Midwest Banc Holdings, Inc. Reports Q3 Results

Midwest Banc Holdings, Inc. (NASDAQ:MBHI), the holding company for Midwest Bank and Trust Company (the “Bank” or “Midwest Bank”), announced results for the third quarter of 2009. The company recorded a net loss of $41.3 million for the third quarter of 2009 compared to a net loss of $159.7 million in the third quarter of 2008, and a net loss of $76.5 million for the second quarter of 2009. On a per share basis, net loss per share for the quarter was $1.52, compared to a net loss per share of $5.76 in the third quarter of 2008 and net loss per share of $2.78 in the second quarter of 2009. Results for the third quarter include a $37.5 million provision for credit losses, which increased the allowance for loan losses to 3.4 percent of loans from 2.5 percent at June 30, 2009. The company also completed its annual goodwill impairment study as of September 30, 2009 and determined that goodwill was not impaired.

“As a result of great effort, foresight, and aggressive action by management, as of September 30, 2009 our Bank remains ‘well-capitalized’ by all regulatory measures,” said Roberto R. Herencia, chief executive officer. “While significantly increasing the loan loss provision, our Bank also maintained its ‘well-capitalized’ status through aggressive cost-cutting actions, loan portfolio reductions and a capital contribution from the holding company.”

“We have improved the quality of the Bank’s balance sheet over the past two quarters through building of loan loss reserves, repositioning of the investment portfolio to provide an extremely high level of liquidity and re-assessing the valuation of our deferred tax assets, while maintaining our Bank’s regulatory capital ratios as we execute a complex and comprehensive capital plan.”

“We have hired new credit talent and our objective is to get in front of credit issues. We have performed several special portfolio reviews, increased our vigilance to allow for early identification of problem loans, significantly increased resources available to manage problem loans, and tightened pricing and underwriting standards - all in less than six months. Our provision for loan losses continues to be double our net charge-offs, and ratio of the allowance for loan losses to loans increased significantly to 3.40 percent at September 30, 2009, from 2.50 percent at June 30, 2009 and 1.58 percent at September 30, 2008. Timely recognition of exposure allows us to work with our customers who are feeling the effects of the downturn in the Chicago commercial real estate market, including the construction and development segment, prior to the need to charge-off uncollectible amounts.”

Q3 Highlights

• At September 30, 2009, the Bank was well-capitalized with a 10.2% total risk-based capital ratio and the holding company was 5 basis points less than adequately capitalized, with a 7.95% total risk-based capital ratio. In July, we announced our capital plan designed to strengthen our capital position. As further detailed below, we made progress during the third quarter with filings with the SEC, negotiations with the U.S. Treasury and entering into a Forbearance Agreement with our senior lender on October 22, 2009, during which period the company is not obligated to make interest and principal payments in excess of funds held in a funded deposit security account. Management believes the forbearance period provides sufficient time to complete all major components of the capital plan.
• Key lending personnel were re-assigned to our special assets (loan workout) group. The Bank has devoted additional resources to its workout unit and engaged an independent firm to actively manage problem loans. The Board of Directors has announced that Stephen L. Eastwood has accepted the position of Executive Vice President and Chief Risk Officer. Eastwood brings more than 35 years of experience in the resolution of complex financial issues and the building of effective risk management models to Midwest Bank, where he will be responsible for the Bank’s credit and compliance risk management. The appointment will become effective upon completion of the required notice to the Federal Reserve.
• The level of the provision for loan losses recognized was 215% of net charge-offs in the third quarter, 219% in the second quarter and 294% in the first quarter, which shows proactive management in this credit environment.
• Liquidity remains high at the Bank. Liquid assets increased by $86.5 million during the quarter to $324.6 million.
• Cost reductions put in place in the second and third quarters are reducing the noninterest expense run rate. Employees are fully engaged in the company’s priorities, while focusing on serving customers effectively and efficiently.
• We anticipate entering into a formal supervisory action with the Bank’s primary regulators, who have recently completed an examination of the Bank. In anticipation, we have been diligently working to address matters they have identified and look forward to resolving them with the regulators as quickly as possible.

Capital Plan Execution

• On July 28, 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 Company’s common equity capital and raise additional capital to enable it to better withstand and respond to adverse market conditions.
• On October 26, 2009, we amended our registration statement previously filed with the SEC in anticipation of launching the exchange offer of common stock for our Series A preferred stock.
• We are in negotiations with the U.S. Treasury related to conversion of the $84.8 million outstanding preferred stock issued to the U.S. Treasury under its Capital Purchase Program in 2008, to common stock. Concurrently, we have amended our application under the Treasury’s Capital Assistance Program that would facilitate the conversion of the preferred stock to common stock.
• As previously announced, we have been advised by our senior lender that we are in default under our term and revolving loan agreements (the “Credit Agreements”). On October 22, 2009, the company entered into a Forbearance Agreement with its Lender through March 31, 2010, during which 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 within the Credit Agreements, the Lender has agreed not to demand payment of amounts due, 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, other than the continued imposition of default interest rates. Management believes that the Forbearance Agreement provides the company sufficient time to complete all major elements of the Capital Plan.
• The company is pursuing a new common equity raise, the proceeds of which will be used for general corporate purposes, including injecting capital into the Bank.

Loan Portfolio

Average total loans decreased $79.6 million during the third quarter of 2009. From June 30, 2009 to September 30, 2009, loans outstanding declined $105.2 million, primarily due to stricter underwriting standards. Average loans yielded 5.32 percent in the third quarter, compared to 5.47 percent in the second quarter, with 82 percent of all loans tied to prime having interest rate floors in place and 78 percent of those loans currently at their floors.

The table below presents the loan portfolio as of September 30, 2009, including the loan balances, amounts and remaining percentage availability and total loan commitments.

• Total construction and land development loan commitments are 92.9 percent funded.
• Land and land development loans represent 6.3 percent of the loan portfolio.

Asset Quality

During the third quarter, steps were taken to improve the credit review function at Midwest Bank:

• The Bank has strengthened its portfolio review process, tracking of credit trends and any document exceptions.
• The Bank has devoted additional resources to its loan workout unit and engaged an independent firm to actively manage problem loans. This expansion and early problem loan identification afforded by the quarterly asset review will enable Midwest Bank’s workout group to identify and manage problem loans at an earlier point in their life-cycle, leading to more favorable outcomes.

In the third quarter, we recorded a provision for credit losses of $37.5 million and recognized net loan charge-offs totaling $17.1 million. Non-accrual loans increased $98.9 million compared to the prior quarter to $193.9 million, or 7.9 percent of loans.

The table below presents certain loan quality information as of September 30, 2009, including loan balance by type, amounts and percentage by past due and nonaccrual status, amount of specific reserve, and year-to-date gross charge-off amounts.

Non-accrual loans in the construction and land development portfolio increased $50.9 million or 170 percent from the second quarter. The largest contributing sub-categories within construction and land development were: land, which increased $19.5 million; land development – teardown, which increased $8.6 million; and residential construction, which increased $22.7 million.

In connection with execution of the capital plan, with the assistance of independent outside parties, management performed cumulative loan loss studies under various methodologies and assumptions, including highly stressed scenarios, in order to determine the optimal capital structure for the Bank. Credit reviews were conducted on both a portfolio and individual loan level in order to estimate future losses under various market conditions.

With the additional resources recently devoted to the loan workout area, management also developed a comprehensive understanding of the factors impacting the primary and secondary sources of repayment and collateral support of the current portfolio, and has used this information in its 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 upward in recent periods based upon the rapid deterioration in the current Chicago commercial real estate market. With the additional resources devoted to the Bank’s loan workout area, management also has better knowledge of current liquidity conditions of borrowers. As a result, although the company’s allowance for loan losses to nonperforming loans ratio dropped to 43% as of September 30, 2009, from a range of 58-62% during December 2008 through June 2009 period, specific reserves to loans analyzed for possible impairment increased to 20% from 7% as of December 31, 2008 and 15% in June 2009.

• Land loans - $11.0 million of the $19.5 million increase was related to one relationship with collateral located in a western suburb, consisting of improved lots on 25 acres. The property value has declined and there are currently no units under contract. The guarantors have limited liquidity and net worth and continue efforts to raise equity to fund the real estate investment. The Bank has specifically reserved $2.9 million for probable losses.
• Land development, teardown loans – The entire $8.6 million increase was related to an acquisition and development loan for property on 26 acres in McHenry County. The borrower’s plans to sell portions of the property have taken longer than expected. The guarantor adds only limited financial support. $4.0 million has been specifically reserved.
• Residential construction loans - $12.6 million of the $22.7 million increase was related to a construction project for several projects in and near Lake County. The Bank has specifically reserved $4.4 million.

Midwest Bank also recognized significant deterioration in its commercial real estate portfolio, with a $34.7 million increase in non-accrual loans to $79.1 million at September 30, 2009, representing a 78 percent increase as compared to $44.4 million in non-accrual loans at the end of the second quarter of 2009. Non-owner occupied commercial real estate loans experienced the greatest deterioration with non-accruals in this category increasing $29.9 million. Of the 38 loan relationships (averaging $1.5 million) within this non-accrual category, the largest increases came from three relationships:

• A $9.5 million relationship – This relationship consists of several loans for various commercial properties in Cook County. 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. The properties securing their loans have experienced increased vacancies and resulting decrease in operating income to provide sufficient cash flow to meet contractual loan payments. Guarantor has limited liquidity. The Bank has specifically reserved $1.3 million.
• A $6.5 million relationship – Slow sales on a project located in Cook County. The properties securing their loans have not sold with the borrower now renting properties at a level that is not sufficient to meet contractual loan payments. There are multiple guarantors who have limited liquidity. $2.5 million has been charged-off and the Bank has specifically reserved $1.5 million.
• A $5.3 million relationship - The property development has stalled and guarantor is considering alternative strategies to sell or liquidate asset. 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 Bank has specifically reserved $1.0 million.

The last of the categories to experience significant deterioration was the commercial and industrial loan portfolio with non-accrual loans increasing $10.7 million (net of $7.5 million of third quarter gross charge-offs) to $23.7 million, or 82 percent, when compared to the second quarter 2009. $9.8 million of the $10.7 million increase was related to one relationship representing three separate projects in Cook County. The Bank believes the value of these loans is supported by the guarantees of the borrowers. The Bank continues to work with these borrowers.

Liquidity

The Bank’s overall liquidity position improved, partially due to a $17.7 million reduction in the securities portfolio and a $105.2 million reduction in loans during the third quarter. Liquid assets, including excess reserves on deposit at the Federal Reserve Bank and unencumbered securities, increased by $86.5 million during the quarter to $324.6 million. Total deposits increased by $16.7 million or 0.7 percent compared to the second quarter.

Net Interest Margin

Net interest margin decreased 69 basis points from 2.52 percent in the second quarter to 1.83 percent in the third quarter. A majority of this decline was attributable to the decline in the overall yield on the securities portfolio to 0.95 percent from 3.03 percent in the second quarter. The 208 basis point decline in the securities portfolio was due largely to the replacement of bonds with lower-yielding U.S. Treasury Bills and Government National Mortgage Association (GNMA) mortgage backed securities which began in May 2009. Since June 30, 2009, approximately $95.8 million in matured Treasury bonds were replaced with GNMA securities. Net interest reversals related to the $87.8 million increase in non-performing loans and a decrease in interest income associated with the $105.2 million decline in the loan portfolio also contributed to the $5.1 million decline in our net interest income. Our net interest margin was positively impacted by the decline in cost of deposits coupled with a successful retail CD campaign raising over $65 million in new deposits during the quarter.

Noninterest Income

Noninterest income for third quarter 2009 declined to $3.7 million from $7.3 million in the second quarter 2009. This decline was primarily attributable to a decrease in securities gains; second quarter net gains on the securities portfolio repositioning were $4.3 million compared to net gains of approximately $0.4 million in the third quarter. The liquidation of bank-owned life insurance in the second quarter also resulted in lower noninterest income by $0.5 million for the third quarter.

Noninterest Expense

Noninterest expense for third quarter 2009 declined to $22.5 million, compared to $24.4 million in second quarter 2009. The decline in noninterest expense of $2.0 million in the third quarter reflects the impact of the cost reduction efforts, which began late in the second quarter. Excluding one time impacts, salaries and benefits were $1.8 million lower compared to the second quarter reflecting a reduction in force of 77 full-time equivalent (FTE) employees (116 FTE employees, or a 22 percent reduction year to date), salary reductions for remaining employees and suspension of the company’s 401(k) contribution. Other expenses were down due to the second quarter FDIC special assessment of $1.7 million and expense control across all discretionary categories. Offsetting the cost savings were increases in write-downs and related expenses for foreclosed properties of approximately $2.6 million and professional fees related to credit review, consultants and legal of $0.9 million.

Financial Highlights

• Diluted earnings (loss) per share was ($1.52) for third quarter and ($4.57) for first nine months of 2009
  • Compared to ($2.78) for second quarter 2009
  • Compared to ($5.76) for third quarter 2008
  • Compared to ($5.93) for first nine months of 2008
• Net income (loss) was ($41.3) million for third quarter and ($123.1) million for first nine months of 2009
  • Compared to ($76.5) million for second quarter 2009
  • Compared to ($159.7) million for third quarter 2008
  • Compared to ($162.7) million for first nine months of 2008

• Net interest margin was 1.83 percent for third quarter and 2.30 percent for first nine months of 2009
  • Compared to 2.52 percent for second quarter 2009
  • Compared to 2.77 percent for third quarter 2008
  • Compared to 2.83 percent for first nine months of 2008

Loans and Loan Quality

• Loans in third quarter 2009 decreased
  • $105.2 million compared to second quarter 2009
• Annualized net charge-off rate was 2.71 percent for third quarter 2009
  • Compared to 1.41 percent for second quarter 2009
  • Compared to 3.98 percent for third quarter 2008
• Nonaccrual loans at September 30, 2009 were $193.9 million or 7.90 percent of loans
  • Compared to 3.71 percent at June 30, 2009
  • Compared to 2.42 percent at September 30, 2008

• Nonperforming assets at September 30, 2009 were $214.9 million, or 8.68 percent of loan-related assets
  • Compared to 4.87 percent at June 30, 2009
  • Compared to 2.74 percent at September 30, 2008
• Nonperforming assets at September 30, 2009 were $214.9 million, or 6.06 percent of total assets
  • Compared to 3.52 percent at June 30, 2009
  • Compared to 1.91 percent at September 30, 2008

• Allowance for loan losses at September 30, 2009 was 3.40 percent of loans
  • Compared to 2.50 percent at June 30, 2009
  • Compared to 1.58 percent at September 30, 2008
• Allowance for loan losses to nonaccrual loans was 43 percent at September 30, 2009
  • Compared to 67 percent at June 30, 2009
  • Compared to 65 percent at September 30, 2008
• Delinquencies 30-89 days were 3.24 percent of loans at September 30, 2009
  • Compared to 2.18 percent at June 30, 2009
  • Compared to 0.99 percent at September 30, 2008

Additional financial data are contained in the accompanying statements, tables and schedules.

Hosting a Conference Call

We will conduct a conference call to discuss these results Wednesday, October 28, 2009, at 11:00 a.m. Eastern time / 10:00 a.m. Central time.

The webcast and call will be hosted by members of management. A brief discussion of quarterly results and trends will be followed by questions from institutional investors and analysts invited to participate in the interactive portion of the discussion.

Interested parties wishing to participate in the interactive portion of the call can dial in to 800-860-2442 or +1 412-858-4600 for international calls. The live webcast can be accessed at www.midwestbank.com and will be available for replay on that website. The audio replay may be accessed through November 5, 2009 at 877-344-7529 or +1 412-317-0088. The replay passcode is 434307.

About Midwest

We are a half century old community bank with $3.5 billion in assets at September 30, 2009. We have two principal operating subsidiaries; Midwest Bank and Trust Company and Midwest Financial and Investment Services, Inc. Midwest Bank has 26 locations serving the diverse needs of both urban and suburban Chicagoland businesses and consumers through its Commercial Banking, Wealth Management, Corporate Trust and Retail Banking areas.

Forward-Looking Statements

This press release 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, and should be reviewed in conjunction with the company's Annual Report on Form 10-K and other publicly available information regarding the company, copies of which are available from the company upon request. Such publicly available information sets forth certain risks and uncertainties related to the company's business which should be considered in evaluating "Forward-Looking Statements."