may be subject
to common law claims by third parties based on damages and costs
resulting from environmental contamination emanating from the
property. If the Company ever becomes subject to significant
environmental liabilities, the Companys business,
financial condition, cash flows, liquidity and results of
operations could be materially and adversely affected.
Severe
weather, natural disasters, acts of war or terrorism and other
external events could significantly impact the Companys
business.
Severe weather, natural disasters, acts of war or terrorism and
other adverse external events could have a significant impact on
the Companys ability to conduct business. Such events
could affect the stability of the Companys deposit base;
impair the ability of borrowers to repay outstanding loans,
impair the value of collateral securing loans, cause significant
property damage, result in loss of revenue
and/or cause
the Company to incur additional expenses. Although management
has established disaster recovery policies and procedures and is
insured for these situations, the occurrence of any such event
could have a material adverse effect on the Companys
business, which, in turn, could have a material adverse effect
on the Companys financial condition, results of operations
and cash flows.
Non-Compliance
with USA PATRIOT Act, Bank Secrecy Act, or Other Laws and
Regulations Could Result in Fines or Sanctions, and Curtail
Expansion Opportunities
Financial institutions are required under the USA PATRIOT and
Bank Secrecy Acts to develop programs to prevent financial
institutions from being used for money laundering and terrorist
activities. Financial institutions are also obligated to file
suspicious activity reports with the U.S. Treasurys
office of Financial Crimes Enforcement Network if such
activities are detected. These rules also require financial
institutions to establish procedures for identifying and
verifying the identity of customers seeking to open new
financial accounts. Failure or the inability to comply with
these regulations could result in fines or penalties,
curtailment of expansion opportunities, intervention or
sanctions by regulators and costly litigation or expensive
additional controls and systems. During the last few years,
several banking institutions have received large fines for
non-compliance with these laws and regulations. The Company has
developed policies and continue to augment procedures and
systems designed to assist in compliance with these laws and
regulations.
Provisions
in the Companys amended and restated certificate of
incorporation and its amended and restated bylaws may delay or
prevent an acquisition of the Company by a third
party.
The Companys amended and restated certificate of
incorporation and its amended and restated bylaws contain
provisions that may make it more difficult for a third party to
gain control or acquire the Company without the consent of its
board of directors. These provisions also could discourage proxy
contests and may make it more difficult for dissident
stockholders to elect representatives as directors and take
other corporate actions.
These provisions of the Companys governing documents may
have the effect of delaying, deferring or preventing a
transaction or a change in control that some or many of its
stockholders might believe to be in their best interest.
|
|
Item 1B.
|
Unresolved
Staff Comments
|
None.
56
The following table sets forth certain information regarding the
Companys principal office and bank branches.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Date
|
|
|
Net Book Value at
|
|
|
Leased or
|
|
Location
|
|
Acquired
|
|
|
December 31, 2009
|
|
|
Owned
|
|
|
|
(In thousands)
|
|
|
Principal Office of the Company and Midwest Bank and Trust
Company Banking Office
|
|
|
|
|
|
|
|
|
|
|
|
|
501 West North Avenue
Melrose Park, Illinois 60160
|
|
|
1987
|
|
|
$
|
973
|
|
|
|
Owned
|
|
Other Midwest Bank and Trust Company Banking Offices
|
|
|
|
|
|
|
|
|
|
|
|
|
1606 North Harlem Avenue
Elmwood Park, Illinois 60607
|
|
|
1959
|
|
|
|
3,080
|
|
|
|
Owned
|
|
2045 East Algonquin Road
Algonquin, Illinois 60102
|
|
|
1994
|
|
|
|
558
|
|
|
|
Owned
|
|
1000 Tower Lane #125
Bensenville, Illinois 60106
|
|
|
2006
|
|
|
|
3
|
|
|
|
Leased
|
|
236 West Lake Street
Bloomingdale, Illinois 60108
|
|
|
2006
|
|
|
|
430
|
|
|
|
Leased
|
|
1001 Johnson Drive
Buffalo Grove, Illinois 60089
|
|
|
2006
|
|
|
|
11
|
|
|
|
Leased
|
|
61 East Van Buren
Chicago, Illinois 60605
|
|
|
1986
|
|
|
|
993
|
|
|
|
Leased
|
|
4012 North Pulaski Road
Chicago, Illinois 60641
|
|
|
1993
|
|
|
|
717
|
|
|
|
Owned
|
|
500 W. Monroe
Chicago, Illinois 60606
|
|
|
2009
|
|
|
|
2,082
|
|
|
|
Leased
|
|
7227 West Addison Street
Chicago, Illinois 60634
|
|
|
1996
|
|
|
|
967
|
|
|
|
Owned
|
|
2130 West North Avenue
Chicago, Illinois 60647
|
|
|
2003
|
|
|
|
833
|
|
|
|
Leased
|
|
1545 Ellinwood Ave
Des Plaines, Illinois 60016
|
|
|
2007
|
|
|
|
5,342
|
|
|
|
Owned
|
|
927 Curtiss Street
Downers Grove, Illinois 60515
|
|
|
1996
|
|
|
|
87
|
|
|
|
Leased
|
|
645 Tollgate Road
Elgin, Illinois 60123
|
|
|
2006
|
|
|
|
|
|
|
|
Leased
|
|
9668 Franklin Avenue
Franklin Park, Illinois 60131
|
|
|
2006
|
|
|
|
94
|
|
|
|
Leased
|
|
1441 Waukegan Road
Glenview, Illinois 60025
|
|
|
2003
|
|
|
|
386
|
|
|
|
Leased
|
|
500 West Chestnut Street
Hinsdale, Illinois 60521
|
|
|
1991
|
|
|
|
1,250
|
|
|
|
Owned
|
|
1604 West Colonial Parkway
Inverness, Illinois 60067
|
|
|
2006
|
|
|
|
|
|
|
|
Leased
|
|
1190 Old McHenry Road
Long Grove, Illinois 60047
|
|
|
2003
|
|
|
|
|
|
|
|
Leased
|
|
5555 Bull Valley Road
McHenry, Illinois 60050
|
|
|
1998
|
|
|
|
979
|
|
|
|
Owned
|
|
50 N. Main Street
Mount Prospect, Illinois 60056
|
|
|
2007
|
|
|
|
4,659
|
|
|
|
Owned
|
|
1730 Park Street
Naperville, Illinois 60563
|
|
|
2006
|
|
|
|
501
|
|
|
|
Owned
|
|
8301 West Lawrence
Norridge, Illinois 60656
|
|
|
2003
|
|
|
|
263
|
|
|
|
|
*
|
444 N. Rand Road
North Barrington, Illinois 60010
|
|
|
2007
|
|
|
|
4,454
|
|
|
|
Owned
|
|
505 North Roselle Road
Roselle, Illinois 60172
|
|
|
1999
|
|
|
|
1,838
|
|
|
|
Owned
|
|
17622 Depot Street
Union, Illinois 60180
|
|
|
1987
|
|
|
|
55
|
|
|
|
Owned
|
|
|
|
|
* |
|
Land is leased and building is owned. |
57
Management believes that the facilities are of sound
construction, in good operating condition, appropriately
insured, and adequately equipped for carrying on the business of
the Company.
|
|
Item 3.
|
Legal
Proceedings
|
The Company and its subsidiaries are from time to time parties
to various legal actions arising in the normal course of
business. Management believes that there is no proceeding
pending against the Company or any of its subsidiaries which, if
determined adversely, would have a material adverse effect on
the financial condition or results of operations of the Company.
PART II
|
|
Item 5.
|
Market
for the Registrants Common Equity and Related Stockholder
Matters and Issuer Purchases of Equity Securities
|
The Companys common stock is traded and quoted on the
Nasdaq Capital Market under the symbol MBHI. On
March 16, 2010, the Company transferred the listing of its
common stock from the Nasdaq Global Market to the Nasdaq Capital
Market in light of the Companys failure to meet the Nasdaq
Global Markets minimum closing bid price requirement of
$1.00 per share. If the Company is not able to satisfy the
minimum closing bid price requirement by September 13,
2010, the Companys common stock may be delisted. See
Risk Factors. As of March 26, 2010, the Company
had approximately 913 stockholders of record, based upon
securities position listings furnished by the Companys
transfer agent. The Company believes the number of beneficial
owners is greater than the number of record holders because a
large portion of the Companys common stock is held through
brokerage firms in street name. The table below sets
forth the high and low sale prices of the common stock and the
cash dividends declared during the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends Declared
|
|
|
High
|
|
Low
|
|
Per Common Share
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
13.93
|
|
|
$
|
9.63
|
|
|
$
|
0.13
|
|
Second Quarter
|
|
|
13.21
|
|
|
|
4.87
|
|
|
|
0.13
|
|
Third Quarter
|
|
|
7.50
|
|
|
|
2.90
|
|
|
|
|
|
Fourth Quarter
|
|
|
4.50
|
|
|
|
1.30
|
|
|
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
2.00
|
|
|
$
|
0.69
|
|
|
$
|
|
|
Second Quarter
|
|
|
1.93
|
|
|
|
0.67
|
|
|
|
|
|
Third Quarter
|
|
|
0.97
|
|
|
|
0.52
|
|
|
|
|
|
Fourth Quarter
|
|
|
0.75
|
|
|
|
0.30
|
|
|
|
|
|
Issuer
Purchases of Equity Securities
In 2006, the Company announced a 5.0% stock repurchase program.
No shares were repurchased during 2009 nor 2008 under this
program. As of December 31, 2009, there were
374,111 shares remaining for repurchase under this program,
should the Company decide to do so with the approval of the
U.S. Treasury and, as a result of the Written Agreement,
the Federal Reserve.
Information regarding the equity compensation plan is included
in Item 12. Security Ownership of Certain Beneficial
Owners and Management and Related Stockholder Matters and
the information included therein is incorporated herein by
reference.
58
Holders of common stock are entitled to receive such dividends
that may be declared by the Board of Directors from time to time
and paid out of funds legally available therefore. Because the
Companys consolidated net income consists largely of net
income of the Bank, the Companys ability to pay dividends
depends upon its receipt of dividends from the Bank. The
Banks ability to pay dividends is regulated by banking
statutes. The Bank will not be able to pay dividends to the
Company in 2010 without prior approval of the Federal Reserve.
See Supervision and Regulation, Financial Institution
Regulation Dividend Limitations. The
Company will only be able to pay dividends with the approval of
the U.S. Treasury and, as a result of the Written
Agreement, the Federal Reserve must approve any dividend
payments by the Company. The declaration of dividends by the
Company is discretionary and depends on the Companys
earnings and financial condition, regulatory limitations, tax
considerations and other factors including limitations imposed
by the terms of the Companys outstanding junior
subordinated debentures owed to its unconsolidated trusts. See
Managements Discussion and Analysis of Financial
Condition and Results of Operations
Liquidity.
59
Performance
Graph
The following graph shows a comparison of the cumulative returns
for the Company, the S&P 500 Index, and the NASDAQ Market
Bank Stocks Index for the period beginning December 31,
2004 and ending December 31, 2009. The information assumes
that $100 was invested at the closing price on December 31,
2004 in the common stock of the Company and each index and that
all dividends were reinvested.
60
|
|
Item 6.
|
Selected
Consolidated Financial Data
|
The following table sets forth certain selected consolidated
financial data at or for the periods indicated. In accordance
with the authoritative guidance for the disposal of long-lived
assets (ASC
360-10-05),
the results of operations and gain on sale of Midwest Bank of
Western Illinois are shown in the Companys statement of
income for 2005 as discontinued operations. This
information should be read in conjunction with the
Companys Consolidated Financial Statements and notes
thereto included herein. See Item 8, Consolidated
Financial Statements and Supplementary Data.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(Dollars in thousands, except per share data)
|
|
|
Statement of Income Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
$
|
150,508
|
|
|
$
|
187,661
|
|
|
$
|
193,869
|
|
|
$
|
159,262
|
|
|
$
|
112,244
|
|
Total interest expense
|
|
|
77,637
|
|
|
|
100,695
|
|
|
|
111,237
|
|
|
|
83,980
|
|
|
|
50,797
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
72,871
|
|
|
|
86,966
|
|
|
|
82,632
|
|
|
|
75,282
|
|
|
|
61,447
|
|
Provision for credit losses(1)
|
|
|
170,203
|
|
|
|
72,642
|
|
|
|
4,891
|
|
|
|
12,025
|
|
|
|
2,797
|
|
Noninterest income (loss)
|
|
|
17,130
|
|
|
|
(50,596
|
)
|
|
|
15,477
|
|
|
|
14,551
|
|
|
|
(6,245
|
)
|
Noninterest expenses
|
|
|
106,915
|
|
|
|
177,074
|
|
|
|
71,395
|
|
|
|
58,640
|
|
|
|
60,319
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before income taxes and discontinued operations
|
|
|
(187,117
|
)
|
|
|
(213,346
|
)
|
|
|
21,823
|
|
|
|
19,168
|
|
|
|
(7,914
|
)
|
Provision (benefit) for income taxes
|
|
|
55,596
|
|
|
|
(55,073
|
)
|
|
|
3,246
|
|
|
|
1,422
|
|
|
|
(6,325
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations
|
|
|
(242,713
|
)
|
|
|
(158,273
|
)
|
|
|
18,577
|
|
|
|
17,746
|
|
|
|
(1,589
|
)
|
Income from discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,533
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
|
(242,713
|
)
|
|
|
(158,273
|
)
|
|
|
18,577
|
|
|
|
17,746
|
|
|
|
5,944
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock dividends and premium accretion
|
|
|
6,057
|
|
|
|
3,728
|
|
|
|
204
|
|
|
|
|
|
|
|
|
|
Income allocated to participating securities(2)
|
|
|
|
|
|
|
|
|
|
|
325
|
|
|
|
217
|
|
|
|
46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income available to common stockholders
|
|
$
|
(248,770
|
)
|
|
$
|
(162,001
|
)
|
|
$
|
18,048
|
|
|
$
|
17,529
|
|
|
$
|
5,898
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per Common Share Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) earnings per share (basic) from continuing operations
|
|
$
|
(8.89
|
)
|
|
$
|
(5.82
|
)
|
|
$
|
0.71
|
|
|
$
|
0.75
|
|
|
$
|
(0.08
|
)
|
Earnings per share (basic) from discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.38
|
|
(Loss) earnings per share (basic)
|
|
|
(8.89
|
)
|
|
|
(5.82
|
)
|
|
|
0.71
|
|
|
|
0.75
|
|
|
|
0.30
|
|
(Loss) earnings per share (diluted) from continuing operations
|
|
|
(8.89
|
)
|
|
|
(5.82
|
)
|
|
|
0.71
|
|
|
|
0.74
|
|
|
|
(0.08
|
)
|
Earnings per share (diluted) from discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.38
|
|
(Loss) earnings per share (diluted)
|
|
|
(8.89
|
)
|
|
|
(5.82
|
)
|
|
|
0.71
|
|
|
|
0.74
|
|
|
|
0.30
|
|
Cash dividends declared
|
|
|
|
|
|
|
0.26
|
|
|
|
0.52
|
|
|
|
0.51
|
|
|
|
0.48
|
|
Book value at end of period
|
|
|
(2.39
|
)
|
|
|
6.56
|
|
|
|
11.94
|
|
|
|
11.65
|
|
|
|
9.91
|
|
Tangible book value at end of period (non-GAAP measure)(3)
|
|
|
(5.14
|
)
|
|
|
3.21
|
|
|
|
5.56
|
|
|
|
7.97
|
|
|
|
9.78
|
|
61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(Dollars in thousands, except per share data)
|
|
|
Selected Financial Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on average assets from continuing operations(4)
|
|
|
(6.69
|
)%
|
|
|
(4.32
|
)%
|
|
|
0.58
|
%
|
|
|
0.67
|
%
|
|
|
(0.07
|
)%
|
Return on average equity from continuing operations(5)
|
|
|
(100.76
|
)
|
|
|
(46.65
|
)
|
|
|
6.13
|
|
|
|
7.04
|
|
|
|
(0.95
|
)
|
Dividend payout ratio
|
|
|
|
|
|
|
N/M
|
|
|
|
73.04
|
|
|
|
67.95
|
|
|
|
162.38
|
|
Average equity to average assets
|
|
|
6.64
|
|
|
|
9.27
|
|
|
|
9.53
|
|
|
|
9.57
|
|
|
|
7.29
|
|
Tier 1 risk-based capital
|
|
|
0.22
|
|
|
|
8.30
|
|
|
|
9.21
|
|
|
|
11.92
|
|
|
|
16.97
|
|
Total risk-based capital
|
|
|
0.43
|
|
|
|
10.07
|
|
|
|
10.17
|
|
|
|
12.97
|
|
|
|
18.07
|
|
Net interest margin (taxable equivalent)(6)(7)(8)
|
|
|
2.16
|
|
|
|
2.75
|
|
|
|
3.02
|
|
|
|
3.32
|
|
|
|
3.31
|
|
Loan to deposit ratio(8)
|
|
|
90.28
|
|
|
|
104.02
|
|
|
|
100.66
|
|
|
|
99.44
|
|
|
|
88.62
|
|
Net overhead expense to average assets(8)(9)
|
|
|
2.59
|
|
|
|
3.98
|
|
|
|
1.76
|
|
|
|
1.67
|
|
|
|
2.14
|
|
Efficiency ratio(8)(10)
|
|
|
113.23
|
|
|
|
144.15
|
|
|
|
68.29
|
|
|
|
60.55
|
|
|
|
75.44
|
|
Loan Quality Ratios(8):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses to total loans at the end of year
|
|
|
5.55
|
|
|
|
1.77
|
|
|
|
1.08
|
|
|
|
1.19
|
|
|
|
1.32
|
|
Provision for loan losses to total loans
|
|
|
7.23
|
|
|
|
2.86
|
|
|
|
0.20
|
|
|
|
0.62
|
|
|
|
0.19
|
|
Net loans charged off to average total loans
|
|
|
3.32
|
|
|
|
2.18
|
|
|
|
0.20
|
|
|
|
0.59
|
|
|
|
0.09
|
|
Nonaccrual loans to total loans at the end of year(11)
|
|
|
11.80
|
|
|
|
2.43
|
|
|
|
1.99
|
|
|
|
2.20
|
|
|
|
0.59
|
|
Nonperforming assets to total assets(12)
|
|
|
9.09
|
|
|
|
2.36
|
|
|
|
1.39
|
|
|
|
1.55
|
|
|
|
0.83
|
|
Allowance for loan losses to nonaccrual loans
|
|
|
0.47
|
x
|
|
|
0.73
|
x
|
|
|
0.54
|
x
|
|
|
0.54
|
x
|
|
|
2.25
|
x
|
Ratio of Earnings to Fixed Charges and Preferred Stock
Dividends (13):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Including deposit interest
|
|
|
(1.31
|
)
|
|
|
(1.05
|
)
|
|
|
1.19
|
|
|
|
1.22
|
|
|
|
0.83
|
|
Excluding deposit interest
|
|
|
(3.03
|
)
|
|
|
(2.76
|
)
|
|
|
3.79
|
|
|
|
3.82
|
|
|
|
2.42
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
3,435,545
|
|
|
$
|
3,570,212
|
|
|
$
|
3,692,782
|
|
|
$
|
2,942,046
|
|
|
$
|
2,307,608
|
|
Total earning assets(8)
|
|
|
3,343,911
|
|
|
|
3,195,408
|
|
|
|
3,266,461
|
|
|
|
2,617,894
|
|
|
|
2,126,227
|
|
Average assets
|
|
|
3,625,855
|
|
|
|
3,661,209
|
|
|
|
3,181,990
|
|
|
|
2,635,138
|
|
|
|
2,305,086
|
|
Loans(8)
|
|
|
2,320,319
|
|
|
|
2,509,759
|
|
|
|
2,474,327
|
|
|
|
1,946,816
|
|
|
|
1,349,996
|
|
Allowance for loan losses(8)
|
|
|
128,800
|
|
|
|
44,432
|
|
|
|
26,748
|
|
|
|
23,229
|
|
|
|
17,760
|
|
Deposits(8)
|
|
|
2,570,111
|
|
|
|
2,412,791
|
|
|
|
2,458,148
|
|
|
|
1,957,810
|
|
|
|
1,523,384
|
|
Borrowings(8)
|
|
|
777,078
|
|
|
|
817,041
|
|
|
|
821,063
|
|
|
|
652,774
|
|
|
|
538,480
|
|
Stockholders equity
|
|
|
56,476
|
|
|
|
305,834
|
|
|
|
375,164
|
|
|
|
287,242
|
|
|
|
216,126
|
|
Tangible stockholders equity (non-GAAP measure)(3)(8)
|
|
|
(20,777
|
)
|
|
|
212,289
|
|
|
|
197,713
|
|
|
|
196,481
|
|
|
|
213,447
|
|
N/M Not meaningful
|
|
|
(1) |
|
The provision for credit losses includes the provision for loan
losses and the provision for unfunded commitments losses as
follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Provision for loan losses
|
|
$
|
167,700
|
|
|
$
|
71,765
|
|
|
$
|
4,891
|
|
|
$
|
12,050
|
|
|
$
|
2,589
|
|
Provision for unfunded commitments losses
|
|
|
2,503
|
|
|
|
877
|
|
|
|
|
|
|
|
(25
|
)
|
|
|
208
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for credit losses
|
|
$
|
170,203
|
|
|
$
|
72,642
|
|
|
$
|
4,891
|
|
|
$
|
12,025
|
|
|
$
|
2,797
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
62
|
|
|
(2) |
|
Prior periods with earnings were restated as required by the
authoritative guidance for determining whether instruments
granted in share-based payment transactions are participating
securities (ASC 260), which was effective on January 1,
2009 and required retrospective application, to allocate
earnings available to common stockholders to restricted shares
of common stock that are considered participating securities. |
|
(3) |
|
Stockholders equity less goodwill, core deposit intangible
and other intangible assets. Management believes that tangible
stockholders equity (non-GAAP measure) is a useful measure
since it excludes the balances of intangible assets which are
subjective components of valuation. The following table
reconciles reported stockholders equity to tangible
stockholders equity for the periods presented: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Stockholders equity
|
|
$
|
56,476
|
|
|
$
|
305,834
|
|
|
$
|
375,164
|
|
|
$
|
287,242
|
|
|
$
|
216,126
|
|
Core deposit intangible and other intangibles, net
|
|
|
(12,391
|
)
|
|
|
(14,683
|
)
|
|
|
(17,044
|
)
|
|
|
(11,273
|
)
|
|
|
(1,788
|
)
|
Goodwill
|
|
|
(64,862
|
)
|
|
|
(78,862
|
)
|
|
|
(160,407
|
)
|
|
|
(79,488
|
)
|
|
|
(891
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tangible stockholders equity
|
|
$
|
(20,777
|
)
|
|
$
|
212,289
|
|
|
$
|
197,713
|
|
|
$
|
196,481
|
|
|
$
|
213,447
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4) |
|
Net income divided by average assets. |
|
(5) |
|
Net income divided by average equity. |
|
(6) |
|
Net interest income, on a fully taxable-equivalent basis,
divided by average earning assets. |
|
(7) |
|
The following table reconciles reported net interest income on a
fully taxable-equivalent basis for the periods presented: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Net interest income
|
|
$
|
72,871
|
|
|
$
|
86,966
|
|
|
$
|
82,632
|
|
|
$
|
75,282
|
|
|
$
|
61,447
|
|
Taxable-equivalent adjustment to net interest income
|
|
|
|
|
|
|
2,621
|
|
|
|
3,612
|
|
|
|
4,286
|
|
|
|
2,628
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income, fully taxable-equivalent basis
|
|
$
|
72,871
|
|
|
$
|
89,587
|
|
|
$
|
86,244
|
|
|
$
|
79,568
|
|
|
$
|
64,075
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
No taxable-equivalent adjustment is included for 2009 as a
result of the Companys current tax position. |
|
(8) |
|
Reflects continuing operations due to the sale of bank
subsidiary on September 30, 2005. |
|
(9) |
|
Noninterest expense less noninterest income, excluding security
gains/losses and impairments, divided by average assets. |
|
(10) |
|
Noninterest expense excluding amortization of intangible assets
and foreclosed properties expense divided by noninterest income,
excluding security gains/losses and impairments, plus net
interest income on a fully taxable-equivalent basis. |
|
(11) |
|
Includes total nonaccrual, impaired and all other loans
90 days or more past due. |
|
(12) |
|
Includes total nonaccrual and all other loans 90 days or
more past due, trouble-debt restructured loans and foreclosed
properties. |
|
(13) |
|
For purposes of calculating the ratio of earnings to combined
fixed charges and preferred stock dividends, earnings are the
sum of (a) income (loss) before income taxes and
discontinued operations and (b) fixed charges; and fixed
charges are the sum of: (x) interest cost, including
interest on deposits, (y) that portion of rent expense
estimated to be representative of the interest factor and
(z) amortization of issuance costs on trust preferred
securities. The preferred stock dividend amounts represent
pre-tax earnings required to cover dividends on Series A
preferred stock and Series T preferred stock. |
63
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
Overview
The Companys principal business is conducted by the Bank
which provides a full range of community-based financial
services, including commercial and retail banking. The
profitability of the Companys operations depends primarily
on its net interest income, provision for credit losses,
noninterest income, noninterest expenses, and income taxes. Net
interest income is the difference between the income the Company
receives on its loan and securities portfolios and its cost of
funds, which consists of interest paid on deposits and
borrowings. The provision for credit losses reflects the cost of
credit risk related to the Companys loan relationships.
Noninterest income consists of service charges on deposit
accounts, securities gains or losses or impairments, gains or
losses on sales of loans, insurance and brokerage commissions,
trust income, increase in cash surrender value of life
insurance, gains on sale of property and extinguishment of debt,
and other noninterest income. Noninterest expenses include
salaries and employee benefits, occupancy and equipment
expenses, professional services, goodwill impairment, loss on
extinguishment of debt, marketing expenses, foreclosed property
expenses, amortization of intangible assets, merger-related
expenses, FDIC premiums, and other noninterest expenses. The
Company is subject to state and federal income taxes.
Net interest income is dependent on the amounts of and yields on
interest-earning assets as compared to the amounts of and rates
on interest-bearing liabilities. Net interest income is
sensitive to changes in market interest rates and is also
dependent on the Companys asset/liability management
processes to react appropriately to such changes. The provision
for credit losses is based upon managements assessment of
the collectibility of the loan portfolio and related commitments
under current economic conditions. Noninterest expenses are
influenced by the growth of operations. Growth in the number of
account relationships directly affects such expenses as data
processing costs, supplies, postage, and other miscellaneous
expenses. The provision for income taxes is affected by tax law
and regulation, accounting principles and policies, and income
tax strategies.
The following discussion and analysis is intended as a review of
significant factors affecting the financial condition and
results of operations of the Company for the periods indicated.
The discussion should be read in conjunction with the
Consolidated Financial Statements and the Notes thereto and the
Selected Consolidated Financial Data presented herein. In
addition to historical information, the following
Managements Discussion and Analysis of Financial Condition
and Results of Operations contains forward-looking statements
that involve risks and uncertainties. The Companys actual
results could differ significantly from those anticipated in
these forward-looking statements as a result of certain factors
discussed in this report.
Critical
Accounting Policies and Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues
and expenses during the reporting period. By their nature,
changes in these assumptions and estimates could significantly
affect the Companys financial position or results of
operations. Actual results could differ from those estimates.
Discussed below are those critical accounting policies that are
of particular significance to the Company.
Allowance for Loan Losses: The allowance for
loan losses represents managements estimate of probable
credit losses inherent in the loan portfolio. Estimating the
amount of the allowance for loan losses requires significant
judgment and the use of estimates related to the amount and
timing of expected future cash flows and collateral values on
impaired loans, estimated losses on pools of homogeneous loans
based on historical loss experience, and consideration of
current economic trends and conditions, all of which may be
susceptible to significant change. Loan losses are charged off
against the allowance, while recoveries of amounts previously
charged off are credited to the allowance. A provision for loan
losses is charged to operations based on managements
periodic evaluation of the factors previously mentioned, as well
as other pertinent factors.
The Companys methodology for determining the allowance for
loan losses represents an estimation pursuant to the
authoritative guidance for contingencies (ASC 450) and loan
impairments (ASC
310-10-35).
The allowance
64
reflects estimated incurred losses resulting from analyses
developed through specific credit allocations for individual
loans and historical loss experience for other loans grouped
within the Companys internal credit rating framework. The
specific credit allocations are based on regular analyses of all
loans over $300,000 where the internal credit rating is at or
below a predetermined classification. These analyses involve a
high degree of judgment in estimating the amount of loss
associated with specific loans including estimating the amount
and timing of future cash flows and collateral values. The
allowance for loan losses also includes consideration of
concentrations and changes in portfolio mix and volume and other
qualitative factors. The results of examination from regulatory
agencies are also considered.
There are many factors affecting the allowance for loan losses;
some are quantitative while others require qualitative judgment.
The process for determining the allowance, which management
believes adequately considers all of the potential factors which
result in credit losses, includes subjective elements and,
therefore, may be susceptible to significant change. To the
extent actual outcomes differ from management estimates,
additional provisions for loan losses could be required that
could adversely affect the Companys earnings or financial
position in future periods.
A loan is considered impaired when, based on current information
and events, it is probable that the Company will be unable to
collect all principal and interest under the original loan
terms. Impairment is evaluated in total for smaller-balance
impaired loans of similar nature such as residential mortgage
and consumer loans below a specific internal credit rating and
on an individual basis for other loans that exceed the set
threshold of $300,000. If a loan is impaired, a portion of the
allowance is allocated so that the loan is reported, net, at the
present value of estimated future cash flows using the
loans existing rate or at the fair value of collateral if
repayment is expected solely from the collateral.
Income Taxes: The Company recognizes expense
for federal and state income taxes currently payable, as well as
for deferred federal and state taxes for estimated future tax
effects of temporary differences between the tax basis of assets
and liabilities and amounts reported in the consolidated balance
sheets, as well as loss carryforwards and tax credit
carryforwards. Realization of deferred tax assets is dependent
upon generating sufficient taxable income in either the
carryforward or carryback periods to cover net operating losses
generated by the reversal of temporary differences. A valuation
allowance is provided by way of a charge to income tax expense
if it is determined that it is not more likely than not that
some or all of the deferred tax asset will be realized. If
different assumptions and conditions were to prevail, the
valuation allowance may not be adequate to absorb unrealized
deferred taxes and the amount of income taxes payable may need
to be adjusted by way of a charge or credit to expense.
Furthermore, income tax returns are subject to audit by the IRS
and state taxing authorities. Income tax expense for current and
prior periods is subject to adjustment based upon the outcome of
such audits. The Company believes it has adequately accrued for
all probable income taxes payable. Accrual of income taxes
payable and valuation allowances against deferred tax assets are
estimates subject to change based upon the outcome of future
events.
The Company has entered into tax allocation agreements with its
subsidiary entities included in the consolidated US federal and
unitary and combined state income tax returns. These agreements
govern the timing and amount of income tax payments required by
the various entities.
The Company accounts for uncertainties in the application of
income tax laws and income tax positions taken or expected to be
taken in income tax returns under the authoritative guidance for
income taxes (ASC 740).
Evaluation of Securities for
Impairment: Securities are classified as
held-to-maturity
when the Company has the ability and intent to hold those
securities to maturity. Accordingly, they are stated at cost
adjusted for amortization of premiums and accretion of
discounts. Securities are classified as
available-for-sale
when the Company may decide to sell those securities due to
changes in market interest rates, liquidity needs, changes in
yields or alternative investments, and for other reasons. They
are carried at fair value with unrealized gains and losses, net
of taxes, reported in other comprehensive income (loss).
Interest income is reported net of amortization of premium and
accretion of discount. Realized gains and losses on the
disposition of securities
available-for-sale
are based on the net proceeds and the adjusted cost of the
securities sold, using the specific identification method.
Declines in the fair value of
held-to-maturity
and
available-for-sale
securities below their cost that are deemed to be other than
temporary are recognized in earnings as realized losses, if the
amounts are related to credit loss, or
65
recognized in other comprehensive income, if the amounts are
related to other factors. In determining
other-than-temporary
losses for debt securities, management considers whether the
Company (i) intends to sell the security, (ii) more
likely than not will be required to sell the security before
recovering its cost, or (iii) does not expect to recover
the securitys entire amortized cost.
Other-than-temporary
losses are separated between the amount related to credit loss
(which is recognized in current earnings) and the amount related
to all other factors (which is recognized in other comprehensive
income). In estimating
other-than-temporary
losses for equity securities, management considers (1) the
length of time and the extent to which the fair value has been
less than cost, (2) the financial condition and near-term
prospects of the issuer, and (3) the intent and ability of
the Company to retain its investment in the issuer for a period
of time sufficient to allow for any anticipated recovery in fair
value.
Evaluation of Goodwill Impairment: When the
Company acquires a business, a portion of the purchase price of
the acquisition may be allocated to goodwill and identifiable
intangible assets. The amount of the purchase price which is
allocated to goodwill is determined by the excess of the
purchase price over the fair value of the net tangible and
identifiable intangible assets acquired. At December 31,
2009, the Companys goodwill and identifiable intangible
assets were $77.3 million. Under generally accepted
accounting principles, if the Company determines that the
carrying value of its goodwill or identifiable intangible assets
is impaired, the Company is required to write down the value of
these assets. The Company conducts an annual review to determine
whether goodwill and identifiable intangible assets are impaired
and updates this analysis on an interim basis, under certain
circumstances.
Goodwill impairment charges are non-cash, non tax deductible, do
not impact tangible equity, and do not adversely affect the
Companys overall liquidity position. Goodwill impairments
are classified in the income statement as noninterest expense.
Under the authoritative guidance for intangibles
goodwill and other (ASC 350), goodwill must be tested for
impairment annually and, under certain circumstances, at
intervening interim dates. A goodwill impairment test also could
be triggered between annual testing dates if an event occurs or
circumstances change that would more likely than not reduce the
fair value below the carrying amount. Examples of those events
or circumstances would include the following:
a) significant adverse change in business climate,
b) significant unanticipated loss of clients/assets under
management, c) unanticipated loss of key personnel,
d) sustained periods of poor investment performance,
e) significant loss of deposits or loans,
f) significant reductions in profitability, or
g) significant changes in loan credit quality.
Representative indicators of fair value considered by management
during interim reporting periods include, but are not limited
to: a) stock price, b) estimated control premiums for
the Company and peer banking organizations, c) future
available cash flows generated by earnings, d) market
multiples of other community banking firms in our market area,
e) institutional investors and correspondent
lenders understanding and acceptance of business strategy,
f) credit quality metrics, g) loan growth and the
ability to generate lending activity, h) core deposit
levels and activity, and i) regulatory capital levels.
The Companys goodwill and intangible assets are reviewed
annually for impairment as of September 30th of each
year. This review is conducted with the assistance of a third
party valuation specialist. In conducting the review, the market
value of the Companys common stock and preferred stocks,
estimated control premiums, projected cash flow and various
pricing analyses are all taken into consideration to determine
if the fair value of the assets and liabilities in its business
exceed their carrying amounts. On September 30, 2008 and
December 31, 2009, the Company recorded goodwill impairment
charges of $80.0 million and $14.0 million,
respectively. The Company also completed its annual goodwill
impairment study for 2009 as of September 30, 2009 and
determined that goodwill was not impaired at that time. The
Company will continue to assess any shortfall in its equity fair
value relative to its total book value and tangible book value,
including what might be attributed to either industry-wide or
Company-specific factors, and to evaluate whether any additional
adjustments are required in the carrying value of goodwill. If
the Companys common stock continues to trade at a price
below book value, the Company may be required in a future period
to recognize an impairment of all, or some portion, of its
remaining goodwill. The Company cannot assure that it will not
be required to take additional goodwill impairment charges in
the future. Any impairment charge would have a negative effect
on its stockholders equity and financial results. See
Managements Discussion and Analysis of Financial
Condition and Results of Operations Goodwill.
66
Accounting
Pronouncements
The Financial Accounting Standards Board (FASB) has
established the FASB Accounting Standards
Codificationtm
(Codification or ASC) as the single
source of authoritative U.S. generally accepted accounting
principles (GAAP) recognized by the FASB to be
applied by nongovernmental entities (ASC 105). Rules and
interpretive releases of the Securities and Exchange Commission
(SEC) under authority of federal securities laws are
also sources of authoritative GAAP for SEC registrants. The
Codification supersedes all existing non-SEC accounting and
reporting standards. All other non-grandfathered, non-SEC
accounting literature not included in the Codification has
become non-authoritative. The Board will not issue new standards
in the form of Statements, FASB Staff Positions, or Emerging
Issues Task Force Abstracts. Instead, it will issue Accounting
Standards Updates (ASU), which will serve to update
the Codification, provide background information about the
guidance and provide the basis for conclusions on the changes to
the Codification. GAAP is not intended to be changed as a result
of the Codification, but it has changed the way the guidance is
organized and presented.
In December 2007, FASB revised the authoritative guidance for
business combinations (ASC 805), which modifies the accounting
for business combinations and requires, with limited exceptions,
the acquirer in a business combination to recognize all of the
assets acquired, liabilities assumed, and any noncontrolling
interests in the acquiree at the acquisition-date, at fair
value. This guidance also requires certain contingent assets and
liabilities acquired as well as contingent consideration to be
recognized at fair value. In addition, the statement requires
payments to third parties for consulting, legal, audit, and
similar services associated with an acquisition to be recognized
as expenses when incurred rather than capitalized as part of the
cost of the acquisition. The adoption of this guidance on
January 1, 2009 did not have a material effect on the
Companys consolidated results of operations or
consolidated financial position.
The Company adopted the authoritative guidance for fair value
measurements (ASC 820) on January 1, 2008, which
defines fair value, establishes a framework for measuring fair
value in GAAP, and expands disclosures about fair value
measurements. This guidance applies to other ASC topics that
require or permit fair value measurements. Accordingly, this
guidance did not require any new financial assets or liabilities
to be measured at fair value. In February 2008, FASB delayed the
effective dates of this guidance for all nonfinancial assets and
nonfinancial liabilities, except those that are recognized or
disclosed at fair value on a recurring basis (at least annually)
to fiscal years beginning after November 15, 2008. In
October 2008, the FASB amended this guidance, which clarifies
the application of fair value measurements in an inactive market
and provides an illustrative example to demonstrate how the fair
value of a financial asset is to be determined when the market
for that financial asset is not active. This amendment became
effective for the Companys interim financial statements as
of September 30, 2008 and did not significantly impact the
methods by which the Company determines the fair values of its
financial assets. On April 9, 2009, the FASB amended the
authoritative guidance for fair value measurements and
disclosures (ASC 820), which amendment requires increased
analysis and management judgment to estimate fair value if an
entity determines that either the volume
and/or level
of activity for an asset or liability has significantly
decreased or price quotations or observable inputs are not
associated with orderly transactions. Valuation techniques such
as an income approach might be appropriate to supplement or
replace a market approach in those circumstances. This guidance
requires entities to disclose in interim and annual periods the
inputs and valuation techniques used to measure fair value along
with any changes in valuation techniques and related inputs
during the period. This guidance is effective for interim and
annual periods ending after June 15, 2009. Accordingly, the
Company included these new disclosures beginning April 1,
2009. See Note 20 Fair Value of the notes to
the consolidated financial statements for more details.
In June 2008, the FASB provided guidance for determining whether
an equity-linked financial instrument (or embedded feature) is
indexed to an entitys own stock (ASC
815-40-15).
This guidance applies to any freestanding financial instrument
or embedded feature that has all of the characteristics of a
derivative or freestanding instrument that is potentially
settled in an entitys own stock (with the exception of
share-based payment awards within the scope of the authoritative
guidance for stock compensation (ASC 718)). To meet the
definition of indexed to own stock, an
instruments contingent exercise provisions must not be
based on (a) an observable market, other than the market
for the issuers stock (if applicable), or (b) an
observable index, other than an index calculated or measured
solely by reference to the issuers own operations, and the
variables that could affect the settlement amount must be inputs
to the fair value of a
fixed-for-fixed
forward or option on equity shares. The adoption of this
guidance on
67
January 1, 2009 did not have a material effect on the
Companys consolidated results of operations or
consolidated financial position.
In June 2008, the FASB issued authoritative guidance for
determining whether instruments granted in share-based payment
transactions are participating securities (ASC 260). This
guidance addresses whether instruments granted in share-based
payment transactions are participating securities prior to
vesting and, therefore, need to be included in the earnings
allocation in computing earnings per share under the two-class
method. The Company adopted the provisions of this guidance
effective January 1, 2009 and computed earnings per share
using the two-class method for all periods presented. Upon
adoption, the Company was required to retrospectively adjust
earnings per share data to conform to the provisions in this
guidance.
In April 2009, the FASB amended the authoritative guidance for
interim disclosures about fair value of financial instruments
(ASC 825), which relates to fair value disclosures in public
entity financial statements for financial instruments. This
guidance increases the frequency of fair value disclosures from
annual only to quarterly. This guidance is effective for interim
and annual periods ending after June 15, 2009. The adoption
of this guidance did not have a material effect on the
Companys consolidated results of operations or
consolidated financial position, but enhanced required
disclosures. Accordingly, the Company included these new
disclosures beginning April 1, 2009. See
Note 20 Fair Value of the notes to the
consolidated financial statements for more details. In January
2010, the FASB issued authoritative guidance on improving
disclosures about fair value measurements (ASU
2010-6).
This guidance requires new disclosures for transfers in and out
of Levels 1 and 2 and the reasons for the transfers as well
as additional breakout of asset and liability categories. This
guidance is effective for interim and annual reporting periods
beginning after December 15, 2009. This guidance also
requires purchases, sales, issuances and settlements to be
reported separately in the summary of changes in Level 3
fair value measurements. This additional guidance will be
effective for fiscal years beginning after December 15,
2010, and for interim periods within those fiscal years. The
Company does not anticipate a material effect on the its
consolidated results of operations or consolidated financial
position from adopting this guidance.
In April 2009, FASB issued new authoritative guidance that
revises the recognition and reporting requirements for
other-than-temporary
impairments of debt securities (ASC 320). This new guidance
revises the recognition and reporting requirements for
other-than-temporary
impairments of debt securities. This guidance eliminates the
ability and intent to hold provision for debt
securities and impairment is considered to be other than
temporary if a company (i) intends to sell the security,
(ii) more likely than not will be required to sell the
security before recovering its cost, or (iii) does not
expect to recover the securitys entire amortized cost.
This guidance also eliminates the probability
standard relating to the collectibility of cash flows and
impairment is considered to be other than temporary if the
present value of cash flows expected to be collected is less
than the amortized cost (credit loss).
Other-than-temporary
losses also need to be separated between the amount related to
credit loss (which is recognized in current earnings) and the
amount related to all other factors (which is recognized in
other comprehensive income). This guidance is effective for
interim and annual periods ending after June 15, 2009. The
adoption of this guidance on April 1, 2009 did not have a
material effect on the Companys consolidated results of
operations or consolidated financial position.
In May 2009, the FASB issued authoritative guidance establishing
principles and requirements for subsequent events (ASC 855).
This guidance establishes general standards of accounting for
and disclosure of events that occur after the balance sheet date
but before financial statements are issued or are available to
be issued. This guidance is based on the same principles as
those that currently exist in the auditing standards. This
guidance also requires disclosure of subsequent events that keep
the financial statements from being misleading. The adoption of
this guidance on June 30, 2009 did not have a material
effect on the Companys consolidated results of operations
or consolidated financial position. In February 2010, the FASB
issued ASU
2010-09,
Subsequent Events (ASU
2010-09),
effective immediately, which amends ASC 855 to clarify that an
SEC filer is not required to disclose the date through which
subsequent events have been evaluated in the financial
statements. The adoption of ASU
2010-09 did
not have a material effect on the Companys consolidated
results of operations or consolidated financial position. See
Note 30 Subsequent Events of the notes to the
consolidated financial statements for more details.
In June 2009, the FASB issued authoritative guidance
establishing accounting and reporting standards for transfers
and servicing of financial assets and also establishing the
accounting for transfers of servicing rights (ASC
68
860). This guidance eliminates the concept of a qualifying
special-purpose entity and introduces the concept of a
participating interest, which will limit the
circumstances where the transfer of a portion of a financial
asset will qualify as a sale, assuming all other derecognition
criteria are met. This guidance also clarifies and amends the
derecognition criteria for determining whether a transfer
qualifies for sale accounting as well as requires additional
disclosures. These additional disclosures are intended to
provide greater transparency about a transferors
continuing involvement with transferred assets. The adoption of
ASC 860 on January 1, 2010 did not have a material effect
on the Companys consolidated results of operations or
consolidated financial position.
In June 2009, the FASB issued authoritative guidance which
eliminates the quantitative approach previously required for
determining the primary beneficiary of a variable interest
entity (ASC 810). If an enterprise is required to consolidate an
entity as a result of the initial application of this standard,
it should describe the transition method(s) applied and shall
disclose the amount and classification in its statement of
financial position of the consolidated assets or liabilities by
the transition method(s) applied. If an enterprise is required
to deconsolidate an entity as a result of the initial
application of this standard, it should disclose the amount of
any cumulative effect adjustment related to deconsolidation
separately from any cumulative effect adjustment related to
consolidation of entities. The adoption of ASC 810 on
January 1, 2010 did not have a material effect on the
Companys consolidated results of operations or
consolidated financial position.
Consolidated
Results of Operations
The Company incurred net losses for the years ended December 31,
2009 and 2008. Due to the resulting deterioration in capital
levels of the Bank and the Company, combined with the current
uncertainty as to the Companys ability to raise sufficient
amounts of new equity capital, recent regulatory actions with
respect to the Company and the Bank, and the current inability
of the Company to repay amounts owed under its Loan Agreements
with its primary lender if, upon or subsequent to the expiration
of the Forbearance Agreement on March 31, 2010, its primary
lender were to declare the amounts outstanding thereunder
immediately due and payable, there is substantial doubt about
the Companys ability to continue as a going concern. See
Recent Developments Outlook for
2010.
2009
Compared to 2008
Results of operations for 2009 reflect aggressive actions taken
to preserve capital and liquidity in order to better withstand
the losses in the Companys loan portfolio stemming from
the worst economy in 75 years. While the Company provides a
full line of financial services to corporate and individual
customers located in the greater Chicago metropolitan area, it
is primarily a lender to many middle market and small businesses
within the community banking segment. The length and breadth of
the economic downturn, including record high unemployment and
vacancy rates, is continuing to put pressure on the Banks
borrowers, reducing both their ability to support their
borrowings from a cash flow perspective and the value of
property pledged as collateral for those borrowings in the case
of default. With a large concentration of the loan portfolio in
commercial real estate, the Company experienced accelerated
deterioration in its portfolio during 2009 as both delinquencies
on commercial real estate loans increased and declines in
related collateral values continued. Unfortunately, losses taken
in 2008, mainly attributed to the recognition of impairment
charges and realized losses on the preferred stock of FNMA and
FHLMC, as well as the impairment charge on goodwill of
$82.1 million and $80.0 million, respectively, and a
$72.6 million provision for credit losses, eroded a large
part of the Companys capital base.
In response, in 2009, the Company initiated changes to optimize
its balance sheet, preserve regulatory capital, enhance
liquidity, reduce costs aggressively, tighten loan underwriting
standards, and build a strong loan workout area in anticipation
of growth in problem loans, and announced a capital
restructuring plan. The Companys actions to strengthen its
balance sheet and capital position to enable it to withstand a
challenging economic cycle as well as the credit quality
deterioration have resulted in steep declines in results of
operations for 2009. The Company had a net loss of
$242.7 million for the year ended December 31, 2009
compared to net loss of $158.3 million for the prior year.
Basic and diluted loss per share for the year ended
December 31, 2009 were both $8.89 compared to $5.82 for
2008. The return on average assets was (6.69)% for 2009 compared
to a (4.32)% for 2008. The return on average equity was
(100.76)% in 2009 compared to (46.65)% in 2008.
69
This loss was mainly attributed to the $170.2 million
provision for credit losses as the Company continued to address
credit issues, tax charges including $116.3 million related
to a valuation allowance on deferred tax assets and
$8.1 million related to the liquidation of bank-owned life
insurance, and a goodwill impairment charge of
$14.0 million. The net interest margin was also negatively
impacted by repositioning of the securities portfolio, which
achieved a $107.2 million reduction in risk-weighted
assets, along with several other liquidity preservation steps
but at a cost of reduced earning asset yields for 2009.
Noninterest expense was also negatively affected by higher FDIC
insurance costs and professional fees incurred to perform
independent cumulative loan loss studies under various
methodologies and assumptions, including highly stressed
scenarios, in order to determine the Companys capital
needs, as well as execute the Capital Plan. Operating expenses
increased further to manage impaired loans within the special
assets group, and carrying costs of foreclosed properties. The
increases were offset substantially by the impact of staff
reductions, suspension of the 401(k) match and other expense
control initiatives estimated at $15.9 million on an annual
basis.
Set forth below are additional highlights of 2009 results
compared to 2008.
Net Interest Income. Net interest income on a
fully taxable-equivalent basis decreased $16.7 million, or
18.7%, to $72.9 million in 2009 from $89.6 million in
2008. This decrease was primarily due to the decrease in the
overall market rates impacting variable-rate loans, interest
foregone on nonaccrual loans, and the decline in interest income
on securities due to the securities portfolio repositioning into
shorter-term and lower risk-weighted securities featuring lower
yields. As a result, the net interest margin, on a tax
equivalent basis, decreased to 2.16% for the year ended
December 31, 2009 from 2.75% for the prior year. Due to the
Companys current tax position, the net interest margin for
2009 does not reflect a fully taxable-equivalent adjustment.
Trends in Fully Taxable-Equivalent Interest Income and
Average Interest-Earning Assets. Interest income
decreased $39.8 million to $150.5 million in 2009
compared to $190.3 million in 2008. Average earning assets
increased by $113.5 million but average yields decreased by
138 basis points. Interest income on loans decreased
$18.2 million to $133.2 million in 2009 from
$151.4 million in 2008 due to a 79 basis point drop in
yields and a decline in average loans. This decline in yields
was primarily due to the re-pricing of the variable-rate loans
resulting from decreases in the prime rate, which was partially
mitigated by interest rate floors and the loss of interest
income related to the increase in nonaccrual loans.
Interest income on securities decreased $21.7 million to
$16.2 million in 2009 from $37.8 million in 2008 as a
result of a decrease in yields from 5.20% in 2008 to 2.49% while
average securities decreased by $78.0 million. The decline
in securities yield was primarily due to the repositioning of
the securities portfolio into shorter-term and lower
risk-weighted securities featuring lower yields. During the
second quarter of 2009, the Company repositioned its securities
portfolio to (i) lower capital requirements associated with
higher risk-weighted assets, (ii) restructure expected cash
flows, and (iii) reduce credit risk.
Trends in Interest Expense and Average Interest-Bearing
Liabilities. Interest expense decreased
$23.1 million to $77.6 million in 2009 from
$100.7 million in 2008. Average balances of
interest-bearing liabilities increased by $51.1 million in
2009 to $3.0 billion compared to the prior year while rates
paid decreased 82 basis points to 2.58% during 2009
compared to 3.40% in 2008 due to the lower costs of
interest-bearing deposits.
Interest expense on interest-bearing deposits decreased by
$18.8 million to $47.2 million in 2009 from
$66.0 million in 2008. Average interest-bearing deposits
increased $120.1 million to $2.2 billion in 2009
compared to $2.1 billion in the prior year mainly as a
result of successful certificates of deposit promotions and new
channels of distribution. Average rates paid on interest-bearing
deposits decreased by 102 basis points to 2.13% in 2009
compared to 3.15% in the prior year. Average interest-bearing
demand deposit, money market, and savings accounts decreased
$59.2 million in 2009 compared to 2008 while average rates
paid decreased 48 basis points. Average certificates of
deposit less than $100,000 increased by $178.4 million, due
to successful deposit promotions and new distribution channels,
while average rates paid decreased by 128 basis points.
Average certificates of deposit greater than $100,000 remained
flat in 2009 while average rates paid decreased 142 basis
points. Most of the decrease in average rates was in
certificates of deposit that matured and re-priced at lower
rates. Average brokered deposits increased by $16.5 million
in 2009 compared to the prior year, but average rates paid
decreased by 218 basis points.
70
Interest expense on borrowings decreased to $30.4 million
in 2009 from $34.7 million in 2008, largely due to
decreases in short-term LIBOR rates and a decrease in
borrowings. Average borrowings decreased by $68.9 million
to $797.8 million in 2009 compared to $866.7 million
in the prior year. Less reliance on borrowings was largely due
to increased funds from deposits.
Interest expense on Federal funds purchased and securities sold
under agreements to repurchase decreased by $2.3 million in
2009 while average balances decreased $78.3 million.
Interest expense on FHLB advances slightly increased by $371,000
in 2009 compared to the prior year while average balances
increased by $11.3 million during the same period. Interest
expense on junior subordinated debentures decreased by
$1.4 million in 2009 compared to the prior year and rates
paid decreased by 231 basis points. During the second
quarter of 2009, the Company begun to defer interest on its
junior subordinated debentures. The accrued interest deferred on
junior subordinated debentures was $1.5 million through
December 31, 2009. Interest expense on the revolving and
term notes, increased in the second half of 2009 due to the
increase to the default rates beginning in the third quarter of
2009. The interest amount due relating to the credit agreements
(as discussed in Note 17 Credit Agreements of
the notes to the consolidated financial statements) was $700,000
at December 31, 2009.
Provision for Credit Losses. The provision for
credit losses increased by $97.6 million to
$170.2 million in 2009 from $72.6 million in 2008; the
large increase reflected the continued deterioration in credit
quality of the portfolio as a result of current economic
conditions. Nonaccrual loans increased $212.7 million to
$273.8 million at December 31, 2009 compared to the
prior year, and net charged off loans increased
$29.3 million to $83.3 million. See Financial
Condition Analysis of Allowance for Loan
Losses.
Noninterest Income. The Companys total
noninterest income was $17.1 million in 2009 compared to
$(50.6) million in 2008. In 2008, the Company recognized an
impairment charge on securities of $65.4 million, net
losses of $16.6 million on securities transactions, and a
gain on the sale of property of $15.2 million.
Service charges on deposits were flat at $7.7 million in
2009 compared to the prior year. The cash surrender value of
life insurance decreased $2.2 million, or 62.0%, reflecting
the liquidation of the bank owned life insurance in the second
quarter of 2009. Trust income decreased $402,000, or 24.8%, to
$1.2 million in 2009 compared to 2008, partially due to a
decrease in accounts. Trust income is largely based on a
percentage of assets under management, which were
$154.8 million and $154.5 million at December 31,
2009 and 2008, respectively. Insurance and brokerage commissions
decreased by $878,000, or 43.4%, to $1.1 million in 2009
compared to the prior year, mostly due to the difficult economy
causing a lower volume of transactions and the departure of
brokers.
Noninterest Expense. The Companys total
noninterest expense decreased by $70.2 million, to
$106.9 million in 2009, from $177.1 million in 2008.
Noninterest expense for 2008 included an $80.0 million
non-cash goodwill impairment charge and a $7.1 million loss
on the early extinguishment of debt. Noninterest expense for
2009 included a $14.0 million non-cash goodwill impairment
charge. Noninterest expense as a percentage of average assets
was 2.95% for 2009 compared to 4.84% for 2008.
Salaries and employee benefits decreased $9.9 million, or
19.6%, which was due in large part to decreases of
$4.6 million in incentive expense and $1.8 million in
stock-based compensation expense. The decrease was also due to
the reduction in force of 120 full-time equivalents
employees from December 31, 2008, salary reductions for
remaining employees, and the suspension of the Companys
401(k) contribution. Occupancy and equipment increased $337,000
to $13.1 million in 2009 compared to the prior year.
Professional services increased $920,000 to $9.5 million in
2009 due to higher legal, including legal expenses related to
problem loan workouts, and consulting expenses related to
Capital Plan activities, the goodwill impairment studies, and
loan portfolio credit-loss studies. Marketing expenses decreased
by $1.4 million, or 50.5%, in 2009 compared to the prior
year, as certain programs were scaled back or put on hold in an
effort to control costs.
Foreclosed properties expense increased by $7.0 million to
$7.3 million in 2009 compared to the prior year, due to the
increase in foreclosed properties and the write-down of certain
properties to updated fair values less costs to sell. Foreclosed
properties were $26.9 million at December 31, 2009
compared to $12.0 million at year end 2008. FDIC insurance
expense increased $6.7 million to $9.3 million in the
2009 compared to the same period in 2008 due to the special
assessment of $1.7 million and increased regular quarterly
FDIC premiums. FDIC insurance expense is expected to increase in
2010 as a result of the Bank being undercapitalized as of
December 31, 2009.
71
The efficiency ratio was 113.23% for the year ended
December 31, 2009 compared to 144.15% in 2008.
Federal and State Income Tax. The
Companys consolidated income tax rate varies from
statutory rates. The Company recorded income tax expense of
$55.6 million in 2009 compared to a benefit of
$55.1 million in 2008. The change in the effective tax rate
reflects $116.3 million related to the recognition of a
valuation allowance on deferred tax assets and the
$8.1 million tax charge related to the liquidation of bank
owned life insurance in the second quarter of 2009. The
Companys marginal tax rate is approximately 40%. Under
current conditions, the Company would expect to offset any tax
benefits earned with similar increases in tax expense as a
result of an increase in the valuation allowance.
Set forth below is a reconciliation of the effective tax rate
for the years ended December 31, 2009 and 2008 to statutory
rates.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in thousands)
|
|
|
Income taxes computed at the statutory rate
|
|
$
|
(65,491
|
)
|
|
|
35.0
|
%
|
|
$
|
(74,671
|
)
|
|
|
35.0
|
%
|
Tax-exempt interest income on securities and loans
|
|
|
(455
|
)
|
|
|
0.2
|
|
|
|
(802
|
)
|
|
|
0.4
|
|
General business credits
|
|
|
(566
|
)
|
|
|
0.3
|
|
|
|
(661
|
)
|
|
|
0.3
|
|
State income taxes, net of federal tax benefit due to state
operating loss
|
|
|
(6,699
|
)
|
|
|
3.6
|
|
|
|
(4,419
|
)
|
|
|
2.1
|
|
Life insurance cash surrender value increase, net of premiums
|
|
|
(466
|
)
|
|
|
0.2
|
|
|
|
(1,195
|
)
|
|
|
0.6
|
|
Liquidation of bank-owned life insurance
|
|
|
6,924
|
|
|
|
(3.7
|
)
|
|
|
|
|
|
|
|
|
Dividends received deduction
|
|
|
|
|
|
|
|
|
|
|
(642
|
)
|
|
|
0.3
|
|
Goodwill impairment
|
|
|
4,900
|
|
|
|
(2.6
|
)
|
|
|
27,733
|
|
|
|
(13.0
|
)
|
Valuation allowance
|
|
|
116,286
|
|
|
|
(62.1
|
)
|
|
|
|
|
|
|
|
|
Nondeductible costs and other, net
|
|
|
1,163
|
|
|
|
(0.6
|
)
|
|
|
(416
|
)
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total (benefit) provision for income taxes
|
|
$
|
55,596
|
|
|
|
(29.7
|
)%
|
|
$
|
(55,073
|
)
|
|
|
25.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
Compared to 2007
The Company had a net loss of $158.3 million for the year
ended December 31, 2008. This loss was mainly attributed to
the impairment charges and realized losses on the preferred
stock of FNMA and FHLMC as well as the impairment charge on
goodwill of $82.1 million and $80.0 million,
respectively, and a $72.6 million provision for credit
losses. Set forth below are some highlights of 2008 results
compared to 2007.
Net loss was $158.3 million for the year ended
December 31, 2008 compared to net income of
$18.6 million for the prior year. Basic and diluted (loss)
earnings per share for the year ended December 31, 2008
were both $(5.82) compared to $0.72 for 2007. The return on
average assets was (4.32)% for 2008 compared to a 0.58% for
2007. The return on average equity was (46.65)% in 2008 compared
to a 6.13% in 2007. Top line revenue (net interest income plus
noninterest income) decreased by $61.7 million, or 62.9%,
to $36.4 million for 2008 compared to $98.1 million in
the prior year. Excluding the gains, losses and impairment
charges on securities and the gain on sale of property incurred
in 2008, top line revenue increased 5.2%, or $5.1 million.
Net Interest Income. Net interest income on a
fully taxable-equivalent basis increased $3.3 million, or
3.9%, to $89.6 million in 2008 from $86.2 million in
2007. This increase was due to interest expense declining to a
greater extent than interest income due to the drops in the
federal funds and prime rates. The Federal Open Market Committee
cut the federal funds rate target by 225 basis points
during 2008. As a result, the Company aggressively re-priced its
deposits downward and benefited from the decreases in the
federal funds rate. The Northwest Suburban acquisition completed
on October 1, 2007 also contributed to this increase. The
Companys net interest margin (tax equivalent net interest
income as a percentage of earning assets) decreased to 2.75% for
2008 compared to 3.02% for 2007. The increase in nonaccrual
loans and decrease in dividends on FNMA and FHLMC preferred
stock contributed to the decline in the net interest margin.
Impairment charges on FNMA and FHLMC preferred stock and net
charge-offs partially offset the overall increase in earning
assets.
72
Trends in Fully Taxable-Equivalent Interest Income and
Average Interest-Earning Assets. Interest income
decreased $7.2 million to $190.3 million in 2008
compared to $197.5 million in 2007. Average earning assets
increased by $398.4 million ($498.3 million of earning
assets were acquired through the Northwest Suburban acquisition
on October 1, 2007) but average yields decreased by
107 basis points. Interest income on loans decreased
$4.0 million to $151.4 million in 2008 from
$155.3 million in 2007 due to a 134 basis point drop
in yield despite an increase of $394.4 million in average
loans; $439.2 million in loans were acquired in the
Northwest Suburban acquisition on October 1, 2007. The
decline in loan yield was primarily due to the re-pricing of
variable-rate loans resulting from decreases in the prime rate
as well as the increase in nonaccrual loans. Most new and
renewing loans beginning in the fourth quarter of 2008 have
floors in place which will help mitigate future margin
contraction.
Interest income on securities decreased $2.6 million to
$37.8 million in 2008 from $40.4 million in 2007 as a
result of a decrease in yields from 5.55% in 2007 to 5.20% while
average securities increased slightly. The decline in securities
yield was primarily due to the termination of dividends on FNMA
and FHLMC preferred stock in the second half of the year and on
the FHLBC stock in 2007. Dividend income on FNMA and FHLMC
preferred stock decreased $2.2 million in 2008 compared to
the prior year. Dividend income on FHLBC stock was $333,000 in
2007 compared to none in 2008.
Trends in Interest Expense and Average Interest-Bearing
Liabilities. Interest expense decreased
$10.5 million to $100.7 million in 2008 from
$111.2 million in 2007. Average balances of
interest-bearing liabilities increased by $398.1 million in
2008 to $3.0 billion compared to $2.6 billion in the
prior year while rates paid decreased 94 basis points to
3.40% during 2008 compared to 4.34% in 2007.
Interest expense on deposits decreased by $10.7 million to
$66.0 million in 2008 from $76.7 million in 2007.
Average interest-bearing deposits increased $240.2 million
to $2.1 billion in 2008 compared to $1.9 billion in
the prior year; $405.4 million in interest-bearing deposits
were acquired in the Northwest Suburban acquisition on
October 1, 2007. Average rates paid on interest-bearing
deposits decreased by 98 basis points to 3.15% in 2008
compared to 4.13% in the prior year. Average interest-bearing
core deposits (interest-bearing demand deposit, money market,
and savings accounts) increased $16.4 million in 2008
compared to 2007 and average rates paid decreased 115 basis
points. Average certificates of deposit less than $100,000
increased by $21.8 million and average rates paid decreased
by 90 basis points. Average certificates of deposit greater
than $100,000 increased $202.0 million in 2008 and average
rates paid decreased 109 basis points. Average brokered
deposits increased by $144.8 million in 2008 compared to
the prior year.
Interest expense on borrowings increased slightly to
$34.7 million in 2008 from $34.5 million in 2007 even
though average borrowings were up. Average borrowings increased
by $157.9 million to $866.7 million in 2008 compared
to $708.8 million in the prior year, primarily as a result
of the Companys asset growth exceeding deposit growth and
the $81.2 million cash used for the Northwest Suburban
acquisition in October 2007.
Interest expense on Federal funds purchased and securities sold
under agreements to repurchase increased by $2.2 million in
2008 as a result of the increases in average balances of
$86.1 million, even as the average rates decreased
39 basis points. Interest expense on FHLB advances
decreased by $2.9 million in 2008 compared to the prior
year while average balances increased by $17.8 million
during the same period. Average rates paid on FHLB advances
dropped by 113 basis points in 2008 to 3.53% compared to
4.66% in 2007. In March 2008, the Company prepaid
$130.0 million of FHLB advances at a weighted average rate
of 4.94% and recognized a loss on the early extinguishment of
debt of $7.1 million. The Company replaced these borrowings
at a weighted average rate of 2.57% in the second quarter of
2008.
Average junior subordinated debentures decreased by
$5.4 million in 2008 compared to the prior year while rates
paid decreased by 190 basis points. The Company acquired
$10.3 million in junior subordinated debentures at LIBOR
plus 2.70% through the Northwest Suburban acquisition on
October 1, 2007, but redeemed $15.5 million at LIBOR
plus 3.45% in November 2007. Average notes payable, including
revolving, term and subordinated notes, increased by
$59.3 million in 2008 compared to the prior year. The
Company used the proceeds from a $75.0 million term note it
has with a correspondent bank to pay the cash portion of the
Northwest Suburban acquisition. Short-term LIBOR rates, to which
many of the Companys borrowings are indexed, did not
decline as quickly as prime and other short-term rates which
dropped quickly in late 2008 as the economy faltered.
73
Provision for Credit Losses. The provision for
credit losses increased by $67.8 million to
$72.6 million in 2008 from $4.9 million in 2007; the
large increase reflected the deterioration in credit quality of
the portfolio as economic conditions reduced: (i) the
borrowers ability to make debt service payments; and
(ii) the value of the underlying collateral for many loans.
Noninterest Income. The Companys total
noninterest income was $(50.6) million in 2008 compared to
$15.5 million in 2007. In 2008 losses on securities of
$82.0 million were mostly related to sales and impairments
recorded on FHLMC and FNMA preferred stock holdings. The Company
also recorded a gain on the sale of a branch property of
$15.2 million in the first quarter of 2008.
Service charges on deposits increased $1.0 million as a
result of the increased deposit base from the Northwest Suburban
acquisition. The cash surrender value of life insurance
increased $446,000, reflecting the addition of
$12.9 million of such insurance acquired with Northwest
Suburban. Trust income decreased $234,000 due mostly to the drop
in trust asset values from the difficult economy and the
departure of trust customers. Insurance and brokerage
commissions decreased by $263,000 mostly due to the difficult
economy and the departure of employees. Gains on sale of loans
decreased by $518,000, a result of outsourcing the residential
mortgage origination operations in mid-2007.
Noninterest Expense. The Companys total
noninterest expense increased by $106.6 million, to
$178.0 million in 2008, from $71.4 million in 2007.
Noninterest expense for 2008 included an $80.0 million
non-cash goodwill impairment charge and a $7.1 million loss
on the early extinguishment of debt. Noninterest expense as a
percentage of average assets was 4.84% for 2008 compared to
2.24% for 2007.
Salaries and employee benefits increased $8.2 million, or
19.4%, reflecting the additions to management and employees from
the Northwest Suburban acquisition, key additions to the
management team, and separation benefits of $1.2 million.
Occupancy and equipment increased $3.2 million in 2008
compared to the prior year reflecting the five additional
branches acquired in the Northwest Suburban acquisition.
Professional services increased $3.1 million in 2008 due to
an increase in loan workout legal fees and consulting expense.
Marketing expenses increased by $397,000, or 17.2%, in 2008
compared to the prior year as deposit retention efforts and
Company image campaigns were increased.
Foreclosed properties expense increased by $298,000 in 2008
compared to the prior year as a result of the increase in
properties. Amortization of intangible assets increased by
$659,000 as a direct result of the increase in intangible assets
from the Northwest Suburban acquisition in October 2007.
Non-capitalized merger related expense was $271,000 in 2008
compared to $1.3 million in 2007.
The Company was granted a one-time credit to offset FDIC
premiums as a result of the Federal Deposit Insurance Reform Act
of 2005 (Reform Act). This one-time credit
artificially reduced the Companys 2007 FDIC insurance
expense, but the credit was fully utilized by the end of 2007,
and as a result of the expiration of that credit and the
addition of the Northwest Suburban deposits in late 2007, the
Company incurred an FDIC insurance expense increase of
$2.4 million in 2008.
The efficiency ratio was 144.15% for the year ended
December 31, 2008 compared to 68.29% in 2007.
74
Federal and State Income Tax. The
Companys consolidated income tax rate varies from
statutory rates. The Company recorded income tax benefit of
$55.1 million in 2008 compared to expense of
$3.2 million in 2007. Set forth below is a reconciliation
of the effective tax rate for the years ended December 31,
2008 and 2007 to statutory rates.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars in thousands)
|
|
|
Income taxes computed at the statutory rate
|
|
$
|
(74,671
|
)
|
|
|
35.0
|
%
|
|
$
|
7,638
|
|
|
|
35.0
|
%
|
Tax-exempt interest income on securities and loans
|
|
|
(802
|
)
|
|
|
0.4
|
|
|
|
(771
|
)
|
|
|
(3.5
|
)
|
General business credits
|
|
|
(661
|
)
|
|
|
0.3
|
|
|
|
(643
|
)
|
|
|
(2.9
|
)
|
State income taxes, net of federal tax benefit due to state
operating loss
|
|
|
(4,419
|
)
|
|
|
2.1
|
|
|
|
(1,027
|
)
|
|
|
(4.7
|
)
|
Life insurance cash surrender value increase, net of premiums
|
|
|
(1,195
|
)
|
|
|
0.6
|
|
|
|
(1,072
|
)
|
|
|
(4.9
|
)
|
Dividends received deduction
|
|
|
(642
|
)
|
|
|
0.3
|
|
|
|
(1,214
|
)
|
|
|
(5.6
|
)
|
Goodwill impairment
|
|
|
27,733
|
|
|
|
(13.0
|
)
|
|
|
|
|
|
|
|
|
Annuity proceeds
|
|
|
|
|
|
|
|
|
|
|
267
|
|
|
|
1.2
|
|
Nondeductible costs and other, net
|
|
|
(416
|
)
|
|
|
0.1
|
|
|
|
68
|
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total provision (benefit) for income taxes
|
|
$
|
(55,073
|
)
|
|
|
25.8
|
%
|
|
$
|
3,246
|
|
|
|
14.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
75
Interest-Earning
Assets and Interest-Bearing Liabilities
The following table sets forth the average balances, net
interest income and expense and average yields and rates for the
Companys interest-earning assets and interest-bearing
liabilities for the indicated periods on a taxable-equivalent
basis assuming a 35.0% tax rate.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
Balance
|
|
|
Interest
|
|
|
Rate
|
|
|
Balance
|
|
|
Interest
|
|
|
Rate
|
|
|
Balance
|
|
|
Interest
|
|
|
Rate
|
|
|
|
(Dollars in thousands)
|
|
|
Interest-Earning Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal funds sold and other short-term investments
|
|
$
|
185,487
|
|
|
$
|
472
|
|
|
|
0.25
|
%
|
|
$
|
17,320
|
|
|
$
|
327
|
|
|
|
1.89
|
%
|
|
$
|
17,124
|
|
|
$
|
839
|
|
|
|
4.90
|
%
|
Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable(1)
|
|
|
624,215
|
|
|
|
15,190
|
|
|
|
2.43
|
|
|
|
667,324
|
|
|
|
34,282
|
|
|
|
5.14
|
|
|
|
669,154
|
|
|
|
36,901
|
|
|
|
5.51
|
|
Exempt from federal income taxes(1)
|
|
|
25,780
|
|
|
|
986
|
|
|
|
3.82
|
|
|
|
60,704
|
|
|
|
3,563
|
|
|
|
5.87
|
|
|
|
58,844
|
|
|
|
3,491
|
|
|
|
5.93
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities
|
|
|
649,995
|
|
|
|
16,176
|
|
|
|
2.49
|
|
|
|
728,028
|
|
|
|
37,845
|
|
|
|
5.20
|
|
|
|
727,998
|
|
|
|
40,392
|
|
|
|
5.55
|
|
FRB and FHLB stock
|
|
|
29,397
|
|
|
|
680
|
|
|
|
2.31
|
|
|
|
29,975
|
|
|
|
741
|
|
|
|
2.47
|
|
|
|
24,697
|
|
|
|
839
|
|
|
|
3.40
|
|
Loans held for sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,450
|
|
|
|
89
|
|
|
|
6.14
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial loans(1)(2)(3)
|
|
|
520,911
|
|
|
|
26,721
|
|
|
|
5.13
|
|
|
|
513,321
|
|
|
|
31,475
|
|
|
|
6.13
|
|
|
|
452,438
|
|
|
|
34,105
|
|
|
|
7.54
|
|
Commercial real estate loans(1)(2)(3)(4)
|
|
|
1,632,689
|
|
|
|
91,187
|
|
|
|
5.59
|
|
|
|
1,639,442
|
|
|
|
102,112
|
|
|
|
6.23
|
|
|
|
1,336,421
|
|
|
|
100,954
|
|
|
|
7.55
|
|
Agricultural loans(1)(2)(3)
|
|
|
7,913
|
|
|
|
511
|
|
|
|
6.46
|
|
|
|
6,287
|
|
|
|
403
|
|
|
|
6.41
|
|
|
|
3,406
|
|
|
|
268
|
|
|
|
7.87
|
|
Consumer real estate loans(2)(3)(4)
|
|
|
339,767
|
|
|
|
14,379
|
|
|
|
4.23
|
|
|
|
314,917
|
|
|
|
16,754
|
|
|
|
5.32
|
|
|
|
285,999
|
|
|
|
19,207
|
|
|
|
6.72
|
|
Consumer installment loans(2)(3)
|
|
|
5,783
|
|
|
|
382
|
|
|
|
6.61
|
|
|
|
9,103
|
|
|
|
625
|
|
|
|
6.87
|
|
|
|
10,432
|
|
|
|
788
|
|
|
|
7.55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
|
2,507,063
|
|
|
|
133,180
|
|
|
|
5.31
|
|
|
|
2,483,070
|
|
|
|
151,369
|
|
|
|
6.10
|
|
|
|
2,088,696
|
|
|
|
155,322
|
|
|
|
7.44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets
|
|
$
|
3,371,942
|
|
|
$
|
150,508
|
|
|
|
4.46
|
%
|
|
$
|
3,258,393
|
|
|
$
|
190,282
|
|
|
|
5.84
|
%
|
|
$
|
2,859,965
|
|
|
$
|
197,481
|
|
|
|
6.91
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-Earning Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
45,724
|
|
|
|
|
|
|
|
|
|
|
$
|
57,303
|
|
|
|
|
|
|
|
|
|
|
$
|
57,185
|
|
|
|
|
|
|
|
|
|
Premises and equipment, net
|
|
|
39,663
|
|
|
|
|
|
|
|
|
|
|
|
39,018
|
|
|
|
|
|
|
|
|
|
|
|
27,093
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses
|
|
|
(65,366
|
)
|
|
|
|
|
|
|
|
|
|
|
(28,093
|
)
|
|
|
|
|
|
|
|
|
|
|
(24,977
|
)
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
233,892
|
|
|
|
|
|
|
|
|
|
|
|
334,588
|
|
|
|
|
|
|
|
|
|
|
|
262,724
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest-earning assets
|
|
|
253,913
|
|
|
|
|
|
|
|
|
|
|
|
402,816
|
|
|
|
|
|
|
|
|
|
|
|
322,025
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
3,625,855
|
|
|
|
|
|
|
|
|
|
|
$
|
3,661,209
|
|
|
|
|
|
|
|
|
|
|
$
|
3,181,990
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-Bearing Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing demand deposits
|
|
$
|
176,930
|
|
|
$
|
862
|
|
|
|
0.49
|
%
|
|
$
|
200,869
|
|
|
$
|
1,977
|
|
|
|
0.98
|
%
|
|
$
|
182,276
|
|
|
$
|
3,366
|
|
|
|
1.85
|
%
|
Money-market demand accounts and savings accounts
|
|
|
349,278
|
|
|
|
2,864
|
|
|
|
0.82
|
|
|
|
384,496
|
|
|
|
4,994
|
|
|
|
1.30
|
|
|
|
386,722
|
|
|
|
9,949
|
|
|
|
2.57
|
|
Time deposits less than $100,000
|
|
|
798,254
|
|
|
|
22,132
|
|
|
|
2.77
|
|
|
|
619,828
|
|
|
|
25,106
|
|
|
|
4.05
|
|
|
|
598,012
|
|
|
|
29,603
|
|
|
|
4.95
|
|
Time deposits of $100,000 or more
|
|
|
892,178
|
|
|
|
21,350
|
|
|
|
2.39
|
|
|
|
891,354
|
|
|
|
33,948
|
|
|
|
3.81
|
|
|
|
689,335
|
|
|
|
33,774
|
|
|
|
4.90
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing deposits
|
|
|
2,216,640
|
|
|
|
47,208
|
|
|
|
2.13
|
|
|
|
2,096,547
|
|
|
|
66,025
|
|
|
|
3.15
|
|
|
|
1,856,345
|
|
|
|
76,692
|
|
|
|
4.13
|
|
Borrowings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal funds purchased and repurchase agreements
|
|
|
312,052
|
|
|
|
13,011
|
|
|
|
4.17
|
|
|
|
390,399
|
|
|
|
15,326
|
|
|
|
3.93
|
|
|
|
304,269
|
|
|
|
13,131
|
|
|
|
4.32
|
|
FHLB advance
|
|
|
346,329
|
|
|
|
12,195
|
|
|
|
3.52
|
|
|
|
335,039
|
|
|
|
11,824
|
|
|
|
3.53
|
|
|
|
317,232
|
|
|
|
14,769
|
|
|
|
4.66
|
|
Junior subordinated debt
|
|
|
60,818
|
|
|
|
2,290
|
|
|
|
3.77
|
|
|
|
60,758
|
|
|
|
3,696
|
|
|
|
6.08
|
|
|
|
66,114
|
|
|
|
5,275
|
|
|
|
7.98
|
|
Revolving note payable
|
|
|
8,600
|
|
|
|
448
|
|
|
|
5.21
|
|
|
|
10,550
|
|
|
|
474
|
|
|
|
4.49
|
|
|
|
3,007
|
|
|
|
186
|
|
|
|
6.19
|
|
Term note payable
|
|
|
55,000
|
|
|
|
1,900
|
|
|
|
3.45
|
|
|
|
58,689
|
|
|
|
2,643
|
|
|
|
4.50
|
|
|
|
18,205
|
|
|
|
1,184
|
|
|
|
6.50
|
|
Subordinated debt
|
|
|
15,000
|
|
|
|
585
|
|
|
|
3.90
|
|
|
|
11,311
|
|
|
|
707
|
|
|
|
6.25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total borrowings
|
|
|
797,799
|
|
|
|
30,429
|
|
|
|
3.81
|
|
|
|
866,746
|
|
|
|
34,670
|
|
|
|
4.00
|
|
|
|
708,827
|
|
|
|
34,545
|
|
|
|
4.87
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities
|
|
$
|
3,014,439
|
|
|
$
|
77,637
|
|
|
|
2.58
|
%
|
|
$
|
2,963,293
|
|
|
$
|
100,695
|
|
|
|
3.40
|
%
|
|
$
|
2,565,172
|
|
|
$
|
111,237
|
|
|
|
4.34
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-Bearing Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits
|
|
$
|
337,246
|
|
|
|
|
|
|
|
|
|
|
$
|
326,104
|
|
|
|
|
|
|
|
|
|
|
$
|
274,819
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
33,290
|
|
|
|
|
|
|
|
|
|
|
|
32,551
|
|
|
|
|
|
|
|
|
|
|
|
38,804
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest-bearing liabilities
|
|
|
370,536
|
|
|
|
|
|
|
|
|
|
|
|
358,655
|
|
|
|
|
|
|
|
|
|
|
|
313,623
|
|
|
|
|
|
|
|
|
|
Stockholders equity
|
|
|
240,880
|
|
|
|
|
|
|
|
|
|
|
|
339,261
|
|
|
|
|
|
|
|
|
|
|
|
303,195
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
3,625,855
|
|
|
|
|
|
|
|
|
|
|
$
|
3,661,209
|
|
|
|
|
|
|
|
|
|
|
$
|
3,181,990
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (tax equivalent)(1)(5)
|
|
|
|
|
|
$
|
72,871
|
|
|
|
1.88
|
%
|
|
|
|
|
|
$
|
89,587
|
|
|
|
2.44
|
%
|
|
|
|
|
|
$
|
86,244
|
|
|
|
2.57
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin (tax equivalent)(1)
|
|
|
|
|
|
|
|
|
|
|
2.16
|
%
|
|
|
|
|
|
|
|
|
|
|
2.75
|
%
|
|
|
|
|
|
|
|
|
|
|
3.02
|
%
|
Net interest income(5)(6)
|
|
|
|
|
|
$
|
72,871
|
|
|
|
|
|
|
|
|
|
|
$
|
86,966
|
|
|
|
|
|
|
|
|
|
|
$
|
82,632
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin(6)
|
|
|
|
|
|
|
|
|
|
|
2.16
|
%
|
|
|
|
|
|
|
|
|
|
|
2.67
|
%
|
|
|
|
|
|
|
|
|
|
|
2.89
|
%
|
Average interest-earning assets to interest-bearing liabilities
|
|
|
111.86
|
%
|
|
|
|
|
|
|
|
|
|
|
109.96
|
%
|
|
|
|
|
|
|
|
|
|
|
111.49
|
%
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Adjusted for 35% tax rate and adjusted for the
dividends-received deduction, except for 2009 as a result of the
Companys current tax position. |
76
|
|
|
(2) |
|
Nonaccrual loans are included in the average balances; however,
these loans are not earning any interest. |
|
(3) |
|
Includes loan fees (in thousands) of $2,134, $2,866, and $2,747
for 2009, 2008, and 2007, respectively. |
|
(4) |
|
Includes construction loans. |
|
(5) |
|
The following table reconciles reported net interest income on a
tax equivalent basis for the periods presented (in thousands): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Net interest income
|
|
$
|
72,871
|
|
|
$
|
86,966
|
|
|
$
|
82,632
|
|
Taxable-equivalent adjustment to net interest income
|
|
|
|
|
|
|
2,621
|
|
|
|
3,612
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income, fully taxable-equivalent basis
|
|
$
|
72,871
|
|
|
$
|
89,587
|
|
|
$
|
86,244
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6) |
|
Not adjusted for 35% tax rate or for the dividends-received
deduction. |
Changes
in Interest Income and Expense
The changes in net interest income from period to period are
reflective of changes in the interest rate environment, changes
in the composition of assets and liabilities as to type and
maturity (and the inherent interest rate differences related
thereto), and volume changes. Later sections of this discussion
and analysis address the changes in maturity composition of
loans and investments and in the asset and liability repricing
gaps associated with interest rate risk, all of which contribute
to changes in net interest margin.
The following table sets forth an analysis of volume and rate
changes in interest income and interest expense of the
Companys average interest-earning assets and average
interest-bearing liabilities for the indicated periods on a
taxable-equivalent basis assuming a 35.0% tax rate, except for
2009. The table distinguishes between the changes related to
average outstanding balances (changes in volume holding the
interest rate constant) and the changes related to average
interest rates (changes in average rate holding the outstanding
balance constant). The change in interest due to both volume and
rate has been allocated to volume and rate changes in proportion
to the relationship of the absolute dollar amounts of the change
in each.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009 Compared to 2008
|
|
|
2008 Compared to 2007
|
|
|
|
Change Due to
|
|
|
Change Due to
|
|
|
|
Net
|
|
|
Volume
|
|
|
Rate
|
|
|
Net
|
|
|
Volume
|
|
|
Rate
|
|
|
|
(In thousands)
|
|
|
Interest-Earning Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal funds sold and other short-term investments
|
|
$
|
145
|
|
|
$
|
653
|
|
|
$
|
(508
|
)
|
|
$
|
(512
|
)
|
|
$
|
9
|
|
|
$
|
(521
|
)
|
Securities taxable
|
|
|
(19,092
|
)
|
|
|
(2,087
|
)
|
|
|
(17,005
|
)
|
|
|
(2,619
|
)
|
|
|
(101
|
)
|
|
|
(2,518
|
)
|
Securities exempt from federal income taxes
|
|
|
(2,577
|
)
|
|
|
(1,605
|
)
|
|
|
(972
|
)
|
|
|
72
|
|
|
|
109
|
|
|
|
(37
|
)
|
FRB and FHLB stock
|
|
|
(61
|
)
|
|
|
(14
|
)
|
|
|
(47
|
)
|
|
|
(98
|
)
|
|
|
158
|
|
|
|
(256
|
)
|
Loans held for sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(89
|
)
|
|
|
(89
|
)
|
|
|
|
|
Commercial loans
|
|
|
(4,754
|
)
|
|
|
459
|
|
|
|
(5,213
|
)
|
|
|
(2,630
|
)
|
|
|
4,231
|
|
|
|
(6,861
|
)
|
Commercial real estate loans
|
|
|
(10,925
|
)
|
|
|
(419
|
)
|
|
|
(10,506
|
)
|
|
|
1,158
|
|
|
|
20,626
|
|
|
|
(19,468
|
)
|
Agricultural loans
|
|
|
108
|
|
|
|
105
|
|
|
|
3
|
|
|
|
135
|
|
|
|
192
|
|
|
|
(57
|
)
|
Consumer real estate loans
|
|
|
(2,375
|
)
|
|
|
1,247
|
|
|
|
(3,622
|
)
|
|
|
(2,453
|
)
|
|
|
1,810
|
|
|
|
(4,263
|
)
|
Consumer installment loans
|
|
|
(243
|
)
|
|
|
(220
|
)
|
|
|
(23
|
)
|
|
|
(163
|
)
|
|
|
(95
|
)
|
|
|
(68
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets
|
|
$
|
(39,774
|
)
|
|
$
|
(1,881
|
)
|
|
$
|
(37,893
|
)
|
|
$
|
(7,199
|
)
|
|
$
|
26,850
|
|
|
$
|
(34,049
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
77
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009 Compared to 2008
|
|
|
2008 Compared to 2007
|
|
|
|
Change Due to
|
|
|
Change Due to
|
|
|
|
Net
|
|
|
Volume
|
|
|
Rate
|
|
|
Net
|
|
|
Volume
|
|
|
Rate
|
|
|
|
(In thousands)
|
|
|
Interest-Bearing Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing demand deposits
|
|
$
|
(1,115
|
)
|
|
$
|
(213
|
)
|
|
$
|
(902
|
)
|
|
$
|
(1,389
|
)
|
|
$
|
315
|
|
|
$
|
(1,704
|
)
|
Money market demand accounts and savings accounts
|
|
|
(2,130
|
)
|
|
|
(424
|
)
|
|
|
(1,706
|
)
|
|
|
(4,955
|
)
|
|
|
(57
|
)
|
|
|
(4,898
|
)
|
Time deposits of less than $100,000
|
|
|
(2,974
|
)
|
|
|
6,139
|
|
|
|
(9,113
|
)
|
|
|
(4,497
|
)
|
|
|
1,047
|
|
|
|
(5,544
|
)
|
Time deposits of $100,000 or more
|
|
|
(12,598
|
)
|
|
|
31
|
|
|
|
(12,629
|
)
|
|
|
174
|
|
|
|
8,646
|
|
|
|
(8,472
|
)
|
Federal funds purchased and repurchase agreements
|
|
|
(2,315
|
)
|
|
|
(3,222
|
)
|
|
|
907
|
|
|
|
2,195
|
|
|
|
3,462
|
|
|
|
(1,267
|
)
|
FHLB advances
|
|
|
371
|
|
|
|
398
|
|
|
|
(27
|
)
|
|
|
(2,945
|
)
|
|
|
791
|
|
|
|
(3,736
|
)
|
Junior subordinated debentures
|
|
|
(1,406
|
)
|
|
|
4
|
|
|
|
(1,410
|
)
|
|
|
(1,579
|
)
|
|
|
(402
|
)
|
|
|
(1,177
|
)
|
Revolving note payable
|
|
|
(26
|
)
|
|
|
(95
|
)
|
|
|
69
|
|
|
|
288
|
|
|
|
351
|
|
|
|
(63
|
)
|
Term note payable
|
|
|
(743
|
)
|
|
|
(158
|
)
|
|
|
(585
|
)
|
|
|
1,459
|
|
|
|
1,922
|
|
|
|
(463
|
)
|
Subordinated note payable
|
|
|
(122
|
)
|
|
|
190
|
|
|
|
(312
|
)
|
|
|
707
|
|
|
|
707
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities
|
|
$
|
(23,058
|
)
|
|
$
|
2,650
|
|
|
$
|
(25,708
|
)
|
|
$
|
(10,542
|
)
|
|
$
|
16,782
|
|
|
$
|
(27,324
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest
|
|
$
|
(16,716
|
)
|
|
$
|
(4,531
|
)
|
|
$
|
(12,185
|
)
|
|
$
|
3,343
|
|
|
$
|
10,068
|
|
|
$
|
(6,725
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
Condition
Balance Sheet. Total assets decreased
$134.7 million, or 3.8%, during 2009 compared to year end
2008, mainly as a result of the decline in loans, the deferred
tax asset valuation allowance, and the liquidation of bank-owned
life insurance offset in part by increases in cash and cash
equivalents. Cash and cash equivalents increased
$379.0 million at December 31, 2009 compared to
December 31, 2008, as management continued to improve the
liquidity position. Loans decreased by $189.4 million, or
7.5%, during 2009 compared to year end 2008, partly due to an
increase in charge-offs of $29.8 million and stricter
underwriting standards decreasing the number of new
originations. The $85.8 million investment in bank owned
life insurance was liquidated during the second quarter of 2009
in order to reduce the Companys investment risk and the
risk-weighted assets. During 2009, the Company established a
valuation allowance of $119.8 million against is existing
net deferred tax assets. Deposits increased by
$157.3 million, or 6.5% mainly as a result of successful
certificate of deposit promotions and new distribution channels.
Goodwill decreased by $14.0 million to $64.9 million
due to an impairment charge.
Asset Quality. The downturn in the commercial
and residential real estate markets continued to have a material
negative impact on the Companys loan portfolio, resulting
in a significant deterioration in credit quality and an increase
in nonaccrual loans, loan losses and the allowance for loan
losses. Nonaccrual loans increased to 11.80% of total loans at
December 31, 2009 from 2.43% at December 31, 2008.
Foreclosed properties increased from $12.0 million at year
end 2008 to $26.9 million at December 31, 2009, mainly
due to the foreclosure action on five large loan relationships.
Loan delinquencies of
30-89 days
were 2.71% of loans at December 31, 2009, up from 1.03% at
December 31, 2008, due to the continued deterioration of
economic conditions. Nonperforming assets were 9.09% of total
assets at December 31, 2009, up from 2.36% at
December 31, 2008, as a result of the increase in
nonaccrual loans and foreclosed properties. The allowance for
loan losses was $128.8 million, or 5.55% of total loans, as
of December 31, 2009, compared to $44.4 million, or
1.77% of total loans, at December 31, 2008. The provision
for loan losses was $167.7 million for 2009, and net
charge-offs were $83.3 million during the year. The
allowance for loan losses to nonaccrual loans ratio was 47.04%
at December 31, 2009 and 72.72% at December 31, 2008.
78
Loans
The following table sets forth the composition of the
Companys loan portfolio as of the indicated dates.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009(1)
|
|
|
2008(1)
|
|
|
2007(1)
|
|
|
2006(2)
|
|
|
2005(2)
|
|
|
|
(In thousands)
|
|
|
Commercial
|
|
$
|
972,090
|
|
|
$
|
1,090,078
|
|
|
$
|
1,079,631
|
|
|
$
|
376,944
|
|
|
$
|
201,284
|
|
Construction
|
|
|
293,215
|
|
|
|
366,178
|
|
|
|
464,583
|
|
|
|
424,181
|
|
|
|
358,785
|
|
Commercial real estate
|
|
|
725,814
|
|
|
|
729,729
|
|
|
|
627,928
|
|
|
|
761,742
|
|
|
|
496,819
|
|
Home equity
|
|
|
219,183
|
|
|
|
194,673
|
|
|
|
142,158
|
|
|
|
147,366
|
|
|
|
115,429
|
|
Other consumer
|
|
|
5,454
|
|
|
|
6,332
|
|
|
|
10,689
|
|
|
|
9,373
|
|
|
|
4,273
|
|
Residential mortgage
|
|
|
105,147
|
|
|
|
123,161
|
|
|
|
149,703
|
|
|
|
227,762
|
|
|
|
174,184
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans, gross
|
|
|
2,320,903
|
|
|
|
2,510,151
|
|
|
|
2,474,692
|
|
|
|
1,947,368
|
|
|
|
1,350,774
|
|
Net deferred fees
|
|
|
(584
|
)
|
|
|
(392
|
)
|
|
|
(365
|
)
|
|
|
(552
|
)
|
|
|
(778
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
|
2,320,319
|
|
|
|
2,509,759
|
|
|
|
2,474,327
|
|
|
|
1,946,816
|
|
|
|
1,349,996
|
|
Allowance for loan losses
|
|
|
(128,800
|
)
|
|
|
(44,432
|
)
|
|
|
(26,748
|
)
|
|
|
(23,229
|
)
|
|
|
(17,760
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loans
|
|
$
|
2,191,519
|
|
|
$
|
2,465,327
|
|
|
$
|
2,447,579
|
|
|
$
|
1,923,587
|
|
|
$
|
1,332,236
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans held for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer real estate
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
2,672
|
|
|
$
|
1,912
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Source of repayment classification. |
|
(2) |
|
Collateral-based classification. |
During the fourth quarter of 2007, the Company revised its
classification of commercial loans and commercial real estate
loans, changing its prior practice of classifying as commercial
real estate loans all loans to a business that included real
estate as collateral (collateral-based
classification). The classification of construction, home
equity, and residential mortgages were also reviewed. The new
method of presentation (source of repayment
classification) recognizes that loans to owner-occupied
businesses engaged in manufacturing, sales
and/or
services are commercial loans, regardless of whether real estate
is taken as collateral. These loans generally have a lower risk
profile than traditional commercial real estate loans. They are
primarily dependent on the borrowers business-generated
cash flows for repayment, not on the conversion of real estate
that may be pledged as collateral. Loans related to rental
income producing properties and properties intended to be sold
continue to be classified as commercial real estate loans.
Completing this change in methodology involved a
loan-by-loan
review of the Companys commercial and commercial real
estate loans. The new presentation methodology was implemented
only as of December 31, 2007 and prospectively, as it is
impracticable to apply it to prior years data.
Total loans decreased by $189.4 million at
December 31, 2009 from year end 2008. The Company expects
to see continued portfolio declines in the near term due to its
emphasis on underwriting and pricing discipline begun in the
second quarter of 2009.
79
Loan
Maturities
The following table sets forth the remaining maturities, based
upon contractual dates, for selected loan categories (source of
repayment classification) as of December 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One Year
|
|
|
1-5 Years
|
|
|
Over 5 Years
|
|
|
|
|
|
|
Or Less
|
|
|
Fixed
|
|
|
Variable
|
|
|
Fixed
|
|
|
Variable
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
Commercial
|
|
$
|
433,429
|
|
|
$
|
424,941
|
|
|
$
|
43,250
|
|
|
$
|
55,777
|
|
|
$
|
14,693
|
|
|
$
|
972,090
|
|
Construction
|
|
|
247,664
|
|
|
|
4,355
|
|
|
|
40,449
|
|
|
|
|
|
|
|
747
|
|
|
|
293,215
|
|
Commercial real estate
|
|
|
300,343
|
|
|
|
347,741
|
|
|
|
69,438
|
|
|
|
8,292
|
|
|
|
|
|
|
|
725,814
|
|
Home equity
|
|
|
16,912
|
|
|
|
13,360
|
|
|
|
104,059
|
|
|
|
199
|
|
|
|
84,653
|
|
|
|
219,183
|
|
Other consumer
|
|
|
3,600
|
|
|
|
1,673
|
|
|
|
181
|
|
|
|
|
|
|
|
|
|
|
|
5,454
|
|
Residential mortgage
|
|
|
8,341
|
|
|
|
19,111
|
|
|
|
2,679
|
|
|
|
35,508
|
|
|
|
39,508
|
|
|
|
105,147
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans, gross
|
|
|
1,010,289
|
|
|
|
811,181
|
|
|
|
260,056
|
|
|
|
99,776
|
|
|
|
139,601
|
|
|
|
2,320,903
|
|
Net deferred fees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(584
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
$
|
1,010,289
|
|
|
$
|
811,181
|
|
|
$
|
260,056
|
|
|
$
|
99,776
|
|
|
$
|
139,601
|
|
|
$
|
2,320,319
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonaccrual
Loans and Nonperforming Assets
The accrual of interest on loans is discontinued at the time a
loan is 90 days past due unless the credit is well-secured
and in process of collection. Past due status is based on
contractual terms of the loan. Loans are placed on nonaccrual or
charged off at an earlier date if collection of principal or
interest is considered doubtful. All interest accrued but not
collected for loans that are placed on nonaccrual or charged off
is reversed against interest income. The interest on these loans
is accounted for on the cash-basis or cost-recovery method,
until qualifying for return to accrual. A loan is returned to
accrual status when all the principal and interest amounts
contractually due are current and future payments are reasonably
assured.
Under the authoritative guidance for loan impairments (ASC
310-10-35),
the Company currently defines loans that are individually
evaluated for impairment to include all loans over $300,000
where the internal credit rating is at or below a predetermined
classification. All other smaller balance loans with similar
attributes are evaluated for impairment in total.
The classification of a loan as impaired or nonaccrual does not
necessarily indicate that the principal is uncollectible, in
whole or in part. Subject to the de minimus level noted
above, the Company makes a determination as to the
collectibility on a
case-by-case
basis based upon the specific facts of each situation. The
Company considers both the adequacy of the collateral and the
other resources of the borrower in determining the steps to be
taken to collect impaired or nonaccrual loans. Alternatives that
are typically considered to collect impaired or nonaccrual loans
are foreclosure, collection under guarantees, loan
restructuring, or judicial collection actions.
Loans that are considered to be impaired are reduced to the
present value of expected future cash flows or to the fair value
of the related collateral, adjusted for selling and other
discounts, by allocating a portion of the allowance to such
loans. If these allocations require an increase to be made to
the allowance for loan losses, such increases are included in
the provision for loan losses charged to expense.
80
The following table sets forth information on the Companys
nonaccrual loans and nonperforming assets as of the indicated
dates.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(Dollars in thousands)
|
|
|
Impaired and other loans 90 days past due and accruing
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
34
|
|
|
$
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonaccrual loans
|
|
$
|
273,823
|
|
|
$
|
61,104
|
|
|
$
|
49,173
|
|
|
$
|
42,826
|
|
|
$
|
7,905
|
|
Troubled-debt restructured loans accruing
|
|
|
11,635
|
|
|
|
11,006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming loans
|
|
|
285,458
|
|
|
|
72,110
|
|
|
|
49,173
|
|
|
|
42,826
|
|
|
|
7,905
|
|
Foreclosed properties
|
|
|
26,917
|
|
|
|
12,018
|
|
|
|
2,220
|
|
|
|
2,640
|
|
|
|
11,154
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming assets
|
|
$
|
312,375
|
|
|
$
|
84,128
|
|
|
$
|
51,393
|
|
|
$
|
45,466
|
|
|
$
|
19,059
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonaccrual loans to loans
|
|
|
11.80
|
%
|
|
|
2.43
|
%
|
|
|
1.99
|
%
|
|
|
2.20
|
%
|
|
|
0.59
|
%
|
Nonperforming assets to loans and foreclosed properties
|
|
|
13.31
|
|
|
|
3.34
|
|
|
|
2.08
|
|
|
|
2.33
|
|
|
|
1.40
|
|
Nonperforming assets to assets
|
|
|
9.09
|
|
|
|
2.36
|
|
|
|
1.39
|
|
|
|
1.55
|
|
|
|
0.83
|
|
Nonaccrual loans increased $212.7 million to
$273.8 million at December 31, 2009 from
$61.1 million at December 31, 2008. This increase in
nonaccrual loans is net of $85.6 million of loans
charged-off during the year and reflects the continued
deterioration of economic conditions. Interest payments on
impaired loans are generally applied to principal, unless the
loan principal is considered to be fully collectible, in which
case interest is recognized on a cash basis. During 2009, 2008,
and 2007, the Company recognized interest income on impaired
loans of $693,000, $836,000, and $1.4 million,
respectively. The interest income that would have been recorded
in 2009 if the nonaccrual loans had been current in accordance
with their original terms was approximately $8.5 million.
The following table sets forth information on the Companys
nonaccrual loans as of the indicated dates.
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in thousands)
|
|
|
Nonaccrual loans:
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
$
|
20,719
|
|
|
$
|
3,559
|
|
Commercial real estate non-owner occupied
|
|
|
110,504
|
|
|
|
10,310
|
|
Commercial real estate owner occupied
|
|
|
19,573
|
|
|
|
14,244
|
|
Construction
|
|
|
73,124
|
|
|
|
20,726
|
|
Vacant land
|
|
|
37,021
|
|
|
|
6,550
|
|
|
|
|
|
|
|
|
|
|
Total commercial and commercial real estate
|
|
|
260,941
|
|
|
|
55,389
|
|
Other consumer
|
|
|
12,588
|
|
|
|
5,315
|
|
Home equity
|
|
|
294
|
|
|
|
400
|
|
|
|
|
|
|
|
|
|
|
Total consumer
|
|
|
12,883
|
|
|
|
5,715
|
|
|
|
|
|
|
|
|
|
|
Total nonaccrual loans
|
|
$
|
273,823
|
|
|
$
|
61,104
|
|
|
|
|
|
|
|
|
|
|
Nonaccrual commercial and industrial loans increased by
$17.2 million from December 31, 2008 to
December 31, 2009 (net of $17.9 million gross
charge-offs). The largest increase came from a $9.8 million
loan relationship secured by subordinated loan or equity
positions in real estate. The Company has $4.0 million in a
specific loan loss reserve for this loan as of December 31,
2009. The Companys total credit exposure to this customer
is $9.8 million.
81
Nonaccrual commercial real estate (owner and non-owner
occupied), construction, and vacant land loans increased by
$188.4 million from December 31, 2008 to
December 31, 2009, due in large part to the following
relationships:
|
|
|
|
|
a $15.9 million loan relationship related to a mobile home
park in Michigan. As of December 31, 2009, the Company has
$10.5 million in a specific loan loss reserve based upon
estimated collateral values. The Companys total credit
exposure to this customer is $15.9 million;
|
|
|
|
an $11.6 million loan relationship (net of
$4.7 million charge-offs in December 2009) secured by
vacant land. As of December 31, 2009, the Company has
$4.0 million in a specific loan loss reserve based upon
estimated collateral values. The Companys total credit
exposure to this customer is $11.8 million;
|
|
|
|
a $9.2 million loan relationship (net of $2.3 million
charge-offs in October 2009) that consists of several loans
for various commercial properties in Cook County, Illinois.
Third party real estate management and marketing firms have been
engaged by the borrower. The management company is focusing on
stabilizing buildings, renewing leases and seeking new tenants.
Collateral consists of five office buildings, a single family
home, and a residential condominium. The properties securing the
loans have experienced increased vacancies and resulting
decreases in operating income to provide sufficient cash flow to
meet contractual loan payments. The guarantor has limited
liquidity. The Company has $0.6 million in a specific loan
loss reserve for this loan as of December 31, 2009. The
Companys total credit exposure to this customer is
$10.5 million;
|
|
|
|
a $9.0 million loan relationship secured by vacant lots,
rented and vacant single family homes, apartment buildings, and
an incomplete condominium project. As of December 31, 2009,
the Company has $2.1 million in a specific loan loss
reserve based upon estimated collateral values. The
Companys total credit exposure to this customer is
$9.3 million;
|
|
|
|
an $8.8 million loan relationship secured by first real
estate mortgages on various commercial real estate properties in
Chicago and Indiana. As of December 31, 2009, the Company
has $0.4 million in a specific loan loss reserve based upon
estimated collateral values. The Companys total credit
exposure to this customer is $8.8 million;
|
|
|
|
an $8.5 million loan relationship related to several
construction projects in and near Lake County, Illinois. As of
December 31, 2009, the Company has $3.3 million in a
specific loan loss reserve based upon estimated collateral
values. The Companys total credit exposure to this
customer is $11.8 million;
|
|
|
|
an $8.3 million loan relationship secured by a completed
condominium project in a western suburb of Chicago, IL with 22
residential condominiums and four commercial spaces. As of
December 31, 2009, the Company has $2.6 million in a
specific loan loss reserve based upon estimated collateral
values. The Companys total credit exposure to this
customer is $8.5 million;
|
|
|
|
an $8.0 million loan relationship secured by 38 residential
condominiums in three projects, three commercial condominiums in
a single building and two residential condominiums. As of
December 31, 2009, the Company has $0.3 million in a
specific loan loss reserve based upon estimated collateral
values. The Companys total credit exposure to this
customer is $8.4 million;
|
|
|
|
a $7.9 million loan relationship (net of $3.2 million
charge-offs in the fourth quarter of 2009) with collateral
located in a western suburb of Chicago, consisting of improved
lots on 25 acres which will consist of 52 single family
homes. The property value has declined and only six lots have
been sold. The guarantors have limited liquidity and net worth
and continue efforts to raise equity to fund the real estate
investment. The Company has $3.0 million in a specific loan
loss reserve for this loan relationship as of December 31,
2009, based upon estimated collateral values. The Companys
total credit exposure to this customer is $8.2 million;
|
|
|
|
a $7.6 million loan relationship comprised of land
acquisition and development for commercial lots. The Company has
$3.6 million in a specific loan loss reserve for this loan
relationship as of December 31, 2009, based upon estimated
collateral values. The Companys total credit exposure to
this customer is $8.5 million;
|
82
|
|
|
|
|
a $5.1 million loan relationship ($2.5 million
commercial real estate, $1.8 million vacant land, and
$0.8 million commercial & industrial) related to
multi-unit
apartment buildings. The borrowers are currently attempting to
sell the properties. The Company has $1.6 million in a
specific loan loss reserve for this loan relationship as of
December 31, 2009, based upon estimated collateral values.
The Companys total credit exposure to this customer is
$5.6 million;
|
|
|
|
a $4.9 million loan relationship to a residential
homebuilder originated in 2003 for a commercial property in a
western suburb of Chicago which has been stalled due to on-going
litigation with the local municipality. The Company has
$1.5 million in a specific loan loss reserve for this loan
relationship as of December 31, 2009, based upon estimated
collateral values. The Companys total credit exposure to
this customer is $5.7 million;
|
|
|
|
a $4.6 million loan relationship to a realtor in west
suburban Chicago. Collateral consists of two office buildings.
No specific loan loss reserve was needed based upon estimated
collateral values. The Companys total credit exposure to
this customer is $4.6 million;
|
|
|
|
a $4.5 million loan relationship (net of $1.0 million
charge-off in November 2009), with collateral located in Indiana
consisting of a three building retail development. The Company
has $0.3 million in a specific loan loss reserve for this
loan relationship as of December 31, 2009, based upon
estimated collateral values. The Companys total credit
exposure to this customer is $4.5 million;
|
|
|
|
a $4.1 million loan relationship (net of $1.0 million
charge-off in December 2009), secured by a vacant auto
dealership and single family home. No specific loan loss reserve
was needed based upon estimated collateral values. The
Companys total credit exposure to this customer is
$4.6 million;
|
|
|
|
a $4.0 million loan relationship ($2.8 million
construction and $1.2 million non-owner occupied real
estate) secured with an 18 unit residential project and a
six unit residential project. The Company has $1.8 million
in a specific loan loss reserve for this loan relationship as of
December 31, 2009, based upon estimated collateral values.
The Companys total credit exposure to this customer is
$4.1 million;
|
|
|
|
a $4.0 million loan relationship, of which
$2.5 million has been charged off, secured with a project
located in Cook County experiencing slow sales. The properties
securing the loan relationship have not sold with the borrower
now leasing properties at a level that is not sufficient to meet
contractual loan payments. There are multiple guarantors who
have limited liquidity. The Company has $1.4 million in a
specific loan loss reserve for this loan relationship as of
December 31, 2009, based upon estimated collateral values.
The Companys total credit exposure to this customer is
$4.0 million;
|
|
|
|
a $3.7 million loan relationship (net of $2.4 million
charge-offs in the fourth quarter of 2009) secured by
retail strip center and various land parcels. Borrower is
currently trying to sell or refinance all of the collateral. The
Company has $0.7 million in a specific loan loss reserve
for this loan relationship as of December 31, 2009, based
upon estimated collateral values. The Companys total
credit exposure to this customer is $3.7 million;
|
|
|
|
a $3.5 million loan relationship (net of $1.6 million
charge-offs in December 2009) secured by four models, five
speculative homes, one townhome, and 41 vacant lots. The Company
has $1.0 million in a specific loan loss reserve for this
loan relationship as of December 31, 2009, based upon
estimated collateral values. The Companys total credit
exposure to this customer is $4.8 million;
|
|
|
|
a $3.4 million loan relationship on an acquisition and
development loan in a southwestern suburb of Chicago, IL. The
Company has $2.2 million in a specific loan loss reserve
for this loan relationship as of December 31, 2009, based
upon estimated collateral values. The Companys total
credit exposure to this customer is $3.4 million;
|
|
|
|
a $3.4 million loan relationship secured by a six unit
residential condominium building with ground level retail and
lower level parking located in Chicago, IL. The Company has
$2.1 million in a specific loan loss reserve for this loan
relationship as of December 31, 2009, based upon estimated
collateral values. The Companys total credit exposure to
this customer is $3.5 million;
|
83
|
|
|
|
|
a $3.4 million loan relationship secured by a high end
single family speculative homes in a western suburb of Chicago,
IL. The Company has $0.3 million in a specific loan loss
reserve for this loan as of December 31, 2009, based upon
estimated collateral values. The Companys total credit
exposure to this customer is $3.4 million;
|
|
|
|
a $3.3 million loan relationship secured by residential
condominiums. The Company has $0.3 million in a specific
loan loss reserve for this loan relationship as of
December 31, 2009, based upon estimated collateral values.
The Companys total credit exposure to this customer is
$3.3 million;
|
|
|
|
a $3.0 million loan relationship secured by real estate
collateral to a borrower which also had a business loan of
$1.3 million that was fully charged-off in November 2009.
The Company has $1.2 million in a specific loan loss
reserve for this loan relationship as of December 31, 2009,
based upon estimated collateral values. The Companys total
credit exposure to this customer is $3.0 million;
|
|
|
|
a $3.0 million loan relationship (net of $1.2 million
charge-offs in December 2009) secured by two single family
residences, a four flat, and a vacant lot. Foreclosures have
been filed on all four properties. No specific loan loss reserve
was needed based upon estimated collateral values. The
Companys total credit exposure to this customer is
$3.0 million;
|
|
|
|
a $3.0 million loan relationship ($2.3 owner occupied
commercial real estate and $674,000 commercial and industrial).
The guarantor has passed away. Foreclosure proceedings are
continuing against underlying collateral of commercial property
located in Chicago, IL. No specific loan loss reserve was needed
based upon estimated collateral value. The Companys total
credit exposure to this customer is $3.0 million;
|
|
|
|
a $3.0 million loan relationship secured by real property
in a western suburb of Chicago, IL that is currently vacant. The
Company has $1.1 million in a loss specific reserve for
this loan relationship as of December 31, 2009, based upon
estimated collateral values. The Companys total credit
exposure to this customer is $3.0 million;
|
|
|
|
a $2.5 million loan relationship secured by three vacant
lots , a commercial property, and an office/warehouse property
in western suburbs of Chicago, IL. No specific loan loss reserve
was needed based upon estimated collateral values. The
Companys total credit exposure to this customer is
$2.5 million; and
|
|
|
|
a $2.2 million loan relationship (net of $3.1 million
charge-offs in December 2009) secured with property where the
development has stalled and the guarantor is considering
alternative strategies to sell or liquidate the assets. The
guarantor is currently providing contractual payments; however,
in the future their liquidity position will no longer enable
them to continue to meet loan repayment terms. The Company has
$0.6 million in a specific loan loss reserve for this loan
relationship as of December 31, 2009, based upon estimated
collateral values. The Companys total credit exposure to
this customer is $2.2 million.
|
As of December 31, 2009, there was $9.7 million in
nonaccrual troubled-debt restructurings to two borrowers and
$11.6 million in accruing troubled-debt restructurings to
five borrowers. The Company had $11.0 million in
troubled-debt restructuring to one borrower as of
December 31, 2008 which was placed on nonaccrual status
during the third quarter of 2009. In order to improve the
collectibility of the troubled-debt restructured loans, the
Company restructured the terms of the loans by lifting a
forbearance agreement, lowering interest rates, or changing
payment terms. No additional commitments were outstanding on the
troubled-debt restructured loans as of December 31, 2009
and 2008. No specific allowance was allocated to the accruing
troubled-debt restructured loans at December 31, 2009 and
2008. As of December 31, 2009, based upon estimated
collateral values the Company held $667,000 in specific loan
loss reserves for the two nonaccrual troubled-debt
restructurings.
Foreclosed properties were $26.9 million at
December 31, 2009, an increase of $14.9 million
compared to December 31, 2008 mainly due to five new
properties: $5.1 million related to multiple properties
including vacant land parcels and an office building, $2.2
million incomplete single family residence, $1.5 million
related to vacant land, $1.4 million related to a single
family residence, and $1.2 million related to a commercial
restaurant property. Foreclosed properties were written down to
the lower of cost or current fair value and a corresponding
charge of $4.9 million was recorded in foreclosed
properties expense in 2009.
84
In addition to the loans summarized above, on December 31,
2009, the Company had $608.7 million of loans currently
performing that have been internally assigned higher credit risk
ratings. The higher risk ratings are primarily due to internally
identified specific or collective credit characteristics
including decreased capacity to repay loan obligations due to
adverse market conditions, a lack of borrower or
guarantors capital capacity and reduced collateral
valuations securing the loans as a secondary source of
repayment. These loans continue to accrue interest. Management
recognizes that a higher level of scrutiny of these loans is
prudent under the circumstances. Similarly rated loans were
$71.0 million as of December 31, 2008 and
$3.5 million as of December 31, 2007.
Analysis
of Allowance for Loan Losses
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 and personal guarantees. The allowance for loan
losses represents the Companys estimate of the amount
deemed necessary to provide for probable losses existing 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. Each
loan officer grades his or her individual commercial credits and
the Companys loan review personnel independently review
the officers grades.
In the event that the loan is downgraded during this review, the
loan is included in the allowance analysis at the lower grade.
On a monthly basis, management of the Bank meets to review the
adequacy of the allowance for loan losses.
Estimating the amount of the allowance for loan losses requires
significant judgment and the use of estimates related to the
amount and timing of expected future cash flows on impaired
loans, estimated losses on pools of homogeneous loans based on
historical loss experience, and consideration of current
economic trends and conditions, all of which may be susceptible
to significant change. The loan portfolio also represents the
largest asset type on the consolidated balance sheet. Loan
losses are charged off against the allowance, while recoveries
of amounts previously charged off are credited to the allowance.
A provision for loan losses is charged to operations based on
managements periodic evaluation of the factors previously
mentioned, as well as other pertinent factors.
The Companys methodology for determining the allowance for
loan losses represents an estimation pursuant to the
authoritative guidance for contingencies (ASC 450) and loan
impairments (ASC
310-10-35).
The allowance reflects expected losses resulting from analyses
developed through specific credit allocations for individual
loans and historical loss experience for each loan category. The
specific credit allocations are based on regular analyses of all
loans over $300,000 where the internal credit rating is at or
below a predetermined classification. These analyses involve a
high degree of judgment in estimating the amount of loss
associated with specific loans, including estimating the amount
and timing of future cash flows and collateral values. The
allowance for loan losses also includes consideration of
concentrations and changes in portfolio mix and volume and other
qualitative factors.
During the third quarter of 2009, steps were taken to improve
the credit review function. The Company strengthened its
portfolio review process, tracking of credit trends and
documentation of exceptions. The Company devoted additional
resources to its loan workout unit and engaged an independent
firm to actively manage problem loans.
With the additional resources devoted to the loan workout area,
management has sharpened its understanding of the factors
impacting the primary and secondary sources of repayment and
collateral support, and has used this information in the risk
ratings and other classifications utilized in the computation of
the allowance for loan losses. In determining loan specific
reserves in the allowance for loan losses, the Company generally
assigns average discounts of
20-35% to
independent appraisal values, dependent upon loan and collateral
type. These discount rates have been adjusted periodically based
upon changes in the Chicago commercial real estate market. As a
result, although the Companys allowance for loan losses to
nonperforming loans ratio dropped to 47.04% as of
December 31, 2009, from 72.72% at December 31, 2008,
specific reserves to loans analyzed for possible impairment
increased to 26.48% from 7.00% as of December 31, 2008.
During 2009, the Company recorded a provision for loan losses of
$167.7 million and recognized net loan charge-offs totaling
$83.3 million. Nonaccrual loans increased
$212.7 million compared to the prior year, to
85
$273.8 million, or 11.8% of loans at December 31,
2009. As nonaccrual loans have increased throughout 2009, the
provision for loan losses was double net charge-offs for the
year reflecting this deterioration and the ratio of allowance
for loan losses to loans increased significantly to 5.55% at
December 31, 2009, from 1.77% at December 31, 2008.
Management computes and provides to the Board of Directors
various allowance for loan loss and other credit quality ratios
as one tool to assist in comparing and understanding changes
from previous periods and to the relative performance of its
peers. These reviews are performed to better understand changes
in credit quality over time and to determine the reasonableness
of the level of the allowance for loan losses. Although these
ratios provide useful benchmarks, this analysis is just one tool
used to determine that the level of the allowance for loan
losses is adequate.
There are many factors affecting the allowance for loan losses;
some are quantitative while others require qualitative judgment.
The process for determining the allowance (which management
believes adequately considers all of the factors which
potentially result in credit losses) includes subjective
elements and, therefore, the allowance may be susceptible to
significant change. To the extent actual outcomes differ from
management estimates, additional provisions for loan losses
could be required that could adversely affect the Companys
earnings or financial position in future periods.
The following table sets forth loans charged off and recovered
by type of loan and an analysis of the allowance for loan losses
for the indicated periods.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(Dollars in thousands)
|
|
|
Average total loans
|
|
$
|
2,507,063
|
|
|
$
|
2,483,070
|
|
|
$
|
2,088,696
|
|
|
$
|
1,658,920
|
|
|
$
|
1,210,873
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans at end of year
|
|
$
|
2,320,319
|
|
|
$
|
2,509,759
|
|
|
$
|
2,474,327
|
|
|
$
|
1,946,816
|
|
|
$
|
1,349,996
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonaccrual loans
|
|
$
|
273,823
|
|
|
$
|
61,104
|
|
|
$
|
49,173
|
|
|
$
|
42,826
|
|
|
$
|
7,905
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses at beginning of year
|
|
$
|
44,432
|
|
|
$
|
26,748
|
|
|
$
|
23,229
|
|
|
$
|
17,760
|
|
|
$
|
16,217
|
|
Addition resulting from acquisition
|
|
|
|
|
|
|
|
|
|
|
2,767
|
|
|
|
3,244
|
|
|
|
|
|
Charge-offs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial loans
|
|
|
28,484
|
|
|
|
11,475
|
|
|
|
5,092
|
|
|
|
5,912
|
|
|
|
1,668
|
|
Consumer real estate loans(1)
|
|
|
5,950
|
|
|
|
3,846
|
|
|
|
458
|
|
|
|
360
|
|
|
|
15
|
|
Commercial real estate loans(1)
|
|
|
51,084
|
|
|
|
40,389
|
|
|
|
336
|
|
|
|
4,401
|
|
|
|
772
|
|
Agricultural loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer installment loans
|
|
|
84
|
|
|
|
139
|
|
|
|
89
|
|
|
|
136
|
|
|
|
64
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total charge-offs
|
|
|
85,602
|
|
|
|
55,849
|
|
|
|
5,975
|
|
|
|
10,809
|
|
|
|
2,519
|
|
Recoveries:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial loans
|
|
|
1,238
|
|
|
|
1,149
|
|
|
|
885
|
|
|
|
616
|
|
|
|
1,448
|
|
Consumer real estate loans(1)
|
|
|
138
|
|
|
|
91
|
|
|
|
9
|
|
|
|
4
|
|
|
|
5
|
|
Commercial real estate loans(1)
|
|
|
881
|
|
|
|
508
|
|
|
|
927
|
|
|
|
339
|
|
|
|
6
|
|
Agricultural loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer installment loans
|
|
|
13
|
|
|
|
20
|
|
|
|
15
|
|
|
|
25
|
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total recoveries
|
|
|
2,270
|
|
|
|
1,768
|
|
|
|
1,836
|
|
|
|
984
|
|
|
|
1,473
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs
|
|
|
83,332
|
|
|
|
54,081
|
|
|
|
4,139
|
|
|
|
9,825
|
|
|
|
1,046
|
|
Provision for loan losses
|
|
|
167,700
|
|
|
|
71,765
|
|
|
|
4,891
|
|
|
|
12,050
|
|
|
|
2,589
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses at end of the year
|
|
$
|
128,800
|
|
|
$
|
44,432
|
|
|
$
|
26,748
|
|
|
$
|
23,229
|
|
|
$
|
17,760
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs to average total loans
|
|
|
3.32
|
%
|
|
|
2.18
|
%
|
|
|
0.20
|
%
|
|
|
0.59
|
%
|
|
|
0.09
|
%
|
Allowance for loan losses to total loans at end of year
|
|
|
5.55
|
|
|
|
1.77
|
|
|
|
1.08
|
|
|
|
1.19
|
|
|
|
1.32
|
|
Allowance for loan losses to nonaccrual loans
|
|
|
0.47
|
x
|
|
|
0.73
|
x
|
|
|
0.54
|
x
|
|
|
0.54
|
x
|
|
|
2.25x
|
|
|
|
|
(1) |
|
Includes construction loans. |
86
The provision for loan losses increased $95.9 million to
$167.7 million for the year ended December 31, 2009
from $71.8 million for the year ended December 31,
2008, reflecting managements updated assessments of
impaired loans, the elevated level of recent charge-offs,
migration of unimpaired loans into higher credit risk rating
categories, and the continued deterioration of economic
conditions. The increase in the provision for loan losses
related to updated assessments of impaired loans includes the
increased volume of impaired loans, above-standard discounts
applied to collateral values of certain loans individually
assessed for impairment, and increased charge-offs. The
allowance for loan losses was $128.8 million at
December 31, 2009 and $44.4 million at
December 31, 2008. Total recoveries on loans previously
charged off were $2.3 million and $1.8 million for the
years ended December 31, 2009 and 2008, respectively.
Net charge-offs increased $29.3 million to
$83.3 million, or 3.32% of average loans, in 2009 compared
to $54.1 million, or 2.18% of average loans in 2008.
Allowance for loan losses to nonaccrual loans ratio was 0.47x at
December 31, 2009 and 0.73x at December 31, 2008.
The following table sets forth the Companys allocation of
the allowance for loan losses by types of loans (collateral
based classification) as of the indicated dates.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
Loan
|
|
|
|
|
|
Loan
|
|
|
|
|
|
Loan
|
|
|
|
|
|
Loan
|
|
|
|
|
|
Loan
|
|
|
|
|
|
|
Category
|
|
|
|
|
|
Category
|
|
|
|
|
|
Category
|
|
|
|
|
|
Category
|
|
|
|
|
|
Category
|
|
|
|
|
|
|
To
|
|
|
|
|
|
To
|
|
|
|
|
|
To
|
|
|
|
|
|
To
|
|
|
|
|
|
To
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
Gross
|
|
|
|
|
|
Gross
|
|
|
|
|
|
Gross
|
|
|
|
|
|
Gross
|
|
|
|
Amount
|
|
|
Loans
|
|
|
Amount
|
|
|
Loans
|
|
|
Amount
|
|
|
Loans
|
|
|
Amount
|
|
|
Loans
|
|
|
Amount
|
|
|
Loans
|
|
|
|
(Dollars in thousands)
|
|
|
Commercial
|
|
$
|
13,944
|
|
|
|
19.42
|
%
|
|
$
|
8,829
|
|
|
|
20.80
|
%
|
|
$
|
6,369
|
|
|
|
21.52
|
%
|
|
$
|
6,156
|
|
|
|
19.87
|
%
|
|
$
|
7,727
|
|
|
|
14.54
|
%
|
Commercial real estate
|
|
|
89,728
|
|
|
|
66.12
|
|
|
|
24,518
|
|
|
|
65.79
|
|
|
|
19,336
|
|
|
|
65.15
|
|
|
|
16,166
|
|
|
|
65.35
|
|
|
|
7,807
|
|
|
|
69.24
|
|
Agricultural
|
|
|
42
|
|
|
|
0.26
|
|
|
|
171
|
|
|
|
0.29
|
|
|
|
2
|
|
|
|
0.20
|
|
|
|
3
|
|
|
|
0.13
|
|
|
|
3
|
|
|
|
0.15
|
|
Consumer real estate
|
|
|
12,398
|
|
|
|
13.97
|
|
|
|
6,258
|
|
|
|
12.67
|
|
|
|
603
|
|
|
|
12.64
|
|
|
|
352
|
|
|
|
14.10
|
|
|
|
864
|
|
|
|
15.76
|
|
Consumer installment
|
|
|
266
|
|
|
|
0.23
|
|
|
|
302
|
|
|
|
0.25
|
|
|
|
81
|
|
|
|
0.49
|
|
|
|
90
|
|
|
|
0.55
|
|
|
|
46
|
|
|
|
0.31
|
|
Unallocated
|
|
|
12,422
|
|
|
|
|
|
|
|
4,354
|
|
|
|
|
|
|
|
357
|
|
|
|
|
|
|
|
462
|
|
|
|
|
|
|
|
1,313
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total allowance for loan losses
|
|
$
|
128,800
|
|
|
|
100.00
|
%
|
|
$
|
44,432
|
|
|
|
100.00
|
%
|
|
$
|
26,748
|
|
|
|
100.00
|
%
|
|
$
|
23,229
|
|
|
|
100.00
|
%
|
|
$
|
17,760
|
|
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due to concerns about the collectibility of loan balances that
could grow due to letter of credit draw downs, the Company
increased the reserve for losses on unfunded commitments to
$2.2 million at December 31, 2009 from
$1.1 million at December 31, 2008.
The Company uses an internal asset classification system as a
means of reporting problem and potential problem assets. At each
scheduled Bank Board of Directors meeting, a watch list is
presented, showing significant loan relationships listed by
internal risk rating as Special Mention, Substandard, and
Doubtful. Set forth below is a discussion of each of these
classifications.
Special Mention: A special mention extension
of credit is defined as having potential weaknesses that deserve
managements close attention. If left uncorrected, these
potential weaknesses may, at some future date, result in the
deterioration of the repayment prospects for the credit or the
institutions credit position. Special mention credits are
not considered as part of the classified extensions of credit
category and do not expose an institution to sufficient risk to
warrant classification. These credits are currently protected
but are potentially weak.
Loans in this category have some identifiable problem but, in
managements opinion, offer no immediate risk of loss. An
extension of credit that is not delinquent also may be
identified as special mention. These loans are classified due to
Bank managements actions or the servicing of the loan. The
lending officer may be unable to properly supervise the credit
because of an inadequate loan or credit agreement. There may be
questions regarding the condition of
and/or
control over collateral. Economic or market conditions may
unfavorably affect the obligor in the future. A declining trend
in the obligors operations or an imbalanced position in
the balance sheet may exist, although it is not to the point
that repayment is jeopardized. Another example of a special
mention credit is one that has other deviations from prudent
lending practices.
87
If the Bank may have to consider relying on a secondary or
alternative source of repayment, then collection may not yet be
in jeopardy, but the loan may be considered special mention.
Other trends that indicate that the loan may deteriorate further
include such red flags as continuous overdrafts,
negative trends on a financial statement, such as a deficit net
worth, a delay in the receipt of financial statements, aging
accounts receivable, etc. These loans on a regular basis can be
30 days or more past due. Judgments, tax liens, delinquent
real estate taxes, cancellation of insurance policies and
exceptions to Bank policies are other red flags.
Substandard: A substandard extension of credit
is one inadequately protected by the current sound net worth and
paying capacity of the obligor or of the collateral pledged, if
any. Extensions of credit so classified must have a well-defined
weakness or weaknesses that jeopardize the liquidation of the
debt. They are characterized by the distinct possibility that
the Bank will sustain some loss if the deficiencies are not
corrected. In other words, there is more than a normal risk of
loss. Loss potential, while existing in the aggregate amount of
substandard credits, does not have to exist in individual
extensions of credit classified substandard.
The likelihood that a substandard loan will be paid from the
primary source of repayment may also be uncertain. Financial
deterioration is underway and very close attention is warranted
to insure that the loan is collected without a loss. The Bank
may be relying on a secondary source of repayment, such as
liquidating collateral, or collecting on guarantees. The
borrower cannot keep up with either the interest or principal
payments. If the Bank is forced into a subordinated or unsecured
position due to flaws in documentation, the loan may also be
substandard. If the loan must be restructured, or interest rate
concessions made, it should be classified as such. If the bank
is contemplating foreclosure or legal action, the credit is
likely substandard.
Doubtful: An extension of credit classified
doubtful has all the weaknesses inherent in one classified
substandard with the added characteristic that the weaknesses
make collection or liquidation in full, on the basis of
currently existing facts, conditions and values, highly
questionable and improbable. The possibility of loss is
extremely high; however, because of certain important and
reasonably specific pending factors that may work to the
advantage of and strengthen the credit, its classification as an
estimated loss is deferred until its more exact status may be
determined. Pending factors may include a proposed merger or
acquisition, liquidation proceedings, capital injection,
perfecting liens on additional collateral, or refinancing plans.
If the primary source of repayment is gone, and there is doubt
as to the quality of the secondary source, then the loan will be
considered doubtful. If a court suit is pending, and is the only
means of collection, a loan is generally doubtful. The loss
amount in this category is often undeterminable, and the loan is
classified doubtful until said loss can be determined.
The Companys determination as to the classification of its
assets and the amount of its valuation allowances is subject to
review by the Banks primary regulators in the course of
its regulatory examinations. The results of examination from
regulatory agencies are also considered. Although management
believes that adequate specific and general loan loss allowances
have been established, actual losses are dependent upon future
events and, as such, further additions to the level of specific
and general loan loss allowances may become necessary. The
Companys allowance for loan losses at December 31,
2009 is considered by management to be adequate.
Securities
The Company manages its securities portfolio to provide a source
of both liquidity and earnings. The investment policy is
developed in conjunction with established asset/liability
committee directives. The investment policy is reviewed by
senior management of the Company in terms of its objectives,
investment guidelines and consistency with overall Company
performance and risk management goals. The asset/liability
committee of the Board of Directors is responsible for reporting
and monitoring compliance with the investment policy. Reports
are provided to the asset/liability committee of the Board of
Directors and the Board of Directors of the Company on a regular
basis.
88
The following tables set forth the composition of the
Companys securities portfolio by major category as of the
indicated dates. The securities portfolio as of
December 31, 2009, 2008, and 2007 has been categorized as
either
available-for-sale
or
held-to-maturity
in accordance with the authoritative guidance for
investments debt and equity securities (ASC 320).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
|
Held-to-Maturity
|
|
|
Available-for-Sale
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
Amortized
|
|
|
Fair
|
|
|
Amortized
|
|
|
Fair
|
|
|
Amortized
|
|
|
Fair
|
|
|
Amortized
|
|
|
|
Cost
|
|
|
Value
|
|
|
Cost
|
|
|
Value
|
|
|
Cost
|
|
|
Value
|
|
|
Cost
|
|
|
|
(Dollars in thousands)
|
|
|
Obligations of the U.S. Treasury
|
|
$
|
|
|
|
$
|
|
|
|
$
|
310,954
|
|
|
$
|
310,947
|
|
|
$
|
310,954
|
|
|
$
|
310,947
|
|
|
|
52.7
|
%
|
Mortgage-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government agencies residential(1)
|
|
|
|
|
|
|
|
|
|
|
259,878
|
|
|
|
256,275
|
|
|
|
259,878
|
|
|
|
256,275
|
|
|
|
44.1
|
|
U.S. government-sponsored entities(2)
|
|
|
|
|
|
|
|
|
|
|
1,271
|
|
|
|
1,259
|
|
|
|
1,271
|
|
|
|
1,259
|
|
|
|
0.2
|
|
Equity securities of U.S. government-sponsored entities(3)
|
|
|
|
|
|
|
|
|
|
|
2,749
|
|
|
|
2,272
|
|
|
|
2,749
|
|
|
|
2,272
|
|
|
|
0.5
|
|
Corporate and other debt securities
|
|
|
|
|
|
|
|
|
|
|
14,920
|
|
|
|
10,721
|
|
|
|
14,920
|
|
|
|
10,721
|
|
|
|
2.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
|
|
|
$
|
|
|
|
$
|
589,772
|
|
|
$
|
581,474
|
|
|
$
|
589,772
|
|
|
$
|
581,474
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes obligations of the Government National Mortgage
Association (GNMA). |
|
(2) |
|
Includes obligations of the Federal Home Loan Mortgage
Corporation (FHLMC). |
|
(3) |
|
Includes issues from Federal National Mortgage Association
(FNMA) and FHLMC. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
|
Held-to-Maturity
|
|
|
Available-for-Sale
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
Amortized
|
|
|
Fair
|
|
|
Amortized
|
|
|
Fair
|
|
|
Amortized
|
|
|
Fair
|
|
|
Amortized
|
|
|
|
Cost
|
|
|
Value
|
|
|
Cost
|
|
|
Value
|
|
|
Cost
|
|
|
Value
|
|
|
Cost
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
Obligations of U.S. Treasury and U.S. government-sponsored
entities(1)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
263,483
|
|
|
$
|
265,435
|
|
|
$
|
263,483
|
|
|
$
|
265,435
|
|
|
|
40.3
|
%
|
Obligations of states and political subdivisions
|
|
|
1,251
|
|
|
|
1,263
|
|
|
|
57,309
|
|
|
|
56,664
|
|
|
|
58,560
|
|
|
|
57,927
|
|
|
|
9.0
|
|
Mortgage-backed securities(1)(2)
|
|
|
29,016
|
|
|
|
29,124
|
|
|
|
281,592
|
|
|
|
283,679
|
|
|
|
310,608
|
|
|
|
312,803
|
|
|
|
47.4
|
|
Equity securities(3)
|
|
|
|
|
|
|
|
|
|
|
2,749
|
|
|
|
930
|
|
|
|
2,749
|
|
|
|
930
|
|
|
|
0.4
|
|
Corporate and other debt securities
|
|
|
|
|
|
|
|
|
|
|
19,176
|
|
|
|
15,241
|
|
|
|
19,176
|
|
|
|
15,241
|
|
|
|
2.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
30,267
|
|
|
$
|
30,387
|
|
|
$
|
624,309
|
|
|
$
|
621,949
|
|
|
$
|
654,576
|
|
|
$
|
652,336
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes obligations of the FHLMC and FNMA. |
|
(2) |
|
Includes obligations of the GNMA. |
|
(3) |
|
Includes issues from the FNMA and FHLMC. |
89
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
|
Held-to-Maturity
|
|
|
Available-for-Sale
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
Amortized
|
|
|
Fair
|
|
|
Amortized
|
|
|
Fair
|
|
|
Amortized
|
|
|
Fair
|
|
|
Amortized
|
|
|
|
Cost
|
|
|
Value
|
|
|
Cost
|
|
|
Value
|
|
|
Cost
|
|
|
Value
|
|
|
Cost
|
|
|
|
(Dollars in thousands)
|
|
|
Obligations of U.S. Treasury and U.S. government-sponsored
entities(1)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
181,983
|
|
|
$
|
183,613
|
|
|
$
|
181,983
|
|
|
$
|
183,613
|
|
|
|
23.6
|
%
|
Obligations of states and political subdivisions
|
|
|
1,254
|
|
|
|
1,268
|
|
|
|
60,985
|
|
|
|
61,400
|
|
|
|
62,239
|
|
|
|
62,668
|
|
|
|
8.1
|
|
Mortgage-backed securities(1)(2)
|
|
|
36,347
|
|
|
|
35,644
|
|
|
|
383,633
|
|
|
|
379,040
|
|
|
|
419,980
|
|
|
|
414,684
|
|
|
|
54.4
|
|
Equity securities(3)
|
|
|
|
|
|
|
|
|
|
|
85,139
|
|
|
|
65,979
|
|
|
|
85,139
|
|
|
|
65,979
|
|
|
|
11.0
|
|
Corporate and other debt securities
|
|
|
|
|
|
|
|
|
|
|
22,095
|
|
|
|
20,849
|
|
|
|
22,095
|
|
|
|
20,849
|
|
|
|
2.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
37,601
|
|
|
$
|
36,912
|
|
|
$
|
733,835
|
|
|
$
|
710,881
|
|
|
$
|
771,436
|
|
|
$
|
747,793
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes obligations of the FHLMC and FNMA. |
|
(2) |
|
Includes obligations of the GNMA. |
|
(3) |
|
Includes issues from the FNMA and FHLMC. |
As of December 31, 2009, the Company held one security with
a book value exceeding 10% of stockholders equity other
than those of the U.S. government or government-sponsored
entities. This investment grade security was a collateralized
debt obligation issued by PreTSL XXVII, Ltd. with an amortized
cost of $10.8 million and fair value of $7.0 million
at December 31, 2009. The Company holds the highest tranche
of the issue, which entitles the Company to receive interest and
principal payments before other tranches. The underlying
securities for this senior tranche are trust preferred
securities issued mainly of depositary institution holding
companies and, to a lesser extent, insurance companies in
diverse geographic regions.
The total fair value of the securities portfolio was
$581.5 million as of December 31, 2009, or 98.6% of
amortized cost. The total fair value of the securities portfolio
was $652.3 million and $747.8 million as of
December 31, 2008 and 2007, respectively.
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 other comprehensive loss. At December 31, 2009,
unrealized losses on securities
available-for-sale
were $8.3 million compared to unrealized losses of
$2.4 million, or $1.4 million net of taxes, at
December 31, 2008. A deferred income tax adjustment to the
carrying value was not recorded as a result of the
Companys tax position at December 31, 2009.
During the second quarter of 2009, the Company repositioned its
securities portfolio to (i) lower capital requirements
associated with higher risk-weighted assets,
(ii) restructure expected cash flows, and (iii) reduce
credit risk. The Company sold $538.1 million of its
securities portfolio with an average yield of 3.94% and average
life of slightly over two years, including $27.7 million of
securities classified as
held-to-maturity.
The securities sold consisted of U.S. government-sponsored
entities debentures, mortgage-backed securities, and municipal
bonds. These securities were sold in the open market at a net
gain of $4.3 million; $117,000 of this gain was related to
securities classified as
held-to-maturity.
The Company reinvested the proceeds in lower yielding securities
with shorter terms, including U.S. Treasury bills and
Government National Mortgage Association mortgage-backed
securities.
Consistent with that repositioning program and the
Companys stated intent to sell certain securities, the
Company recognized a $740,000
other-than-temporary
impairment charge on June 30, 2009 on securities that were
identified as for sale under the program.
90
The Companys securities
available-for-sale
portfolio decreased $40.5 million, or 6.5%, in 2009
compared to 2008. Set forth below are other highlights of the
securities portfolio.
|
|
|
|
|
U.S. Treasury and obligations of
U.S. government-sponsored entities increased by
$45.5 million to $310.9 million, or 52.7% of the
portfolio in terms of amortized cost, at December 31, 2009
compared to $265.4 million at the end of 2008. At
December 31, 2009, the Companys holdings in this
category consisted of only U.S. Treasury bills with
maturities of less than four months.
|
|
|
|
U.S. government agency and government-sponsored entity
mortgage-backed securities decreased 9.2%, or
$26.1 million, from $283.7 million at
December 31, 2008 to $257.5 million at
December 31, 2009.
|
|
|
|
Equity securities increased $1.3 million to
$2.3 million at December 31, 2009 from
December 31, 2008 as a result of the increase in fair
market value.
|
|
|
|
Corporate and other debt securities decreased by
$4.5 million to $10.7 million at December 31,
2009 from $15.2 million at December 31, 2008 mainly as
a result of a sale transaction.
|
The securities portfolio does not contain any
sub-prime or
Alt-A mortgage-backed securities.
Certain
available-for-sale
securities were temporarily impaired at December 31, 2009.
The unrealized loss on
available-for-sale
securities is included in other comprehensive loss on the
consolidated balance sheets. Management has concluded that no
individual unrealized loss as of December 31, 2009
represents
other-than-temporary
impairment. The Company does not intend to sell nor would it be
required to sell the temporarily impaired securities before
recovering their amortized cost. See Note 7
Securities of the notes to the consolidated financial statements
for more details.
There were no trading securities held at December 31, 2009
or December 31, 2008. When acquired, the Company holds
trading securities and derivatives on a short-term basis based
on market and liquidity conditions.
Investment
Maturities and Yields
The following tables set forth the contractual or estimated
maturities of the components of the Companys
available-for-sale
securities portfolio as of December 31, 2009 in terms of
estimated fair values and the weighted average yields:
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual or Estimated Maturity
|
|
|
|
|
|
|
After One But
|
|
|
After Five But
|
|
|
|
|
|
|
|
|
|
Within One
|
|
|
Within
|
|
|
Within
|
|
|
After
|
|
|
|
|
|
|
Year
|
|
|
Five Years
|
|
|
Ten Years
|
|
|
Ten Years
|
|
|
Total
|
|
|
|
Amount
|
|
|
Yield
|
|
|
Amount
|
|
|
Yield
|
|
|
Amount
|
|
|
Yield
|
|
|
Amount
|
|
|
Yield
|
|
|
Amount
|
|
|
Yield
|
|
|
|
(Dollars in thousands)
|
|
|
Available- for-Sale-Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of U.S. Treasury
|
|
$
|
310,947
|
|
|
|
0.07
|
%
|
|
$
|
|
|
|
|
|
%
|
|
$
|
|
|
|
|
|
%
|
|
$
|
|
|
|
|
|
%
|
|
$
|
310,947
|
|
|
|
0.07
|
%
|
Mortgage-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government agencies residential(1)
|
|
|
4,206
|
|
|
|
0.76
|
|
|
|
168,476
|
|
|
|
2.68
|
|
|
|
83,593
|
|
|
|
3.80
|
|
|
|
|
|
|
|
|
|
|
|
256,275
|
|
|
|
3.02
|
|
U.S. government-sponsored entities(2)
|
|
|
1,259
|
|
|
|
3.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,259
|
|
|
|
3.01
|
|
Equity securities of U.S. government-sponsored entities(3)(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,272
|
|
|
|
|
|
|
|
2,272
|
|
|
|
|
|
Corporate and other debt securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,700
|
|
|
|
4.39
|
|
|
|
7,021
|
|
|
|
0.69
|
|
|
|
10,721
|
|
|
|
1.66
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
316,412
|
|
|
|
0.09
|
%
|
|
$
|
168,476
|
|
|
|
2.68
|
%
|
|
$
|
87,293
|
|
|
|
3.83
|
%
|
|
$
|
9,293
|
|
|
|
0.52
|
%
|
|
$
|
581,474
|
|
|
|
1.40
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes obligations of the GNMA. |
|
(2) |
|
Includes obligations of the FHLMC. |
91
|
|
|
(3) |
|
Includes issues from FNMA and FHLMC. |
|
(4) |
|
Equity securities, although they do not have a maturity date,
are included in the after ten years column. |
Cash
Surrender Value of Life Insurance
During 2009, the Company liquidated its entire
$85.8 million investment in bank owned life insurance in
order to reduce the Companys investment risk and
risk-weighted assets, which favorably impacted the Banks
regulatory capital ratios. The $16.3 million increase in
cash surrender value of the policies since the time of purchase
was treated as ordinary income for tax purposes. Additionally, a
10% IRS excise tax was incurred as a result of the liquidation.
The Company recorded a tax expense of $8.1 million in 2009
for this transaction.
Goodwill
Goodwill was $64.9 million at December 31, 2009
compared to $78.9 million at December 31, 2008 due to
an impairment of $14.0 million recorded in the fourth
quarter of 2009.
It has been the established policy of the Company to perform its
annual review for goodwill impairment as of September 30th of
each year. As a result of the previous years annual test
performed as of September 30, 2008, the Company determined
goodwill was impaired and recorded an $80.0 million
impairment to reduce the goodwill balance to $78.9 million.
The 2009 annual review for goodwill impairment was conducted as
of September 30, 2009, with the assistance of a nationally
recognized third party valuation specialist. Based upon that
review, the Company determined that the $78.9 million of
goodwill recorded on the September 30, 2009 balance sheet
was not impaired at that time.
Under the authoritative guidance for intangibles
goodwill and other (ASC 350), a goodwill impairment test is
required between annual testing dates if an event occurred or
circumstances changed that would more likely than not reduce the
fair value of goodwill below the carrying amount. During the
quarter ended December 31, 2009, management considered
whether events and circumstances would require an interim test
of goodwill impairment. Management concluded that it was more
likely than not that events and changes in circumstances, both
individually and in the aggregate, reduced the fair value of the
Companys single reporting unit below its carrying amount.
Managements analysis was based on and considered changes
in the key indicators and inputs consistent with those included
in its previous annual review such as stock price, estimated
control premium, future available cash flows, market multiples,
business strategy, credit quality metrics, loan growth, core
deposits and regulatory capital requirements along with interest
rates, credit spreads and collateral values.
The Company determined that activities in the fourth quarter of
2009, including the Written Agreement with the regulators, the
decline in the Banks regulatory capital position to
undercapitalized during that period, and the significant
deterioration in the market price of the Companys common
stock, constituted triggering events that would more likely than
not reduce the fair value of goodwill below the carrying amount
and would, therefore, require that an interim goodwill
impairment test be performed. As a result of that test, a
$14.0 million goodwill impairment was recorded as of
December 31, 2009.
Following is a summary of the methodologies employed to conduct
the Companys testing at December 31, 2009, the
underlying assumptions and related rationale in the context of
current facts and circumstances, and how the methodologies
employed compared with those used in prior tests.
Management worked closely with the third party valuation
specialist throughout the valuation process. Management provided
necessary information to this third party and reviewed the
methodologies and assumptions used including loan and deposit
growth, regulatory capital requirements, and the Companys
business strategy.
The Company operates in one operating segment, community
banking, as defined in the authoritative guidance for segment
reporting (ASC 280) and currently does not internally
report its operating income below that level or provide such
information to its chief executive officer, the companys
chief operating decision maker. For this reason, the Company
performs its goodwill impairment test as one reporting unit at
the consolidated company level.
A variation of the market approach was utilized to estimate the
fair value of the Company under Step 1 of the goodwill
impairment test. The fair value estimate of the Companys
publicly traded market capitalization was
92
computed utilizing the thirty day average closing prices through
the valuation date for the two publicly traded components of
equity, the Companys common stock and Series A
preferred stock. No implied control premium was assumed. A
discounted cash flow analysis was used to estimate the fair
value of the Series T preferred stock issued under the TARP
Capital Purchase Program.
The discount rate used in the Series T preferred stock fair
value estimate was developed based upon the yield of the
Series A preferred stock since the two preferred stocks
participate on a pari passu basis in the event of liquidation
and therefore would be expected to have similar yields. The
valuation assumed the Series T preferred would likely be
paid off on its five year anniversary in December 2013 when the
cumulative dividend yield would contractually move from 5% to 9%
consistent with optimal financial budgeting considerations.
Dividend assumptions included the Company resuming the payment
of the dividends at 5% beginning in February 2011, including a
cumulative payment of all previously deferred amounts.
The fair value of the TARP warrant was computed using a
Cox-Ross- Rubinstein Binomial Option Pricing Model with major
inputs including the $0.36 December 31, 2009 closing
price of the Company common stock, the $2.97 per share
contractual exercise price, the 8.9 year term to expiration
of the warrant, 75.9% stock price volatility similar to the
historic stock price volatility of the Companys common
stock over the past 8.9 years, a risk free rate of return
of 3.7% based on the yield of U.S. Treasury Strips with a
remaining term of 8.9 years and an assumed average dividend
yield rate of 2.1% assuming the Company resumes paying dividends
on its common stock at its historical average rate of 2.7% after
two years.
In Step 1 of the analysis, it was determined that the fair value
of stockholders equity was $42.5 million less than
the book carrying value of equity. In Step 2 of the test, it was
determined that the decline in the fair value was partially
attributable to a decline in the fair values of the net assets
of the single reporting unit and partially to a decline in the
value of the goodwill. Management concluded the decrease in the
fair value was primarily attributable to prolonged weak economic
conditions and the impact these conditions have had on the fair
value of the Companys loan portfolio and decreases in
market interest rates. However, since the net result of the Step
2 fair value estimates was less than the fair value of
stockholders equity from Step 1, goodwill was determined
to be impaired. A discussion of the Step 2 test assumptions,
methods, and results is presented below.
In Step 2 of the test, the Company estimated the fair value of
assets and liabilities in the same manner as if a purchase of
the reporting unit was taking place from a market participant
perspective, which includes estimating the fair value of other
intangibles. The fair value estimation methodology selected for
the Companys most significant assets and liabilities was
based on the Companys observations and knowledge of
methodologies typically and currently utilized by market
participants, the structure and characteristics of the asset and
liability in terms of cash flows and collateral, and the
availability and reliability of significant inputs required for
a selected methodology and comparative data to evaluate the
outcomes. Specifically, the Company selected the income approach
for performing loans, retail certificates of deposit, core
deposit intangibles, and borrowings, and the market approach for
branch properties. The Company estimated fair values separately
for nonaccrual loans and loans
60-89 days
past due and accruing. The income approach was deemed
appropriate for the assets and liabilities noted above due to
the limited current comparable market transaction data
available. The market approach was deemed appropriate for the
branch properties due to the nature of the underlying real and
personal property. In Step 2, the Company did not use multiple
approaches to estimate the fair value of any given asset or
liability category; therefore, no weightings were incorporated
into the Companys methodology in this step.
Loans net of the allowance were $2.2 billion or 63.8% of
Company assets as of December 31, 2009. The estimated fair
value of loans net of the allowance was $54.3 million, or
2.5% below book value. In computing this estimated fair value,
performing loans were separated into fixed and variable
components, floors and collateral coverage ratios were
considered, and appropriate comparable market discount rates
were used to compute fair values using a discounted cash flow
approach. A 40% discount was applied to nonaccrual loans based
upon recent Company charge-off experience and a 10% discount was
applied to loans
60-89 days
past due and accruing.
The core deposit intangible asset fair value was estimated by
computing the expected future cost savings from holding low cost
deposits and resulted in a fair value estimate $7.8 million
above book value. Estimated fair value for the Companys
branch facilities was $6.6 million above book value based
upon appraisals received in December 2009.
93
The fair values of the Companys liabilities were estimated
using: price estimates from a nationally known dealer for
securities sold under repurchasing agreements, market price
quotes from the FHLB on FHLB advances, discounted cash flows for
the subordinated debentures, trust preferred securities, and
time and brokered deposits, and a weighted combination of
discounted cash flows reflecting the effects of credit spreads
and a liquidation scenario value estimate for the remaining
borrowings. The fair value estimate for all liabilities was
$14.9 million below book carrying value. Time and brokered
deposits were determined to have a net fair value
$11.5 million over book carrying value but borrowings were
determined to have a net fair value $26.4 million below
their book carrying value.
Material assumptions used in the fair value estimate include
effective tax rates, market discount rates, terminal residual
values, and composition of market comparables. Changes in any of
these assumptions can have a material effect on the fair value
used in the goodwill impairment evaluation. In particular,
changes in the Companys publicly traded stocks prices, and
the assumed market participant discount rate on the
Series T preferred stock, affect the estimated fair values
determined in Step 1. As a financial institution, the fair value
estimates in Step 2 are extremely sensitive to changes in market
interest rates and credit spreads, especially on the values of
longer term fixed rate assets and liabilities. As noted above,
net loans represented 63.8% of total assets as of
December 31, 2009. Using the December 31, 2009
impairment study values, a 1% change in loan fair values up or
down due to market interest rates or changes in credit spreads
would change the net loan fair value by $21.9 million. Core
deposit intangible fair values increase with higher market
interest rates. The fair value of long term borrowings with
fixed interest rates generally increase as market rates decline
and decrease as market rates increase. Loan and borrowing fair
values are also affected by changes in market credit spreads.
The assumptions and methodologies used for the interim goodwill
impairment testing for December 31, 2009 as discussed
above, were generally similar to those used in the annual tests
completed as of September 30, 2008 and September 30,
2009. The same independent third party valuation specialist was
used for the three fair value studies. Compared to the 2008
test, interest rates continued to decline in 2009, asset quality
materially changed, and the evaluation of loan fair values was
more granular and involved segregating the loan balances into
much finer groups for valuation purposes including segregating
60-89 days
past due and accruing loans and assigning a 10% discount to
unpaid principal on them. Credit spreads also narrowed by
September 30, 2009 and December 31, 2009 as compared
to 2008. Although discounted cash flows and guideline company
and guideline transaction data was utilized in Step 1 testing
for previous testing periods, they were not utilized in the
December 31, 2009 test since no control premium was assumed
in that periods fair value of stockholders equity
estimate. The Company will continue to assess any shortfall in
its equity fair value relative to its total book value and
tangible book value, including what might be attributed to
either industry-wide or company-specific factors, and to
evaluate whether any additional adjustments are required in the
carrying value of goodwill.
Deposits
The following table sets forth deposits by type as of the
periods presented.
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in thousands)
|
|
|
Noninterest-bearing demand
|
|
$
|
349,796
|
|
|
$
|
334,495
|
|
Interest-bearing demand
|
|
|
178,172
|
|
|
|
176,224
|
|
Money market
|
|
|
168,228
|
|
|
|
208,484
|
|
Savings
|
|
|
172,969
|
|
|
|
129,101
|
|
Certificates of deposit less than $100,000
|
|
|
833,187
|
|
|
|
689,896
|
|
Certificates of deposit of $100,000 or more
|
|
|
413,256
|
|
|
|
435,687
|
|
Brokered certificates of deposit
|
|
|
454,503
|
|
|
|
438,904
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing deposits
|
|
|
2,220,315
|
|
|
|
2,078,296
|
|
|
|
|
|
|
|
|
|
|
Total deposits
|
|
$
|
2,570,111
|
|
|
$
|
2,412,791
|
|
|
|
|
|
|
|
|
|
|
Total core deposits(1)
|
|
$
|
869,165
|
|
|
$
|
848,304
|
|
94
|
|
|
(1) |
|
Includes noninterest-bearing and interest-bearing demand, money
market, and savings. |
Total deposits of $2.6 billion at December 31, 2009
represented an increase of $157.3 million, or 6.5%, from
December 31, 2008.
Set forth below is a summary of the change in the Companys
deposits:
|
|
|
|
|
Noninterest-bearing deposits were $349.8 million at
December 31, 2009, $15.3 million, or 4.6%, more than
the $334.5 million level at December 31, 2008.
|
|
|
|
Interest-bearing deposits increased 6.8%, or $142.0 million
to $2.2 billion at December 31, 2009 compared to
December 31, 2008.
|
|
|
|
Core deposits increased $20.9 million, or 2.5%, to
$869.2 million at December 31, 2009 from
$848.3 million at December 31, 2008.
|
|
|
|
Certificates of deposit under $100,000 increased
$143.3 million, or 20.8%, from December 31, 2008 to
$833.2 million at December 31, 2009, as a result of
successful promotions which allowed the Company to build
liquidity.
|
|
|
|
Certificates of deposit of $100,000 or more decreased by
$22.4 million, or 5.1%, from December 31, 2008 to
$413.3 million at December 31, 2009.
|
|
|
|
Certificates of deposits through the CDARS and Internet networks
were $137.8 million at December 31, 2009 compared to
$41.6 million at December 31, 2008. These networks
allow the Company to access other deposit funding sources.
|
|
|
|
Brokered certificates of deposit increased $15.6 million,
or 3.6%, to $454.5 million at December 31, 2009
compared to year end 2008. The brokered certificates of deposit
are comprised of underlying certificates of deposits in
denominations of less than $100,000.
|
|
|
|
As a result of the Banks undercapitalized status for
regulatory capital purposes, the Bank is no longer able to
accept or renew brokered deposits or, whether wholesale or
retail, secure deposits at rates that are 75 basis points
higher than the prevailing effective rates on insured deposits
of comparable amounts or maturities in the Banks normal
market area or the national rates periodically release by the
FDIC.
|
The Company continues to participate in the FDICs
Temporary Liquidity Guarantee Program. This program consists of
two components. The first is the Transaction Account Guarantee
Program where all noninterest-bearing transaction deposit
accounts, including all personal and business checking deposit
accounts, and NOW accounts, which are capped at a rate no higher
than 0.50% are fully guaranteed by the FDIC, through
June 30, 2010, regardless of dollar amount. All other
deposit accounts continue to be covered by the FDICs
expanded deposit insurance limit of $250,000 through
December 31, 2013. The second component is the Debt
Guarantee Program, which guarantees newly issued senior
unsecured debt. The Company has not issued any such debt and
currently does not plan to issue any such debt.
In 2009, the FDIC increased premium assessments to maintain
adequate funding of the DIF. Assessment rates set by the FDIC,
effective March 1, 2009, generally range from 12 to
45 basis points; however, these rates may be adjusted
upward or downward if the institution has unsecured debt or
secured liabilities. As a result, assessment rates for
institutions may range from 7 basis points to
77.5 basis points. These increases in premium assessments
have increased the Companys expenses. In addition, on
May 22, 2009, the FDIC board agreed to impose an emergency
special assessment of 5 basis points on all banks (based on
June 30, 2009 assets) to restore the Deposit Insurance Fund
to an acceptable level. The assessment was paid on
September 30, 2009 and was in addition to the increase in
premiums discussed above. The cost of this emergency special
assessment to the Company was $1.7 million. On
November 12, 2009, the FDIC issued new assessment
regulations that require FDIC-insured institutions to prepay on
December 30, 2009 their estimated quarterly risk-based
assessments for the fourth quarter 2009 and for all of 2010,
2011 and 2012; however certain financial institutions, including
the Bank, were exempted from the new prepayment regulations and
will continue to pay their risk-based assessments on a quarterly
basis. FDIC insurance expense increased $6.7 million to
$9.3 million in the 2009 compared to the same period in
2008 due
95
to the special assessment of $1.7 million and increased
regular quarterly FDIC premiums. FDIC insurance expense is
expected to increase in 2010 as a result of the Bank being
undercapitalized as of December 31, 2009.
The Company competes for core deposits in the highly competitive
Chicago Metropolitan Statistical Area. Competitive pricing has
made it difficult to maintain and grow these types of deposits.
The level of competition for core deposits is not expected to
ease in the near term. The Companys campaigns include
certificates of deposit promotions and core product promotions.
The following table sets forth the average amount of and the
average rate paid on deposits by category for the indicated
periods.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
Average
|
|
|
Percent of
|
|
|
|
|
|
Average
|
|
|
Percent of
|
|
|
|
|
|
Average
|
|
|
Percent of
|
|
|
|
|
|
|
Balance
|
|
|
Deposits
|
|
|
Rate
|
|
|
Balance
|
|
|
Deposits
|
|
|
Rate
|
|
|
Balance
|
|
|
Deposits
|
|
|
Rate
|
|
|
|
(Dollars in thousands)
|
|
|
Noninterest-bearing demand deposits
|
|
$
|
337,246
|
|
|
|
13.21
|
%
|
|
|
0.00
|
%
|
|
$
|
326,104
|
|
|
|
13.46
|
%
|
|
|
0.00
|
%
|
|
$
|
274,819
|
|
|
|
12.90
|
%
|
|
|
0.00
|
%
|
Interest-bearing demand deposits
|
|
|
176,930
|
|
|
|
6.93
|
|
|
|
0.49
|
|
|
|
200,869
|
|
|
|
8.29
|
|
|
|
0.98
|
|
|
|
182,276
|
|
|
|
8.55
|
|
|
|
1.85
|
|
Savings and money market accounts
|
|
|
349,278
|
|
|
|
13.68
|
|
|
|
0.82
|
|
|
|
384,496
|
|
|
|
15.87
|
|
|
|
1.30
|
|
|
|
386,722
|
|
|
|
18.15
|
|
|
|
2.57
|
|
Time Deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of deposit, less than $100,000
|
|
|
798,254
|
|
|
|
31.26
|
|
|
|
2.77
|
|
|
|
619,829
|
|
|
|
25.58
|
|
|
|
4.05
|
|
|
|
598,012
|
|
|
|
28.06
|
|
|
|
4.95
|
|
Certificates of deposit, $100,000 or more(1)
|
|
|
892,178
|
|
|
|
34.92
|
|
|
|
2.39
|
|
|
|
891,354
|
|
|
|
36.80
|
|
|
|
3.81
|
|
|
|
689,335
|
|
|
|
32.34
|
|
|
|
4.90
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total time deposits
|
|
|
1,690,432
|
|
|
|
66.18
|
|
|
|
2.57
|
|
|
|
1,511,183
|
|
|
|
62.38
|
|
|
|
3.91
|
|
|
|
1,287,347
|
|
|
|
60.40
|
|
|
|
4.92
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits
|
|
$
|
2,553,886
|
|
|
|
100.00
|
%
|
|
|
1.85
|
%
|
|
$
|
2,422,652
|
|
|
|
100.00
|
%
|
|
|
2.73
|
%
|
|
$
|
2,131,164
|
|
|
|
100.00
|
%
|
|
|
3.60
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes brokered deposits. |
The following table summarizes the maturity distribution of
certificates of deposit in amounts of $100,000 or more as of the
dates indicated. These deposits have been made by individuals,
businesses, and public and other
not-for-profit
entities, part of which are located within the Companys
market area.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Three months or less
|
|
$
|
187,794
|
|
|
$
|
402,122
|
|
|
$
|
308,259
|
|
Over three months through six months
|
|
|
130,508
|
|
|
|
172,417
|
|
|
|
241,765
|
|
Over six months through twelve months
|
|
|
447,293
|
|
|
|
229,867
|
|
|
|
230,985
|
|
Over twelve months
|
|
|
102,164
|
|
|
|
70,185
|
|
|
|
75,598
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
867,759
|
|
|
$
|
874,591
|
|
|
$
|
856,607
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a result of the Banks undercapitalized status for
regulatory capital purposes as of December 31, 2009, the
Bank is not permitted to accept or renew brokered deposits or,
whether wholesale or retail, secure deposits at rates that are
75 basis points higher than the prevailing effective rates
on insured deposits of comparable amounts or maturities in the
Banks normal market area or the national rates
periodically release by the FDIC. See Note 3
Regulatory Capital of the notes to the consolidated financial
statements for further information. Brokered deposits were
$454.5 million at December 31, 2009 and had a weighted
average maturity of approximately eight months.
96
Borrowings
The following table summarizes the Companys borrowings as
of the dates indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Federal funds purchased
|
|
$
|
|
|
|
$
|
|
|
|
$
|
81,000
|
|
Revolving note payable
|
|
|
8,600
|
|
|
|
8,600
|
|
|
|
2,500
|
|
Securities sold under agreements to repurchase
|
|
|
297,650
|
|
|
|
297,650
|
|
|
|
283,400
|
|
Advances from the Federal Home Loan Bank
|
|
|
340,000
|
|
|
|
380,000
|
|
|
|
323,439
|
|
Junior subordinated debentures
|
|
|
60,828
|
|
|
|
60,791
|
|
|
|
60,724
|
|
Subordinated debt
|
|
|
15,000
|
|
|
|
15,000
|
|
|
|
|
|
Term note payable
|
|
|
55,000
|
|
|
|
55,000
|
|
|
|
70,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
777,078
|
|
|
$
|
817,041
|
|
|
$
|
821,063
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys borrowings include overnight federal funds
purchased, securities sold under agreements to repurchase, FHLBC
advances, junior subordinated debentures, and commercial bank
notes payable and subordinated debt. The following tables set
forth categories and the balances of the Companys
borrowings for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2009
|
|
2008
|
|
2007
|
|
|
(Dollars in thousands)
|
|
Federal funds purchased:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
$
|
|
|
|
$
|
|
|
|
$
|
81,000
|
|
Weighted average interest rate at end of year
|
|
|
|
%
|
|
|
|
%
|
|
|
4.15
|
%
|
Maximum amount outstanding(1)
|
|
$
|
55,000
|
|
|
$
|
184,500
|
|
|
$
|
109,000
|
|
Average amount outstanding
|
|
|
12,441
|
|
|
|
77,000
|
|
|
|
35,630
|
|
Weighted average interest rate during year(2)
|
|
|
0.39
|
%
|
|
|
2.62
|
%
|
|
|
5.13
|
%
|
|
|
|
(1) |
|
Based on amounts outstanding at each month end during each year. |
|
(2) |
|
During 2008, the federal funds target rate decreased by
225 basis points. |
As a result of the Bank being less than well capitalized for
regulatory capital purposes, the agreements with one of the
Banks repurchase agreement counterparties could permit
that counterparty to terminate the repurchase agreements. At
December 31, 2009, the Banks repurchase agreements
with those provisions totaled $262.7 million with fixed
interest rates ranging from 2.76% to 4.65%, maturities ranging
from approximately 7.5 to 8.5 years, and quarterly call
provisions (at the counterpartys option). Due to the
relatively high fixed rates on these borrowings as compared to
currently low market rates of interest, the Bank would incur
substantial costs to unwind these repurchase agreements if
terminated prior to their maturities. These associated unwind
costs could have a material adverse effect on the Companys
results of operations and financial condition in the period of
payment. The associated unwind costs would be the difference
between the fair value and carrying value of the repurchase
agreements on the date of termination. Because the repurchase
agreements are collateralized at an amount sufficient to cover
any such unwind costs which may be incurred, any such costs
would result in a charge in the statement of operations but
would not expect to have an adverse effect on the Banks
liquidity.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2009
|
|
2008
|
|
2007
|
|
|
(Dollars in thousands)
|
|
Securities sold under repurchase agreements:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
$
|
297,650
|
|
|
$
|
297,650
|
|
|
$
|
283,400
|
|
Weighted average interest rate at end of year
|
|
|
4.29
|
%
|
|
|
4.29
|
%
|
|
|
4.21
|
%
|
Maximum amount outstanding(1)
|
|
$
|
323,033
|
|
|
$
|
394,764
|
|
|
$
|
317,118
|
|
Average amount outstanding
|
|
|
299,611
|
|
|
|
311,346
|
|
|
|
268,639
|
|
Weighted average interest rate during year
|
|
|
4.33
|
%
|
|
|
4.26
|
%
|
|
|
4.21
|
%
|
97
|
|
|
(1) |
|
Based on amount outstanding at each month end during each year. |
The Bank is a member of the FHLBC. Membership requirements
include common stock ownership in the FHLB. At December 31,
2009, the FHLBC advances have quarterly call provisions. The
Bank is currently in compliance with the FHLBCs membership
requirements. The Bank has collateralized the FHLB advances with
various securities totaling $121.8 million and
multi-family, junior lien, and commercial real estate loans
totaling $829.6 million, as well as a blanket lien on
multi-family and commercial real estate loans. As a result of
the Banks capital position, it had to increase the amount
of collateral securing the existing FHLBC advances.
The following table sets forth categories and the balances of
the Companys FHLBC advances as of the indicated dates or
for the indicated periods.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2009
|
|
2008
|
|
2007
|
|
|
(Dollars in thousands)
|
|
FHLB advances:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
$
|
340,000
|
|
|
$
|
380,000
|
|
|
$
|
323,439
|
|
Weighted average interest rate at end of year
|
|
|
3.53
|
%
|
|
|
3.38
|
%
|
|
|
4.49
|
%
|
Maximum amount outstanding(1)
|
|
$
|
380,000
|
|
|
$
|
380,000
|
|
|
$
|
323,439
|
|
Average amount outstanding
|
|
|
346,329
|
|
|
|
335,039
|
|
|
|
317,232
|
|
Weighted average interest rate during year
|
|
|
3.52
|
%
|
|
|
3.53
|
%
|
|
|
4.66
|
%
|
|
|
|
(1) |
|
Based on amount outstanding at each month end during each year. |
At December 31, 2009, the Company had $60.8 million in
junior subordinated debentures owed to unconsolidated trusts
that were formed to issue trust preferred securities. During the
second quarter of 2009, the Company began deferring interest
payments on its junior subordinated debentures as permitted by
the terms of such debentures. The accrued interest deferred on
junior subordinated debentures was $1.5 million through
December 31, 2009. The Written Agreement requires the
Company to obtain prior approval to resume interest payments in
respect of its junior subordinated debentures.
The following table details the unconsolidated trusts and their
common and trust preferred securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
Initial
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
Mandatory
|
|
Optional
|
Issuer
|
|
Issue Date
|
|
Amount
|
|
|
Amount
|
|
|
Rate
|
|
Redemption Date
|
|
Redemption Date(1)
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
MBHI Capital Trust III
|
|
December 19, 2003
|
|
$
|
9,279
|
|
|
$
|
9,279
|
|
|
LIBOR+3.00%
|
|
December 30, 2033
|
|
December 30, 2008
|
MBHI Capital Trust IV
|
|
December 19, 2003
|
|
|
10,310
|
|
|
|
10,310
|
|
|
LIBOR+2.85%
|
|
January 23, 2034
|
|
January 23, 2009
|
MBHI Capital Trust V
|
|
June 7, 2005
|
|
|
20,619
|
|
|
|
20,619
|
|
|
LIBOR+1.77%
|
|
June 15, 2035
|
|
June 15, 2010
|
Royal Capital Trust I
|
|
April 30, 2004
|
|
|
10,310
|
|
|
|
10,310
|
|
|
6.62% until July
|
|
July 23, 2034
|
|
July 23, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
23, 2009; then
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIBOR+2.75%
|
|
|
|
|
Northwest Suburban Capital Trust I
|
|
May 18, 2004
|
|
|
10,310
|
|
|
|
10,310
|
|
|
LIBOR+2.70%
|
|
July 23, 2034
|
|
July 23, 2009
|
Unamortized purchase accounting adjustment
|
|
|
|
|
|
|
|
|
(37
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
$
|
60,828
|
|
|
$
|
60,791
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Redeemable at option of the Company as of the initial optional
redemption date provided and quarterly thereafter. |
98
Revolving
and Term Loan Facilities; Events of Default
The Companys credit agreements with a correspondent bank
at December 31, 2009 consisted of a revolving line of
credit, a term note loan, and a subordinated debenture in the
amounts of $8.6 million, $55.0 million, and
$15.0 million, respectively.
The revolving line of credit had a maximum availability of
$8.6 million, an outstanding balance of $8.6 million
as of December 31, 2009, an interest rate at
December 31, 2009 of one-month LIBOR plus 455 basis
points with an interest rate floor of 7.25%, and matured on
July 3, 2009. The term note had an interest rate of
one-month LIBOR plus 455 basis points at December 31,
2009 and matures on September 28, 2010. The subordinated
debt had an interest rate of one-month LIBOR plus 350 basis
points at December 31, 2009, matures on March 31,
2018, and qualifies as a component of Tier 2 capital.
As a result of the effects of recent economic conditions, the
increase in nonperforming assets, and the impairment charges on
goodwill and the impairment charges and realized losses on FNMA
and FHLMC preferred securities, the Company sought covenant
waivers on two occasions in 2008. First, the lender waived a
covenant violation in the first quarter of 2008 resulting from
the Companys net loss recognized in that period. Second,
the lender waived a covenant violation in the third quarter of
2008 resulting from the Companys net loss recognized in
that period, contingent upon the Company making accelerated
principal payments under the aforementioned term note in the
amounts and on or prior to the dates as follows: July 1,
2009 $5.0 million; October 1,
2009 $5.0 million; and January 4,
2010 $5.0 million.
The Company did not make a required $5.0 million principal
payment on the term note due on July 1, 2009 under the
covenant waiver for the third quarter of 2008. On July 8,
2009, the lender advised the Company that such non-compliance
constituted a continuing event of default under the loan
agreements (the Contingent Waiver Default). The
Companys decision not to make the $5.0 million
principal payment, together with its previously announced
decision to suspend the dividend on its Series A preferred
stock and defer the dividends on its Series T preferred
stock and interest payments on its trust preferred securities,
were made in order to retain cash and preserve liquidity and
capital at the holding company.
The revolving line of credit matured on July 3, 2009, and
the Company did not pay to the lender all of the aggregate
outstanding principal on the revolving line of credit on such
date. The failure to make such payment constituted an additional
event of default under the credit agreements (the Payment
Default; the Contingent Wavier Default, the Financial
Covenant Defaults and the Payment Default are hereinafter
collectively referred to as the Existing Events of
Default).
As a result of the occurrence and the continuance of the
Existing Events of Default, the lender notified the Company
that, as of July 8, 2009, the interest rate on the
revolving line of credit increased to the default interest rate
of 7.25%, which represents the current interest rate floor, and
the interest rate under the term note agreement increased to the
default interest rate of 30 day LIBOR plus 455 basis
points. The Company also did not make required $5.0 million
principal payment on the term note due on October 1, 2009
and January 4, 2010 under the covenant waiver for the third
quarter of 2008.
As a result of not making the required payments, and as a result
of the other Existing Events of Default, the lender possesses
certain rights and remedies, including the ability to demand
immediate payment of amounts due totaling $63.6 million
plus accrued interest or foreclose on the collateral supporting
the credit agreements, being 100% of the stock of the
Companys wholly-owned subsidiary, the Bank.
On October 22, 2009, the Company entered into a forbearance
agreement (Forbearance Agreement) with its lender
that provides for a forbearance period through March 31,
2010, during which time the Company will pursue completion of
its Capital Plan. During the forbearance period, the Company is
not obligated to make interest and principal payments in excess
of funds held in a deposit security account (which was initially
with $325,000), and while retaining all rights and remedies
under the credit agreements, the lender has agreed not to demand
payment of amounts due or begin foreclosure proceedings in
respect of the collateral (which consists primarily of all the
stock of the Bank), and has agreed to forbear from exercising
the rights and remedies available to it in respect of existing
defaults and future compliance with certain covenants through
March 31, 2010. As part of the Forbearance Agreement, the
Company entered into a tax refund security agreement under which
it agreed to deliver to the lender
99
the expected proceeds to be received in connection with an
outstanding Federal income tax refund in the approximate amount
of $2.1 million. These proceeds, if and when received, will
be placed in the deposit security account, and will be available
for interest and principal payments. No proceeds from this tax
refund have been received as of December 31, 2009. The
Forbearance Agreement may terminate prior to March 31, 2010
if the Company defaults under any of its representations,
warranties or obligations contained in either the Forbearance
Agreement or credit agreements (other than with respect to
certain financial and regulatory covenants), or the Bank becomes
subject to receivership by the FDIC or the Company becomes
subject to other bankruptcy or insolvency type proceedings.
Although the lender is not exercising all of its rights and
remedies while the forbearance period is in effect (other than
continuing to impose default rates of interest), the lender has
not waived, or committed to waive, the Existing Events of
Default or any other default or event of default.
Upon the expiration of the forbearance period, the principal and
interest payments that were due under the revolving line of
credit and the term note, as modified by the covenant waivers,
at the time the Forbearance Agreement was entered into will once
again become due and payable, along with such other amounts as
may have become due during the forbearance period. Absent
successful completion of all or a significant portion of the
Capital Plan, the Company expects that it would not be able to
meet any demands for payment of amounts then due at the
expiration of the forbearance period. If the Company is unable
to renegotiate, renew, replace or expand its sources of
financing on acceptable terms, it may have a material adverse
effect on the Companys business and results of operations.
Capital
Resources
The Company monitors compliance with bank and bank-holding
company regulatory capital requirements, focusing primarily on
risk-based capital guidelines. Under the risk-based capital
method of capital measurement, the ratio computed is dependent
upon the amount and composition of assets recorded on the
balance sheet and the amount and composition of
off-balance-sheet items, in addition to the level of capital.
Included in the risk-based capital method are two measures of
capital adequacy: Tier 1, or core capital, and total
capital, which consists of Tier 1 plus Tier 2 capital.
See Business Supervision and
Regulation Bank Holding Company Regulation for
definitions of Tier 1 and Tier 2 capital as well as
Note 19 Capital Requirements of the
notes to the consolidated financial statements.
As of December 31, 2009, the Company and the Bank did not
meet all capital adequacy requirements administered by the
federal banking agencies. Under capital adequacy guidelines and
the regulatory framework for prompt corrective action, banks
must meet specific capital guidelines that involve quantitative
measures of assets, liabilities, and certain off-balance-sheet
items as calculated under regulatory accounting practices.
Prompt corrective action provisions are not applicable to bank
holding companies.
Quantitative measures established by regulation to ensure
capital adequacy require banks and bank holding companies to
maintain minimum amounts and ratios of total and Tier 1
capital to risk-weighted assets, Tier 1 capital to average
assets, and tangible equity to total assets. If a bank does not
meet these minimum capital requirements, as defined, bank
regulators can initiate certain actions that could have a direct
material adverse effect on the banks financial condition
and ongoing operations.
As of December 31, 2009, the most recent Federal Deposit
Insurance Corporation notification categorized the Bank as
undercapitalized under the regulatory framework for prompt
corrective action. As a result of the Banks
undercapitalized status for regulatory capital purposes as of
December 31, 2009, the Bank is no longer able to accept or
renew brokered deposits or, whether wholesale or retail, secure
deposits at rates that are 75 basis points higher than the
prevailing effective rates on insured deposits of comparable
amounts or maturities in the Banks normal market area or
the national rates periodically release by the FDIC, pay
dividends or make other capital distributions, or obtain funds
through Federal funds lines.
In addition, the agreements with one of the Banks
repurchase agreement counterparties could permit that
counterparty to terminate the repurchase agreements as a result
of the Bank being categorized as less than well capitalized. At
December 31, 2009, the Banks repurchase agreements
with those provisions totaled $262.7 million
100
with fixed interest rates ranging from 2.76% to 4.65%,
maturities ranging from approximately 7.5 to 8.5 years, and
quarterly call provisions (at the counterpartys option).
Based on current trends, the Company projects the Bank will be
critically undercapitalized at March 31, 2010. See
Recent Developments Outlook for
2010.
See Regulatory Capital and Note 19
Capital Requirements of the notes to the
consolidated financial statements for a further discussion of
the Companys and Banks capital requirements.
The following tables set forth the Companys capital ratios
as of the indicated dates.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk-Based Capital Ratios December 31,
|
|
|
2009
|
|
2008
|
|
2007
|
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
|
(Dollars in thousands)
|
|
Tier 1 capital to risk-weighted assets
|
|
$
|
5,037
|
|
|
|
0.22
|
%
|
|
$
|
238,873
|
|
|
|
8.30
|
%
|
|
$
|
258,862
|
|
|
|
9.21
|
%
|
Tier 1 capital minimum requirement
|
|
|
92,664
|
|
|
|
4.00
|
|
|
|
115,123
|
|
|
|
4.00
|
|
|
|
112,457
|
|
|
|
4.00
|
|
Total capital to risk-weighted assets
|
|
|
10,074
|
|
|
|
0.43
|
|
|
|
289,967
|
|
|
|
10.07
|
|
|
|
285,843
|
|
|
|
10.17
|
|
Total capital minimum requirements
|
|
|
185,329
|
|
|
|
8.00
|
|
|
|
230,247
|
|
|
|
8.00
|
|
|
|
224,914
|
|
|
|
8.00
|
|
Total risk-weighted assets
|
|
|
2,316,607
|
|
|
|
|
|
|
|
2,878,087
|
|
|
|
|
|
|
|
2,811,423
|
|
|
|
|
|
In December 2008, the Company issued 84,784 shares of
Series T fixed cumulative perpetual preferred stock at
$1,000 per share to the U.S. Treasury under the TARP CPP
raising $84.8 million in capital, which qualifies for
Tier I capital.
On March 8, 2010, the U.S. Treasury exchanged the
84,784 shares of Series T preferred stock, having an
aggregate approximate liquidation preference of
$84.8 million, plus approximately $4.6 million in
cumulative dividends not declared or paid on such preferred
stock, for a new series of fixed rate cumulative mandatorily
convertible preferred stock, Series G, with the same
liquidation preference. The warrant dated December 5, 2008
to purchase 4,282,020 shares of common stock was also
amended to re-set the strike price of the warrant to be
consistent with the conversion price of the Series G
preferred stock. The U.S. Treasury has the authority to
convert the new preferred stock into the Companys common
stock at any time. In addition, the Company can compel a
conversion of the new preferred stock into common stock, subject
to the following conditions: (i) the Company receives
appropriate approvals from the Federal Reserve;
(ii) approximately $78.6 million principal amount of
the Companys revolving, senior, and subordinated debt
shall have previously been converted into common stock on terms
acceptable to the U.S. Treasury in its sole discretion;
(iii) the Company shall have completed a new cash equity
raise of not less than $125 million on terms acceptable to
the U.S. Treasury in its sole discretion; and (iv) the
Company has made the anti-dilution adjustments to the new
preferred stock, if any, as required by the terms thereof.
Unless earlier converted, the new preferred stock converts
automatically into shares of the Companys common stock on
March 8, 2017.
On January 25, 2010, the Company successfully completed its
offer (the Exchange Offer) to exchange shares of its
common stock for outstanding depositary shares, $25.00
liquidation amount per share, each representing a
1/100th fractional interest in a share of the
Companys Series A preferred stock. The final exchange
ratio was set at 7.0886 shares of common stock for each
depositary share of the Series A preferred stock. The
Company accepted for exchange 1,414,941 depositary shares,
representing approximately 82% of the 1,725,000 depositary
shares outstanding prior to the Exchange Offer. The Exchange
Offer generated approximately $35.4 million of additional
common equity. The Company issued 10,029,946 shares of
common stock for the 1,414,941 shares tendered in the
exchange. The remaining 310,059 depositary shares outstanding
have an aggregate liquidation preference of approximately
$7.8 million.
In October 2007, the Company issued 3.7 million shares of
common stock as a result of the Northwest Suburban acquisition
increasing capital by $55.1 million. In December 2007, the
Company issued 1,725,000
101
depositary shares each representing 1/100th of a share of
its Series A noncumulative redeemable convertible perpetual
preferred stock at $25.00 per share through a public offering
raising net new equity capital of $41.4 million.
The Company includes $21.4 million for 2009 and
$59.0 million for 2008 and 2007 of trust preferred
securities in Tier I capital based on regulatory
limitations.
Liquidity
At December 31, 2009, on a consolidated basis, the Company
had cash and cash equivalents of $442.1 million compared to
$63.1 million at December 31, 2008. The Company
manages the liquidity position of the Bank with the objective of
maintaining access to sufficient funds to respond to the needs
of depositors and borrowers and to take advantage of earnings
enhancement opportunities. The Bank expanded its liquidity
during 2009. Liquid assets, including cash held at the Federal
Reserve Bank and unencumbered securities, improved from
$36.1 million at December 31, 2008 to
$419.5 million at December 31, 2009.
In addition to the normal cash flows from its securities
portfolio, and repayments and maturities of loans and
securities, the Bank utilizes other short-term,
intermediate-term and long-term funding sources such as
securities sold under agreements to repurchase and overnight
funds purchased from correspondent banks.
The FHLBC provides an additional source of liquidity which has
been used by the Bank since 1999. The Bank also has various
funding arrangements with commercial and investment banks in the
form of Federal funds lines, repurchase agreements, and
internet-based and brokered certificate of deposit programs. The
Bank maintains these funding arrangements to achieve favorable
costs of funds, manage interest rate risk, and enhance liquidity
in the event of deposit withdrawals. As a result of the
Banks undercapitalized status for regulatory capital
purposes, the Bank is no longer able to accept or renew brokered
deposits or, whether wholesale or retail, secure deposits at
rates that are 75 basis points higher than the prevailing
effective rates on insured deposits of comparable amounts or
maturities in the Banks normal market area or the national
rates periodically release by the FDIC, pay dividends or make
other capital distributions, or obtain funds through Federal
funds lines.
The FHLB advances and repurchase agreements are subject to the
availability of collateral. The Bank has collateralized the FHLB
advances with various securities totaling $121.8 million
and multi-family, junior lien, and commercial real estate loans
totaling $261.7 million, as well as a blanket lien on
multi-family and commercial real estate loans, and the
repurchase agreements with various securities totaling
$359.4 million at December 31, 2009. As a result of
the Banks capital position, it had to increase the amount
of collateral securing the existing FHLBC advances and the
wholesale funding market is no longer available. In addition, as
a result of the Bank being less than well capitalized for
regulatory capital purposes, the agreements with one of the
Banks repurchase agreement counterparties could permit
that counterparty to terminate the repurchase agreements. At
December 31, 2009, the Banks repurchase agreements
with those provisions totaled $262.7 million with fixed
interest rates ranging from 2.76% to 4.65%, maturities ranging
from approximately 7.5 to 8.5 years, and quarterly call
provisions (at the counterpartys option). The Company
believes the Bank has sufficient liquidity to meet its current
and future near-term liquidity needs; however, no assurances can
be made that the Banks liquidity position will not be
materially, adversely affected in the future. See Risk
Factors The Company and the Bank may not be able to
access sufficient and cost-effective sources of liquidity
necessary to fund operations and meet payment obligations under
their existing funding commitments, including the repayment of
its brokered deposits.
The Company monitors and manages its liquidity position on
several levels, which include estimated loan funding
requirements, estimated loan payoffs, securities portfolio
maturities or calls, anticipated depository buildups or runoffs,
and interest and principal payments on borrowings.
Certain
available-for-sale
securities were temporarily impaired at December 31, 2009,
primarily due to changes in interest rates as well as current
economic conditions that appear to be cyclical in nature. The
Company does not intend to sell nor would it be required to sell
the temporarily impaired securities before recovering their
amortized cost. See Note 7 Securities of the
notes to the consolidated financial statements for more details.
The Companys liquidity position is further enhanced by
monthly principal and interest payments received from a majority
of the loan portfolio.
102
The Company continues to seek opportunities to diversify the
customer base, enhance the product suite, and improve the
overall liquidity position. The Company has developed analytical
tools to help support the overall liquidity forecasting and
contingency planning. In addition, the Company has developed a
more efficient collateral management process which has
strengthened the Banks liquidity.
Since May 6, 2009, the Company has suspended the dividend
on its Series A preferred stock; deferred the dividend on
the $84.8 million of Series T preferred stock; and
deferred interest payments on $60.8 million of its junior
subordinated debentures as permitted by the terms of such
debentures. The accrued interest deferred on junior subordinated
debentures was $1.5 million through December 31, 2009.
The Written Agreement requires the Company to obtain prior
approval to resume dividend payments in respect of the
Series A preferred stock or interest payments in respect of
its junior subordinated debentures. On March 8, 2010, the
U.S. Treasury exchanged the 84,784 shares of
Series T preferred stock, having an aggregate approximate
liquidation preference of $84.8 million, plus approximately
$4.6 million in cumulative dividends not declared or paid
on such preferred stock, for a new series of fixed rate
cumulative mandatorily convertible preferred stock,
Series G, with the same liquidation preference. The warrant
dated December 5, 2008 to purchase 4,282,020 shares of
common stock was also amended to re-set the strike price of the
warrant to be consistent with the conversion price of the
Series G preferred stock. See Capital Resources
for additional detail regarding the exchange of the
Series T preferred stock.
Holding Company Liquidity. The liquidity
position at the holding company level is generally affected by
the amount of cash and other liquid assets on hand, payment of
interest and dividends on debt and equity issued by the holding
company (all of which have been recently suspended or deferred),
capital it injects into the Bank, any redemption of debt for
cash issued by the holding company, proceeds it raises through
the issuance of debt
and/or
equity through the holding company, if any, and dividends
received from the Bank, to the extent permitted.
At December 31, 2009, the Companys cash and cash
equivalents on an unconsolidated basis amounted to
$3.4 million. There are currently a number of limitations
on the Companys ability to manage its liquidity at the
holding company level. The Written Agreement with the Federal
Reserve Bank and the Illinois Division of Banking requires,
among other things, that the Bank obtain prior approval in order
to pay dividends. In addition, as noted above under Recent
Developments Written Agreement with
Regulators, the Company must obtain prior approval of the
Federal Reserve Bank to, among other things, take any other form
of payment from the Bank representing a reduction in capital of
the Bank and incur, increase or guarantee any debt. Accordingly,
the Companys present primary sources of funds at the
holding company level are access to the capital and debt markets
and private equity investments. While the Company continues to
pursue new equity capital, it has not received any commitment
for a new equity capital investment, and there can be no
assurance that the Company will be able to raise a sufficient
amount of new equity capital in a timely manner, on acceptable
terms or at all. If the lender under its revolving and term loan
facilities does not exercise its right to demand payment of
amounts owed following the expiration of a forbearance period
further described below, the Company believes that it has
adequate liquidity to meet its near-term commitments.
On October 22, 2009, the Company entered into the
Forbearance Agreement with the lender under its revolving and
term loan facilities, pursuant to which, among other things, the
lender agreed to forbear from exercising the rights and remedies
available to it as a consequence of certain continuing events of
default, except for continuing to impose default rates of
interest. This Forbearance Agreement expired March 31,
2010, or earlier if, among other things, the Company breaches
representations and warranties contained in the Forbearance
Agreement, or the Company defaults on certain obligations under
the Forbearance Agreement or credit agreements (other than with
respect to certain financial and regulatory covenants) or the
Bank becomes subject to receivership by the FDIC or the Company
becomes subject to other bankruptcy or insolvency type
proceedings.
Upon the expiration of the forbearance period, the principal and
interest payments that were due under the revolving line of
credit and the term note, as modified by the covenant waivers,
at the time the Forbearance Agreement was entered into will once
again become due and payable, along with such other amounts as
may have become due during the forbearance period. The Company
will not be able to meet any demands for payment of amounts then
due at the expiration of the forbearance period unless it
successfully completes all or a significant portion of the
Capital Plan, including raising a significant amount of new
equity capital. If the Company is unable to renegotiate, renew,
replace or expand its sources of financing on acceptable terms,
it may have a material adverse
103
effect on the Companys business and results of operations
and ability to continue as a going concern, and investors could
lose their investment in the securities.
See Recent Developments Outlook for
2010.
Contractual
Obligations, Commitments, and Off-Balance Sheet
Arrangements
The following table details the amounts and expected payments of
significant contractual obligations as of December 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
|
Payments Due By Period
|
|
|
|
Within
|
|
|
|
|
|
|
|
|
After
|
|
|
|
|
|
|
|
|
|
1 Year
|
|
|
2-3 Years
|
|
|
4-5 Years
|
|
|
5 Years
|
|
|
Other(1)
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
Deposits without a stated maturity
|
|
$
|
869,165
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
869,165
|
|
Consumer and brokered certificates of deposits
|
|
|
1,478,026
|
|
|
|
217,641
|
|
|
|
5,279
|
|
|
|
|
|
|
|
|
|
|
|
1,700,946
|
|
Revolving note payable
|
|
|
8,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,600
|
|
Securities sold under agreements to repurchase
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
297,650
|
|
|
|
|
|
|
|
297,650
|
|
FHLB advances
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
340,000
|
|
|
|
|
|
|
|
340,000
|
|
Junior subordinated debentures
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60,828
|
|
|
|
|
|
|
|
60,828
|
|
Subordinated debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,000
|
|
|
|
|
|
|
|
15,000
|
|
Term note payable
|
|
|
55,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
55,000
|
|
Operating leases
|
|
|
1,519
|
|
|
|
2,647
|
|
|
|
2,683
|
|
|
|
13,850
|
|
|
|
|
|
|
|
20,699
|
|
Uncertain tax position liability
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
784
|
|
|
|
784
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual cash obligations
|
|
$
|
2,412,310
|
|
|
$
|
220,288
|
|
|
$
|
7,962
|
|
|
$
|
727,328
|
|
|
$
|
784
|
|
|
$
|
3,368,672
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Duration of liability is not determinable. |
The following table details the amounts and expected maturities
of significant commitments as of December 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Commitment Expiration Per Period
|
|
|
|
Within
|
|
|
|
|
|
|
|
|
After
|
|
|
|
|
|
|
1 Year
|
|
|
1-3 Years
|
|
|
4-5 Years
|
|
|
5 Years
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
Lines of credit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
$
|
64,539
|
|
|
$
|
3,444
|
|
|
$
|
4,268
|
|
|
$
|
4,137
|
|
|
$
|
76,388
|
|
Consumer real estate
|
|
|
26,061
|
|
|
|
24,886
|
|
|
|
29,165
|
|
|
|
26,486
|
|
|
|
106,598
|
|
Consumer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,778
|
|
|
|
1,778
|
|
Commercial
|
|
|
150,735
|
|
|
|
2,575
|
|
|
|
2,311
|
|
|
|
4,738
|
|
|
|
160,359
|
|
Letters of credit
|
|
|
36,686
|
|
|
|
3,847
|
|
|
|
2,483
|
|
|
|
|
|
|
|
43,016
|
|
Commitments to extend credit
|
|
|
7,158
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,158
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commitments
|
|
$
|
285,179
|
|
|
$
|
34,752
|
|
|
$
|
38,227
|
|
|
$
|
37,139
|
|
|
$
|
395,297
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
104
At December 31, 2009, commitments to extend credit included
$3.6 million of fixed rate loan commitments. These
commitments are due to expire within 30 to 90 days of
issuance and have rates ranging from 5.00% to 7.50%.
Substantially all of the unused lines of credit are at
adjustable rates of interest.
The Company had a reserve for losses on unfunded commitments of
$2.2 million at December 31, 2009, up from
$1.1 million at December 31, 2008.
During the second quarter of 2009, the Company began deferring
payment of dividends on the $84.8 million of Series T
cumulative preferred stock and deferring interest payments on
$60.8 million of its junior subordinated debentures as
permitted by the terms of such debentures. The deferred interest
payments on the Companys junior subordinated debentures
were $1.5 million through December 31, 2009. The
dividends on the Series T cumulative preferred stock are
recorded only when declared. The cumulative amount of dividends
not declared was $3.8 million for the year ended
December 31, 2009. The amount due, including principal and
interest, relating to the credit agreements (as discussed in
Note 17 Credit Agreements of the notes to the
consolidated financial statements) was $9.3 million at
December 31, 2009.
Asset/Liability
Management
The business of the Company and the composition of its
consolidated balance sheet consist of investments in
interest-earning assets (primarily loans, mortgage-backed
securities, and other securities) that are primarily funded by
interest-bearing liabilities (deposits and borrowings). All of
the financial instruments of the Company as of December 31,
2009 were held for
other-than-trading
purposes. Such financial instruments have varying levels of
sensitivity to changes in market rates of interest. The
Companys net interest income is dependent on the amounts
of and yields on its interest-earning assets as compared to the
amounts of and rates on its interest-bearing liabilities. Net
interest income is therefore sensitive to changes in market
rates of interest.
The Companys asset/liability management strategy is to
maximize net interest income while limiting exposure to risks
associated with changes in interest rates. This strategy is
implemented by the Companys ongoing analysis and
management of its interest rate risk. A principal function of
asset/liability management is to coordinate the levels of
interest-sensitive assets and liabilities to manage net interest
income fluctuations within limits in times of fluctuating market
interest rates.
Interest rate risk results when the maturity or repricing
intervals and interest rate indices of the interest-earning
assets, interest-bearing liabilities, and off-balance-sheet
financial instruments are different, thus creating a risk that
will result in disproportionate changes in the value of and the
net earnings generated from the Companys interest-earning
assets, interest-bearing liabilities, and off-balance-sheet
financial instruments. The Companys exposure to interest
rate risk is managed primarily through the Companys
strategy of selecting the types and terms of interest-earning
assets and interest-bearing liabilities that generate favorable
earnings while limiting the potential negative effects of
changes in market interest rates. Because the Companys
primary source of interest-bearing liabilities is customer
deposits, the Companys ability to manage the types and
terms of such deposits may be somewhat limited by customer
maturity preferences in the market areas in which the Company
operates. Several hundred new bank branches were opened in the
Companys marketplace between 2004 and 2007. Deposit
pricing is competitive with promotional rates frequently offered
by competitors. Ongoing competition for core and time deposits
are driving up yields paid. Borrowings, which include FHLB
advances, short-term borrowings, and long-term borrowings, are
generally structured with specific terms which, in
managements judgment, when aggregated with the terms for
outstanding deposits and matched with interest-earning assets,
reduce the Companys exposure to interest rate risk. The
rates, terms, and interest rate indices of the Companys
interest-earning assets result primarily from the Companys
strategy of investing in securities and loans (a substantial
portion of which have adjustable rates). This permits the
Company to limit its exposure to interest rate risk, together
with credit risk, while at the same time achieving a positive
interest rate spread from the difference between the income
earned on interest-earning assets and the cost of
interest-bearing liabilities.
Management uses a simulation model for the Companys
internal asset/liability management. The model uses maturity and
repricing information for securities, loans, deposits, and
borrowings plus repricing assumptions on products without
specific repricing dates (e.g., savings and interest-bearing
demand deposits), to calculate the cash flows, income, and
expense of the Companys assets and liabilities. In
addition, the model computes a theoretical
105
market value of the Companys equity by estimating the
market values of its assets and liabilities. The model also
projects the effect on the Companys earnings and
theoretical value for a change in interest rates. The
Companys exposure to interest rates is reviewed on a
monthly basis by senior management and the Companys Board
of Directors.
Effects
of Inflation
Interest rates are significantly affected by inflation, but it
is difficult to assess the impact, since neither the timing nor
the magnitude of the changes in the various inflation indices
coincide with changes in interest rates. Inflation does impact
the economic value of longer term, interest-earning assets and
interest-bearing liabilities, but the Company attempts to limit
its long-term assets and liabilities, as indicated in the tables
set forth under Financial Condition and
Item 7A. Quantitative and Qualitative Disclosures
about Market Risk.
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
The Company performs a net interest income analysis as part of
its asset/liability management processes. 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 100 and 200 basis point increases
in market interest rates. The tables below present the
Companys projected changes in net interest income for the
various rate shock levels at December 31, 2009 and
December 31, 2008, respectively. As result of current
market conditions, 100 and 200 basis point decreases in
market interest rates are not applicable for 2009 and 2008 as
those decreases would result in some deposit interest rate
assumptions falling below zero. Nonetheless, the Companys
net interest income could decline in those scenarios as yields
on earning assets could continue to adjust downward.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in Net Interest Income Over One Year Horizon
|
|
|
|
|
|
|
Company
|
|
|
|
|
|
|
|
|
|
|
Guideline
|
|
|
December 31, 2009
|
|
December 31, 2008
|
|
Maximum
|
|
|
Dollar
|
|
%
|
|
Dollar
|
|
%
|
|
%
|
|
|
Change
|
|
Change
|
|
Change
|
|
Change
|
|
Change
|
|
|
(Dollars in thousands)
|
|
+200 bp
|
|
$
|
11,109
|
|
|
|
18.12
|
%
|
|
$
|
6,274
|
|
|
|
8.23
|
%
|
|
|
(10.0
|
)%
|
+100 bp
|
|
|
5,084
|
|
|
|
8.29
|
|
|
|
2,850
|
|
|
|
3.74
|
|
|
|
|
|
−100 bp
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
|
|
−200 bp
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
(10.0
|
)
|
As shown above, at December 31, 2009, the effect of an
immediate 200 basis point increase in interest rates would
increase the Companys net interest income by 18.12%, or
$11.1 million. Overall net interest income sensitivity
remains within the Companys and recommended regulatory
guidelines.
The changes in the Companys net interest income
sensitivity were due, in large part, to the optionality on both
sides of the balance sheet. The changes in net interest income
over the one year horizon for December 31, 2009 under the
1.0% and 2.0% increases in market interest rates scenarios are
reflective of this optionality. In general, in a rising rate
environment, yields on floating rate loans and investment
securities are expected to re-price upwards more quickly than
the cost of funds. This has been mitigated somewhat by the
aggressive implementation of floors on floating rate loans over
the past year; the impact of a rise in interest rates for these
assets is less than if these loans had no floors, causing the
positive net interest income sensitivity to be less than
previous reports.
The Company does not have any
sub-prime or
Alt-A mortgage-backed securities in its securities portfolio nor
does it have any
sub- prime
loans.
Gap analysis is used to determine the repricing
characteristics of the Companys assets and liabilities.
The following table sets forth the interest rate sensitivity of
the Companys assets and liabilities as of
December 31,
106
2009, and provides the repricing dates of the Companys
interest-earning assets and interest-bearing liabilities as of
that date, as well as the Companys interest rate
sensitivity gap percentages for the periods presented.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0-3
|
|
|
4-12
|
|
|
|
|
|
Over
|
|
|
|
|
|
|
Months
|
|
|
Months
|
|
|
1-5 Years
|
|
|
5 Years
|
|
|
Total
|
|
|
|
(Dollars in thousands)
|
|
|
INTEREST-EARNING ASSETS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal funds sold and other short-term investments
|
|
$
|
414,466
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
414,466
|
|
Securities
available-for-sale,
at fair value
|
|
|
197,672
|
|
|
|
165,818
|
|
|
|
89,782
|
|
|
|
128,202
|
|
|
|
581,474
|
|
Federal Reserve Bank and Federal Home Loan Bank stock
|
|
|
27,652
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27,652
|
|
Loans
|
|
|
1,024,700
|
|
|
|
267,194
|
|
|
|
744,475
|
|
|
|
283,950
|
|
|
|
2,320,319
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets
|
|
$
|
1,664,490
|
|
|
$
|
433,012
|
|
|
$
|
834,257
|
|
|
$
|
412,152
|
|
|
$
|
3,343,911
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INTEREST-BEARING LIABILITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing demand deposits
|
|
$
|
16,035
|
|
|
$
|
48,106
|
|
|
$
|
|
|
|
$
|
114,031
|
|
|
$
|
178,172
|
|
Money market deposits
|
|
|
15,141
|
|
|
|
45,422
|
|
|
|
|
|
|
|
107,665
|
|
|
|
168,228
|
|
Savings deposits
|
|
|
15,567
|
|
|
|
46,702
|
|
|
|
|
|
|
|
110,700
|
|
|
|
172,969
|
|
Time deposits
|
|
|
428,793
|
|
|
|
1,052,101
|
|
|
|
220,052
|
|
|
|
|
|
|
|
1,700,946
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing deposits
|
|
|
475,536
|
|
|
|
1,192,331
|
|
|
|
220,052
|
|
|
|
332,396
|
|
|
|
2,220,315
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revolving note payable
|
|
|
8,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,600
|
|
Securities sold under agreements to repurchase
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
297,650
|
|
|
|
297,650
|
|
Advances from the Federal Home Loan Bank
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
340,000
|
|
|
|
340,000
|
|
Junior subordinated debentures
|
|
|
60,828
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60,828
|
|
Subordinated debt
|
|
|
15,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,000
|
|
Term note payable
|
|
|
55,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
55,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total borrowings
|
|
|
139,428
|
|
|
|
|
|
|
|
|
|
|
|
637,650
|
|
|
|
777,078
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities
|
|
$
|
614,964
|
|
|
$
|
1,192,331
|
|
|
$
|
220,052
|
|
|
$
|
970,046
|
|
|
$
|
2,997,393
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest sensitivity gap
|
|
$
|
1,049,526
|
|
|
$
|
(759,319
|
)
|
|
$
|
614,205
|
|
|
$
|
(557,894
|
)
|
|
$
|
346,518
|
|
Cumulative interest sensitivity gap
|
|
$
|
1,049,526
|
|
|
$
|
290,207
|
|
|
$
|
904,412
|
|
|
$
|
346,518
|
|
|
|
|
|
Interest sensitivity gap to total assets
|
|
|
30.5
|
%
|
|
|
(22.1
|
)%
|
|
|
17.9
|
%
|
|
|
(16.2
|
)%
|
|
|
|
|
Cumulative interest sensitivity gap to total assets
|
|
|
30.5
|
%
|
|
|
8.4
|
%
|
|
|
26.3
|
%
|
|
|
10.1
|
%
|
|
|
|
|
The chart above shows the Company was asset sensitive or had a
positive Gap in the short-term (0-3 months) meaning a
greater amount of interest-earning assets are repricing or
maturing than the amount of interest-bearing liabilities during
the same time period. A positive gap generally indicates the
Company is positioned to benefit from a rising interest rate
environment. The cumulative interest sensitivity Gap is still
positive but substantially decreased in the 4-12 month
period, indicating the Companys GAP position is much more
closely matched through that time period and rate changes would
theoretically have much less effect on net interest income. In
the 1-5 year period the cumulative interest sensitivity Gap
becomes much more positive again showing the Companys
benefit from rising interest rates would increase. The Gap
position does not necessarily indicate the level of the
Companys interest rate sensitivity or the impact to net
interest income because the interest-earning assets and
interest-bearing liabilities are repricing off of different
indices.
Mortgage-backed securities, including adjustable rate mortgage
pools, are included in the above table based on their estimated
repricing or principal paydowns obtained from outside analytical
sources. Loans are included in the
107
above table based on contractual maturity or contractual
repricing dates, coupled with principal prepayment assumptions.
Deposits are based on managements analysis of industry
trends and customer behavior.
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. These computations 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. The
Gap analysis is based upon assumptions as to when
assets and liabilities will reprice in a changing interest rate
environment. Because such assumptions can be no more than
estimates, certain assets and liabilities indicated as maturing
or otherwise repricing within a stated period may, in fact,
mature or reprice at different times and at different volumes
than those estimated. Also, the renewal or repricing of certain
assets and liabilities can be discretionary and subject to
competitive and other pressures. Therefore, the gap table
included above does not and cannot necessarily indicate the
actual future impact of general interest rate movements on the
Companys net interest income. See Managements
Discussion and Analysis of Financial Condition and Results of
Operations Asset/Liability Management.
|
|
Item 8.
|
Consolidated
Financial Statements and Supplementary Data
|
See Consolidated Financial Statements beginning on
page F-1.
|
|
Item 9.
|
Changes
in and Disagreements With Independent Accountants On Accounting
and Financial Disclosure
|
None.
|
|
Item 9A.
|
Controls
and Procedures
|
Evaluation
of Disclosure Controls and Procedures
As of the end of the period covered by this report, an
evaluation was performed under the supervision and with the
participation of the Companys Chief Executive Officer and
Chief Financial Officer of the effectiveness of the
Companys disclosure controls and procedures (as defined in
Exchange Act
Rule 13a-15(e)).
Based on that evaluation, the Chief Executive Officer and the
Chief Financial Officer have concluded that the Companys
disclosure controls and procedures as of December 31, 2009
are effective to ensure that information required to be
disclosed by the Company in the reports that it files or submits
under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported, within the time periods
specified in the Securities and Exchange Commissions rules
and forms and such information is accumulated and communicated
to management as appropriate to allow timely decisions regarding
required disclosure.
Managements
Report on Internal Control Over Financial
Reporting
Management is responsible for establishing and maintaining
adequate internal control over financial reporting (as defined
in
Rule 13a-15(f)
under the Exchange Act). The Companys internal control
over financial reporting was designed to provide reasonable
assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in
accordance with GAAP. There are inherent limitations to the
effectiveness of any control system. Because of its inherent
limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the
risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies
or procedures may deteriorate.
Management assessed the effectiveness of the Companys
internal control over financial reporting as of
December 31, 2009. In making this assessment, management
used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in Internal
Control Integrated Framework. Based on
managements assessment, it determined that, as of
December 31, 2009, the Companys internal control over
financial reporting is effective based on those criteria.
108
The effectiveness of the Companys internal control over
financial reporting as of December 31, 2009, has been
audited by PricewaterhouseCoopers LLP, the independent
registered public accounting firm who also audited the
Companys consolidated financial statements, as stated in
their report included under Item 8.
|
|
Item 9B.
|
Other
Information
|
None.
PART III
|
|
Item 10.
|
Directors,
Executive Officers and Corporate Governance
|
Information regarding directors of the Company is included in
the Companys Proxy Statement for its 2010 Annual Meeting
of Stockholders (the Proxy Statement) under the
heading Election of Directors and the information
included therein is incorporated herein by reference.
Information regarding the executive officers of the Company is
included in Item 1. Business of this report.
Information regarding compliance with the reporting requirements
of Section 16(a) of the Securities Exchange Act of 1934 by
the Companys directors and certain officers, and certain
other owners of the Companys common stock is included in
the Proxy Statement under the heading Section 16(a)
Beneficial Ownership Compliance and the information
included therein is incorporated herein by reference.
Information regarding the Companys director nomination
procedures is included in the Proxy Statement under the heading
Director Nomination Procedures and the information
included therein is incorporated herein by reference.
Information regarding the Companys audit committee is
included in the Proxy Statement under the heading Audit
Committee and the information included therein is
incorporated herein by reference.
Information regarding the Companys Code of Business and
Conduct and Ethics is included in the Proxy Statement under the
heading Code of Business and Conduct and Ethics and
the information included therein is incorporated herein by
reference.
|
|
Item 11.
|
Executive
Compensation
|
Information regarding compensation of executive officers and
directors, compensation committee, and compensation committee
interlocks, are included in the Proxy Statement under the
headings Directors Compensation,
Executive Compensation, Compensation Committee
Report, and Compensation Committee Interlocks and
Insider Participation and the information included therein
is incorporated herein by reference.
|
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
|
Information regarding the equity compensation plan and security
ownership of certain beneficial owners and management are
included in the Proxy Statement under the heading Equity
Compensation Plan Information and Security Ownership
of Certain Beneficial Owners, and the information included
therein is incorporated herein by reference.
|
|
Item 13.
|
Certain
Relationships and Related Transactions, and Director
Independence
|
Information regarding certain relationships and related
transactions and the independence of the Companys
directors under its director independence standards are included
in the Proxy Statement under the heading Transactions with
Certain Related Persons and Director
Independence, and the information included therein is
incorporated herein by reference.
|
|
Item 14.
|
Principal
Accounting Fees and Services
|
Information regarding principal accounting fees and services is
included in the Proxy Statement under the heading
Independent Auditor, and the information included
therein is incorporated herein by reference.
109
PART IV
|
|
Item 15.
|
Exhibits
and Financial Statement Schedules
|
(a) (1) Index to Financial Statements
The consolidated financial statements of the Company and its
subsidiaries as required by Item 8 of
Form 10-K
are filed as a part of this document. See Contents of
Consolidated Financial Statements on
page F-1.
(a) (2) Financial Statement Schedules
All financial statement schedules as required by Item 8 and
Item 15 of
Form 10-K
have been omitted because the information requested is either
not applicable or has been included in the consolidated
financial statements or notes thereto.
(a) (3) Exhibits
The following exhibits are either filed as part of this report
or are incorporated herein by reference:
|
|
|
|
|
|
3
|
.1
|
|
Amended and Restated Certificate of Incorporation, as amended
(incorporated by reference to Registrants Form 10-Q for
the quarter ended September 30, 2007, File No. 001-13735).
|
|
3
|
.1.1
|
|
Certificate of Designation for the Series A Preferred Stock
(incorporated by reference to Registrants Report on Form
8-K filed December 7, 2007, File No. 001-13735).
|
|
3
|
.1.2
|
|
Deposit Agreement, dated December 5, 2007, among the Registrant,
Illinois Stock Transfer Company and the holders from time to
time of the Depositary Receipts issued pursuant to the Deposit
Agreement (incorporated by reference to Registrants Report
on Form 8-K filed December 7, 2007, File No. 001-13735).
|
|
3
|
.2
|
|
Amended and Restated By-laws (incorporated by reference to
Registrants Report on Form 8-K filed July 29, 2009, File
No. 001-13735).
|
|
3
|
.3
|
|
Certificate of Designation for the Series G Preferred Stock.
|
|
4
|
.1
|
|
Specimen Common Stock Certificate (incorporated by reference to
Registrants Registration Statement on Form S-1,
Registration No. 333-42827).
|
|
4
|
.1.1
|
|
Form of Certificate for the Series A Preferred Stock
(incorporated by reference to Registrants Report on Form
8-K filed December 7, 2007, File No. 001-13735).
|
|
4
|
.1.2
|
|
Form of Depositary Receipt for the Depositary Shares
(incorporated by reference to Registrants Report on Form
8-K filed December 7, 2007, File No. 001-13735).
|
|
4
|
.1.3
|
|
Form of Certificate for the Series G Preferred Stock.
|
|
4
|
.1.4
|
|
Warrant for Purchase of Shares of Common Stock, Dated March 8,
2010.
|
|
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 total 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
|
|
Midwest Banc Holdings, Inc. Stock and Incentive Plan
(incorporated by reference to Registrants Form 10-K for
the year ended December 31, 2006, File No. 001-13735).
|
|
10
|
.5
|
|
Lease dated as of December 24, 1958, between Western National
Bank of Cicero and Midwest Bank and Trust Company, as amended
(incorporated by reference to Registrants Registration
Statement on Form S-1, Registration No. 333-42827).
|
|
10
|
.6
|
|
Britannica Centre Lease, dated as of May 1, 1994, between
Chicago Title and Trust Company, as Trustee under Trust
Agreement dated November 2, 1977 and known as Trust No. 1070932
and Midwest Bank and Trust Company (incorporated by reference to
Registrants Registration Statement on Form S-1,
Registration No. 333-42827).
|
|
10
|
.7
|
|
Lease dated as of March 20, 1996 between Grove Lodge No. 824
Ancient Free and Accepted Masons and Midwest Bank of Hinsdale
(incorporated by reference to Registrants Registration
Statement on Form S-1, Registration No. 333-42827)
|
110
|
|
|
|
|
|
10
|
.8
|
|
Office Lease, undated, between Grove Lodge No. 824 Ancient Free
and Accepted Masons and Midwest Bank of Hinsdale (incorporated
by reference to Registrants Registration Statement on Form
S-1, Registration No. 333-42827).
|
|
*10
|
.15
|
|
Form of 2001 Supplemental Executive Retirement Agreement
(incorporated by reference to Registrants Form 10-Q for
the quarter ended September 30, 2001, File No. 001-13735).
|
|
*10
|
.16
|
|
Form of Transitional Employment Agreement (Executive Officer
Group) (incorporated by reference to Registrants Form 10-Q
for the quarter ended September 30, 2001, File No. 001-13735).
|
|
*10
|
.17
|
|
Form of Restricted Stock Award Agreement for Officers,
Restricted Stock Grant Notice for Officers, Incentive and
Nonqualified Stock Options Award Agreements, and Stock Option
Grant Notice for Officers (incorporated by reference to
Registrants Report on Form 8-K filed August 29, 2005, File
No. 001-13735).
|
|
*10
|
.18
|
|
Form of 2005 Supplemental Executive Retirement Agreement
(incorporated by reference to Registrants Report on Form
8-K filed October 28, 2005, File No. 001-13735).
|
|
*10
|
.19
|
|
Form of Restricted Stock Award Agreement for Non-employee
Directors and Restricted Stock Grant Notice for Non-employee
Directors (incorporated by reference to Registrants Report
on Form 8-K filed October 28, 2005, File No. 001-13735).
|
|
10
|
.21
|
|
Lease dated as of April 29, 1976, between Joseph C. and Grace
Ann Sanfilippo and Fairfield Savings and Loan Association, as
amended (incorporated by reference to Registrants Form
10-K for the year ended December 31, 2003, File No. 001-13735).
|
|
10
|
.22
|
|
Lease dated as of August 28, 2002 between Glen Oak Plaza and
Midwest Bank and Trust Company (incorporated by reference to
Registrants Form 10-K for the year ended December 31,
2003, File No. 001-13735).
|
|
10
|
.24
|
|
Loan Agreement as of April 4, 2007, between the Company and
M&I Marshall & Ilsley Bank (incorporated by reference
to Registrants Report on Form 8-K filed April 6, 2007,
File
No. 001-13735).
|
|
*10
|
.25
|
|
Employment Agreement as of September 28, 2004 between the
Company and the Chief Executive Officer (incorporated by
reference to Registrants Form 10-Q for the quarter ended
September 30, 2004, File No. 001-13735).
|
|
10
|
.29
|
|
Midwest Banc Holdings, Inc. Directors Deferred Compensation Plan
(incorporated by reference to Registrants Report on Form
8-K filed December 19, 2008, File No. 001-13735).
|
|
*10
|
.30
|
|
Amendment to Employment Agreement as of September 28, 2004
between the Company and the Chief Executive Officer
(incorporated by reference to Registrants Report on Form
8-K filed March 24, 2006, File No. 001-13735).
|
|
10
|
.32
|
|
Lease dated April 1, 1993, by and between Royal American Bank
and LaSalle National Trust, N.A., as amended, assumed by the
Company as of July 1, 2006 (incorporated by reference to
Registrants Form 10-Q for the quarter ended September 30,
2006, File No. 001-13735).
|
|
10
|
.33
|
|
Lease dated April 19, 1993 by and between Royal American Bank
and Hamilton Forsythe 1000 Tower Lane LLC, successor-in-interest
to Bensenville Office Venture, as amended, assumed by the
Company as of July 1, 2006 (incorporated by reference to
Registrants Form 10-Q for the quarter ended September 30,
2006, File No. 001-13735).
|
|
10
|
.34
|
|
Sublease dated January 31, 2006 by and between Royal American
Bank and JPMorgan Chase Bank, National Association, assumed by
the Company as of July 1, 2006 (incorporated by reference to
Registrants Form 10-Q for the quarter ended September 30,
2006, File No. 001-13735).
|
|
10
|
.35
|
|
Lease dated January 20, 2006 by and between Royal American Bank
and MEG Associates Limited Partnership, assumed by the Company
as of July 1, 2006 (incorporated by reference to
Registrants Form 10-Q for the quarter ended September 30,
2006, File No. 001-13735).
|
|
10
|
.36
|
|
Lease dated October 28, 1996 by and between Royal American Bank
and Tiffany Pointe, Inc./Marquette Bank, as amended, assumed by
the Company as of July 1, 2006 (incorporated by reference to
Registrants Form 10-Q for the quarter ended September 30,
2006, File No. 001-13735).
|
|
10
|
.37
|
|
Lease dated September 24, 1999, by and between Royal American
Bank and Moats Office Properties, Inc., as amended, assumed by
the Company as of July 1, 2006 (incorporated by reference to
Registrants Form 10-Q for the quarter ended September 30,
2006, File No. 001-13735).
|
111
|
|
|
|
|
|
10
|
.38
|
|
Lease dated July 14, 2006 by and between Midwest Bank and Trust
Company and William C. Moran (incorporated by reference to
Registrants Form 10-Q for the quarter ended September 30,
2006, File No. 001-13735).
|
|
*10
|
.41
|
|
Form of 2006 Supplemental Executive Retirement Agreement
(incorporated by reference to Registrants Form 10-Q for
the quarter ended September 30, 2006, File No. 001-13735).
|
|
*10
|
.42
|
|
First Amendment to the Form of 2005 Supplemental Executive
Retirement Agreement (incorporated by reference to
Registrants Form 10-Q for the quarter ended September 30,
2006, File
No. 001-13735).
|
|
10
|
.43
|
|
Lease dated November 9, 2005 by and between Midwest Bank and
Trust Company and Crossings Commercial, LLC (incorporated by
reference to Registrants Form 10-Q for the quarter ended
September 30, 2006, File No. 001-13735).
|
|
10
|
.44
|
|
Lease dated August 17, 2005 by and between Royal American Bank
and L.F.A.J.J. Partners, LLC, assumed by the Company as of July
1, 2006 (incorporated by reference to Registrants Form
10-Q for the quarter ended March 31, 2007, File No. 001-13735).
|
|
10
|
.45
|
|
Loan Agreement dated as of September 28, 2007 and amendment of
loan agreement dated April 4, 2007, between the Company and
M&I Marshall & Ilsley Bank (incorporated by reference
to Registrants Report on Form 8-K filed October 1, 2007,
File No. 001-13735).
|
|
*10
|
.46
|
|
Form of 2007 Transitional Employment Agreement (incorporated by
reference to Registrants Report on Form 8-K filed October
1, 2007, File No. 001-13735).
|
|
*10
|
.47
|
|
Form of 2007 Supplemental Executive Retirement Agreement
(incorporated by reference to Registrants Report on Form
8-K filed October 1, 2007, File No. 001-13735).
|
|
*10
|
.48
|
|
First Amendment to the Midwest Banc Holdings, Inc. Stock and
Incentive Plan (incorporated by reference to Registrants
Report on Form 8-K filed October 1, 2007, File No. 001-13735).
|
|
10
|
.49
|
|
Lease dated December 27, 2007 by and between Midwest Bank and
Trust Company and George Garner and Barbara Garner (incorporated
by reference to Registrants Form 10-K for the year ended
December 31, 2007, File No. 001-13735).
|
|
*10
|
.51
|
|
Second amendment to Employment Agreement as of September 28,
2004 between the Company and the Chief Executive Officer
(incorporated by reference to Registrants Form 10-Q for
the quarter ended March 31, 2008, File No. 001-13735).
|
|
10
|
.56
|
|
Amendment to Loan Agreement dated as of September 28, 2007 and
Loan Agreement dated March 31, 2008, between the Company
and M&I Marshall & Ilsley Bank (incorporated by
reference to Registrants Form 10-Q for the quarter ended
March 31, 2008, File No. 001-13735).
|
|
10
|
.57
|
|
Second Amendment of Loan Agreement dated April 4, 2007, between
the Company and M&I Marshall & Ilsley Bank
(incorporated by reference to Registrants Form 10-Q for
the quarter ended March 31, 2008, File No. 001-13735).
|
|
*10
|
.59
|
|
Midwest Banc Holdings, Inc. Employee Stock Purchase Plan
(incorporated by reference to Registrants Proxy Statement
filed April 7, 2008, File No. 001-13735).
|
|
*10
|
.60
|
|
Form of Waiver, executed by each of the Senior Executive
Officers (incorporated by reference to Registrants Report
on Form 8-K filed December 8, 2008, File No. 001-13735).
|
|
*10
|
.61
|
|
EESA Amendment to Officer Employment Benefits executed by each
of the Senior Executive Officers (incorporated by reference to
Registrants Report on Form 8-K filed December 8, 2008,
File No. 001-13735).
|
|
*10
|
.62
|
|
Settlement Agreement between the Company and James J. Giancola
(incorporated by reference to Registrants Form 10-K for
the year ended December 31, 2008, File No. 001-13735).
|
|
10
|
.63
|
|
Lease dated August 7, 2008 by and between Midwest Bank and Trust
Company and Buckingham Master Tenant, LLC (incorporated by
reference to Registrants Form 10-K for the year ended
December 31, 2008, File No. 001-13735).
|
|
10
|
.64
|
|
Lease dated November 18, 2008 by and between Midwest Bank and
Trust Company and Broadway 500 West Monroe Fee LLC
(incorporated by reference to Registrants Form 10-K for
the year ended December 31, 2008, File No. 001-13735).
|
112
|
|
|
|
|
|
10
|
.65
|
|
Lease dated December 1, 2008 by and between Midwest Bank and
Trust Company and 2150 I Corporation (incorporated by reference
to Registrants Form 10-K for the year ended December 31,
2008, File No. 001-13735).
|
|
*10
|
.66
|
|
Letter agreement dated January 30, 2008 by and between the
Company and the Chief Financial Officer (incorporated by
reference to Registrants Form 10-K for the year ended
December 31, 2008, File No. 001-13735).
|
|
10
|
.67
|
|
M&I Marshall & Ilsley Bank Loan Agreement Covenant
Waiver Letter dated March 4, 2009 (incorporated by reference to
Registrants Form 10-K for the year ended December 31,
2008, File No. 001-13735).
|
|
10
|
.68
|
|
Short-term Revolving Line of Credit Loan Agreement dated April
3, 2009 between the Company and M&I Marshall & Ilsley
(incorporated by reference to Registrants Report on Form
8-K filed April 30, 2009, File No. 001-13735).
|
|
10
|
.69
|
|
Short-term Revolving Line of Credit Loan Agreement dated June 3,
2009 between the Company and M&I Marshall & Ilsley.
(incorporated by reference to Registrants Report on Form
10-Q for the quarter ended June 30, 2009 filed August 10,
2009, File No. 001-13735).
|
|
*10
|
.70
|
|
Amended and Restated Midwest Banc Holdings, Inc. Severance
Policy (incorporated by reference to Registrants Report on
Form 8-K filed July 29, 2009, File No. 001-13735).
|
|
10
|
.71
|
|
Forbearance Agreement dated October 22, 2009 between the Company
and M&I Marshall & Ilsley Bank (incorporated by
reference to Registrants Report on Form 8-K filed October
28, 2009, File No. 001-13735).
|
|
*10
|
.72
|
|
Employment Agreement dated May 6, 2009 by and between the
Company and Roberto R. Herencia (incorporated by reference to
Registrants Report on Form 8-K filed May 8, 2009, File
No. 001-13735).
|
|
*10
|
.73
|
|
Employment Agreement dated May 15, 2009 by and between the
Company and J.J. Fritz (incorporated by reference to
Registrants Report on Form 8-K filed May 21, 2009, File
No. 001-13735).
|
|
10
|
.74
|
|
Written Agreement dated December 18, 2009 by and among the
Company, the Bank, the Federal Reserve Bank of Chicago, and the
Illinois Department of Financial and Professional Regulation
Division of Banking (incorporated by reference to
Registrants Report on Form 8-K filed December 24,
2009, File No. 001-13735).
|
|
10
|
.75
|
|
Exchange Agreement dated February 25, 2010 by and between the
Company and the United States Department of the Treasury
(incorporated by reference to Registrants Report on Form
8-K filed March 3, 2010, File No. 001-13735).
|
|
10
|
.76
|
|
Letter Agreement, dated December 5, 2008, between the Company
and United States Department of the Treasury (incorporated by
reference to Registrants Report on Form 8-K filed December
8, 2008, File No. 001-13735).
|
|
10
|
.77
|
|
Prompt Corrective Action Directive issued March 29, 2010 to the
Bank by the Board of Governors of the Federal Reserve System.
|
|
*10
|
.78
|
|
Form of Waiver, executed by each of the Senior Executive
Officers.
|
|
12
|
.1
|
|
Ratios of Earnings To Fixed Charges and Preferred Stock
Dividends.
|
|
21
|
.1
|
|
Subsidiaries.
|
|
23
|
.1
|
|
Consent of PricewaterhouseCoopers LLP.
|
|
31
|
.1
|
|
Rule 13a-14(a) Certification of Principal Executive Officer.
|
|
31
|
.2
|
|
Rule 13a-14(a) Certification of Principal Financial Officer.
|
|
32
|
.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 Companys Chief Executive Officer and Chief
Accounting Officer.
|
|
99
|
.1
|
|
Certification of Chief Executive Officer Pursuant to Section
111(B).
|
|
99
|
.2
|
|
Certification of Chief Financial Officer Pursuant to Section
111(B).
|
|
|
|
* |
|
Indicates management contracts or compensatory plans or
arrangements required to be filed as an exhibit. |
113
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Midwest Banc Holdings,
Inc.
|
|
|
|
By:
|
/s/ Roberto
r. herencia
|
Roberto R. Herencia
President and Chief Executive Officer
(Principal Executive Officer)
Date: March 30, 2010
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the
dates indicated.
Each person whose signature appears below constitutes and
appoints Roberto R. Herencia, JoAnn Sannasardo Lilek, and Jan R.
Thiry his true and law attorneys-in-fact and agents, each acting
alone, with full powers of substitution and resubstitution, for
him and in his name, place and stead, in any and all capacities,
to sign any or all amendments to this Annual Report on
Form 10-K,
and to file the same, with all exhibits thereto and other
documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and
perform each and every act and thing requisite and necessary to
be done in order to effectuate the filing of such report, as
fully for all intents and purposes as he might or could do in
person, thereby ratifying and confirming all that said
attorneys-in-fact and agents, and each of them, or his
substitutes, may lawfully do or cause to be done by virtue
hereof.
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
/s/ Percy
L. Berger
Percy
L. Berger
|
|
Chairman of the Board, Director
|
|
March 30, 2010
|
|
|
|
|
|
/s/ Roberto
R. Herencia
Roberto
R. Herencia
|
|
President, Chief Executive Officer, and Director (Principal
Executive Officer)
|
|
March 30, 2010
|
|
|
|
|
|
/s/ Barry
I. Forrester
Barry
I. Forrester
|
|
Director
|
|
March 30, 2010
|
|
|
|
|
|
/s/ Robert
J. Genetski
Robert
J. Genetski
|
|
Director
|
|
March 30, 2010
|
|
|
|
|
|
/s/ Gerald
F. Hartley
Gerald
F. Hartley
|
|
Director
|
|
March 30, 2010
|
|
|
|
|
|
/s/ E.V.
Silveri
E.V.
Silveri
|
|
Director
|
|
March 30, 2010
|
|
|
|
|
|
/s/ Kenneth
Velo
Kenneth
Velo
|
|
Director
|
|
March 30, 2010
|
114
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
/s/ JoAnn
Sannasardo Lilek
JoAnn
Sannasardo Lilek
|
|
Executive Vice President and Chief Financial Officer (Principal
Financial Officer)
|
|
March 30, 2010
|
|
|
|
|
|
/s/ Jan
R. Thiry
Jan
R. Thiry
|
|
Senior Vice President and Chief Accounting Officer (Principal
Accounting Officer)
|
|
March 30, 2010
|
115
MIDWEST
BANC HOLDINGS, INC.
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands, except share and per share data)
|
|
|
ASSETS
|
Cash and due from banks
|
|
$
|
27,644
|
|
|
$
|
61,330
|
|
Federal funds sold and other short-term investments
|
|
|
414,466
|
|
|
|
1,735
|
|
|
|
|
|
|
|
|
|
|
Total cash and cash equivalents
|
|
|
442,110
|
|
|
|
63,065
|
|
|
|
|
|
|
|
|
|
|
Securities
available-for-sale,
at fair value
|
|
|
581,474
|
|
|
|
621,949
|
|
Securities
held-to-maturity,
at amortized cost (fair value:
|
|
|
|
|
|
|
|
|
$30,387 at December 31, 2008)
|
|
|
|
|
|
|
30,267
|
|
|
|
|
|
|
|
|
|
|
Total securities
|
|
|
581,474
|
|
|
|
652,216
|
|
|
|
|
|
|
|
|
|
|
Federal Reserve Bank and Federal Home Loan Bank stock, at cost
|
|
|
27,652
|
|
|
|
31,698
|
|
Loans
|
|
|
2,320,319
|
|
|
|
2,509,759
|
|
Allowance for loan losses
|
|
|
(128,800
|
)
|
|
|
(44,432
|
)
|
|
|
|
|
|
|
|
|
|
Net loans
|
|
|
2,191,519
|
|
|
|
2,465,327
|
|
|
|
|
|
|
|
|
|
|
Cash surrender value of life insurance
|
|
|
|
|
|
|
84,675
|
|
Premises and equipment, net
|
|
|
39,769
|
|
|
|
38,313
|
|
Foreclosed properties
|
|
|
26,917
|
|
|
|
12,018
|
|
Core deposit intangibles, net
|
|
|
12,391
|
|
|
|
14,683
|
|
Goodwill
|
|
|
64,862
|
|
|
|
78,862
|
|
Other assets
|
|
|
48,851
|
|
|
|
129,355
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
3,435,545
|
|
|
$
|
3,570,212
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Liabilities
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
|
|
|
|
|
|
Noninterest-bearing
|
|
$
|
349,796
|
|
|
$
|
334,495
|
|
Interest-bearing
|
|
|
2,220,315
|
|
|
|
2,078,296
|
|
|
|
|
|
|
|
|
|
|
Total deposits
|
|
|
2,570,111
|
|
|
|
2,412,791
|
|
|
|
|
|
|
|
|
|
|
Revolving note payable
|
|
|
8,600
|
|
|
|
8,600
|
|
Securities sold under agreements to repurchase
|
|
|
297,650
|
|
|
|
297,650
|
|
Advances from the Federal Home Loan Bank
|
|
|
340,000
|
|
|
|
380,000
|
|
Junior subordinated debentures
|
|
|
60,828
|
|
|
|
60,791
|
|
Subordinated debt
|
|
|
15,000
|
|
|
|
15,000
|
|
Term note payable
|
|
|
55,000
|
|
|
|
55,000
|
|
|
|
|
|
|
|
|
|
|
Total borrowings
|
|
|
777,078
|
|
|
|
817,041
|
|
Other liabilities
|
|
|
31,880
|
|
|
|
34,546
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
3,379,069
|
|
|
|
3,264,378
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (see note 21)
|
|
|
|
|
|
|
|
|
Stockholders Equity
|
|
|
|
|
|
|
|
|
Preferred stock, $0.01 par value, 1,000,000 shares
authorized; Series A, $2,500 liquidation preference,
17,250 shares issued and outstanding at December 31,
2009 and 2008, Series T, $1,000 liquidation preference,
84,784 shares issued and outstanding at December 31,
2009 and 2008
|
|
|
1
|
|
|
|
1
|
|
Common stock, $0.01 par value, 64,000,000 shares
authorized; 29,847,921 shares issued and 28,121,279
outstanding at December 31, 2009 and 29,530,878 shares
issued and 27,892,578 outstanding at December 31, 2008
|
|
|
301
|
|
|
|
296
|
|
Additional paid-in capital
|
|
|
385,616
|
|
|
|
383,491
|
|
Warrant
|
|
|
5,229
|
|
|
|
5,229
|
|
Accumulated deficit
|
|
|
(311,620
|
)
|
|
|
(66,325
|
)
|
Accumulated other comprehensive loss
|
|
|
(8,298
|
)
|
|
|
(2,122
|
)
|
Treasury stock, at cost (1,726,642 shares at
December 31, 2009 and 1,638,300 shares at
December 31, 2008)
|
|
|
(14,753
|
)
|
|
|
(14,736
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
56,476
|
|
|
|
305,834
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
3,435,545
|
|
|
$
|
3,570,212
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-2
MIDWEST
BANC HOLDINGS, INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands, except per share data)
|
|
|
Interest income
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
133,180
|
|
|
$
|
151,120
|
|
|
$
|
155,044
|
|
Loans held for sale
|
|
|
|
|
|
|
|
|
|
|
89
|
|
Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
15,190
|
|
|
|
33,157
|
|
|
|
34,787
|
|
Exempt from federal income taxes
|
|
|
986
|
|
|
|
2,316
|
|
|
|
2,269
|
|
Trading securities
|
|
|
|
|
|
|
|
|
|
|
2
|
|
Dividend income from Federal Reserve Bank and Federal Home Loan
Bank stock
|
|
|
680
|
|
|
|
741
|
|
|
|
839
|
|
Federal funds sold and other short-term investments
|
|
|
472
|
|
|
|
327
|
|
|
|
839
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
|
150,508
|
|
|
|
187,661
|
|
|
|
193,869
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
47,208
|
|
|
|
66,025
|
|
|
|
76,692
|
|
Federal funds purchased and FRB discount window advances
|
|
|
49
|
|
|
|
2,064
|
|
|
|
1,829
|
|
Revolving note payable
|
|
|
448
|
|
|
|
474
|
|
|
|
186
|
|
Securities sold under agreements to repurchase
|
|
|
12,962
|
|
|
|
13,262
|
|
|
|
11,302
|
|
Advances from the Federal Home Loan Bank
|
|
|
12,195
|
|
|
|
11,824
|
|
|
|
14,769
|
|
Junior subordinated debentures
|
|
|
2,290
|
|
|
|
3,696
|
|
|
|
5,275
|
|
Subordinated debt
|
|
|
585
|
|
|
|
707
|
|
|
|
|
|
Term note payable
|
|
|
1,900
|
|
|
|
2,643
|
|
|
|
1,184
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
|
77,637
|
|
|
|
100,695
|
|
|
|
111,237
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
72,871
|
|
|
|
86,966
|
|
|
|
82,632
|
|
Provision for credit losses
|
|
|
170,203
|
|
|
|
72,642
|
|
|
|
4,891
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after provision for credit losses
|
|
|
(97,332
|
)
|
|
|
14,324
|
|
|
|
77,741
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest income
|
|
|
|
|
|
|
|
|
|
|
|
|
Service charges on deposit accounts
|
|
|
7,701
|
|
|
|
7,742
|
|
|
|
6,697
|
|
Net gains (losses) on securities transactions
|
|
|
4,798
|
|
|
|
(16,596
|
)
|
|
|
32
|
|
Impairment loss on securities
|
|
|
(740
|
)
|
|
|
(65,387
|
)
|
|
|
|
|
(Loss) gains on sale of loans
|
|
|
|
|
|
|
(75
|
)
|
|
|
443
|
|
Insurance and brokerage commissions
|
|
|
1,146
|
|
|
|
2,024
|
|
|
|
2,287
|
|
Trust fees
|
|
|
1,221
|
|
|
|
1,623
|
|
|
|
1,857
|
|
Increase in cash surrender value of life insurance
|
|
|
1,332
|
|
|
|
3,509
|
|
|
|
3,063
|
|
Gain on sale of property
|
|
|
|
|
|
|
15,196
|
|
|
|
|
|
Other
|
|
|
1,672
|
|
|
|
1,368
|
|
|
|
1,098
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest income (loss)
|
|
|
17,130
|
|
|
|
(50,596
|
)
|
|
|
15,477
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits
|
|
|
40,506
|
|
|
|
50,389
|
|
|
|
42,215
|
|
Occupancy and equipment
|
|
|
13,051
|
|
|
|
12,714
|
|
|
|
9,482
|
|
Professional services
|
|
|
9,510
|
|
|
|
8,590
|
|
|
|
5,470
|
|
Goodwill impairment
|
|
|
14,000
|
|
|
|
80,000
|
|
|
|
|
|
Loss on extinguishment of debt
|
|
|
|
|
|
|
7,121
|
|
|
|
|
|
Marketing
|
|
|
1,339
|
|
|
|
2,706
|
|
|
|
2,309
|
|
Foreclosed properties
|
|
|
7,313
|
|
|
|
332
|
|
|
|
34
|
|
Amortization of intangible assets
|
|
|
2,292
|
|
|
|
2,361
|
|
|
|
1,702
|
|
Merger related
|
|
|
|
|
|
|
271
|
|
|
|
1,312
|
|
FDIC insurance
|
|
|
9,296
|
|
|
|
2,603
|
|
|
|
252
|
|
Other
|
|
|
9,608
|
|
|
|
9,987
|
|
|
|
8,619
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest expense
|
|
|
106,915
|
|
|
|
177,074
|
|
|
|
71,395
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before income taxes
|
|
|
(187,117
|
)
|
|
|
(213,346
|
)
|
|
|
21,823
|
|
Provision (benefit) for income taxes
|
|
|
55,596
|
|
|
|
(55,073
|
)
|
|
|
3,246
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
|
(242,713
|
)
|
|
|
(158,273
|
)
|
|
|
18,577
|
|
Preferred stock dividends and premium accretion
|
|
|
6,057
|
|
|
|
3,728
|
|
|
|
204
|
|
Income allocated to participating securities
|
|
|
|
|
|
|
|
|
|
|
325
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income available to common stockholders
|
|
$
|
(248,770
|
)
|
|
$
|
(162,001
|
)
|
|
$
|
18,048
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic (loss) earnings per share
|
|
$
|
(8.89
|
)
|
|
$
|
(5.82
|
)
|
|
$
|
0.71
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted (loss) earnings per share
|
|
$
|
(8.89
|
)
|
|
$
|
(5.82
|
)
|
|
$
|
0.71
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends declared per common share
|
|
$
|
|
|
|
$
|
0.26
|
|
|
$
|
0.52
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-3
MIDWEST
BANC HOLDINGS, INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Earnings
|
|
|
Other
|
|
|
|
|
|
Total
|
|
|
|
Preferred
|
|
|
Common
|
|
|
Paid in
|
|
|
|
|
|
(Accumulated
|
|
|
Comprehensive
|
|
|
Treasury
|
|
|
Stockholders
|
|
|
|
Stock
|
|
|
Stock
|
|
|
Capital
|
|
|
Warrant
|
|
|
Deficit)
|
|
|
Loss
|
|
|
Stock
|
|
|
Equity
|
|
|
|
(In thousands, except share and per share data)
|
|
|
Balance, December 31, 2006
|
|
$
|
|
|
|
$
|
255
|
|
|
$
|
200,797
|
|
|
$
|
|
|
|
$
|
97,807
|
|
|
$
|
(6,273
|
)
|
|
$
|
(5,344
|
)
|
|
$
|
287,242
|
|
Cash dividends declared ($11.84 per share) on preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(204
|
)
|
|
|
|
|
|
|
|
|
|
|
(204
|
)
|
Cash dividends declared ($0.52 per share) on common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13,418
|
)
|
|
|
|
|
|
|
|
|
|
|
(13,418
|
)
|
Issuance of 17,250 shares of preferred stock, net of
issuance costs
|
|
|
|
|
|
|
|
|
|
|
41,441
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
41,441
|
|
Issuance of 3,680,725 shares of stock upon acquisition
|
|
|
|
|
|
|
37
|
|
|
|
54,953
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
54,990
|
|
Issuance of common stock upon exercise of 36,443 stock options,
net of tax benefits
|
|
|
|
|
|
|
|
|
|
|
429
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
429
|
|
Purchase of 661,500 treasury shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,392
|
)
|
|
|
(9,392
|
)
|
Issuance of 59,700 shares of restricted stock
|
|
|
|
|
|
|
1
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
3,143
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,143
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,577
|
|
|
|
|
|
|
|
|
|
|
|
18,577
|
|
Net decrease in fair value of
available-for-sale
securities, net of income taxes and reclassification adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,644
|
)
|
|
|
|
|
|
|
(7,644
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,933
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2007
|
|
|
|
|
|
|
293
|
|
|
|
300,762
|
|
|
|
|
|
|
|
102,762
|
|
|
|
(13,917
|
)
|
|
|
(14,736
|
)
|
|
|
375,164
|
|
Cash dividends declared ($193.75 per share) on preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,342
|
)
|
|
|
|
|
|
|
|
|
|
|
(3,342
|
)
|
Cash dividends declared ($0.26 per share) on common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,404
|
)
|
|
|
|
|
|
|
|
|
|
|
(7,404
|
)
|
Issuance of 84,784 shares of preferred stock
|
|
|
1
|
|
|
|
|
|
|
|
79,554
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
79,555
|
|
Issuance of warrant to purchase 4,282,020 shares of common
stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,229
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,229
|
|
Issuance of common stock upon exercise of 16,500 stock options,
net of tax benefits
|
|
|
|
|
|
|
|
|
|
|
178
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
178
|
|
Issuance of 24,168 shares of common stock to employee stock
purchase plan
|
|
|
|
|
|
|
|
|
|
|
35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35
|
|
Issuance of 278,324 shares of restricted stock
|
|
|
|
|
|
|
3
|
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accreted discount on preferred stock
|
|
|
|
|
|
|
|
|
|
|
68
|
|
|
|
|
|
|
|
(68
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
2,897
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,897
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(158,273
|
)
|
|
|
|
|
|
|
|
|
|
|
(158,273
|
)
|
Prior service cost, net of income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(433
|
)
|
|
|
|
|
|
|
(433
|
)
|
Loss on the projected benefit obligation, net of income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(240
|
)
|
|
|
|
|
|
|
(240
|
)
|
Net increase in fair value of
available-for-sale
securities, net of income taxes and reclassification adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,468
|
|
|
|
|
|
|
|
12,468
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(146,478
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2008
|
|
|
1
|
|
|
|
296
|
|
|
|
383,491
|
|
|
|
5,229
|
|
|
|
(66,325
|
)
|
|
|
(2,122
|
)
|
|
|
(14,736
|
)
|
|
|
305,834
|
|
Cash dividends declared ($48.4375 per share) on Series A
preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(836
|
)
|
|
|
|
|
|
|
|
|
|
|
(836
|
)
|
Cash dividends declared ($9.72 per share) on Series T
preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(824
|
)
|
|
|
|
|
|
|
|
|
|
|
(824
|
)
|
Issuance of 23,932 shares of common stock to employee stock
purchase plan
|
|
|
|
|
|
|
|
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15
|
|
Issuance of 166,568 shares of common stock to
directors deferred compensation plan
|
|
|
|
|
|
|
2
|
|
|
|
113
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
115
|
|
Issuance of 334,882 shares of restricted stock
|
|
|
|
|
|
|
3
|
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accreted discount on Series T preferred stock
|
|
|
|
|
|
|
|
|
|
|
922
|
|
|
|
|
|
|
|
(922
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
1,078
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,078
|
|
Repurchase of 10,695 shares of common stock under benefit
plan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(17
|
)
|
|
|
(17
|
)
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(242,713
|
)
|
|
|
|
|
|
|
|
|
|
|
(242,713
|
)
|
Prior service cost, including income taxes adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(177
|
)
|
|
|
|
|
|
|
(177
|
)
|
Gain on the projected benefit obligation, including income taxes
adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
849
|
|
|
|
|
|
|
|
849
|
|
Net decrease in fair value of
available-for-sale
securities, including income taxes adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,848
|
)
|
|
|
|
|
|
|
(6,848
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(248,889
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2009
|
|
$
|
1
|
|
|
$
|
301
|
|
|
$
|
385,616
|
|
|
$
|
5,229
|
|
|
$
|
(311,620
|
)
|
|
$
|
(8,298
|
)
|
|
$
|
(14,753
|
)
|
|
$
|
56,476
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-4
MIDWEST
BANC HOLDINGS, INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(242,713
|
)
|
|
$
|
(158,273
|
)
|
|
$
|
18,577
|
|
Adjustments to reconcile net (loss) income to net cash provided
by operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
4,079
|
|
|
|
4,206
|
|
|
|
3,288
|
|
Provision for credit losses
|
|
|
170,203
|
|
|
|
72,642
|
|
|
|
4,891
|
|
Amortization of core deposit and other intangibles
|
|
|
1,522
|
|
|
|
989
|
|
|
|
912
|
|
Goodwill impairment charge
|
|
|
14,000
|
|
|
|
80,000
|
|
|
|
|
|
Amortization of premiums and discounts on securities, net
|
|
|
723
|
|
|
|
630
|
|
|
|
819
|
|
Realized (gain) loss on sales of securities
|
|
|
(4,798
|
)
|
|
|
16,596
|
|
|
|
(32
|
)
|
Impairment loss on securities
|
|
|
740
|
|
|
|
65,387
|
|
|
|
|
|
Net gain on sales of mortgage loans
|
|
|
|
|
|
|
|
|
|
|
(443
|
)
|
Originations of loans held for sale
|
|
|
|
|
|
|
|
|
|
|
(40,800
|
)
|
Proceeds from sales of loans held for sale
|
|
|
|
|
|
|
|
|
|
|
43,915
|
|
Net loss on sales of loans
|
|
|
|
|
|
|
75
|
|
|
|
|
|
Gain on sale of property
|
|
|
|
|
|
|
(15,196
|
)
|
|
|
|
|
Loss of early extinguishment of debt
|
|
|
|
|
|
|
7,121
|
|
|
|
|
|
Increase in cash surrender value of life insurance
|
|
|
(1,332
|
)
|
|
|
(3,509
|
)
|
|
|
(3,063
|
)
|
Deferred income taxes
|
|
|
48,692
|
|
|
|
(43,757
|
)
|
|
|
(323
|
)
|
Loss on disposition of foreclosed properties, net
|
|
|
211
|
|
|
|
222
|
|
|
|
12
|
|
Impairment loss on foreclosed properties
|
|
|
4,904
|
|
|
|
|
|
|
|
|
|
Amortization of deferred stock based compensation
|
|
|
1,078
|
|
|
|
2,897
|
|
|
|
3,085
|
|
Change in other assets
|
|
|
30,186
|
|
|
|
(12,122
|
)
|
|
|
7,602
|
|
Change in other liabilities
|
|
|
(3,666
|
)
|
|
|
(892
|
)
|
|
|
(14,569
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
23,829
|
|
|
|
17,016
|
|
|
|
23,871
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales of securities
available-for-sale
|
|
|
593,097
|
|
|
|
108,770
|
|
|
|
189,495
|
|
Sales of securities held-to maturity
|
|
|
27,856
|
|
|
|
4,262
|
|
|
|
2,039
|
|
Redemption of Federal Reserve Bank and Federal Home Loan Bank
stock
|
|
|
4,046
|
|
|
|
1,000
|
|
|
|
499
|
|
Maturities of securities
available-for-sale
|
|
|
1,678,165
|
|
|
|
137,725
|
|
|
|
93,571
|
|
Maturities of securities
held-to-maturity
|
|
|
|
|
|
|
|
|
|
|
430
|
|
Principal payments on securities
available-for-sale
|
|
|
65,151
|
|
|
|
50,875
|
|
|
|
69,254
|
|
Principal payments on securities
held-to-maturity
|
|
|
2,468
|
|
|
|
2,966
|
|
|
|
5,665
|
|
Purchases of securities
available-for-sale
|
|
|
(2,298,598
|
)
|
|
|
(270,533
|
)
|
|
|
(428,468
|
)
|
Purchases of Federal Reserve Bank and Federal Home Loan Bank
stock
|
|
|
|
|
|
|
(4,974
|
)
|
|
|
(3,128
|
)
|
Purchase of mortgage loans
|
|
|
|
|
|
|
|
|
|
|
(5,776
|
)
|
Proceeds from sale of mortgages
|
|
|
|
|
|
|
5,789
|
|
|
|
|
|
Loan originations and principal collections, net
|
|
|
84,207
|
|
|
|
(103,298
|
)
|
|
|
(85,378
|
)
|
Proceeds from sale of property
|
|
|
|
|
|
|
18,259
|
|
|
|
|
|
Cash paid, net of cash and cash equivalents in acquisition
|
|
|
|
|
|
|
|
|
|
|
(71,658
|
)
|
Proceeds from disposition of foreclosed properties
|
|
|
2,311
|
|
|
|
244
|
|
|
|
225
|
|
Proceeds from liquidation of bank-owned life insurance
|
|
|
86,008
|
|
|
|
|
|
|
|
|
|
Additions to property and equipment
|
|
|
(5,535
|
)
|
|
|
(3,889
|
)
|
|
|
(3,869
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
239,176
|
|
|
|
(52,804
|
)
|
|
|
(237,099
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-5
MIDWEST
BANC HOLDINGS, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in deposits
|
|
|
157,587
|
|
|
|
(44,997
|
)
|
|
|
29,324
|
|
Payments of junior subordinated debt owed to unconsolidated
trusts
|
|
|
|
|
|
|
|
|
|
|
(15,000
|
)
|
Proceeds from borrowings
|
|
|
|
|
|
|
289,600
|
|
|
|
192,500
|
|
Repayments on borrowings
|
|
|
(40,000
|
)
|
|
|
(234,075
|
)
|
|
|
(120,000
|
)
|
Preferred cash dividends paid
|
|
|
(1,660
|
)
|
|
|
(3,342
|
)
|
|
|
(204
|
)
|
Common cash dividends paid
|
|
|
|
|
|
|
(11,076
|
)
|
|
|
(13,004
|
)
|
Change in federal funds purchased and securities sold under
agreements to repurchase
|
|
|
|
|
|
|
(66,750
|
)
|
|
|
91,151
|
|
Proceeds from issuance of common stock under stock and incentive
plan
|
|
|
130
|
|
|
|
35
|
|
|
|
|
|
Issuance of preferred stock and warrant
|
|
|
|
|
|
|
84,784
|
|
|
|
41,441
|
|
Repurchase of common stock
|
|
|
(17
|
)
|
|
|
|
|
|
|
(9,392
|
)
|
Proceeds from issuance of treasury stock under stock option plan
|
|
|
|
|
|
|
175
|
|
|
|
379
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
116,040
|
|
|
|
14,354
|
|
|
|
197,195
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents
|
|
|
379,045
|
|
|
|
(21,434
|
)
|
|
|
(16,033
|
)
|
Cash and cash equivalents at beginning of year
|
|
|
63,065
|
|
|
|
84,499
|
|
|
|
100,532
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$
|
442,110
|
|
|
$
|
63,065
|
|
|
$
|
84,499
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the year for:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
78,163
|
|
|
$
|
103,436
|
|
|
$
|
109,483
|
|
Income taxes
|
|
|
2,242
|
|
|
|
2,700
|
|
|
|
10,100
|
|
Dividends declared not paid
|
|
$
|
|
|
|
$
|
|
|
|
$
|
3,672
|
|
Acquisition
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncash assets acquired
|
|
$
|
|
|
|
$
|
|
|
|
$
|
624,270
|
|
Liabilities assumed
|
|
|
|
|
|
|
|
|
|
|
497,622
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net noncash assets acquired
|
|
$
|
|
|
|
$
|
|
|
|
$
|
126,648
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents acquired
|
|
$
|
|
|
|
$
|
|
|
|
$
|
10,066
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
MIDWEST
BANC HOLDINGS, INC.
Note 1
Nature of Operations
Midwest Banc Holdings, Inc. (the Company) is a bank
holding company organized under the laws of the State of
Delaware. Through its commercial bank and non-bank subsidiaries,
the Company provides a full line of financial services to
corporate and individual customers located in the greater
Chicago metropolitan area. These services include demand, time,
and savings deposits; lending; brokerage and insurance products;
and trust services. While the Companys management monitors
the revenue streams of the various products and services,
operations are managed and financial performance is evaluated on
a Company-wide basis. The Company operates in one business
segment, community banking, providing a full range of services
to individual and corporate customers.
Note 2
Regulatory Actions
As a result of a safety and soundness examination of the
Companys wholly owned subsidiary, Midwest Bank and
Trust Company (the Bank) by the Federal Reserve
Bank of Chicago (the Federal Reserve Bank) and the
Illinois Department of Financial and Professional Regulation,
Division of Banking (the Illinois Division of
Banking), the Company and the Bank entered into a written
agreement (the Written Agreement) with the Federal
Reserve Bank and the Illinois Division of Banking on
December 18, 2009, that is intended to strengthen the Bank
and improve the Companys overall financial condition. As
disclosed in previous documents filed with the Securities and
Exchange Commission, the Company had anticipated entering into a
formal supervisory action following the completion of the
examination and was already taking many of the steps referenced
in the Written Agreement.
The Written Agreement establishes timeframes for the completion
of measures which have been previously identified by the Company
and the regulators as important to improve the Companys
financial performance. Under the Written Agreement, the Company
was required to prepare and file with the regulators within
specified timeframes (generally, 60 days from the date of
the Written Agreement) various specific plans designed to
improve (i) board oversight over the management and
operations of the Bank, (ii) credit risk management
practices, (iii) management of problem loans, (iv) the
allowance for loan losses, (v) the Banks earnings and
budget, (vi) liquidity and funds management and
(vii) interest rate risk management.
The Written Agreement requires, among other things, that the
Company and the Bank obtain prior approval in order to pay
dividends. In addition, the Company must obtain prior approval
of the Federal Reserve Bank to (i) take any other form of
payment from the Bank representing a reduction in capital of the
Bank; (ii) make any distributions of interest, principal or
other sums on subordinated debentures or trust preferred
securities; (iii) incur, increase or guarantee any debt; or
(iv) purchase or redeem any shares of the Companys
stock. Pursuant to the terms of the Written Agreement, the
Company and the Bank were also required, within 60 days of
the date of the Written Agreement, to submit an acceptable
written plan to the regulators to maintain sufficient capital at
the Company, on a consolidated basis, and at the Bank on a
standalone basis. The Company submitted its written plan in
February 2010.
There can be no assurance that the Company will be able to
satisfy, in a timely manner or at all, the requirements set
forth in the Written Agreement, or that the plans adopted in
response to the Written Agreements requirements will have
their intended effect. The Company believes that the successful
completion of all or a significant portion of its capital plan,
which includes executing transactions that seek to improve the
Companys and the Banks capital position, increase
its common equity and Tier 1 capital and raise additional
capital (Capital Plan), will help the Bank and the
Company to meet the requirements of the Written Agreement. The
Company has completed, or is in the process of completing a
number of significant steps as part of the Capital Plan. The
steps completed in 2009 and the beginning of 2010 include the
exchange of 82% of the Companys outstanding shares of
Series A noncumulative redeemable convertible perpetual
preferred stock for common stock, the exchange of all of the
Companys outstanding Series T fixed rate cumulative
perpetual preferred stock for a new series of fixed rate
cumulative mandatorily convertible preferred stock, cost
reduction initiatives, and refined cumulative credit loss
projections. However, the successful completion of all or any
remaining portions of the Capital Plan is not assured.
F-7
MIDWEST
BANC HOLDINGS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company is actively pursuing execution of the remaining
steps of the Capital Plan including the restructuring of its
outstanding credit agreements with its primary lender along with
raising significant new equity capital. The Company believes
that an equity raise of approximately $250 million together
with an agreement by its primary lender to convert the amount
outstanding under its credit agreements to equity capital is
required for the Company and Bank to become and remain well
capitalized and continue to operate as a going concern. While
the Company continues to seek new equity capital, it has not
received any commitment for a new capital investment, and there
can be no assurance a sufficient amount of capital can be raised
in a timely manner. If the Company is unsuccessful in raising a
sufficient amount of new equity capital, or, alternatively,
executing another strategic initiative, the Company may become
subject to a voluntary or involuntary bankruptcy filing or a
receiver for the Bank could be appointed by its regulators.
The Company and the Bank were notified on March 25, 2010 by
the Federal Reserve Bank of Chicago (the Federal Reserve
Bank) that the Banks capital plan, submitted on
March 15, 2010, was not accepted. According to the Federal
Reserve Bank, the plan was not accepted because, among other
things, the Company has not yet raised $125 million of new
equity, which is a condition to the Companys ability to
convert to common stock the new convertible preferred stock,
Series G, that the Company issued to the
U.S. Department of the Treasury (the U.S.
Treasury) in March 2010 in exchange for all outstanding
preferred stock, Series T, previously held by the
U.S. Treasury.
On March 29, 2010, as a result of the Banks
significantly undercapitalized status, the Bank consented to the
issuance of a Prompt Corrective Action Directive
(PCA) by the Federal Reserve Bank. The PCA provides
that the Bank, in conjunction with the Company, must within
45 days of March 29, 2010 either: (i) increase
the Banks capital so that it becomes adequately
capitalized; (ii) enter into and close on an agreement to
sell the Bank subject to regulatory approval and customary
closing conditions; or (iii) take other necessary measures
to make the Bank adequately capitalized. The PCA also prohibits
the Bank from making any capital distributions, including
dividends and from soliciting and accepting new deposits bearing
an interest rate that exceeds the prevailing effective rates on
deposits of comparable amounts and maturities in the Banks
market area. The Bank must submit to the Federal Reserve Bank
within 30 days a plan and timetable for conforming the
rates of interest paid on existing non-time deposit accounts to
these levels.
The PCA also subjects the Bank to other operating restrictions,
including payment of bonuses to senior executive officers and
increasing their compensation, restrictions on asset growth and
branching, and ensuring that all transactions between the Bank
and any affiliates comply with Section 23A of the Federal
Reserve Act. The Bank was already in compliance with certain of
these guidelines as the Bank is already significantly
undercapitalized. For example, the Bank has been complying with
the FDICs rules relating to the payment of interest on
deposits. The Company and the Bank continue to be subject to the
Written Agreement entered into with the Federal Reserve Bank and
the Illinois Division of Banking in December 2009 as further
described under Recent Developments Written
Agreement with Regulators.
Note 3
Regulatory Capital
As of December 31, 2009, the Company and the Bank did not
meet all regulatory capital adequacy requirements administered
by the federal banking agencies. Under capital adequacy
guidelines and the regulatory framework for prompt corrective
action, banks must meet specific capital guidelines that involve
quantitative measures of assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory
accounting practices. Prompt corrective action provisions are
not applicable to bank holding companies.
Quantitative measures established to ensure capital adequacy
require banks and bank holding companies to maintain minimum
amounts and ratios of total and Tier 1 capital to
risk-weighted assets and Tier 1 capital to average assets.
If a bank does not meet these minimum capital requirements, as
defined, bank regulators can initiate certain actions that could
have a direct material adverse effect on the banks ongoing
operations.
F-8
MIDWEST
BANC HOLDINGS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
As of December 31, 2009, the most recent Federal Deposit
Insurance Corporation notification categorized the Bank as under
capitalized under the regulatory framework for prompt corrective
action. As a result of the Banks undercapitalized status
for regulatory capital purposes as of December 31, 2009,
the Bank is no longer able to accept or renew brokered deposits,
whether wholesale or retail, secure deposits at rates that are
75 basis points higher than the prevailing effective rates
on insured deposits of comparable amounts or maturities in the
Banks normal market area or the national rates
periodically released by the FDIC, pay dividends or make other
capital distributions, or obtain funds through Federal funds
lines.
In addition, the agreements with one of the Banks
repurchase agreement counterparties could permit that
counterparty to terminate the repurchase agreements as a result
of the Bank being categorized as less than well capitalized. At
December 31, 2009, the Banks repurchase agreements
with those provisions totaled $262.7 million with fixed
interest rates ranging from 2.76% to 4.65%, maturities ranging
from approximately 7.5 to 8.5 years, and quarterly call
provisions (at the counterpartys option). Due to the
relatively high fixed rates on these borrowings as compared to
currently low market rates of interest, the Bank would incur
substantial costs to unwind these repurchase agreements if
terminated prior to their maturities. These associated unwind
costs could have a material adverse effect on the Companys
results of operations and financial condition in the period of
payment. The associated unwind costs would be the difference
between the fair value and carrying value of the repurchase
agreements on the date of termination. Because the repurchase
agreements are collateralized at an amount sufficient to cover
any such unwind costs which may be incurred, any such costs
would result in a charge in the statement of operations but
would not expect to have an adverse effect on the Banks
liquidity.
As a result of continued deterioration in the credit quality of
the loan portfolio in early 2010, the Banks interim
capital position was significantly undercapitalized
as of January 31, 2010.
See Note 5 Summary of Significant
Accounting Policies, Going Concern and Note 19
Capital Requirements of the notes to the
consolidated financial statements for a further discussion of
the Companys and Banks capital requirements.
Note 4
Forbearance Agreement
The Companys credit agreements with a correspondent bank
at December 31, 2009 included a revolving line of credit,
term note, and subordinated debt. At September 30, 2009,
the Company was in violation of the financial, regulatory
capital, and nonperforming loan covenants contained in the
revolving line of credit and term note. The Company also did not
make a required principal payment on the term note due on
July 1, 2009 and did not pay all of the aggregate
outstanding principal on the revolving line of credit that
matured July 3, 2009. On July 8, 2009, the lender
advised the Company that the non-compliance and failure to make
the principal payments constitute events of default. See
Note 17 Credit Agreements of the notes to the
consolidated financial statements.
On October 22, 2009, the Company entered into a forbearance
agreement (Forbearance Agreement) with its lender
that provides for a forbearance period through March 31,
2010, during which time the Company will pursue completion of
its Capital Plan. During the forbearance period, the Company is
not obligated to make interest and principal payments in excess
of funds held in a deposit security account (which was initially
funded with $325,000), and while retaining all rights and
remedies under the credit agreements, the lender has agreed not
to demand payment of amounts due or begin foreclosure
proceedings in respect of the collateral, which consists
primarily of all the stock of the Companys principal
subsidiary, the Bank, and has agreed to forbear from exercising
the rights and remedies available to it in respect of existing
defaults and future compliance with certain covenants through
March 31, 2010. As part of the Forbearance Agreement, the
Company entered into a tax refund security agreement under which
it agreed to deliver to the lender the expected proceeds to be
received in connection with an outstanding Federal income tax
refund in the approximate amount of $2.1 million. These
proceeds, if and when received, will be placed in the deposit
security account, and will be available for interest and
principal payments. No proceeds from this tax refund have been
received as of December 31, 2009. The Forbearance Agreement
may terminate prior to March 31, 2010 if the Company
defaults under any of its representations, warranties or
obligations contained in
F-9
MIDWEST
BANC HOLDINGS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
either the Forbearance Agreement or credit agreements, or the
Bank becomes subject to receivership by the FDIC or the Company
becomes subject to other bankruptcy or insolvency type
proceedings.
Although the lender is not exercising all of its rights and
remedies while the forbearance period is in effect (other than
continuing to impose default rates of interest), the lender has
not waived, or committed to waive, the Existing Events of
Default or any other default or event of default.
Upon the expiration of the forbearance period, the principal and
interest payments that were due under the revolving line of
credit and the term note, as modified by the covenant waivers,
at the time the Forbearance Agreement was entered into will once
again become due and payable, along with such other amounts as
may have become due during the forbearance period. Absent
successful completion of all or a significant portion of the
Capital Plan, the Company expects that it would not be able to
meet any demands for payment of amounts then due at the
expiration of the forbearance period. If the Company is unable
to renegotiate, renew, replace or expand its sources of
financing on acceptable terms, it may have a material adverse
effect on the Companys business and results of operations.
See Note 5 Summary of Significant
Accounting Policies, Going Concern of the notes to the
consolidated financial statements.
Note 5
Summary of Significant Accounting Policies
Basis of Presentation: The consolidated
financial statements of the Company include the accounts of the
Company and the Bank. Included in the Bank are its wholly owned
subsidiaries MBTC Investment Company, Midwest Funding, L.L.C.,
and Midwest Financial and Investment Services, Inc. Significant
intercompany balances and transactions have been eliminated.
Going Concern: The consolidated financial
statements of the Company have been prepared assuming that the
Company will continue as a going concern. The Company incurred
net losses of $248.8 million and $162.0 million for
the years ended December 31, 2009 and 2008, respectively,
primarily due to provisions for credit losses and goodwill
impairment charges in both years, tax charges related to a
valuation allowance on deferred tax assets in 2009, and
impairment charges and realized losses on the preferred stock of
FNMA and FHLMC in 2008. Due to the resulting deterioration in
capital levels of the Bank and the Company, combined with the
current uncertainty as to the Companys ability to raise
sufficient amounts of new equity capital, recent regulatory
actions with respect to the Company and the Bank, and the
current inability of the Company to repay amounts owed under its
Loan Agreements with its primary lender if, upon or subsequent
to the expiration of the Forbearance Agreement on March 31,
2010, its primary lender were to declare the amounts outstanding
thereunder immediately due and payable, as previously discussed
in Notes 2, 3 and 4, there is substantial doubt about the
Companys ability to continue as a going concern. The
December 31, 2009 consolidated financial statements do not
include any adjustments that might result from the outcome of
this uncertainty.
Managements plans in regard to these matters are described
in detail in Note 2 Regulatory Actions. The
Company continues to pursue the completion of all significant
portions of the Capital Plan as described in Note 2 above,
which primarily includes executing transactions that seek to
improve the Companys and the Banks capital ratios,
restructure its obligations under the Companys loan
agreements with its primary lender (as described in
Note 4 Forbearance Agreement and
Note 17 Credit Agreements) and raise additional
equity capital to permit the Bank and the Company to meet and
maintain minimum regulatory capital levels as required under the
Written Agreement and PCA and provide the necessary liquidity to
provide for future operating needs. The successful completion of
all or any remaining portions of the Capital Plan is not
assured, and if the Company is unsuccessful in raising a
sufficient amount of new equity capital, or alternatively,
executing another strategic initiative, the Company may become
subject to a voluntary or involuntary bankruptcy filing or the
Bank could be placed into FDIC receivership by its regulators.
In addition, if the Company or the Bank is unable to comply with
the terms of the Written Agreement or any other applicable
regulations, the Company and the Bank could become subject to
additional, heightened supervisory actions and orders, which
could, among other things, limit their ability to
F-10
MIDWEST
BANC HOLDINGS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
develop new business lines, mandate additional capital, require
the sale of certain assets and liabilities, and otherwise have a
material adverse effect on the business of the Bank and the
Company.
Use of Estimates: The preparation of the
consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could
differ significantly from those estimates. Material estimates
that are particularly susceptible to change are the allowance
for loan losses, income taxes, and the fair value of financial
instruments.
Cash and Cash Equivalents: Cash and cash
equivalents include cash, deposits with other financial
institutions under 90 days, and federal funds sold. The
Bank is required to maintain reserve balances in cash or on
deposit with the Federal Reserve Bank, based on a percentage of
deposits. The total of those reserve balances was
$6.4 million at December 31, 2009.
Securities: Securities are classified as
held-to-maturity
when the Company has the ability and the positive intent to hold
those securities to maturity. Accordingly, they are stated at
cost adjusted for amortization of premiums and accretion of
discounts. Securities are classified as
available-for-sale
when the Company may decide to sell those securities due to
changes in market interest rates, liquidity needs, changes in
yields or alternative investments, and for other reasons. They
are carried at fair value with unrealized gains and losses, net
of taxes, reported in other comprehensive income. Interest
income is reported net of amortization of premium and accretion
of discount. Realized gains and losses on disposition of
securities
available-for-sale
are based on the net proceeds and the adjusted cost of the
securities sold, using the specific identification method.
Declines in the fair value of
held-to-maturity
and
available-for-sale
securities below their cost that are deemed to be other than
temporary, if any, are reflected in earnings as realized losses,
if the amounts are related to credit loss, or recognized in
other comprehensive income, if the amounts are related to other
factors. In determining
other-than-temporary
losses for debt securities, management considers whether the
Company (i) intends to sell the security, (ii) more
likely than not will be required to sell the security before
recovering its cost, or (iii) does not expect to recover
the securitys entire amortized cost.
Other-than-temporary
losses are separated between the amount related to credit loss
(which is recognized in current earnings) and the amount related
to all other factors (which is recognized in other comprehensive
income).
Other-than-temporary
losses are recognized in current earnings if the Company has the
intent to sell and recovery of the securitys entire
amortized cost is not expected. In estimating
other-than-temporary
losses for equity securities, management considers (1) the
length of time and the extent to which the fair value has been
less than cost, (2) the financial condition and near-term
prospects of the issuer, and (3) the intent and ability of
the Company to retain its investment in the issuer for a period
of time sufficient to allow for any anticipated recovery in fair
value.
Loans: Loans are reported net of the allowance
for loan losses and deferred fees. Impaired loans are carried at
the present value of expected future cash flows or the fair
value of the related collateral if lower than the principal
balance outstanding for collateral dependent loans. Interest on
loans is included in interest income over the term of the loan
based upon the principal balance outstanding. The accrual of
interest on loans is discontinued at the time the loan becomes
90 days past due unless the credit is well-secured and in
process of collection. Past due status is based on contractual
terms of the loan. Loans are placed on nonaccrual or charged off
at an earlier date if collection of principal or interest is
considered doubtful. All interest accrued but not collected for
loans that are placed on nonaccrual is reversed against interest
income. The interest on these loans is accounted for on the
cash-basis or cost-recovery method, until qualifying for return
to accrual status. Loans are returned to accrual status when all
the principal and interest amounts contractually due are brought
current and future payments are reasonably assured.
Deferred Loan Fees and Costs: Loan origination
fees and origination costs are deferred and amortized over the
life of the loan as an adjustment to yield. The amortization of
the remaining loan origination fees and origination costs is
suspended when the loan is placed on nonaccrual status.
F-11
MIDWEST
BANC HOLDINGS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Allowance for Loan Losses: The allowance for
loan losses represents managements estimate of probable
credit losses inherent in the loan portfolio. Estimating the
amount of the allowance for loan losses requires significant
judgment and the use of estimates related to the amount and
timing of expected future cash flows and collateral values on
impaired loans, estimated losses on pools of homogeneous loans
based on historical loss experience, and consideration of
current economic trends and conditions, all of which are
susceptible to significant change. Loan losses are charged off
against the allowance, while recoveries of amounts previously
charged off are credited to the allowance. A provision for loan
losses is charged to operations based on managements
periodic evaluation of the factors previously mentioned, as well
as other pertinent factors.
The Companys methodology for determining the allowance for
loan losses represents an estimation pursuant to the
authoritative guidance for contingencies (ASC 450) and loan
impairments (ASC
310-10-35).
The allowance reflects estimated incurred losses resulting from
analyses developed through specific credit allocations for
individual loans and historical loss experience for other loans
grouped within the Companys internal credit rating
framework. The specific credit allocations are based on regular
analyses of all loans over $300,000 where the internal credit
rating is at or below a predetermined classification. These
analyses involve a high degree of judgment in estimating the
amount of loss associated with specific loans, including
estimating the amount and timing of future cash flows and
collateral values. The allowance for loan losses also includes
consideration of concentrations and changes in portfolio mix and
volume, and other qualitative factors. The results of
examination from regulatory agencies are also considered.
There are many factors affecting the allowance for loan losses;
some are quantitative while others require qualitative judgment.
The process for determining the allowance includes subjective
elements and, therefore, may be susceptible to significant
change. To the extent actual outcomes differ from management
estimates, additional provision for loan losses could be
required that could adversely affect earnings or financial
position in future periods.
A loan is considered impaired when, based on current information
and events, it is probable that the Company will be unable to
collect all amounts due according to the contractual terms of
the loan agreement. Impairment is evaluated in total for
smaller-balance impaired loans of a similar nature such as
residential mortgage and consumer loans below a specific
internal credit rating and on an individual basis for other
loans that exceed the set threshold of $300,000. If a loan is
impaired, a portion of the allowance is allocated so that the
loan is reported, net, at the present value of estimated future
cash flows using the loans existing rate or at the fair
value of collateral if lower than the principal balance
outstanding for collateral dependent loans.
Cash Surrender Value of Life Insurance: The
Company previously purchased life insurance policies on certain
executive and other officers. Life insurance was recorded at its
cash surrender value or the amount that could be realized.
During 2009, the Company liquidated its entire
$85.8 million investment in bank owned life insurance.
Premises and Equipment: Premises and equipment
are stated at cost, less accumulated depreciation and
amortization. Provisions for depreciation and amortization,
included in operating expenses are computed on the straight-line
method over the estimated useful lives of the assets ranging
from three to thirty-nine years (three to five years for
equipment and up to thirty-nine years for premises). The cost of
maintenance and repairs is charged to income as incurred; and
all significant improvements are capitalized.
Foreclosed Properties: Real estate acquired in
settlement of loans is recorded at the lower of cost or fair
value when acquired, establishing a new cost basis. Expenditures
that increase the fair value of properties are capitalized as an
adjustment to the cost basis, while other expenditures are
recognized in noninterest expense. If fair value subsequently
declines below the cost basis, a valuation allowance is recorded
through expense.
Core Deposit Intangibles: Core deposit
intangible assets arise from whole bank and branch acquisitions.
They are initially measured at fair value and then are amortized
on an accelerated method over their estimated useful lives.
F-12
MIDWEST
BANC HOLDINGS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Goodwill: Goodwill results from business
acquisitions and represents the excess of the purchase price
over the fair value of acquired net tangible assets and
identifiable intangible assets. Goodwill is not amortized but
assessed at least annually, at September 30, for
impairment, and any such impairment is recognized in the period
it is identified. A goodwill impairment test also could be
triggered between annual testing dates if an event occurs or
circumstances change that would more likely than not reduce the
fair value below the carrying amount. Examples of those events
or circumstances would include the following
(i) significant adverse change in business climate;
(ii) significant unanticipated loss of clients/assets under
management; (iii) unanticipated loss of key personnel;
(iv) sustained periods of poor investment performance;
(v) significant loss of deposits or loans;
(vi) significant reductions in profitability; or
(vii) significant changes in loan credit quality.
Income Taxes: Deferred tax assets and
liabilities are recognized for temporary differences between the
financial reporting basis and the tax basis of the
Companys assets and liabilities. Deferred taxes are
recognized for the estimated taxes ultimately payable or
recoverable based on enacted tax laws. Changes in enacted tax
rates and laws are reflected in the financial statements in the
periods they occur. Deferred tax assets are reduced by a
valuation allowance when, in the judgment of management, it is
more likely than not that some portion or all of the deferred
tax assets will not be realized.
Securities Sold Under Agreements to
Repurchase: All securities sold under agreements
to repurchase represent amounts advanced by various primary
dealers. Securities are pledged to secure these liabilities.
Transfers of Financial Assets: Transfers of
financial assets are accounted for as sales only when control
over the assets has been surrendered. Control over transferred
assets is deemed to be surrendered when (1) the assets have
been isolated from the Company, (2) the transferee obtains
the right (free of conditions that constrain it from taking
advantage of that right) to pledge or exchange the transferred
assets, and (3) the Company does not maintain effective
control over the transferred assets through an agreement to
repurchase them before their maturity.
Fair Value of Financial Instruments and
Derivatives: Fair values of financial
instruments, including derivatives, are estimated using relevant
market information and other assumptions. Fair value estimates
involve uncertainties and matters of significant judgment
regarding interest rates, credit risk, prepayments, and other
factors, especially in the absence of broad markets for
particular items. There is no readily available market for a
significant portion of the Companys financial instruments.
Accordingly, fair values are based on various factors relative
to expected loss experience, current economic conditions, risk
characteristics, and other factors. The assumptions and
estimates used in the fair value determination process are
subjective in nature and involve uncertainties and significant
judgment. As a consequence, fair values cannot be determined
with precision. Changes in assumptions or in market conditions
could significantly affect these estimates.
Stock Compensation: Employee compensation cost
relating to share-based payment transactions, including grants
of employee stock options and restricted stock awards, are
measured at fair value and recognized in the financial
statements as prescribed by the authoritative guidance for stock
compensation (ASC 718). Employee compensation expense for stock
options and restricted stock granted is recorded in the
consolidated statement of operations based on the grants
vesting schedule. Forfeitures of stock options and restricted
stock grants are estimated for those grants where the requisite
service is not expected to be rendered. The grant-date fair
value for each stock options grant is calculated using the
Black-Scholes option pricing model.
Comprehensive Income: Comprehensive income
includes both net income and other comprehensive income
elements, including the change in unrealized gains and losses on
securities
available-for-sale,
as well as the prior service cost and unrealized gains and
losses related to the projected benefit obligation of the
Supplemental Executive Retirement Plan, net of tax.
Earnings Per Common Share: Basic earnings per
common share is net income available to common stockholders
divided by the weighted average number of common shares
outstanding during the period. Diluted earnings per common share
includes the dilutive effect of additional potential common
shares issuable under stock options, the warrant, and restricted
stock awards as well as under the if converted
method for the noncumulative
F-13
MIDWEST
BANC HOLDINGS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
redeemable convertible perpetual preferred stock. Earnings and
dividends per share are restated for all stock splits and stock
dividends through the date of issue of the financial statements.
Earnings per share was also computed for instruments granted in
share-based payment transactions that are deemed participating
securities using the two-class method for all periods presented.
Dividend Restriction: Banking regulations
require the Company and the Bank to maintain certain capital
levels and may limit the dividends paid by the Bank to the
Company or by the Company to stockholders. The Company will only
be able to pay dividends with the approval of the
U.S. Department of the Treasury (the
U.S. Treasury). The Company and the Bank must
obtain prior approval from the Federal Reserve Bank and Illinois
Division of Banking in order to pay dividends as required by the
Written Agreement. Due to net loss, the Bank must obtain prior
approval from the Federal Reserve Bank in order to pay dividends.
Reclassifications: Certain items in the prior
year financial statements were reclassified to conform to the
current years presentation. Such reclassifications had no
effect on net income.
Accounting Pronouncements: The Financial
Accounting Standards Board (FASB) has established
the FASB Accounting Standards
Codificationtm
(Codification or ASC) as the single
source of authoritative U.S. generally accepted accounting
principles (GAAP) recognized by the FASB to be
applied by nongovernmental entities (ASC 105). Rules and
interpretive releases of the Securities and Exchange Commission
(SEC) under authority of federal securities laws are
also sources of authoritative GAAP for SEC registrants. The
Codification supersedes all existing non-SEC accounting and
reporting standards. All other non-grandfathered, non-SEC
accounting literature not included in the Codification has
become non-authoritative. Following the Codification, the Board
will not issue new standards in the form of Statements, FASB
Staff Positions, or Emerging Issues Task Force Abstracts.
Instead, it will issue Accounting Standards Updates
(ASU), which will serve to update the Codification,
provide background information about the guidance and provide
the basis for conclusions on the changes to the Codification.
GAAP is not intended to be changed as a result of the
Codification, but it will change the way the guidance is
organized and presented.
In June 2006, the FASB issued authoritative guidance which
clarifies the accounting and reporting for uncertainties in the
application of income tax laws, providing a comprehensive model
for the financial statement recognition, measurement,
presentation and disclosure of income tax positions taken or
expected to be taken in income tax returns. The Companys
adoption of this guidance on January 1, 2007 did not have a
material impact on the Companys consolidated financial
position and results of operations. See Note 25
Income Taxes of the notes to the consolidated financial
statements for more details.
In December 2007, FASB revised the authoritative guidance for
business combinations (ASC 805), which modifies the accounting
for business combinations and requires, with limited exceptions,
the acquirer in a business combination to recognize all of the
assets acquired, liabilities assumed, and any noncontrolling
interests in the acquiree at the acquisition-date, at fair
value. This guidance also requires certain contingent assets and
liabilities acquired as well as contingent consideration to be
recognized at fair value. In addition, the statement requires
payments to third parties for consulting, legal, audit, and
similar services associated with an acquisition to be recognized
as expenses when incurred rather than capitalized as part of the
cost of the acquisition. The adoption of this guidance on
January 1, 2009 did not have a material effect on the
Companys consolidated results of operations or
consolidated financial position.
The Company adopted the authoritative guidance for fair value
measurements (ASC 820) on January 1, 2008, which
defines fair value, establishes a framework for measuring fair
value in GAAP, and expands disclosures about fair value
measurements. This guidance applies to other ASC topics that
require or permit fair value measurements. Accordingly, this
guidance did not require any new financial assets or liabilities
to be measured at fair value. In February 2008, FASB delayed the
effective date of this guidance for all nonfinancial assets and
nonfinancial liabilities, except those that are recognized or
disclosed at fair value on a recurring basis (at least annually)
to fiscal years beginning after November 15, 2008. The
Companys adoption of this guidance did not have a material
impact
F-14
MIDWEST
BANC HOLDINGS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
on the Companys consolidated financial position and
results of operations. In October 2008, the FASB amended this
guidance, which clarifies the application of fair value
measurements in an inactive market and provides an illustrative
example to demonstrate how the fair value of a financial asset
is to be determined when the market for that financial asset is
not active. This amendment became effective for the
Companys interim financial statements as of
September 30, 2008 and did not significantly impact the
methods by which the Company determines the fair values of its
financial assets. On April 9, 2009, the FASB amended the
authoritative guidance for fair value measurements and
disclosures (ASC 820), which requires increased analysis and
management judgment to estimate fair value if an entity
determines that either the volume
and/or level
of activity for an asset or liability has significantly
decreased or price quotations or observable inputs are not
associated with orderly transactions. Valuation techniques such
as an income approach might be appropriate to supplement or
replace a market approach in those circumstances. This guidance
requires entities to disclose in interim and annual periods the
inputs and valuation techniques used to measure fair value along
with any changes in valuation techniques and related inputs
during the period. This guidance is effective for interim and
annual periods ending after June 15, 2009. Accordingly, the
Company included these new disclosures beginning April 1,
2009. See Note 20 Fair Value of the notes to
the consolidated financial statements for more information.
In June 2008, the FASB provided guidance for determining whether
an equity-linked financial instrument (or embedded feature) is
indexed to an entitys own stock (ASC
815-40-15).
This guidance applies to any freestanding financial instrument
or embedded feature that has all of the characteristics of a
derivative or freestanding instrument that is potentially
settled in an entitys own stock (with the exception of
share-based payment awards within the scope of the authoritative
guidance for stock compensation (ASC 718)). To meet the
definition of indexed to own stock, an
instruments contingent exercise provisions must not be
based on (a) an observable market, other than the market
for the issuers stock (if applicable), or (b) an
observable index, other than an index calculated or measured
solely by reference to the issuers own operations, and the
variables that could affect the settlement amount must be inputs
to the fair value of a
fixed-for-fixed
forward or option on equity shares. The adoption of this
guidance on January 1, 2009 did not have a material effect
on the Companys consolidated results of operations or
consolidated financial position.
In June 2008, the FASB issued authoritative guidance for
determining whether instruments granted in share-based payment
transactions are participating securities (ASC 260). This
guidance addresses whether instruments granted in share-based
payment transactions are participating securities prior to
vesting and, therefore, need to be included in the earnings
allocation in computing earnings per share under the two-class
method. The Company adopted the provisions of this guidance
effective January 1, 2009 and computed earnings per share
using the two-class method for all periods presented. Upon
adoption, the Company was required to retrospectively adjust
earnings per share data to conform to the provisions in this
guidance.
In April 2009, the FASB amended the authoritative guidance for
interim disclosures about fair value of financial instruments
(ASC 825), which relates to fair value disclosures in public
entity financial statements for financial instruments. This
guidance increases the frequency of fair value disclosures from
annual only to quarterly. This guidance is effective for interim
and annual periods ending after June 15, 2009. The adoption
of this guidance did not have a material effect on the
Companys consolidated results of operations or
consolidated financial position, but enhanced required
disclosures. Accordingly, the Company included these new
disclosures beginning April 1, 2009. See
Note 20 Fair Value of the notes to the
consolidated financial statements for more information. In
January 2010, the FASB issued authoritative guidance on
improving disclosures about fair value measurements (ASU
2010-6).
This guidance requires new disclosures for transfers in and out
of Levels 1 and 2 and the reasons for the transfers as well
as additional breakout of asset and liability categories. This
guidance is effective for interim and annual reporting periods
beginning after December 15, 2009. This guidance also
requires purchases, sales, issuances and settlements to be
reported separately in the summary of changes in Level 3
fair value measurements. This additional guidance will be
effective for fiscal years beginning after December 15,
2010, and for interim periods within those fiscal years. The
Company does not anticipate a material effect on the its
consolidated results of operations or consolidated financial
position from adopting this guidance.
F-15
MIDWEST
BANC HOLDINGS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In April 2009, FASB issued new authoritative guidance that
revises the recognition and reporting requirements for
other-than-temporary
impairments of debt securities (ASC 320). This new guidance
revises the recognition and reporting requirements for
other-than-temporary
impairments of debt securities. This guidance eliminates the
ability and intent to hold provision for debt
securities and impairment is considered to be other than
temporary if a company (i) intends to sell the security,
(ii) more likely than not will be required to sell the
security before recovering its cost, or (iii) does not
expect to recover the securitys entire amortized cost.
This guidance also eliminates the probability
standard relating to the collectibility of cash flows and
impairment is considered to be other than temporary if the
present value of cash flows expected to be collected is less
than the amortized cost (credit loss).
Other-than-temporary
losses also need to be separated between the amount related to
credit loss (which is recognized in current earnings) and the
amount related to all other factors (which is recognized in
other comprehensive income). This guidance is effective for
interim and annual periods ending after June 15, 2009. The
adoption of this guidance on April 1, 2009 did not have a
material effect on the Companys consolidated results of
operations or consolidated financial position.
In May 2009, the FASB issued authoritative guidance establishing
principles and requirements for subsequent events (ASC 855).
This guidance establishes general standards of accounting for
and disclosure of events that occur after the balance sheet date
but before financial statements are issued or are available to
be issued. This guidance is based on the same principles as
those that currently exist in the auditing standards. This
guidance also requires disclosure of subsequent events that keep
the financial statements from being misleading. The adoption of
this guidance on June 30, 2009 did not have a material
effect on the Companys consolidated results of operations
or consolidated financial position. In February 2010, the FASB
issued ASU
2010-09,
Subsequent Events (ASU
2010-09),
effective immediately, which amends ASC 855 to clarify that an
SEC filer is not required to disclose the date through which
subsequent events have been evaluated in the financial
statements. The adoption of ASU
2010-09 did
not have a material effect on the Companys consolidated
results of operations or consolidated financial position. See
Note 30 Subsequent Events of the notes to the
consolidated financial statements for more information.
In June 2009, the FASB issued authoritative guidance
establishing accounting and reporting standards for transfers
and servicing of financial assets and also establishing the
accounting for transfers of servicing rights (ASC 860). This
guidance eliminates the concept of a qualifying special-purpose
entity and introduces the concept of a participating
interest, which will limit the circumstances where the
transfer of a portion of a financial asset will qualify as a
sale, assuming all other derecognition criteria are met. This
guidance also clarifies and amends the derecognition criteria
for determining whether a transfer qualifies for sale accounting
as well as requires additional disclosures. These additional
disclosures are intended to provide greater transparency about a
transferors continuing involvement with transferred
assets. The adoption of ASC 860 on January 1, 2010 is not
expected to have a material effect on the Companys
consolidated results of operations or consolidated financial
position.
In June 2009, the FASB issued authoritative guidance which
eliminates the quantitative approach previously required for
determining the primary beneficiary of a variable interest
entity (ASC 810). If an enterprise is required to consolidate an
entity as a result of the initial application of this standard,
it should describe the transition method(s) applied and shall
disclose the amount and classification in its statement of
financial position of the consolidated assets or liabilities by
the transition method(s) applied. If an enterprise is required
to deconsolidate an entity as a result of the initial
application of this standard, it should disclose the amount of
any cumulative effect adjustment related to deconsolidation
separately from any cumulative effect adjustment related to
consolidation of entities. The adoption of ASC 810 on
January 1, 2010 is not expected to have a material effect
on the Companys consolidated results of operations or
consolidated financial position.
Note 6
Business Combination
On October 1, 2007, the Company acquired Northwest Suburban
Bancorp, Inc. (Northwest Suburban), in a cash and
stock merger transaction. The agreement and plan of merger
provided that the Companys stock comprise
F-16
MIDWEST
BANC HOLDINGS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
up to 45% of the purchase price, at an exchange ratio of
2.4551 shares of Company common stock for each Northwest
Suburban common share, and that the remainder be paid in cash at
the rate of $42.75 for each share of Northwest Suburban common
stock. The Company issued 3.7 million shares of common
stock, paid $81.2 million in cash, and incurred $414,000 in
acquisition costs which were capitalized for a total purchase
price of $136.7 million at the closing on October 1,
2007. The Company used the proceeds from a $75.0 million
term note it had under a borrowing facility with a correspondent
bank to pay for a portion of the cash requirement of the
acquisition. Northwest Suburban was merged into the Company,
thus canceling 100% of Northwest Suburbans voting shares
outstanding.
The acquisition of Northwest Suburban constituted a business
combination under the authoritative guidance for business
combinations and was accounted for using the then applicable
purchase method. Accordingly, the purchase price was allocated
to the respective assets acquired and liabilities assumed based
on their estimated fair values on the date of acquisition. The
excess of purchase price over the fair value of net assets
acquired was recorded as goodwill, which is not deductible for
tax purposes. The purchase price allocation was finalized in the
third quarter of 2008. The results of operations of Northwest
Suburban have been included in the Companys consolidated
results of operations since October 1, 2007, the date of
acquisition.
The following are the adjustments made to record the transaction
and to adjust Northwest Suburbans assets and liabilities
to their estimated fair values at acquisition.
|
|
|
|
|
|
|
(In thousands)
|
|
|
Purchase price of Northwest Suburban:
|
|
|
|
|
Market value of the Companys stock issued
|
|
$
|
55,137
|
|
Cash paid
|
|
|
81,163
|
|
|
|
|
|
|
Total consideration
|
|
|
136,300
|
|
Capitalized costs
|
|
|
414
|
|
|
|
|
|
|
Total cost
|
|
$
|
136,714
|
|
|
|
|
|
|
Historical net assets of Northwest Suburban
|
|
$
|
52,388
|
|
Fair market value adjustments:
|
|
|
|
|
Securities
available-for-sale
|
|
|
(323
|
)
|
Loans
|
|
|
(970
|
)
|
Goodwill
|
|
|
80,550
|
|
Core deposit intangible
|
|
|
8,061
|
|
Premises and equipment
|
|
|
1,726
|
|
Deposits
|
|
|
(2,140
|
)
|
Severance
|
|
|
(88
|
)
|
Deferred taxes on purchase accounting adjustment
|
|
|
(2,490
|
)
|
|
|
|
|
|
Total adjustments to record the transaction
|
|
$
|
136,714
|
|
|
|
|
|
|
F-17
MIDWEST
BANC HOLDINGS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following are the assets acquired and liabilities assumed
from Northwest Suburban at October 1, 2007, including the
adjustments made to record the transaction and to adjust the
assets and liabilities to their estimated fair values.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Market
|
|
|
|
|
|
|
Northwest
|
|
|
Value
|
|
|
As
|
|
|
|
Suburban
|
|
|
Adjustment
|
|
|
Adjusted
|
|
|
|
(In thousands)
|
|
|
Assets acquired:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
10,066
|
|
|
$
|
|
|
|
$
|
10,066
|
|
Securities
available-for-sale
|
|
|
57,920
|
|
|
|
(323
|
)
|
|
|
57,597
|
|
Federal Reserve Bank and Federal Home Loan Bank stock
|
|
|
1,503
|
|
|
|
|
|
|
|
1,503
|
|
Loans, net
|
|
|
437,452
|
|
|
|
(970
|
)
|
|
|
436,482
|
|
Cash value of life insurance
|
|
|
12,884
|
|
|
|
|
|
|
|
12,884
|
|
Premises and equipment, net
|
|
|
17,553
|
|
|
|
1,726
|
|
|
|
19,279
|
|
Core deposit intangible, net
|
|
|
|
|
|
|
8,061
|
|
|
|
8,061
|
|
Goodwill
|
|
|
|
|
|
|
80,550
|
|
|
|
80,550
|
|
Other assets
|
|
|
7,914
|
|
|
|
|
|
|
|
7,914
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets acquired
|
|
|
545,292
|
|
|
|
89,044
|
|
|
|
634,336
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities assumed:
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
468,520
|
|
|
|
2,140
|
|
|
|
470,660
|
|
Federal funds purchased
|
|
|
6,170
|
|
|
|
|
|
|
|
6,170
|
|
Advances from the Federal Home Loan Bank
|
|
|
3,500
|
|
|
|
|
|
|
|
3,500
|
|
Junior subordinated debentures
|
|
|
10,310
|
|
|
|
|
|
|
|
10,310
|
|
Other liabilities (including severance)
|
|
|
4,404
|
|
|
|
2,578
|
|
|
|
6,982
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities assumed
|
|
|
492,904
|
|
|
|
4,718
|
|
|
|
497,622
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets acquired less liabilities assumed
|
|
$
|
52,388
|
|
|
$
|
84,326
|
|
|
$
|
136,714
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following are the unaudited pro forma consolidated results
of operations of the Company for the year ended
December 31, 2007 as though Northwest Suburban had been
acquired as of January 1, 2007.
|
|
|
|
|
|
|
2007
|
|
|
(In thousands, except
|
|
|
per share data)
|
|
Net interest income
|
|
$
|
96,429
|
|
Net income
|
|
|
16,983
|
|
Basic earnings per share
|
|
|
0.60
|
|
Diluted earnings per share
|
|
|
0.60
|
|
Included in the pro forma results of operations for the year
ended December 31, 2007 were merger-related expenses,
primarily
change-in-control
and severance payments, investment banker, legal and audit fees,
net of tax, of $4.3 million.
F-18
MIDWEST
BANC HOLDINGS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Note 7
Securities
The amortized cost and fair value of securities
available-for-sale
and
held-to-maturity
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
|
|
(In thousands)
|
|
|
Securities
available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of U.S. Treasury
|
|
$
|
310,954
|
|
|
$
|
6
|
|
|
$
|
(13
|
)
|
|
$
|
310,947
|
|
Mortgage-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government agencies residential(1)
|
|
|
259,878
|
|
|
|
219
|
|
|
|
(3,822
|
)
|
|
|
256,275
|
|
U.S. government-sponsored entities residential(2)
|
|
|
1,271
|
|
|
|
|
|
|
|
(12
|
)
|
|
|
1,259
|
|
Equity securities of U.S. government-sponsored entities(3)
|
|
|
2,749
|
|
|
|
105
|
|
|
|
(582
|
)
|
|
|
2,272
|
|
Corporate and other debt securities
|
|
|
14,920
|
|
|
|
|
|
|
|
(4,199
|
)
|
|
|
10,721
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities
available-for-sale
|
|
$
|
589,772
|
|
|
$
|
330
|
|
|
$
|
(8,628
|
)
|
|
$
|
581,474
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities
held-to-maturity
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes obligations of the Government National Mortgage
Association (GNMA). |
|
(2) |
|
Includes obligations of the Federal Home Loan Mortgage
Corporation (FHLMC). |
|
(3) |
|
Includes issues from Federal National Mortgage Association
(FNMA) and FHLMC. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
|
|
(In thousands)
|
|
|
Securities
available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of U.S. Treasury and U.S. government-sponsored
entities(1)
|
|
$
|
263,483
|
|
|
$
|
1,952
|
|
|
$
|
|
|
|
$
|
265,435
|
|
Obligations of states and political subdivisions
|
|
|
57,309
|
|
|
|
241
|
|
|
|
(886
|
)
|
|
|
56,664
|
|
Mortgage-backed securities(1)(2)
|
|
|
281,592
|
|
|
|
3,363
|
|
|
|
(1,276
|
)
|
|
|
283,679
|
|
Equity securities(3)
|
|
|
2,749
|
|
|
|
|
|
|
|
(1,819
|
)
|
|
|
930
|
|
Corporate and other debt securities
|
|
|
19,176
|
|
|
|
|
|
|
|
(3,935
|
)
|
|
|
15,241
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities
available-for-sale
|
|
$
|
624,309
|
|
|
$
|
5,556
|
|
|
$
|
(7,916
|
)
|
|
$
|
621,949
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
held-to-maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of states and political subdivisions
|
|
$
|
1,251
|
|
|
$
|
12
|
|
|
$
|
|
|
|
$
|
1,263
|
|
Mortgage-backed securities(1)(2)
|
|
|
29,016
|
|
|
|
138
|
|
|
|
(30
|
)
|
|
|
29,124
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities
held-to-maturity
|
|
$
|
30,267
|
|
|
$
|
150
|
|
|
$
|
(30
|
)
|
|
$
|
30,387
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes obligations of the FHLMC and FNMA. |
|
(2) |
|
Includes obligations of the GNMA. |
|
(3) |
|
Includes issues from the FNMA and FHLMC. |
F-19
MIDWEST
BANC HOLDINGS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company sold $538.1 million of its securities portfolio
with an average yield of 3.94% and average life of slightly over
two years, including $27.7 million of securities classified
as
held-to-maturity.
The securities sold consisted of U.S. government-sponsored
entities debentures, mortgage-backed securities, and municipal
bonds. These securities were sold in the open market at a net
gain of $4.3 million; $117,000 of this gain was related to
securities classified as
held-to-maturity.
The Company reinvested the proceeds in lower yielding securities
with shorter terms, including U.S. Treasury bills and
Government National Mortgage Association mortgage-backed
securities.
Consistent with the Companys stated intent to sell certain
other securities, the Company recognized a $740,000
other-than-temporary
impairment charge on June 30, 2009 on securities that were
identified as for sale under the program.
The following is a summary of the fair value of securities
held-to-maturity
and
available-for-sale
with unrealized losses and the time period of those unrealized
losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
|
Less Than 12 Months
|
|
|
12 Months or More
|
|
|
Total
|
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
|
(In thousands)
|
|
|
Securities
available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of U.S. Treasury
|
|
$
|
150,954
|
|
|
$
|
(13
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
150,954
|
|
|
$
|
(13
|
)
|
Mortgage-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government agencies residential(1)
|
|
|
204,754
|
|
|
|
(3,822
|
)
|
|
|
|
|
|
|
|
|
|
|
204,754
|
|
|
|
(3,822
|
)
|
U.S. government-sponsored entities residential(2)
|
|
|
1,259
|
|
|
|
(12
|
)
|
|
|
|
|
|
|
|
|
|
|
1,259
|
|
|
|
(12
|
)
|
Equity securities of U.S. government-sponsored entities(3)
|
|
|
219
|
|
|
|
(64
|
)
|
|
|
461
|
|
|
|
(518
|
)
|
|
|
680
|
|
|
|
(582
|
)
|
Corporate and other debt securities
|
|
|
|
|
|
|
|
|
|
|
10,721
|
|
|
|
(4,199
|
)
|
|
|
10,721
|
|
|
|
(4,199
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities
available-for-sale
|
|
|
357,186
|
|
|
|
(3,911
|
)
|
|
|
11,182
|
|
|
|
(4,717
|
)
|
|
|
368,368
|
|
|
|
(8,628
|
)
|
Total securities
held-to-maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total temporarily impaired securities
|
|
$
|
357,186
|
|
|
$
|
(3,911
|
)
|
|
$
|
11,182
|
|
|
$
|
(4,717
|
)
|
|
$
|
368,368
|
|
|
$
|
(8,628
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes obligations of GNMA. |
|
(2) |
|
Includes obligations of FHLMC. |
|
(3) |
|
Includes issues from FNMA and FHLMC. |
F-20
MIDWEST
BANC HOLDINGS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
|
Less Than 12 Months
|
|
|
12 Months or More
|
|
|
Total
|
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
|
(In thousands)
|
|
|
Securities
available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of states and political subdivisions
|
|
$
|
34,293
|
|
|
$
|
(886
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
34,293
|
|
|
$
|
(886
|
)
|
Mortgage-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government-sponsored entities(1)
|
|
|
60,117
|
|
|
|
(198
|
)
|
|
|
39,778
|
|
|
|
(1,078
|
)
|
|
|
99,895
|
|
|
|
(1,276
|
)
|
Equity securities of U.S. government-sponsored entities(2)
|
|
|
899
|
|
|
|
(1,819
|
)
|
|
|
|
|
|
|
|
|
|
|
899
|
|
|
|
(1,819
|
)
|
Corporate and other debt securities
|
|
|
3,746
|
|
|
|
(287
|
)
|
|
|
11,495
|
|
|
|
(3,648
|
)
|
|
|
15,241
|
|
|
|
(3,935
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities
available-for-sale
|
|
|
99,055
|
|
|
|
(3,190
|
)
|
|
|
51,273
|
|
|
|
(4,726
|
)
|
|
|
150,328
|
|
|
|
(7,916
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
held-to-maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of states and political subdivisions
|
|
|
250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
250
|
|
|
|
|
|
Mortgage-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government-sponsored entities(1)
|
|
|
|
|
|
|
|
|
|
|
20,521
|
|
|
|
(30
|
)
|
|
|
20,521
|
|
|
|
(30
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities
held-to-maturity
|
|
|
250
|
|
|
|
|
|
|
|
20,521
|
|
|
|
(30
|
)
|
|
|
20,771
|
|
|
|
(30
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total temporarily impaired securities
|
|
$
|
99,305
|
|
|
$
|
(3,190
|
)
|
|
$
|
71,794
|
|
|
$
|
(4,756
|
)
|
|
$
|
171,099
|
|
|
$
|
(7,946
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes obligations of GNMA. |
|
(2) |
|
Includes issues from FNMA and FHLMC. |
The unrealized loss on
available-for-sale
securities is included in other comprehensive loss on the
consolidated balance sheets. Management has concluded that no
individual unrealized loss as of December 31, 2009,
identified in the preceding table, represents
other-than-temporary
impairment. These unrealized losses are primarily attributable
to the current credit environment and turmoil in the market for
securities related to the housing industry and are not
representative of the collectibility of the securities.
Management expects to recover the entire amortized cost basis of
these securities. The Company does not intend to sell nor would
it be required to sell the securities shown in the table with
unrealized losses before recovering their amortized cost.
The Company recognized an
other-than-temporary
impairment charge of $17.6 million at March 31, 2008
on certain FNMA and FHLMC preferred equity securities with a
cost basis of $85.1 million. In September 2008, the Company
sold $16.9 million of the remaining $67.5 million
recognizing a $16.7 million loss. The Company recognized an
additional
other-than-temporary
impairment charge of $47.8 million at September 30,
2008 on the remaining securities and thereby reduced the
amortized cost to their fair value of $2.7 million.
Management believes this impairment was primarily attributable
to economic conditions at that time, FNMA and FHLMC being placed
into the Federal Housing Finance Agencys conservatorship
and the discontinued dividend payments. Since recovery did not
appear likely in the near future, the Company recognized the
impairment losses.
Securities with an approximate carrying value of
$557.7 million and $623.7 million at December 31,
2009 and 2008, respectively, were pledged to secure public
deposits, borrowings, and for other purposes as required or
permitted by law. Included in securities pledged at
December 31, 2009 and 2008 are $121.8 million and
$113.5 million, respectively, which have been pledged for
FHLB borrowings.
F-21
MIDWEST
BANC HOLDINGS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The amortized cost and fair value of securities by contractual
maturity at December 31, 2009 are shown below. Since
expected maturities will differ from contractual maturities
because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties, the
contractual maturities for mortgage-backed securities are not
shown.
|
|
|
|
|
|
|
|
|
|
|
Amortized
|
|
|
|
|
|
|
Cost
|
|
|
Fair Value
|
|
|
|
(In thousands)
|
|
|
Securities
available-for-sale
|
|
|
|
|
|
|
|
|
Due in one year or less
|
|
$
|
310,954
|
|
|
$
|
310,947
|
|
Due after one year through five years
|
|
|
|
|
|
|
|
|
Due after five years through ten years
|
|
|
4,077
|
|
|
|
3,700
|
|
Due after ten years
|
|
|
10,843
|
|
|
|
7,021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
325,874
|
|
|
|
321,668
|
|
Mortgage-backed securities
|
|
|
|
|
|
|
|
|
U.S. government agencies residential
|
|
|
259,878
|
|
|
|
256,275
|
|
U.S. government-sponsored entities residential
|
|
|
1,271
|
|
|
|
1,259
|
|
|
|
|
|
|
|
|
|
|
Total debt securities
|
|
|
261,149
|
|
|
|
257,534
|
|
Equity securities of U.S. government-sponsored entities
|
|
|
2,749
|
|
|
|
2,272
|
|
|
|
|
|
|
|
|
|
|
Total securities
available-for-sale
|
|
$
|
589,772
|
|
|
$
|
581,474
|
|
|
|
|
|
|
|
|
|
|
Total securities
held-to-maturity
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sales of securities
available-for-sale
and the realized gross gains and losses are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Proceeds from sales
|
|
$
|
593,097
|
|
|
$
|
108,770
|
|
|
$
|
189,495
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross realized gains
|
|
$
|
6,499
|
|
|
$
|
325
|
|
|
$
|
893
|
|
Gross realized losses
|
|
|
(1,818
|
)
|
|
|
(17,111
|
)
|
|
|
(831
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net gains (losses) on securities transactions
|
|
$
|
4,681
|
|
|
$
|
(16,786
|
)
|
|
$
|
62
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sales of securities
held-to-maturity
and the realized gross gains and losses are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Proceeds from sales
|
|
$
|
27,856
|
|
|
$
|
4,262
|
|
|
$
|
2,039
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross realized gains
|
|
$
|
134
|
|
|
$
|
182
|
|
|
$
|
|
|
Gross realized losses
|
|
|
(17
|
)
|
|
|
(31
|
)
|
|
|
(30
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net gains (losses) on securities transactions
|
|
$
|
117
|
|
|
$
|
151
|
|
|
$
|
(30
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the second quarter of 2009, the Company sold its entire
held-to-maturity
portfolio. The securities
held-to-maturity
sold in 2008 and 2007 had paid down to less than 15% of their
original face value and were sold as permitted under ASC 320.
F-22
MIDWEST
BANC HOLDINGS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Note 8
Loans
Major classifications of loans by source of repayment are
summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
% of Gross
|
|
|
|
|
|
% of Gross
|
|
|
|
Amount
|
|
|
Loans
|
|
|
Amount
|
|
|
Loans
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
Commercial
|
|
$
|
972,090
|
|
|
|
41.9
|
%
|
|
$
|
1,090,078
|
|
|
|
43.3
|
%
|
Construction
|
|
|
293,215
|
|
|
|
12.6
|
|
|
|
366,178
|
|
|
|
14.6
|
|
Commercial real estate
|
|
|
725,814
|
|
|
|
31.3
|
|
|
|
729,729
|
|
|
|
29.1
|
|
Home equity
|
|
|
219,183
|
|
|
|
9.5
|
|
|
|
194,673
|
|
|
|
7.8
|
|
Other consumer
|
|
|
5,454
|
|
|
|
0.2
|
|
|
|
6,332
|
|
|
|
0.3
|
|
Residential mortgage
|
|
|
105,147
|
|
|
|
4.5
|
|
|
|
123,161
|
|
|
|
4.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans, gross
|
|
|
2,320,903
|
|
|
|
100.0
|
%
|
|
|
2,510,151
|
|
|
|
100.0
|
%
|
Net deferred fees
|
|
|
(584
|
)
|
|
|
|
|
|
|
(392
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans, net
|
|
$
|
2,320,319
|
|
|
|
|
|
|
$
|
2,509,759
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company reclassified $441,000 and $5.0 million in
overdraft deposits to loans as of December 31, 2009 and
2008, respectively.
Note 9
Related Party Transactions
Certain executive officers, directors, and their related
interests are loan customers of the Bank. These loans were made
under comparable terms as for non-related parties and were
determined to be arms-length transactions. A summary of loans
made by the Bank to or for the benefit of directors, executive
officers, and their related interests is as follows:
|
|
|
|
|
|
|
(In thousands)
|
|
|
Balance at December 31, 2008
|
|
$
|
47,375
|
|
New loans
|
|
|
11,328
|
|
Repayments
|
|
|
(99
|
)
|
Balances of former related parties(1)
|
|
|
(58,530
|
)
|
|
|
|
|
|
Balance at December 31, 2009
|
|
$
|
74
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents loan balances of individuals and their related
interests that were no longer related parties at
December 31, 2009. |
F-23
MIDWEST
BANC HOLDINGS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Note 10
Allowance for Loan Losses
The following is a summary of changes in the allowance for loan
losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Balance at beginning of year
|
|
$
|
44,432
|
|
|
$
|
26,748
|
|
|
$
|
23,229
|
|
Addition resulting from acquisition
|
|
|
|
|
|
|
|
|
|
|
2,767
|
|
Provision for loan losses
|
|
|
167,700
|
|
|
|
71,765
|
|
|
|
4,891
|
|
Loans charged off
|
|
|
(85,602
|
)
|
|
|
(55,849
|
)
|
|
|
(5,975
|
)
|
Recoveries on loans previously charged off
|
|
|
2,270
|
|
|
|
1,768
|
|
|
|
1,836
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loans charged off
|
|
|
(83,332
|
)
|
|
|
(54,081
|
)
|
|
|
(4,139
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
$
|
128,800
|
|
|
$
|
44,432
|
|
|
$
|
26,748
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The provision for credit losses reflected on the consolidated
statements of operations includes the provision for loan losses
and the provision for unfunded commitment losses as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Provision for loan losses
|
|
$
|
167,700
|
|
|
$
|
71,765
|
|
|
$
|
4,891
|
|
Provision for unfunded commitment losses
|
|
|
2,503
|
|
|
|
877
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for credit losses
|
|
$
|
170,203
|
|
|
$
|
72,642
|
|
|
$
|
4,891
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A portion of the allowance for loan losses is allocated to
impaired loans. Information with respect to impaired loans and
the related allowance for loan losses is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Impaired loans for which no allowance for loan losses is
allocated
|
|
$
|
61,456
|
|
|
$
|
21,784
|
|
|
$
|
15,490
|
|
Impaired loans with an allocation of the allowance for loan
losses
|
|
|
200,979
|
|
|
|
43,180
|
|
|
|
43,652
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total impaired loans
|
|
$
|
262,435
|
|
|
$
|
64,964
|
|
|
$
|
59,142
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses allocated to impaired loans
|
|
$
|
69,494
|
|
|
$
|
4,546
|
|
|
$
|
14,029
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2009
|
|
2008
|
|
2007
|
|
|
(In thousands)
|
|
Average impaired loans
|
|
$
|
134,928
|
|
|
$
|
57,058
|
|
|
$
|
54,956
|
|
Interest income recognized on impaired loans on a cash basis
|
|
|
693
|
|
|
|
836
|
|
|
|
1,432
|
|
Interest payments on impaired loans are generally applied to
principal, unless the loan principal is considered to be fully
collectible, in which case interest is recognized on a cash
basis.
Nonaccrual loans were $273.8 million and $61.1 million
as of December 31, 2009 and 2008, respectively. There were
no loans past due 90 days but still accruing as of
December 31, 2009 or 2008.
F-24
MIDWEST
BANC HOLDINGS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
There was $11.6 million in troubled-debt restructured loans
and still accruing as of December 31, 2009 and
$11.0 million as of December 31, 2008. Additionally,
included in nonaccrual loans, there were $9.7 million in
troubled-debt restructured loans as of December 31, 2009
and none at December 31, 2008. In order to improve the
collectibility of the troubled-debt restructured loans, the
Company restructured the terms of the loans by lifting a
forbearance agreement, lowering interest rates, or changing
payment terms. No additional commitments were outstanding on the
troubled-debt restructured loans as of December 31, 2009
and 2008. No specific allowance was allocated to the accruing
troubled-debt restructured loans at December 31, 2009 and
2008. As of December 31, 2009, based upon estimated
collateral values the Company held $667,000 in specific loan
loss reserves for the two nonaccrual troubled-debt
restructurings.
Note 11
Premises and Equipment
Premises and equipment are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Land and improvements
|
|
$
|
14,144
|
|
|
$
|
14,456
|
|
Buildings and improvements
|
|
|
37,941
|
|
|
|
33,992
|
|
Furniture and equipment
|
|
|
29,009
|
|
|
|
28,696
|
|
|
|
|
|
|
|
|
|
|
Total cost
|
|
|
81,094
|
|
|
|
77,144
|
|
Accumulated depreciation
|
|
|
(41,325
|
)
|
|
|
(38,831
|
)
|
|
|
|
|
|
|
|
|
|
Premises and equipment, net
|
|
$
|
39,769
|
|
|
$
|
38,313
|
|
|
|
|
|
|
|
|
|
|
In March 2008, the Company sold two pieces of real property for
$18.4 million creating a pre-tax gain of $15.2 million.
Note 12
Goodwill and Core Deposit Intangibles
The following table presents the carrying amount and accumulated
amortization of intangible assets (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
December 31, 2008
|
|
|
Gross
|
|
|
|
Net
|
|
Gross
|
|
|
|
Net
|
|
|
Carrying
|
|
Accumulated
|
|
Carrying
|
|
Carrying
|
|
Accumulated
|
|
Carrying
|
|
|
Amount
|
|
Amortization
|
|
Amount
|
|
Amount
|
|
Amortization
|
|
Amount
|
|
Amortizing intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Core deposit intangibles
|
|
$
|
21,091
|
|
|
$
|
(8,700
|
)
|
|
$
|
12,391
|
|
|
$
|
21,091
|
|
|
$
|
(6,408
|
)
|
|
$
|
14,683
|
|
The amortization of intangible assets was $2.3 million for
the year ended December 31, 2009. At December 31,
2009, the projected amortization of intangible assets for the
years ending December 31, 2010 through 2014 and thereafter
is as follows (in thousands):
|
|
|
|
|
|
|
|
|
2010
|
|
|
|
|
|
$
|
2,222
|
|
2011
|
|
|
|
|
|
|
1,918
|
|
2012
|
|
|
|
|
|
|
1,803
|
|
2013
|
|
|
|
|
|
|
1,696
|
|
2014
|
|
|
|
|
|
|
1,626
|
|
Thereafter
|
|
|
|
|
|
|
3,126
|
|
F-25
MIDWEST
BANC HOLDINGS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The remaining weighted average amortization period for the core
deposit intangibles is approximately seven years as of
December 31, 2009.
The following table presents the changes in the carrying amount
of goodwill and other intangibles during the years ended
December 31, 2009 and 2008 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
Core Deposit
|
|
|
|
|
|
Core Deposit
|
|
|
|
Goodwill
|
|
|
Intangibles
|
|
|
Goodwill
|
|
|
Intangibles
|
|
|
Balance before impairment losses
|
|
$
|
158,862
|
|
|
$
|
14,683
|
|
|
$
|
160,407
|
|
|
$
|
17,044
|
|
Accumulated impairment losses
|
|
|
(80,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
|
|
78,862
|
|
|
|
14,683
|
|
|
|
160,407
|
|
|
|
17,044
|
|
Impairment
|
|
|
(14,000
|
)
|
|
|
|
|
|
|
(80,000
|
)
|
|
|
|
|
Amortization
|
|
|
|
|
|
|
(2,292
|
)
|
|
|
|
|
|
|
(2,361
|
)
|
Purchase price adjustment(1)
|
|
|
|
|
|
|
|
|
|
|
(1,545
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance before impairment losses
|
|
|
158,862
|
|
|
|
12,391
|
|
|
|
158,862
|
|
|
|
14,683
|
|
Accumulated impairment losses
|
|
|
(94,000
|
)
|
|
|
|
|
|
|
(80,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
$
|
64,862
|
|
|
$
|
12,391
|
|
|
$
|
78,862
|
|
|
$
|
14,683
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Goodwill was reduced in the second quarter of 2008 by the
remaining fair value adjustment of a loan accounted for under
ASC
310-30-05
for which full contractual payment was received. Goodwill was
also adjusted in the third quarter of 2008 for the final
purchase price allocation for the Northwest Suburban acquisition. |
Goodwill is not amortized but assessed at least annually for
impairment, and any impairment recognized in the period it is
identified. In accordance with guidelines under the
authoritative guidance for intangibles goodwill and
other (ASC 350), and consistent with established Company policy,
an annual review for goodwill impairment as of
September 30, 2009 was conducted with the assistance of a
nationally recognized third party valuation specialist. Based
upon that review, the Company determined that the
$78.9 million of goodwill recorded on the
September 30, 2009 balance sheet was not impaired. The
Company determined that activities in the fourth quarter of 2009
including the Written Agreement with the regulators, the decline
in the Banks regulatory capital position to
undercapitalized, and the significant deterioration in the
market price of the Companys common stock, constituted
triggering events requiring an interim goodwill impairment test.
As a result of that test, the Company recorded a
$14.0 million goodwill impairment as of December 31,
2009. The Company cannot assure that it will not be required to
take goodwill impairment charges in the future.
As a result of the Companys previous annual test performed
at September 30, 2008, the Company determined goodwill was
impaired and recorded an $80.0 million impairment for the
year ended December 31, 2008.
Note 13
Time Deposits
Interest-bearing time deposits in denominations of $100,000 and
greater were $867.8 million as of December 31, 2009
and $874.6 million as of December 31, 2008. Interest
expense related to deposits in denominations of $100,000 and
greater was $21.4 million for 2009, $33.9 million for
2008, and $33.8 million for 2007.
F-26
MIDWEST
BANC HOLDINGS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Certificates of deposit, including brokered deposits, have
scheduled maturities for the years 2010 through 2014 and
thereafter as follows:
|
|
|
|
|
|
|
(In thousands)
|
|
|
2010
|
|
$
|
1,478,026
|
|
2011
|
|
|
196,068
|
|
2012
|
|
|
21,573
|
|
2013
|
|
|
1,339
|
|
2014
|
|
|
3,940
|
|
Thereafter
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,700,946
|
|
|
|
|
|
|
As a result of the Banks undercapitalized status for
regulatory capital purposes as of December 31, 2009, the
Bank is not permitted to accept or renew brokered deposits or,
whether wholesale or retail, secure deposits at rates that are
75 basis points higher than the prevailing effective rates
on insured deposits of comparable amounts or maturities in the
Banks normal market area or the national rates
periodically release by the FDIC. Brokered deposits were
$454.5 million at December 31, 2009 and have a
weighted average maturity of approximately eight months. See
Note 3 Regulatory Capital of the notes to the
consolidated financial statements for further information.
|
|
Note 14
|
Securities
Sold Under Agreements to Repurchase
|
The Company has repurchase agreements with brokerage firms,
which are in possession of the underlying securities. The same
securities are returned to the Company at the maturity of the
agreements. The following summarizes certain information
relative to these borrowings:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
2008
|
|
|
(In thousands)
|
|
Outstanding at end of year
|
|
$
|
297,650
|
|
|
$
|
297,650
|
|
Weighted average interest rate at year end
|
|
|
4.29
|
%
|
|
|
4.29
|
%
|
Maximum amount outstanding as of any month end
|
|
$
|
323,033
|
|
|
$
|
394,764
|
|
Average amount outstanding
|
|
|
299,611
|
|
|
|
311,346
|
|
Approximate weighted average rate during the year
|
|
|
4.33
|
%
|
|
|
4.26
|
%
|
At December 31, 2009, securities sold under agreements to
repurchase are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateral
|
|
|
|
|
|
|
Obligations of U.S. Treasury and
|
|
|
|
|
|
|
U.S. Government Agency
|
|
|
|
|
|
|
Mortgage-Backed
|
|
|
|
|
|
|
Securities
|
|
|
Repurchase
|
|
Weighted Average
|
|
Amortized
|
|
|
Original Term
|
|
Liability
|
|
Interest Rate
|
|
Cost
|
|
Fair Value
|
|
|
|
|
(In thousands)
|
|
|
|
Over 3 years
|
|
$
|
297,650
|
|
|
|
4.29
|
%
|
|
$
|
362,207
|
|
|
$
|
359,414
|
|
As a result of the Bank being less than well capitalized for
regulatory capital purposes, the agreements with one of the
Banks repurchase agreement counterparties could permit
that counterparty to terminate the repurchase agreements. At
December 31, 2009, the Banks repurchase agreements
with those provisions totaled $262.7 million with fixed
interest rates ranging from 2.76% to 4.65%, maturities ranging
from approximately 7.5 to 8.5 years, and quarterly call
provisions (at the counterpartys option). See
Note 3 Regulatory Capital of the notes to the
consolidated financial statements for further information.
F-27
MIDWEST
BANC HOLDINGS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
Note 15
|
Advances
from the Federal Home Loan Bank
|
Advances from the Federal Home Loan Bank are summarized as
follows:
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Rate
|
|
|
Amount
|
|
|
|
(In thousands)
|
|
|
Advances from the Federal Home Loan Bank due
|
|
|
|
|
|
|
|
|
2010
|
|
|
|
%
|
|
$
|
|
|
2011
|
|
|
|
|
|
|
|
|
2012
|
|
|
|
|
|
|
|
|
2013
|
|
|
|
|
|
|
|
|
2014
|
|
|
|
|
|
|
|
|
Thereafter
|
|
|
3.53
|
|
|
|
340,000
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
3.53
|
%
|
|
$
|
340,000
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2009, the Federal Home Loan Bank advances
have quarterly call provisions. Various securities are pledged
as collateral as discussed in Note 7 Securities
of the notes to the consolidated financial statements. In
addition, the Company has pledged $829.6 million in loans
as collateral for the advances as well as a blanket lien on its
multi-family and commercial real estate loans at
December 31, 2009. As a result of the Banks capital
position, it had to increase the amount of collateral securing
the existing FHLB advances and additional funds cannot be
obtained through FHLB advances. See Note 3
Regulatory Capital of the notes to the consolidated financial
statements for further information.
|
|
Note 16
|
Junior
Subordinated Debentures
|
At December 31, 2009, the Company had $60.8 million in
junior subordinated debentures owed to unconsolidated trusts
that were formed to issue trust preferred securities. The trust
preferred securities offerings were pooled private placements
exempt from registration under the Securities Act of 1933
pursuant to Section 4(2) thereunder. The Company has
provided a full, irrevocable, and unconditional subordinated
guarantee of the obligations of these trusts under the preferred
securities. The Company is obligated to fund dividends on these
securities before it can pay dividends on shares of its common
stock and preferred stock. The Company must obtain prior
approval of the Federal Reserve Bank and Illinois Division of
Banking in order to fund dividends on these securities as
required by the Written Agreement. The Company is not deemed to
have a controlling financial interest in these variable interest
entities, and therefore is required to deconsolidate them.
During the second quarter of 2009, the Company began deferring
interest payments on its junior subordinated debentures as
permitted by the terms of such debentures. The deferred interest
payments on the Companys junior subordinated debentures
were $1.5 million through December 31, 2009.
F-28
MIDWEST
BANC HOLDINGS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table details the unconsolidated trusts and their
common and trust preferred securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Initial
|
|
|
|
|
|
|
|
|
|
|
|
|
Mandatory
|
|
Optional
|
|
|
|
|
December 31,
|
|
|
|
|
Redemption
|
|
Redemption
|
Issuer
|
|
Issue Date
|
|
2009
|
|
|
2008
|
|
|
Rate
|
|
Date
|
|
Date(1)
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
MBHI Capital Trust III
|
|
December 19, 2003
|
|
$
|
9,279
|
|
|
$
|
9,279
|
|
|
LIBOR+3.00%
|
|
December 30, 2033
|
|
December 30, 2008
|
MBHI Capital Trust IV
|
|
December 19, 2003
|
|
|
10,310
|
|
|
|
10,310
|
|
|
LIBOR+2.85%
|
|
January 23, 2034
|
|
January 23, 2009
|
MBHI Capital Trust V
|
|
June 7, 2005
|
|
|
20,619
|
|
|
|
20,619
|
|
|
LIBOR+1.77%
|
|
June 15, 2035
|
|
June 15, 2010
|
Royal Capital Trust I
|
|
April 30, 2004
|
|
|
10,310
|
|
|
|
10,310
|
|
|
LIBOR+2.75%
|
|
July 23, 2034
|
|
July 23, 2009
|
Northwest Suburban Capital Trust I
|
|
May 18, 2004
|
|
|
10,310
|
|
|
|
10,310
|
|
|
LIBOR+2.70%
|
|
July 23, 2034
|
|
July 23, 2009
|
Unamortized purchase accounting adjustment
|
|
|
|
|
|
|
|
|
(37
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
$
|
60,828
|
|
|
$
|
60,791
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Redeemable at option of the Company as of the initial optional
redemption date provided and quarterly thereafter. |
|
|
Note 17
|
Credit
Agreements
|
The Companys credit agreements with a correspondent bank
at December 31, 2009 and 2008 consisted of a revolving line
of credit, a term note loan, and a subordinated debenture in the
amounts of $8.6 million, $55.0 million, and
$15.0 million, respectively.
The revolving line of credit had a maximum availability of
$8.6 million, an outstanding balance of $8.6 million
as of December 31, 2009, an interest rate of one-month
LIBOR plus 455 basis points with an interest rate floor of
7.25%, and matured on July 3, 2009. The term note had an
interest rate of one-month LIBOR plus 455 basis points at
December 31, 2009 and matures on September 28, 2010.
The subordinated debt had an interest rate of one-month LIBOR
plus 350 basis points at December 31, 2009, matures on
March 31, 2018, and qualifies as a component of Tier 2
capital.
As a result of the effects of recent economic conditions, the
increase in nonperforming assets, and the impairment charges on
goodwill and the impairment charges and realized losses on FNMA
and FHLMC preferred securities, the Company sought covenant
waivers on two occasions in 2008. First, the lender waived a
covenant violation in the first quarter of 2008 resulting from
the Companys net loss recognized in that period. Second,
the lender waived a covenant violation in the third quarter of
2008 resulting from the Companys net loss recognized in
that period, contingent upon the Company making accelerated
principal payments under the aforementioned term note in the
amounts and on or prior to the dates as follows: July 1,
2009 $5.0 million; October 1,
2009 $5.0 million; and January 4,
2010 $5.0 million.
At September 30, 2009, the Company was in violation of the
financial, regulatory capital, and nonperforming loan covenants
contained in the revolving line of credit and term note. The
Company did not make the required $5.0 million principal
payment on the term note due on July 1, 2009 under the
covenant waiver for the third quarter of 2008. On July 8,
2009, the lender advised the Company that such non-compliance
constituted a continuing event of default under the loan
agreements (the Contingent Waiver Default). The
Companys decision not to make the $5.0 million
principal payment, together with its previously announced
decision to suspend the dividend on its Series A preferred
stock and defer the dividends on its Series T preferred
stock and interest payments on its trust preferred securities,
were made in order to retain cash and preserve liquidity and
capital at the holding company.
The revolving line of credit matured on July 3, 2009, and
the Company did not pay to the lender all of the aggregate
outstanding principal on the revolving line of credit on such
date. The failure to make such payment constituted an additional
event of default under the credit agreements (the Payment
Default; the Contingent
F-29
MIDWEST
BANC HOLDINGS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Wavier Default, the Financial Covenant Defaults and the Payment
Default are hereinafter collectively referred to as the
Existing Events of Default).
As a result of the occurrence and the continuance of the
Existing Events of Default, the lender notified the Company
that, as of July 8, 2009, the interest rate on the
revolving line of credit increased to the then current default
interest rate of 7.25%, which represents the current interest
rate floor, and the interest rate under the term note increased
to the default interest rate of 30 day LIBOR plus
455 basis points. The Company also did not make required
$5.0 million principal payments on the term note due on
October 1, 2009 and January 4, 2010 under the covenant
waiver for the third quarter of 2008.
As a result of not making the required payments, and as a result
of the other Existing Events of Default, the lender possesses
certain rights and remedies, including the ability to demand
immediate payment of amounts due totaling $63.6 million
plus accrued interest or foreclose on the collateral supporting
the credit agreements, being 100% of the stock of the
Companys wholly-owned subsidiary, the Bank.
On October 22, 2009, the Company entered into a forbearance
agreement with its lender that provides for a forbearance period
through March 31, 2010. See Note 4
Forbearance Agreement and Note 5 Summary
of Significant Accounting Policies, Going Concern of the
notes to the consolidated financial statements.
Note 18
Preferred Stock and Warrant
Series T
and Warrant
In December 2008, the Company raised $84.8 million in new
equity through an offering of 84,784 shares of
Series T fixed rate cumulative perpetual preferred stock
and issued a warrant to purchase 4,282,020 shares of common
stock at $2.97 per share to the U.S. Treasury under the
Troubled Assets Relief Program (TARP) Capital
Purchase Program. The Series T preferred stock has a
cumulative dividend rate of 5.00% per annum of the stated
liquidation preference for five years and increases to 9.00%
thereafter.
The proceeds of $84.8 million were allocated between the
Series T preferred stock and the warrant based on their
relative fair values. A nationally recognized independent
valuation specialist was used to assist in the valuation of the
Series T preferred stock and the related warrant.
Series T. The Series T preferred
stock qualifies as Tier 1 capital. The Company may redeem
the Series T preferred stock at its liquidation preference
($1,000 per share) plus accrued and unpaid dividends under the
American Recovery and Reinvestment Act of 2009, subject to the
U.S. Treasurys consultation with the Companys
appropriate federal regulator.
Prior to the third anniversary of the U.S. Treasurys
purchase of the Series T preferred stock, unless the
preferred stock has been redeemed or the U.S. Treasury has
transferred all of the Series T preferred stock to third
parties, the consent of the U.S. Treasury will be required
for the Company to (i) pay any dividend on its common stock
or (ii) repurchase its common stock or other equity or
capital securities, including trust preferred securities, other
than in connection with benefit plans consistent with past
practice and certain other circumstances specified in the
Purchase Agreement. The Series T preferred stock will be
non-voting except for the class voting rights on matters that
would adversely affect the rights of the holders of the
Series T preferred stock.
A discounted cash flow analysis was used to compute the fair
value of the Series T preferred stock. Major inputs and
assumptions used included a 5% cash dividend rate over a
5 year life (assuming the obligation would be paid off
before the dividend yield increased to 9%) and a discount rate
averaging approximately 10% based upon an estimated yield curve
for a bank rated BB by S&P.
During the second quarter of 2009, the Company began deferring
payment of dividends on the $84.8 million of Series T
cumulative preferred stock. The dividends on the Series T
cumulative preferred stock are recorded only
F-30
MIDWEST
BANC HOLDINGS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
when declared. The cumulative amount of dividends not declared
or paid was $3.8 million for the year ended
December 31, 2009.
Warrant. The warrant has a
10-year term
and is immediately exercisable upon its issuance, with an
initial per share exercise price of $2.97. The warrant provides
for the adjustment of the exercise price and the number of
shares of common stock issuable upon exercise pursuant to
customary anti-dilution provisions, such as upon stock splits or
distributions of securities or other assets to holders of common
stock, and upon certain issuances of common stock at or below a
specified price relative to the initial exercise price.
The warrant was valued using a Cox-Ross-Rubinstein Binomial
Option Pricing Model using the following assumptions and inputs:
beginning stock price equal to the December 5, 2008 close
price of $2.26, exercise price of $2.97, a 10 year life
(assumes maximum contractual term), stock price volatility at
53% equal to the past 10 years average, a stock dividend
yield of 1.66% and a 3.35% risk free rate of return equal to the
yield on a 10 year treasury strip that remains constant
over the life of the warrant. The resulting discount on the
Series T preferred stock from recognition of the warrant is
being accreted directly to retained earnings over the five year
expected term using the level yield method.
Exchange Transaction with the
U.S. Treasury. On March 8, 2010, the
U.S. Treasury exchanged the 84,784 shares of
Series T preferred stock, having an aggregate approximate
liquidation preference of $84.8 million, plus approximately
$4.6 million in cumulative dividends not declared or paid
on such preferred stock, for a new series of fixed rate
cumulative mandatorily convertible preferred stock,
Series G, with the same liquidation preference. The warrant
dated December 5, 2008 to purchase 4,282,020 shares of
common stock was also amended to re-set the strike price of the
warrant to be consistent with the conversion price of the
Series G preferred stock. The U.S. Treasury has the
authority to convert the new preferred stock into the
Companys common stock at any time. In addition, the
Company can compel a conversion of the new preferred stock into
common stock, subject to the following conditions: (i) the
Company receives appropriate approvals from the Federal Reserve;
(ii) approximately $78.6 million principal amount of
the Companys revolving, senior, and subordinated debt
shall have previously been converted into common stock on terms
acceptable to the U.S. Treasury in its sole discretion;
(iii) the Company shall have completed a new cash equity
raise of not less than $125 million on terms acceptable to
the U.S. Treasury in its sole discretion; and (iv) the
Company has made the anti-dilution adjustments to the new
preferred stock, if any, as required by the terms thereof.
Unless earlier converted, the new preferred stock converts
automatically into shares of the Companys common stock on
March 8, 2017.
Series A
In December 2007, the Company raised $41.4 million in
equity capital, net of issuance costs, through an offering of
1,725,000 depositary shares each representing 1/100th of a
share of its Series A Noncumulative Redeemable Convertible
Perpetual Preferred Stock (the Series A Preferred
Stock), at $25.00 per depositary share. The depositary
shares have a dividend rate of 7.75% per annum of the stated
liquidation preference, which is equivalent to $1.937500 per
year and $0.484375 per quarter per depositary share. Dividends
are noncumulative and are payable if, when and as declared by
the Companys board of directors.
The depositary shares are convertible, at the option of the
holder, at any time into the number of shares of the
Companys common stock equal to $25.00 divided by the
conversion price then in effect. The depositary shares are
convertible, at the option of the Company, on or after the fifth
anniversary of the issue date, into the number of shares of the
Companys common stock equal to $25.00 divided by the
conversion price then in effect. The current conversion price is
$15.00. The Company may exercise this conversion option only if
its common stock price equals or exceeds 130% of the then
prevailing conversion price for at least 20 trading days in a
period of 30 consecutive trading days and the Company has paid
full dividends on the depositary shares for four consecutive
quarters.
The depositary shares are redeemable, at the option of the
Company, on or after the fifth anniversary of the issue date,
for $25.00 per share, plus declared and unpaid dividends, if
any, provided that the payment of dividends for prior periods
has been approved by the Federal Reserve Board.
F-31
MIDWEST
BANC HOLDINGS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The preferred stock outstanding has preference over the
Companys common stock with respect to the payment of
dividends and distribution of the Companys assets in the
event of a liquidation or dissolution. The holders of preferred
stock have no voting rights, except in certain circumstances.
The Company announced on May 6, 2009, that the Board of
Directors made the decision to suspend the dividend on the
$43.1 million of Series A noncumulative redeemable
convertible perpetual preferred stock. The Written Agreement
requires the Company to obtain prior approval to resume dividend
payments in respect of the Series A preferred stock.
On January 25, 2010, the Company successfully completed its
offer (the Exchange Offer) to exchange shares of its
common stock for outstanding depositary shares, $25.00
liquidation amount per share, each representing a
1/100th fractional interest in a share of the
Companys Series A Preferred Stock. The final exchange
ratio was set at 7.0886 shares of common stock for each
depositary share of the Series A Preferred Stock. The
Company accepted for exchange 1,414,941 depositary shares,
representing approximately 82% of the 1,725,000 depositary
shares outstanding prior to the Exchange Offer. The Exchange
Offer generated approximately $35.4 million of additional
common equity. The Company issued 10,029,946 shares of
common stock for the 1,414,941 shares tendered in the
exchange. The remaining 310,059 depositary shares outstanding
have an aggregate liquidation preference of approximately
$7.8 million.
In addition, on January 21, 2010, the holders of the
Companys depositary shares approved proposals to amend the
Companys charter to eliminate certain rights with respect
to dividends on the Series A Preferred Stock and the
election of directors and the proposal to authorize the issuance
of senior preferred stock to the U.S. Treasury, should such
transaction be consummated. The proposals to eliminate the
Series A Preferred Stock rights regarding dividends and the
election of directors were approved by the Companys common
stockholders at a special meeting of the holders of the
Companys common stock held on March 2, 2010.
Note 19
Capital Requirements
The Company and the Bank are subject to regulatory capital
requirements administered by the federal banking agencies. Under
capital adequacy guidelines and the regulatory framework for
prompt corrective action, banks must meet specific capital
guidelines that involve quantitative measures of assets,
liabilities, and certain off-balance-sheet items as calculated
under regulatory accounting practices. Prompt corrective action
provisions are not applicable to bank holding companies.
Quantitative measures established by regulation to ensure
capital adequacy require banks and bank holding companies to
maintain minimum amounts and ratios of total and Tier 1
capital to risk-weighted assets and Tier 1 capital to
average assets. If a bank does not meet these minimum capital
requirements, as defined, bank regulators can initiate certain
actions that could have a direct material adverse effect on the
banks financial condition and ongoing operations. As of
December 31, 2009, the Company and the Bank did not meet
all capital adequacy requirements to which they were subject.
As of December 31, 2009, the most recent Federal Deposit
Insurance Corporation notification categorized the Bank as under
capitalized under the regulatory framework for prompt corrective
action. To be categorized as well capitalized, banks must
maintain minimum total risk-based, Tier 1 risk-based, and
Tier 1 leverage ratios.
On December 18, 2009, the Company and the Bank entered into
the Written Agreement with the Federal Reserve Bank and the
Illinois Division of Banking. See Note 2
Regulatory Actions of the notes to the consolidated financial
statements.
As a result of continued deterioration in the credit quality of
the loan portfolio in early 2010, the Bank became
significantly undercapitalized as of
January 31, 2010. See Note 5
Summary of Significant Accounting Policies,
Going Concern.
F-32
MIDWEST
BANC HOLDINGS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The risk-based capital information for the Company is as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Risk-weighted assets
|
|
$
|
2,316,607
|
|
|
$
|
2,878,087
|
|
Average assets for leverage capital purposes
|
|
|
3,467,651
|
|
|
|
3,464,020
|
|
Capital components:
|
|
|
|
|
|
|
|
|
Stockholders equity
|
|
$
|
56,476
|
|
|
$
|
305,834
|
|
Plus: Guaranteed trust preferred securities
|
|
|
21,432
|
|
|
|
59,000
|
|
Less: Core deposit and other intangibles, net
|
|
|
(12,391
|
)
|
|
|
(14,683
|
)
|
Less: Goodwill
|
|
|
(64,862
|
)
|
|
|
(78,862
|
)
|
Less: Disallowed deferred tax assets
|
|
|
(3,438
|
)
|
|
|
(32,748
|
)
|
Plus: Prior service cost and decrease in projected benefit
obligation
|
|
|
1
|
|
|
|
|
|
Plus: Unrealized losses on securities, net of tax
|
|
|
8,297
|
|
|
|
1,449
|
|
Less: Unrealized losses on equity securities, net of tax
|
|
|
(478
|
)
|
|
|
(1,117
|
)
|
|
|
|
|
|
|
|
|
|
Tier 1 capital
|
|
|
5,037
|
|
|
|
238,873
|
|
Allowance for loan losses
|
|
|
128,800
|
|
|
|
44,432
|
|
Reserve for unfunded commitments
|
|
|
2,217
|
|
|
|
1,068
|
|
Disallowed allowance for loan losses
|
|
|
(100,799
|
)
|
|
|
(9,406
|
)
|
Remaining trust preferred securities
|
|
|
37,568
|
|
|
|
|
|
Qualifying subordinated debt
|
|
|
2,519
|
|
|
|
15,000
|
|
|
|
|
|
|
|
|
|
|
Tier 2 capital
|
|
$
|
70,305
|
|
|
$
|
51,094
|
|
|
|
|
|
|
|
|
|
|
Allowable Tier 2 Capital
|
|
$
|
5,037
|
|
|
$
|
51,094
|
|
|
|
|
|
|
|
|
|
|
Total risk-based capital
|
|
$
|
10,074
|
|
|
$
|
289,967
|
|
|
|
|
|
|
|
|
|
|
The capital amounts and ratios for the Company and the Bank are
presented in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum Required
|
|
|
|
|
|
|
For Capital
|
|
To Be Adequately
|
|
|
Actual
|
|
Adequacy Purposes
|
|
Capitalized Under Prompt Corrective Action Provisions
|
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
|
(Dollars in thousands)
|
|
As of December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital (to risk-weighted assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
$
|
10,074
|
|
|
|
0.4
|
%
|
|
$
|
185,329
|
|
|
|
8.0
|
%
|
|
$
|
185,329
|
|
|
|
8.0
|
%
|
Bank
|
|
|
148,062
|
|
|
|
6.4
|
|
|
|
184,899
|
|
|
|
8.0
|
|
|
|
184,899
|
|
|
|
8.0
|
|
Tier 1 Capital (to risk-weighted assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
|
5,037
|
|
|
|
0.2
|
|
|
|
92,664
|
|
|
|
4.0
|
|
|
|
92,664
|
|
|
|
4.0
|
|
Bank
|
|
|
117,911
|
|
|
|
5.1
|
|
|
|
92,450
|
|
|
|
4.0
|
|
|
|
92,450
|
|
|
|
4.0
|
|
Tier 1 Capital (to average assets for leverage capital
purposes)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
|
5,037
|
|
|
|
0.1
|
|
|
|
138,706
|
|
|
|
4.0
|
|
|
|
138,706
|
|
|
|
4.0
|
|
Bank
|
|
|
117,911
|
|
|
|
3.4
|
|
|
|
138,482
|
|
|
|
4.0
|
|
|
|
138,482
|
|
|
|
4.0
|
|
F-33
MIDWEST
BANC HOLDINGS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum Required
|
|
|
|
|
|
|
|
|
|
For Capital
|
|
|
To Be Well
|
|
|
|
Actual
|
|
|
Adequacy Purposes
|
|
|
Capitalized Under Prompt Corrective Action Provisions
|
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
|
(Dollars in thousands)
|
|
|
As of December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital (to risk-weighted assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
$
|
289,967
|
|
|
|
10.1
|
%
|
|
$
|
230,247
|
|
|
|
8.0
|
%
|
|
|
n/a
|
|
|
|
n/a
|
|
Bank
|
|
|
301,993
|
|
|
|
10.5
|
|
|
|
229,244
|
|
|
|
8.0
|
|
|
$
|
286,555
|
|
|
|
10.0
|
%
|
Tier 1 Capital (to risk-weighted assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
|
238,873
|
|
|
|
8.3
|
|
|
|
115,123
|
|
|
|
4.0
|
|
|
|
n/a
|
|
|
|
n/a
|
|
Bank
|
|
|
236,054
|
|
|
|
8.2
|
|
|
|
114,622
|
|
|
|
4.0
|
|
|
|
171,933
|
|
|
|
6.0
|
|
Tier 1 Capital (to average assets for leverage capital
purposes)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
|
238,873
|
|
|
|
6.9
|
|
|
|
138,561
|
|
|
|
4.0
|
|
|
|
n/a
|
|
|
|
n/a
|
|
Bank
|
|
|
236,054
|
|
|
|
6.8
|
|
|
|
138,176
|
|
|
|
4.0
|
|
|
|
172,720
|
|
|
|
5.0
|
|
Note 20
Fair Value
The Company adopted the authoritative guidance for fair value
measurement (ASC 820) on January 1, 2008. This
guidance defines fair value as the exchange price that would be
received for an asset or paid to transfer a liability (an exit
price) in the principal or most advantageous market for the
asset or liability in an orderly transaction between willing
market participants on the measurement date. This guidance also
establishes a fair value hierarchy which requires an entity to
maximize the use of observable inputs and minimize the use of
unobservable inputs when measuring fair value. The standard
describes three levels of inputs that may be used to measure
fair value:
|
|
|
|
|
Level 1: Quoted prices (unadjusted) for identical
assets or liabilities in active markets that the entity has the
ability to access as of the measurement date.
|
|
|
|
Level 2: Significant other observable inputs other
than Level 1 prices, such as quoted prices for similar
assets or liabilities, quoted prices in markets that are not
active, and other inputs that are observable or can be
corroborated by observable market data.
|
|
|
|
Level 3: Significant unobservable inputs that
reflect a companys own assumptions about the assumptions
that market participants would use in pricing an asset or
liability.
|
The Companys
available-for-sale
investment securities are the only financial assets that are
measured at fair value on a recurring basis; it does not hold
any financial liabilities that are measured at fair value on a
recurring basis. The fair values of
available-for-sale
securities are determined by obtaining either quoted prices on
nationally recognized securities exchanges or matrix pricing,
which is a mathematical technique used widely in the industry to
value debt securities without relying exclusively on quoted
prices for the specific securities but rather by relying on
these securities relationship to other benchmark quoted
securities. If quoted prices or matrix pricing are not
available, the fair value is determined by an adjusted price for
similar securities including unobservable inputs.
F-34
MIDWEST
BANC HOLDINGS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The fair values of the
available-for-sale
securities were measured at December 31, 2009 and 2008
using the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices or
|
|
|
Significant
|
|
|
Significant
|
|
|
|
|
|
|
Identical Assets in
|
|
|
Other Observable
|
|
|
Unobservable
|
|
|
|
Total
|
|
|
Active Markets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
|
Fair Value
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Assets at December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of the U.S. Treasury
|
|
$
|
310,947
|
|
|
$
|
|
|
|
$
|
310,947
|
|
|
$
|
|
|
Mortgage-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government agencies residential(1)
|
|
|
256,275
|
|
|
|
|
|
|
|
256,275
|
|
|
|
|
|
U.S. government-sponsored entities residential(2)
|
|
|
1,259
|
|
|
|
|
|
|
|
1,259
|
|
|
|
|
|
Equity securities of U.S. government-sponsored entities(3)
|
|
|
2,272
|
|
|
|
2,272
|
|
|
|
|
|
|
|
|
|
Corporate and other debt securities
|
|
|
10,721
|
|
|
|
|
|
|
|
3,700
|
|
|
|
7,021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale
securities
|
|
$
|
581,474
|
|
|
$
|
2,272
|
|
|
$
|
572,181
|
|
|
$
|
7,021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets at December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of the U.S. Treasury and of U.S.
government-sponsored entities(4)
|
|
$
|
265,435
|
|
|
$
|
|
|
|
$
|
265,435
|
|
|
$
|
|
|
Obligations of states and political subdivisions
|
|
|
56,664
|
|
|
|
|
|
|
|
56,664
|
|
|
|
|
|
Mortgage-backed securities(1)(4)
|
|
|
283,679
|
|
|
|
|
|
|
|
283,679
|
|
|
|
|
|
Equity securities of U.S. government-sponsored entities(3)
|
|
|
930
|
|
|
|
930
|
|
|
|
|
|
|
|
|
|
Corporate and other debt securities
|
|
|
15,241
|
|
|
|
|
|
|
|
6,808
|
|
|
|
8,433
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale
securities
|
|
$
|
621,949
|
|
|
$
|
930
|
|
|
$
|
612,586
|
|
|
$
|
8,433
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes obligations of GNMA. |
|
(2) |
|
Includes obligations of FHLMC. |
|
(3) |
|
Includes issues from FNMA and FHLMC. |
|
(4) |
|
Includes obligations of FHLMC and FNMA. |
F-35
MIDWEST
BANC HOLDINGS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following is a summary of changes in the fair value of the
available-for-sale
securities that were measured using significant unobservable
inputs for the years ended December 31, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Beginning balance
|
|
$
|
8,433
|
|
|
$
|
10,479
|
|
Paydowns received
|
|
|
(228
|
)
|
|
|
(35
|
)
|
Total gains or losses (realized/unrealized):
|
|
|
|
|
|
|
|
|
Included in earnings
|
|
|
|
|
|
|
|
|
Included in other comprehensive income
|
|
|
(1,184
|
)
|
|
|
(2,011
|
)
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
7,021
|
|
|
$
|
8,433
|
|
|
|
|
|
|
|
|
|
|
The Companys impaired loans that are measured using the
fair value of the underlying collateral are measured on a
non-recurring basis. Once a loan is identified as individually
impaired, management measures impairment in accordance with the
authoritative guidance for loan impairments (ASC
310-10-35).
At December 31, 2009, $201.0 million of the total
impaired loans were evaluated based on the fair value of the
collateral compared to $41.3 million at December 31,
2008. The fair value of the collateral is determined by
obtaining an observable market price or by obtaining an
appraised value with management applying selling and other
discounts to the underlying collateral value. If an appraised
value is not available, the fair value of the impaired loan is
determined by an adjusted appraised value including unobservable
cash flows.
Loans which are measured for impairment using the fair value of
collateral, had a gross carrying amount of $201.0 million,
with an associated valuation allowance of $69.5 million for
a fair value of $131.5 million at December 31, 2009
and $41.3 million, with an associated valuation allowance
of $4.2 million for a fair value of $37.1 million at
December 31, 2008. The provision for credit losses included
$125.9 million and $39.0 million of specific allowance
allocations for impaired loans for the years ended
December 31, 2009 and 2008, respectively.
The Companys goodwill is assessed at least annually, at
September 30, for impairment, and any such impairment is
recognized in the period it is identified. A goodwill impairment
test also could be triggered between annual testing dates if an
event occurs or circumstances change that would more likely than
not reduce the fair value below the carrying amount. In
accordance with guidelines under the authoritative guidance for
intangibles goodwill and other (ASC 350), and
consistent with established Company policy, an annual review for
goodwill impairment as of September 30, 2009 was conducted
with the assistance of a nationally recognized third party
valuation specialist. Based upon that review, the Company
determined that the $78.9 million of goodwill recorded on
the September 30, 2009 balance sheet was not impaired. The
Company determined that, due to certain activities in the fourth
quarter of 2009, an interim goodwill impairment test was
required. As a result of that test, the Company recorded a
$14.0 million goodwill impairment as of December 31,
2009. As a result of the Companys previous annual test
performed at September 30, 2008, the Company determined
goodwill was impaired and recorded an $80.0 million
impairment for the year ended December 31, 2008.
F-36
MIDWEST
BANC HOLDINGS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
At December 31, 2009 and 2008, the fair values of assets
measured on a non-recurring basis were measured using the
following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices or
|
|
Significant
|
|
Significant
|
|
|
|
|
Identical Assets in
|
|
Other Observable
|
|
Unobservable
|
|
|
Total
|
|
Active Markets
|
|
Inputs
|
|
Inputs
|
|
|
Fair Value
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
|
|
|
|
(In thousands)
|
|
|
|
Assets at December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans
|
|
$
|
131,485
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
131,485
|
|
Goodwill
|
|
|
64,862
|
|
|
|
|
|
|
|
|
|
|
|
64,862
|
|
Assets at December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans
|
|
$
|
37,098
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
37,098
|
|
Goodwill
|
|
|
78,862
|
|
|
|
|
|
|
|
|
|
|
|
78,862
|
|
The estimated fair values of the Companys financial
instruments were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
Carrying
|
|
|
Estimated
|
|
|
Carrying
|
|
|
Estimated
|
|
|
|
Amount
|
|
|
Fair Value
|
|
|
Amount
|
|
|
Fair Value
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Financial assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
442,110
|
|
|
$
|
442,110
|
|
|
$
|
63,065
|
|
|
$
|
63,065
|
|
Securities
available-for-sale
|
|
|
581,474
|
|
|
|
581,474
|
|
|
|
621,949
|
|
|
|
621,949
|
|
Securities
held-to-maturity
|
|
|
|
|
|
|
|
|
|
|
30,267
|
|
|
|
30,387
|
|
Federal Reserve Bank and Federal Home Loan Bank stock
|
|
|
27,652
|
|
|
|
27,652
|
|
|
|
31,698
|
|
|
|
31,698
|
|
Loans, net of allowance for loan losses
|
|
|
2,191,519
|
|
|
|
2,137,263
|
|
|
|
2,465,327
|
|
|
|
2,485,011
|
|
Accrued interest receivable
|
|
|
8,584
|
|
|
|
8,584
|
|
|
|
13,302
|
|
|
|
13,302
|
|
Financial liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing
|
|
|
349,796
|
|
|
|
349,796
|
|
|
|
334,495
|
|
|
|
334,495
|
|
Interest-bearing
|
|
|
2,220,315
|
|
|
|
2,231,823
|
|
|
|
2,078,296
|
|
|
|
2,008,100
|
|
Revolving note payable
|
|
|
8,600
|
|
|
|
3,947
|
|
|
|
8,600
|
|
|
|
8,600
|
|
Securities sold under agreements to repurchase
|
|
|
297,650
|
|
|
|
329,298
|
|
|
|
297,650
|
|
|
|
369,376
|
|
Advances from Federal Home Loan Bank
|
|
|
340,000
|
|
|
|
366,277
|
|
|
|
380,000
|
|
|
|
410,992
|
|
Junior subordinated debentures
|
|
|
60,828
|
|
|
|
19,064
|
|
|
|
60,791
|
|
|
|
56,572
|
|
Subordinated debt
|
|
|
15,000
|
|
|
|
6,883
|
|
|
|
15,000
|
|
|
|
15,000
|
|
Term note payable
|
|
|
55,000
|
|
|
|
25,238
|
|
|
|
55,000
|
|
|
|
55,000
|
|
Accrued interest payable
|
|
|
7,798
|
|
|
|
7,798
|
|
|
|
8,553
|
|
|
|
8,553
|
|
The remaining other assets and liabilities of the Company are
not considered financial instruments and are not included in the
above disclosures.
The methods and assumptions used to determine fair values for
each class of financial instrument are presented below.
F-37
MIDWEST
BANC HOLDINGS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
A test for goodwill impairment was conducted as of
September 30, 2009 and December 31, 2009 with the
assistance of a nationally recognized third party valuation
specialist. In Step 2 of that test, the Company estimated the
fair value of assets and liabilities in the same manner as if a
purchase of the reporting unit was taking place from a market
participant perspective. Management worked closely with the
third party valuation specialist throughout the valuation
process, provided necessary information and reviewed and
approved the methodologies, assumptions and conclusions.
The fair value estimation methodology selected for the
Companys most significant assets and liabilities was based
on managements observations and knowledge of methodologies
typically and currently utilized by market participants, the
structure and characteristics of the asset and liability in
terms of cash flows and collateral, and the availability and
reliability of significant inputs required for a selected
methodology and comparative data to evaluate the outcomes.
The carrying amount is equivalent to the estimated fair value
for cash and cash equivalents, Federal Reserve Bank and Federal
Home Loan Bank stock, and accrued interest receivable and
payable. The fair values of securities are determined by
obtaining either quoted prices on nationally recognized
securities exchanges or matrix pricing. The Company selected the
income approach for performing loans, retail certificates of
deposit, and borrowings. The Company estimated discounted fair
values separately for nonaccrual loans and loans
60-89 days
past due and accruing. The income approach was deemed
appropriate for the assets and liabilities noted above due to
the limited current comparable market transaction data available.
In computing this estimated fair value, performing loans were
broken into fixed and variable components, floors and collateral
coverage ratios were considered, and appropriate comparable
market discount rates were used to compute fair values using a
discounted cash flow approach. A 40% discount was applied to
nonaccrual loans based upon recent Company charge-off experience
and a 10% discount was applied to loans
60-89 days
past due and accruing.
The fair values of the Companys liabilities were estimated
using: price estimates from a nationally known dealer for
securities sold under repurchasing agreements, market price
quotes from the FHLB on FHLB advances, discounted cash flows for
the subordinated debentures and time and brokered deposits, and
a weighted combination of discounted cash flows reflecting the
effects of credit spreads and a liquidation scenario value
estimate for the remaining borrowings.
There is no readily available market for a significant portion
of the Companys financial instruments. Accordingly, fair
values are based on various factors relative to expected loss
experience, current economic conditions, risk characteristics,
and other factors. The assumptions and estimates used in the
fair value determination process are subjective in nature and
involve uncertainties and significant judgment and, therefore,
fair values cannot be determined with precision. Changes in
assumptions could significantly affect these estimated values.
F-38
MIDWEST
BANC HOLDINGS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Note 21
Off-Balance-Sheet Risk and Concentrations of Credit
Risk
In the normal course of business and to meet financing needs of
customers, the Company is a party to financial instruments with
off-balance-sheet risk. Since many commitments to extend credit
expire without being used, the amounts below do not necessarily
represent future cash commitments. These financial instruments
include lines of credit, letters of credit, and commitments to
extend credit. These are summarized as of December 31, 2009
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Commitment Expiration Per Period
|
|
|
|
Within
|
|
|
|
|
|
|
|
|
After
|
|
|
|
|
|
|
1 Year
|
|
|
1-3 Years
|
|
|
4-5 Years
|
|
|
5 Years
|
|
|
Total
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Lines of credit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
$
|
64,539
|
|
|
$
|
3,444
|
|
|
$
|
4,268
|
|
|
$
|
4,137
|
|
|
$
|
76,388
|
|
Consumer real estate
|
|
|
26,061
|
|
|
|
24,886
|
|
|
|
29,165
|
|
|
|
26,486
|
|
|
|
106,598
|
|
Consumer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,778
|
|
|
|
1,778
|
|
Commercial
|
|
|
150,735
|
|
|
|
2,575
|
|
|
|
2,311
|
|
|
|
4,738
|
|
|
|
160,359
|
|
Letters of credit
|
|
|
36,686
|
|
|
|
3,847
|
|
|
|
2,483
|
|
|
|
|
|
|
|
43,016
|
|
Commitments to extend credit
|
|
|
7,158
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,158
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commitments
|
|
$
|
285,179
|
|
|
$
|
34,752
|
|
|
$
|
38,227
|
|
|
$
|
37,139
|
|
|
$
|
395,297
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2009, commitments to extend credit included
$3.6 million of fixed rate loan commitments. These
commitments are due to expire within 30 to 90 days of
issuance and have rates ranging from 5.00% to 7.50%.
Substantially all of the unused lines of credit are at
adjustable rates of interest.
The Company had a reserve for losses on unfunded commitments of
$2.2 million at December 31, 2009, up from
$1.1 million at December 31, 2008.
During the second quarter of 2009, the Company began deferring
payment of dividends on the $84.8 million of Series T
cumulative preferred stock. The dividends on the Series T
cumulative preferred stock are recorded only when declared. The
cumulative amount of dividends not declared was
$3.8 million for the year ended December 31, 2009. On
March 8, 2010, the U.S. Treasury exchanged the
84,784 shares of Series T preferred stock, having an
aggregate approximate liquidation preference of
$84.8 million, plus approximately $4.6 million in
cumulative dividends not declared or paid on such preferred
stock, for a new series of fixed rate cumulative mandatorily
convertible preferred stock, Series G, with the same
liquidation preference. See Note 18 Preferred
Stock and Warrant.
In the normal course of business, the Company is involved in
various legal proceedings. In the opinion of management, any
liability resulting from such proceedings would not have a
material adverse effect on the Companys financial position
or results of operations.
F-39
MIDWEST
BANC HOLDINGS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Note 22
Leases
The Bank leases a portion of its premises. The leases expire in
various years through the year 2029. Future rental commitments
under these noncancelable operating leases for the years 2010
through 2014 and thereafter are as follows:
|
|
|
|
|
|
|
(In thousands)
|
|
|
2010
|
|
$
|
1,519
|
|
2011
|
|
|
1,354
|
|
2012
|
|
|
1,293
|
|
2013
|
|
|
1,331
|
|
2014
|
|
|
1,352
|
|
Thereafter
|
|
|
13,850
|
|
|
|
|
|
|
|
|
$
|
20,699
|
|
|
|
|
|
|
Rent expense included in occupancy and equipment expense was
$2.1 million, $2.1 million, and $1.3 million for
the years ended December 31, 2009, 2008, and 2007,
respectively. Occupancy expense has been reduced by $515,000,
$566,000, and $494,000 for the years ended December 31,
2009, 2008, and 2007, respectively, due to rental income
received on leased premises.
Note 23
Stock Compensation and Restricted Stock Awards
Under the Companys Stock and Incentive Plan (the
Plan), officers, directors, and key employees may be
granted incentive stock options to purchase the Companys
common stock at no less than 100% of the market price on the
date the option is granted. Options can be granted to become
exercisable immediately or after a specified vesting period or
may be issued subject to performance targets. In all cases, the
options have a maximum term of ten years. The Plan also permits
the issuance of nonqualified stock options, stock appreciation
rights, restricted stock, and restricted stock units. The Plan
authorizes a total of 3,900,000 shares for issuance. There
are 1,650,021 shares remaining for issuance under the Plan
at December 31, 2009. It is the Companys policy to
issue new shares of its common stock in conjunction with the
exercise of stock options or grants of restricted stock.
During 2009, no employee stock options were exercised. Total
employee stock options outstanding at December 31, 2009
were 540,626 with exercise prices ranging between $1.15 and
$22.03, with a weighted average exercise price of $8.02, and
expiration dates between 2010 and 2019.
F-40
MIDWEST
BANC HOLDINGS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Information about option grants follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
Weighted Average
|
|
|
|
Number of
|
|
|
Exercise Price
|
|
|
Grant-Date Fair
|
|
|
|
Options
|
|
|
Per Share
|
|
|
Value Per Share
|
|
|
Outstanding at December 31, 2006
|
|
|
517,048
|
|
|
$
|
13.90
|
|
|
$
|
4.58
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(36,443
|
)
|
|
|
10.38
|
|
|
|
3.19
|
|
Forfeited
|
|
|
(1,453
|
)
|
|
|
15.21
|
|
|
|
5.57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2007
|
|
|
479,152
|
|
|
|
14.03
|
|
|
|
4.63
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(16,500
|
)
|
|
|
10.61
|
|
|
|
3.01
|
|
Forfeited
|
|
|
(83,281
|
)
|
|
|
13.56
|
|
|
|
4.17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2008
|
|
|
379,371
|
|
|
|
14.28
|
|
|
|
4.80
|
|
Granted
|
|
|
288,693
|
|
|
|
1.15
|
|
|
|
0.66
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(127,438
|
)
|
|
|
11.13
|
|
|
|
3.51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2009
|
|
|
540,626
|
|
|
|
8.02
|
|
|
|
2.89
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at year end are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
Number of
|
|
Exercise Price
|
|
|
Options
|
|
Per Share
|
|
2007
|
|
|
451,652
|
|
|
$
|
13.70
|
|
2008
|
|
|
355,871
|
|
|
|
13.94
|
|
2009
|
|
|
261,413
|
|
|
|
14.26
|
|
Options outstanding at December 31, 2009 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
Exercisable
|
|
|
|
|
|
|
Remaining
|
|
|
|
|
|
Weighted Average
|
|
Range of Exercise Price
|
|
Number
|
|
|
Contractual Life
|
|
|
Number
|
|
|
Exercise Price
|
|
|
$1.15-9.09
|
|
|
336,751
|
|
|
|
7.25
|
|
|
|
73,038
|
|
|
$
|
8.95
|
|
$10.21-14.90
|
|
|
100,125
|
|
|
|
1.75
|
|
|
|
100,125
|
|
|
|
12.58
|
|
$18.34-22.03
|
|
|
103,750
|
|
|
|
4.28
|
|
|
|
88,250
|
|
|
|
20.58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at year end
|
|
|
540,626
|
|
|
|
5.66
|
|
|
|
261,413
|
|
|
|
14.26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2009, the aggregate intrinsic value of the
options outstanding and exercisable were both zero. The total
intrinsic value of options exercised during the years ended
December 31, 2008 and 2007 was $50,000 and $116,000,
respectively. No options were exercised during 2009.
Employee compensation expense for stock options previously
granted was recorded in the consolidated statement of operations
based on the grants vesting schedule. Forfeitures of stock
option grants are estimated for those stock options where the
requisite service is not expected to be rendered. The grant-date
fair value for each
F-41
MIDWEST
BANC HOLDINGS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
grant was calculated using the Black-Scholes option pricing
model. The following table reflects the assumptions used to
determine the grant-date fair value of stock options granted in
2009.
|
|
|
|
|
|
|
2009
|
|
|
Fair value per share
|
|
$
|
0.66
|
|
Risk-free interest rate
|
|
|
2.78
|
%
|
Expected option life
|
|
|
7.5 years
|
|
Expected stock price volatility
|
|
|
52.54
|
%
|
For the years ended December 31, 2009, 2008, and 2007,
employee compensation expense related to stock options was
$56,000, $19,000, and $22,000, respectively. The total
compensation cost related to nonvested stock options not yet
recognized was $118,000 at December 31, 2009 and the
weighted average period over which this cost is expected to be
recognized is 25 months.
Under the Plan, officers, directors, and key employees may also
be granted awards of restricted shares of the Companys
common stock. Holders of restricted shares are entitled to
receive non-forfeitable cash dividends paid to the
Companys common stockholders and have the right to vote
the restricted shares prior to vesting. The existing restricted
share grants vest over various time periods not exceeding five
years. Compensation expense for the restricted shares equals the
market price of the related stock at the date of grant and is
amortized on a straight-line basis over the expected vesting
period. All restricted shares had a grant-date fair value equal
to the market price of the underlying common stock at date of
grant.
Information about restricted share grants follows:
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
Weighted Average
|
|
|
|
Restricted
|
|
|
Grant-Date Fair Value
|
|
|
|
Shares
|
|
|
Per Share
|
|
|
Outstanding at December 31, 2006
|
|
|
480,629
|
|
|
$
|
21.59
|
|
Granted
|
|
|
59,700
|
|
|
|
14.99
|
|
Vested
|
|
|
(84,709
|
)
|
|
|
20.85
|
|
Forfeited
|
|
|
(7,226
|
)
|
|
|
20.77
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2007
|
|
|
448,394
|
|
|
|
20.87
|
|
Granted
|
|
|
278,324
|
|
|
|
9.45
|
|
Vested
|
|
|
(42,996
|
)
|
|
|
17.77
|
|
Forfeited
|
|
|
(73,821
|
)
|
|
|
16.40
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2008
|
|
|
609,901
|
|
|
|
16.42
|
|
Granted
|
|
|
334,882
|
|
|
|
1.22
|
|
Vested
|
|
|
(48,896
|
)
|
|
|
15.67
|
|
Forfeited
|
|
|
(216,239
|
)
|
|
|
17.45
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2009
|
|
|
679,648
|
|
|
|
8.65
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31, 2009, 2008, and 2007, the
Company recognized $1.0 million, $2.9 million, and
$3.1 million, respectively, in compensation expense related
to the restricted stock grants. The total grant-date fair value
of shares outstanding was $5.9 million as of
December 31, 2009. The total grant-date fair value of
shares vested during the years ended December 31, 2009,
2008, and 2007 was $766,000, $764,000, and $1.8 million,
respectively. The total compensation cost related to nonvested
restricted shares not yet recognized was $1.2 million at
December 31, 2009 and the weighted average period over
which this cost is expected to be recognized is 31 months.
F-42
MIDWEST
BANC HOLDINGS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Note 24
Other Employee Benefit Plans
The Company maintains a 401(k) plan covering substantially all
employees. Eligible employees may elect to make tax deferred
contributions within a specified range of their compensation as
defined in the plan. The Company previously contributed 1% more
than the employees contribution up to a maximum 5%
employer contribution. The Company suspended contributions
during the third quarter of 2009. Contributions to the plan are
expensed currently and were $705,000, $1.2 million, and
$1.1 million for the years ended December 31, 2009,
2008, and 2007, respectively.
The Company and various members of senior management have
entered into a Supplemental Executive Retirement Plan
(SERP). The SERP is an unfunded plan that provides
for guaranteed payments, based on a percentage of the
individuals final salary, for 15 years after
age 65. The benefit amount is reduced if the individual
retires prior to age 65.
Effective April 1, 2008, the SERP agreements with employees
constituted a pension plan under the authoritative guidance for
compensation retirement plans (ASC 715). The
objective of this guidance is to recognize the compensation cost
of pension benefits (including prior service cost) over that
employees approximate service period. The benefit
obligation was $6.5 million and $6.4 million as of
December 31, 2009 and 2008, respectively, and is included
in other liabilities. Expense of $1.3 million,
$1.8 million, and $1.1 million was recorded for the
years ended December 31, 2009, 2008, and 2007,
respectively, and has been included in salaries and employee
benefits expense in the statements of operations. Prior to
April 1, 2008, the SERP was accounted for under the
authoritative guidance for deferred compensation arrangements
(ASC 710).
The following is a summary of changes in the benefit obligation
for the year ended December 31, 2009:
|
|
|
|
|
|
|
(In thousands)
|
|
|
Beginning balance
|
|
$
|
6,403
|
|
Service cost
|
|
|
824
|
|
Interest cost
|
|
|
356
|
|
Benefits paid
|
|
|
(128
|
)
|
Actuarial gain
|
|
|
(1,000
|
)
|
|
|
|
|
|
Ending balance
|
|
$
|
6,455
|
|
|
|
|
|
|
The following is a summary of the net periodic costs for the
year ended December 31, 2009:
|
|
|
|
|
|
|
(In thousands)
|
|
|
Service cost
|
|
$
|
824
|
|
Interest cost
|
|
|
356
|
|
Amortization of prior service cost
|
|
|
95
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$
|
1,275
|
|
|
|
|
|
|
The following are the weighted-average assumptions used to
determine the benefit obligation at December 31, 2009:
|
|
|
|
|
Discount rate
|
|
|
|
|
Net periodic pension cost
|
|
|
5.75
|
%
|
Benefit obligation
|
|
|
5.78
|
|
Rate of compensation increase
|
|
|
4.00
|
|
The Companys weighted-average assumptions were determined
at December 31, 2009, the measurement date, based on common
benchmarks used for measuring benefit liabilities, the
Moodys As corporate bond rate and Citigroup pension
liability discount rate.
F-43
MIDWEST
BANC HOLDINGS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The prior service cost amortization expense for 2009 was
$95,000; $610,000 was unamortized as of December 31, 2009.
Due to the Companys current tax position, no tax
adjustment was made. The prior service cost amortization expense
is projected to be $95,000 for 2010. The Company recognized a
$1.0 million actuarial gain in accumulated other
comprehensive loss as of December 31, 2009.
The following benefit payments, which reflect expected future
service, as appropriate, are expected to be paid:
|
|
|
|
|
|
|
(In thousands)
|
|
2010
|
|
$
|
252
|
|
2011
|
|
|
323
|
|
2012
|
|
|
477
|
|
2013
|
|
|
535
|
|
2014
|
|
|
730
|
|
Years 2015 2019
|
|
|
4,325
|
|
Prior to 2009, the Company purchased life insurance policies on
various members of management. In 2009, the Company liquidated
its entire $85.8 million investment in bank owned life
insurance in order to reduce the Companys investment risk
and risk-weighted assets, which favorably impacted the
Banks regulatory capital ratios. The $16.3 million
increase in cash surrender value of the policies since the time
of purchase was treated as ordinary income for tax purposes.
Note 25
Income Taxes
The provision (benefit) for income taxes consists of the
following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Current
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
3,923
|
|
|
$
|
(11,316
|
)
|
|
$
|
2,923
|
|
State
|
|
|
2,989
|
|
|
|
|
|
|
|
|
|
Deferred
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
39,714
|
|
|
|
(36,756
|
)
|
|
|
1,903
|
|
State
|
|
|
8,970
|
|
|
|
(7,001
|
)
|
|
|
(1,580
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total provision (benefit) for income taxes
|
|
$
|
55,596
|
|
|
$
|
(55,073
|
)
|
|
$
|
3,246
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-44
MIDWEST
BANC HOLDINGS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The difference between the provision for income taxes in the
consolidated financial statements and amounts computed by
applying the current federal statutory income tax rate of 35% to
income before income taxes is reconciled as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
Income taxes computed at the statutory rate
|
|
$
|
(65,491
|
)
|
|
|
35.0
|
%
|
|
$
|
(74,671
|
)
|
|
|
35.0
|
%
|
|
$
|
7,638
|
|
|
|
35.0
|
%
|
Tax-exempt interest income on securities and loans
|
|
|
(455
|
)
|
|
|
0.2
|
|
|
|
(802
|
)
|
|
|
0.4
|
|
|
|
(771
|
)
|
|
|
(3.5
|
)
|
General business credits
|
|
|
(566
|
)
|
|
|
0.3
|
|
|
|
(661
|
)
|
|
|
0.3
|
|
|
|
(643
|
)
|
|
|
(2.9
|
)
|
State income taxes, net of federal tax benefit due to state
operating loss
|
|
|
(6,699
|
)
|
|
|
3.6
|
|
|
|
(4,419
|
)
|
|
|
2.1
|
|
|
|
(1,027
|
)
|
|
|
(4.7
|
)
|
Life insurance cash surrender value increase, net of premiums
|
|
|
(466
|
)
|
|
|
0.2
|
|
|
|
(1,195
|
)
|
|
|
0.6
|
|
|
|
(1,072
|
)
|
|
|
(4.9
|
)
|
Liquidation of bank-owned life insurance
|
|
|
6,924
|
|
|
|
(3.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends received deduction
|
|
|
|
|
|
|
|
|
|
|
(642
|
)
|
|
|
0.3
|
|
|
|
(1,214
|
)
|
|
|
(5.6
|
)
|
Goodwill impairment
|
|
|
4,900
|
|
|
|
(2.6
|
)
|
|
|
27,733
|
|
|
|
(13.0
|
)
|
|
|
|
|
|
|
|
|
Valuation allowance
|
|
|
116,286
|
|
|
|
(62.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annuity proceeds
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
267
|
|
|
|
1.2
|
|
Nondeductible costs and other, net
|
|
|
1,163
|
|
|
|
(0.6
|
)
|
|
|
(416
|
)
|
|
|
0.1
|
|
|
|
68
|
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total provision (benefit) for income taxes
|
|
$
|
55,596
|
|
|
|
(29.7
|
)%
|
|
$
|
(55,073
|
)
|
|
|
25.8
|
%
|
|
$
|
3,246
|
|
|
|
14.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the year, the Company liquidated its $85.8 million
investment in bank owned life insurance in order to reduce the
Companys investment risk and the risk-weighted assets. The
$16.3 million increase in cash surrender value of the
policies since the time of purchase is treated as ordinary
income for tax purposes. Additionally, a 10% IRS excise tax was
incurred as a result of the liquidation. As a result, the
Company recorded federal taxes of $6.9 million, and an
additional state tax expense of $1.2 million in 2009 for
this transaction.
F-45
MIDWEST
BANC HOLDINGS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The net deferred tax asset, included in other assets and other
liabilities in the accompanying consolidated balance sheets,
consisted of the following components:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Gross deferred tax assets
|
|
|
|
|
|
|
|
|
Allowance for loan losses
|
|
$
|
51,026
|
|
|
$
|
17,543
|
|
Net operating loss carryforward
|
|
|
40,934
|
|
|
|
13,446
|
|
Impairment charges
|
|
|
24,364
|
|
|
|
25,816
|
|
Deferred tax credits
|
|
|
5,559
|
|
|
|
1,351
|
|
Deferred compensation
|
|
|
4,720
|
|
|
|
4,675
|
|
Unrealized loss on securities
available-for-sale
|
|
|
3,276
|
|
|
|
911
|
|
Valuation loss on foreclosed properties
|
|
|
1,015
|
|
|
|
|
|
Other
|
|
|
396
|
|
|
|
433
|
|
Less: Valuation Allowance
|
|
|
(119,797
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross deferred tax assets
|
|
|
11,493
|
|
|
|
64,175
|
|
|
|
|
|
|
|
|
|
|
Gross deferred tax liabilities
|
|
|
|
|
|
|
|
|
Amortizing intangible assets
|
|
|
(4,153
|
)
|
|
|
(4,729
|
)
|
FHLB stock dividends
|
|
|
(1,528
|
)
|
|
|
(1,526
|
)
|
Depreciation
|
|
|
(973
|
)
|
|
|
(612
|
)
|
Loss from partnerships
|
|
|
(554
|
)
|
|
|
(812
|
)
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross deferred tax liabilities
|
|
|
(7,208
|
)
|
|
|
(7,679
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset
|
|
$
|
4,285
|
|
|
$
|
56,496
|
|
|
|
|
|
|
|
|
|
|
During 2009, the Company established a valuation allowance of
$119.8 million against existing net deferred tax assets.
The valuation allowance includes $3.5 million recorded in
accumulated other comprehensive loss fully offsetting deferred
taxes which were established for securities available for sale
and for the SERP. The Companys primary deferred tax assets
relate to its allowance for loan losses, net operating losses
and impairment charges relating to FNMA and FHLMC preferred
stock holdings. Under generally accepted accounting principles,
a valuation allowance is required to be recognized if it is
more likely than not that such deferred tax assets
will not be realized. In making that determination, management
is required to evaluate both positive and negative evidence,
including recent historical financial performance, forecasts of
future income, tax planning strategies and assessments of the
current and future economic and business conditions. The Company
performs and updates this evaluation on a quarterly basis.
The Company made a determination to establish the valuation
allowance during 2009 based primarily upon the existence of a
three year cumulative loss derived by combining the pre-tax
income (loss) reported during the two preceding years and the
current year. This three year cumulative loss position is
primarily attributable to significant provisions for loan losses
incurred during 2009 and 2008, and losses realized during 2008
on its FNMA and FHLMC preferred stock holdings. The
Companys current financial forecasts indicate that taxable
income will be generated in the future. However, the existing
deferred tax benefits may not be fully realized due to statutory
limitations on their utilization based on the Companys
planned capital restructuring. The creation of the valuation
allowance did not have an effect on the Companys cash
flows. The remaining net deferred tax assets of
$4.3 million are supported by available tax planning
strategies involving the use of sale-leaseback transactions on
branch properties.
F-46
MIDWEST
BANC HOLDINGS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The unrecognized tax benefits at December 31, 2009 and
December 31, 2008 were as follows:
|
|
|
|
|
|
|
|
|
|
|
Unrecognized
|
|
|
|
Income
|
|
|
|
Tax Benefits
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Balance, at beginning of year
|
|
$
|
3,261
|
|
|
$
|
1,122
|
|
Additions based on tax positions taken in current year
|
|
|
|
|
|
|
304
|
|
Additions based on tax positions taken in prior year
|
|
|
2
|
|
|
|
1,835
|
|
Reductions due to settlements
|
|
|
(2,166
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, at end of year
|
|
$
|
1,097
|
|
|
$
|
3,261
|
|
|
|
|
|
|
|
|
|
|
The Company recognizes interest related to unrecognized tax
benefits and penalties, if any, in income tax expense. At
December 31, 2009, the Company had approximately $71,000 of
interest accrued for potential income tax exposures and $713,000
of unrecognized income tax benefits that, if recognized, would
affect the effective tax rate. At December 31, 2008, the
Company had approximately $167,000 of interest and $91,000 of
penalty accrued for potential income tax exposures and
$2.1 million of unrecognized tax benefits that, if
recognized, would affect the effective rate.
The IRS and the Illinois Department of Revenue are currently
auditing the Company for various years. In addition, both are
currently reviewing certain previously acquired entities for
pre-acquisition years. The Company is responsible for all income
taxes related to acquired entities including periods prior to
their acquisition. The Company anticipates that it is reasonably
possible that the gross balance of unrecognized tax benefits may
be reduced to zero due to audit settlement within the next
twelve months primarily related to a single issue common to
Illinois banks.
The Company has cumulative federal net operating losses of
$90.2 million. The earliest expiration date for these
losses is 2028. The Company has general business credit
carryforwards that aggregate to $2.8 million. These credits
begin to expire in 2024. The Company has cumulative alternative
minimum tax credit carryforwards of $2.8 million. These
credits do not expire. The Company also has cumulative Illinois
losses of $197.4 million. The earliest expiration date for
these losses is 2018.
Years that remain subject to examination include 2006 to present
for federal, 2006 to present for Illinois, 2006 to present for
Indiana, and 2006 to present for federal and 2005 to present for
Illinois for various acquired entities.
F-47
MIDWEST
BANC HOLDINGS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Note 26
(Loss)/Earnings Per Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands, except per share data)
|
|
|
Net (loss) income
|
|
$
|
(242,713
|
)
|
|
$
|
(158,273
|
)
|
|
$
|
18,577
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A preferred stock dividends
|
|
|
835
|
|
|
|
3,342
|
|
|
|
204
|
|
Series T preferred stock dividends(1)
|
|
|
4,300
|
|
|
|
318
|
|
|
|
|
|
Series T discount accretion
|
|
|
922
|
|
|
|
68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total preferred stock dividends and premium accretion
|
|
|
6,057
|
|
|
|
3,728
|
|
|
|
204
|
|
Income allocated to participating securities(2)
|
|
|
|
|
|
|
|
|
|
|
325
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income available to common stockholders
|
|
$
|
(248,770
|
)
|
|
$
|
(162,001
|
)
|
|
$
|
18,048
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
27,982
|
|
|
|
27,854
|
|
|
|
25,426
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic (loss) earnings per share(2)
|
|
$
|
(8.89
|
)
|
|
$
|
(5.82
|
)
|
|
$
|
0.71
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
27,982
|
|
|
|
27,854
|
|
|
|
25,426
|
|
Dilutive effect of stock options(3)
|
|
|
|
|
|
|
|
|
|
|
98
|
|
Dilutive effect of restricted stock(3)
|
|
|
|
|
|
|
|
|
|
|
56
|
|
Dilutive effect of warrant(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted average common shares
|
|
|
27,982
|
|
|
|
27,854
|
|
|
|
25,580
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted (loss) earnings per share(2)
|
|
$
|
(8.89
|
)
|
|
$
|
(5.82
|
)
|
|
$
|
0.71
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes $824 in dividends declared and paid in first quarter of
2009 and $3.8 million in cumulative dividends not declared
or paid during 2009. |
|
(2) |
|
No adjustment for unvested restricted shares was included in the
computation of income available to common stockholders for any
period there was a loss. Prior periods with earnings were
restated as required by the authoritative guidance for
determining whether instruments granted in share-based payment
transactions are participating securities (ASC 260), which was
effective on January 1, 2009 and required retrospective
application, to allocate earnings available to common
stockholders to restricted shares of common stock that are
considered participating securities. |
|
(3) |
|
No dilutive shares from stock options, restricted stock, or
warrant were included in the computation of diluted earnings per
share for any period there was a loss. |
Options to purchase 540,626 shares at a weighted average
exercise price of $8.02 and 379,371 shares at $14.28 were
not included in the computation of diluted earnings per share
for the years ended December 31, 2009 and 2008,
respectively, because the exercise price of the options was
greater than the average market price of the common stock and
the options were, therefore, anti-dilutive. The warrant to
purchase 4,282,020 shares at an exercise price of $2.97 was
not included in the computation of diluted earnings per share
for the years ended December 31, 2009 and 2008, because the
warrants exercise price was greater than the average
market price of common stock and was, therefore, anti-dilutive.
The effect of the 679,648 shares and 609,901 shares of
restricted stock were not included in the computation of diluted
earnings per share for the years ended December 31, 2009
and December 31, 2008, respectively, because of the
anti-dilutive effect. The shares that would be issued if the
Series A noncumulative
F-48
MIDWEST
BANC HOLDINGS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
redeemable convertible perpetual preferred stock were converted
are not included in the computation of diluted earnings per
share for the years ended December 31, 2009, 2008, and 2007
because of the anti-dilutive effect.
Note 27
Other Comprehensive Income
Changes in other comprehensive income or loss components and
related taxes are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Unrealized holding losses on securities
available-for-sale
|
|
$
|
(1,996
|
)
|
|
$
|
(61,540
|
)
|
|
$
|
(12,221
|
)
|
Reclassification adjustment for (gains) losses recognized in
income
|
|
|
(4,681
|
)
|
|
|
16,747
|
|
|
|
(32
|
)
|
Reclassification adjustment for impairment losses recognized in
income
|
|
|
740
|
|
|
|
65,387
|
|
|
|
|
|
Accretion of unrealized gains on securities transferred from
available-for-sale
to
held-to-maturity
|
|
|
|
|
|
|
(295
|
)
|
|
|
(7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized (losses) gains
|
|
|
(5,937
|
)
|
|
|
20,299
|
|
|
|
(12,260
|
)
|
Tax effect
|
|
|
(911
|
)
|
|
|
(7,831
|
)
|
|
|
4,616
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in fair value of securities classified
as
available-for-sale,
net of income taxes and reclassification adjustments
|
|
|
(6,848
|
)
|
|
|
12,468
|
|
|
|
(7,644
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior service cost related to benefit obligation
|
|
|
|
|
|
|
(776
|
)
|
|
|
|
|
Amortization of prior service cost
|
|
|
95
|
|
|
|
71
|
|
|
|
|
|
Tax effect
|
|
|
(272
|
)
|
|
|
272
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior service cost, net of tax adjustment
|
|
|
(177
|
)
|
|
|
(433
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actuarial gain (loss) related to the projected benefit obligation
|
|
|
1,000
|
|
|
|
(391
|
)
|
|
|
|
|
Tax effect
|
|
|
(151
|
)
|
|
|
151
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actuarial gain (loss) related to the projected benefit
obligation, net of tax adjustment
|
|
|
849
|
|
|
|
(240
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive (loss) income
|
|
$
|
(6,176
|
)
|
|
$
|
11,795
|
|
|
$
|
(7,644
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-49
MIDWEST
BANC HOLDINGS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Note 28
Parent Company Financial Statements
The following are condensed balance sheets and statements of
operations and cash flows for the Company, without subsidiaries:
CONDENSED
BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
ASSETS
|
Cash and cash equivalents
|
|
$
|
3,435
|
|
|
$
|
43,469
|
|
Investment in subsidiaries
|
|
|
189,313
|
|
|
|
358,480
|
|
Loan to subsidiary
|
|
|
|
|
|
|
30,000
|
|
Other assets
|
|
|
6,719
|
|
|
|
15,820
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
199,467
|
|
|
$
|
447,769
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Revolving note payable
|
|
$
|
8,600
|
|
|
$
|
8,600
|
|
Subordinated debt
|
|
|
15,000
|
|
|
|
15,000
|
|
Term note payable
|
|
|
55,000
|
|
|
|
55,000
|
|
Junior subordinated debentures
|
|
|
60,828
|
|
|
|
60,791
|
|
Other liabilities
|
|
|
3,563
|
|
|
|
2,544
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
142,991
|
|
|
|
141,935
|
|
Stockholders equity
|
|
|
56,476
|
|
|
|
305,834
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
199,467
|
|
|
$
|
447,769
|
|
|
|
|
|
|
|
|
|
|
CONDENSED
STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Operating income
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends from subsidiaries
|
|
$
|
68
|
|
|
$
|
22,311
|
|
|
$
|
4,032
|
|
Interest from subsidiaries
|
|
|
2,068
|
|
|
|
16
|
|
|
|
|
|
Fees from subsidiaries
|
|
|
2,636
|
|
|
|
1,103
|
|
|
|
1,103
|
|
Noninterest income
|
|
|
425
|
|
|
|
(51
|
)
|
|
|
(162
|
)
|
Interest expense
|
|
|
(5,223
|
)
|
|
|
(7,519
|
)
|
|
|
(6,645
|
)
|
Noninterest expense
|
|
|
(5,165
|
)
|
|
|
(8,037
|
)
|
|
|
(3,330
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before income taxes and equity in undistributed
(loss) income of subsidiaries
|
|
|
(5,191
|
)
|
|
|
7,823
|
|
|
|
(5,002
|
)
|
Income tax (expense) benefit
|
|
|
(6,246
|
)
|
|
|
7,599
|
|
|
|
3,377
|
|
Equity in undistributed (loss) income of subsidiaries
|
|
|
(231,276
|
)
|
|
|
(173,695
|
)
|
|
|
20,202
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(242,713
|
)
|
|
$
|
(158,273
|
)
|
|
$
|
18,577
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-50
MIDWEST
BANC HOLDINGS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
CONDENSED
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(242,713
|
)
|
|
$
|
(158,273
|
)
|
|
$
|
18,577
|
|
Adjustments to reconcile net (loss) income to net cash (used in)
provided by operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in undistributed loss (income) of subsidiaries
|
|
|
231,276
|
|
|
|
173,695
|
|
|
|
(20,202
|
)
|
Depreciation
|
|
|
26
|
|
|
|
43
|
|
|
|
70
|
|
Amortization of stock-based compensation
|
|
|
244
|
|
|
|
899
|
|
|
|
22
|
|
Amortization of intangibles
|
|
|
37
|
|
|
|
67
|
|
|
|
67
|
|
Change in other assets
|
|
|
9,020
|
|
|
|
(5,794
|
)
|
|
|
2,971
|
|
Change in other liabilities
|
|
|
1,124
|
|
|
|
1,039
|
|
|
|
(3,766
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by operating activities
|
|
|
(986
|
)
|
|
|
11,676
|
|
|
|
(2,261
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid, net of cash and cash equivalents in acquisition
|
|
|
|
|
|
|
|
|
|
|
(67,557
|
)
|
Investment in subsidiaries
|
|
|
(67,500
|
)
|
|
|
(17,000
|
)
|
|
|
(20,000
|
)
|
Loan advances to subsidiary
|
|
|
(21,000
|
)
|
|
|
(30,000
|
)
|
|
|
|
|
Repayment of advances to subsidiary
|
|
|
51,000
|
|
|
|
|
|
|
|
|
|
Property and equipment expenditures
|
|
|
(1
|
)
|
|
|
|
|
|
|
(75
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(37,501
|
)
|
|
|
(47,000
|
)
|
|
|
(87,632
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments of junior subordinated debentures
|
|
|
|
|
|
|
|
|
|
|
(15,000
|
)
|
Proceeds from revolving note payable
|
|
|
|
|
|
|
24,600
|
|
|
|
75,000
|
|
Proceeds from term note payable
|
|
|
|
|
|
|
|
|
|
|
17,500
|
|
Repayments on revolving note payable
|
|
|
|
|
|
|
(18,500
|
)
|
|
|
(15,000
|
)
|
Repayments on term note payable
|
|
|
|
|
|
|
|
|
|
|
(5,000
|
)
|
Cash common dividends paid
|
|
|
|
|
|
|
(11,076
|
)
|
|
|
(13,003
|
)
|
Cash preferred dividends paid
|
|
|
(1,660
|
)
|
|
|
(3,342
|
)
|
|
|
(204
|
)
|
Issuance of common stock
|
|
|
130
|
|
|
|
35
|
|
|
|
|
|
Issuance of preferred stock and warrant
|
|
|
|
|
|
|
84,784
|
|
|
|
41,441
|
|
Repurchase of common stock
|
|
|
(17
|
)
|
|
|
|
|
|
|
(9,392
|
)
|
Proceeds from issuance of common and treasury stock under stock
option plan
|
|
|
|
|
|
|
174
|
|
|
|
378
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities
|
|
|
(1,547
|
)
|
|
|
76,675
|
|
|
|
(76,720
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Decrease) increase in cash and cash equivalents
|
|
|
(40,034
|
)
|
|
|
41,351
|
|
|
|
(13,173
|
)
|
Cash and cash equivalents at beginning of year
|
|
|
43,469
|
|
|
|
2,118
|
|
|
|
15,291
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$
|
3,435
|
|
|
$
|
43,469
|
|
|
$
|
2,118
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-51
MIDWEST
BANC HOLDINGS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Note 29
Quarterly Results of Operations (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended,
|
|
|
Year Ended,
|
|
2009
|
|
March 31
|
|
|
June 30
|
|
|
September 30
|
|
|
December 31
|
|
|
December 31
|
|
|
|
|
|
|
(In thousands, except per share data)
|
|
|
|
|
|
Interest income
|
|
$
|
42,266
|
|
|
$
|
40,662
|
|
|
$
|
35,135
|
|
|
$
|
32,445
|
|
|
$
|
150,508
|
|
Interest expense
|
|
|
21,164
|
|
|
|
19,607
|
|
|
|
19,193
|
|
|
|
17,673
|
|
|
|
77,637
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
21,102
|
|
|
|
21,055
|
|
|
|
15,942
|
|
|
|
14,772
|
|
|
|
72,871
|
|
Provision for credit losses
|
|
|
13,253
|
|
|
|
20,750
|
|
|
|
37,450
|
|
|
|
98,750
|
|
|
|
170,203
|
|
Noninterest income
|
|
|
3,343
|
|
|
|
7,295
|
|
|
|
3,657
|
|
|
|
2,835
|
|
|
|
17,130
|
|
Noninterest expense
|
|
|
21,508
|
|
|
|
24,420
|
|
|
|
22,450
|
|
|
|
38,537
|
|
|
|
106,915
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(10,316
|
)
|
|
|
(16,820
|
)
|
|
|
(40,301
|
)
|
|
|
(119,680
|
)
|
|
|
(187,117
|
)
|
(Benefit) provision for income taxes
|
|
|
(4,996
|
)
|
|
|
59,647
|
|
|
|
966
|
|
|
|
(21
|
)
|
|
|
55,596
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(5,320
|
)
|
|
|
(76,467
|
)
|
|
|
(41,267
|
)
|
|
|
(119,659
|
)
|
|
|
(242,713
|
)
|
Preferred stock dividends and premium accretion
|
|
|
2,123
|
|
|
|
1,290
|
|
|
|
1,289
|
|
|
|
1,355
|
|
|
|
6,057
|
|
Income allocated to participating securities(a)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss available to common stockholders
|
|
$
|
(7,443
|
)
|
|
$
|
(77,757
|
)
|
|
$
|
(42,556
|
)
|
|
$
|
(121,014
|
)
|
|
$
|
(248,770
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per common share(b)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.27
|
)
|
|
$
|
(2.78
|
)
|
|
$
|
(1.52
|
)
|
|
$
|
(4.30
|
)
|
|
$
|
(8.89
|
)
|
Diluted
|
|
|
(0.27
|
)
|
|
|
(2.78
|
)
|
|
|
(1.52
|
)
|
|
|
(4.30
|
)
|
|
|
(8.89
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended,
|
|
|
Year Ended,
|
|
2008
|
|
March 31
|
|
|
June 30
|
|
|
September 30
|
|
|
December 31
|
|
|
December 31
|
|
|
|
|
|
|
(In thousands, except per share data)
|
|
|
|
|
|
Interest income
|
|
$
|
50,795
|
|
|
$
|
47,244
|
|
|
$
|
45,888
|
|
|
$
|
43,734
|
|
|
$
|
187,661
|
|
Interest expense
|
|
|
28,579
|
|
|
|
24,479
|
|
|
|
23,735
|
|
|
|
23,902
|
|
|
|
100,695
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
22,216
|
|
|
|
22,765
|
|
|
|
22,153
|
|
|
|
19,832
|
|
|
|
86,966
|
|
Provision for credit losses
|
|
|
5,752
|
|
|
|
4,415
|
|
|
|
42,200
|
|
|
|
20,275
|
|
|
|
72,642
|
|
Noninterest income (loss)
|
|
|
1,790
|
|
|
|
4,394
|
|
|
|
(60,512
|
)
|
|
|
3,732
|
|
|
|
(50,596
|
)
|
Noninterest expense
|
|
|
28,257
|
|
|
|
20,368
|
|
|
|
103,046
|
|
|
|
25,403
|
|
|
|
177,074
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before income taxes
|
|
|
(10,003
|
)
|
|
|
2,376
|
|
|
|
(183,605
|
)
|
|
|
(22,114
|
)
|
|
|
(213,346
|
)
|
Benefit for income taxes
|
|
|
(4,587
|
)
|
|
|
(52
|
)
|
|
|
(23,891
|
)
|
|
|
(26,543
|
)
|
|
|
(55,073
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
|
(5,416
|
)
|
|
|
2,428
|
|
|
|
(159,714
|
)
|
|
|
4,429
|
|
|
|
(158,273
|
)
|
Preferred stock dividends and premium accretion
|
|
|
835
|
|
|
|
836
|
|
|
|
835
|
|
|
|
1,222
|
|
|
|
3,728
|
|
Income allocated to participating securities(a)
|
|
|
|
|
|
|
35
|
|
|
|
|
|
|
|
69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income available to common stockholders
|
|
$
|
(6,251
|
)
|
|
$
|
1,557
|
|
|
$
|
(160,549
|
)
|
|
$
|
3,138
|
|
|
$
|
(162,001
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) earnings per common share(b)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.22
|
)
|
|
$
|
0.06
|
|
|
$
|
(5.76
|
)
|
|
$
|
0.11
|
|
|
$
|
(5.82
|
)
|
Diluted
|
|
|
(0.22
|
)
|
|
|
0.06
|
|
|
|
(5.76
|
)
|
|
|
0.11
|
|
|
|
(5.82
|
)
|
F-52
MIDWEST
BANC HOLDINGS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
(a) |
|
No adjustment for unvested restricted shares was included in the
computation of income available to common stockholders for any
period there was a loss. Prior periods with earnings were
restated as required by the authoritative guidance for
determining whether instruments granted in share-based payment
transactions are participating securities (ASC 260), which was
effective on January 1, 2009 and required retrospective
application, to allocate earnings available to common
stockholders to restricted shares of common stock that are
considered participating securities. |
|
(b) |
|
Earnings per share for the quarters and fiscal years have been
calculated separately. Accordingly, the total of the quarterly
amounts may not equal the annual amounts because of differences
in the average common shares outstanding during each period. |
Certain infrequent items are reflected in the quarterly results
of 2009 and 2008.
As a result of the continued deterioration of economic
conditions and managements updated assessments of impaired
loans, the Company recorded a provision for credit losses of
$170.2 million in 2009, 58.0% of which was recorded in the
fourth quarter. Also, the Company recognized an impairment
charge of $14.0 million on its goodwill intangible asset
during the fourth quarter of 2009 based upon an appraisal
completed with the assistance of an independent third party. The
results of the second quarter of 2009 included a
$116.3 million tax charge due to a valuation allowance on
deferred tax assets and an $8.1 million tax charge related
to the liquidation of bank owned life insurance which was partly
offset by the $4.3 million in net gains on the securities
portfolio repositioning.
During 2008, the Company recognized a non-cash, non-operating,
other-than-temporary
impairment charge of $47.8 million at September 30,
2008 on certain FNMA and FHLMC preferred equity securities
similar to the impairment charge of $17.6 million taken in
the first quarter of 2008. In September 2008, the Company sold a
portion of its FNMA and FHLMC preferred equity securities
recognizing a $16.7 million loss. The income tax benefits
related to the first and third quarter 2008 losses on FNMA and
FHLMC securities were appropriately recognized as capital losses
in those periods. As a result of subsequent law changes,
$16.6 million in tax benefits were recognized in the fourth
quarter of 2008 for losses reported in the third quarter of 2008.
During the third and fourth quarters of 2008, the Company
recorded $42.2 million and $20.3 million in provision
for credit losses, respectively, reflecting managements
updated assessments of impaired loans and concerns about the
continued deterioration of economic conditions. The Company also
recognized an impairment charge of $80.0 million on its
goodwill intangible asset during the third quarter of 2008 based
upon an appraisal by an independent third party. During the
first quarter of 2008, the Company incurred a $7.1 million
loss on the early extinguishment of debt arising from the
prepayment of $130.0 million in FHLB advances and
recognized a $15.2 million gain on the sale of real estate.
Note 30
Subsequent Events
The Company has performed an evaluation of events that have
occurred subsequent to December 31, 2009. There have been
no subsequent events that occurred during such period that would
require disclosure in this
Form 10-K,
other than those that are described in Note 2
Regulatory Actions, Note 3 Regulatory Capital,
Note 4 Forbearance Agreement,
Note 18 Preferred Stock and Warrant, and
Note 19 Capital Requirements or would be
required to be recognized in the Consolidated Financial
Statements as of or for the year ended December 31, 2009.
F-53
Report of
Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors of Midwest Banc
Holdings, Inc.:
In our opinion, the accompanying consolidated balance sheets and
the related consolidated statements of operations,
stockholders equity and cash flows present fairly, in all
material respects, the financial position of Midwest Banc
Holdings, Inc. and its subsidiaries at December 31, 2009
and December 31, 2008, and the results of their operations
and their cash flows for each of the three years in the period
ended December 31, 2009 in conformity with accounting
principles generally accepted in the United States of America.
Also in our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as
of December 31, 2009, based on criteria established in
Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). The Companys management is responsible
for these financial statements, for maintaining effective
internal control over financial reporting and for its assessment
of the effectiveness of internal control over financial
reporting, included in Managements Report on Internal
Control over Financial Reporting under Item 9A. Our
responsibility is to express opinions on these financial
statements and on the Companys internal control over
financial reporting based on our integrated audits. We conducted
our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are
free of material misstatement and whether effective internal
control over financial reporting was maintained in all material
respects. Our audits of the financial statements included
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. Our audit of internal control over financial
reporting included obtaining an understanding of internal
control over financial reporting, assessing the risk that a
material weakness exists, and testing and evaluating the design
and operating effectiveness of internal control based on the
assessed risk. Our audits also included performing such other
procedures as we considered necessary in the circumstances. We
believe that our audits provide a reasonable basis for our
opinions.
The accompanying consolidated financial statements have been
prepared assuming that the Company will continue as a going
concern. As more fully described in Notes 2, 3 and 4 to the
consolidated financial statements, the Company has experienced
significant net losses during 2008 and 2009, is undercapitalized
at December 31, 2009, as defined by the regulatory capital
requirements administered by the federal banking agencies, does
not have sufficient liquidity to meet the potential demand for
all amounts due under certain lending arrangements with its
primary lender upon expiration of a related forbearance
agreement that expires on March 31, 2010, and its ability
to raise sufficient new equity capital in a timely manner is
uncertain. As discussed in Note 5, these factors raise
substantial doubt about the Companys ability to continue
as a going concern. Managements plans in regard to these
matters are also described in Notes 2 and 5. The December
31, 2009 consolidated financial statements do not include any
adjustments that might result from the outcome of this
uncertainty.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (i) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of
management and directors of the company; and (iii) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
PRICEWATERHOUSECOOPERS LLP
Chicago, Illinois
March 30, 2010
F-54