<PAGE>
SECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
Washington, D.C. 20549
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarter ended JUNE 30, 1998, or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ______________________
to ___________________________
COMMISSION FILE NUMBER 0-10967
- --------------------------------------------------------------------------------
FIRST MIDWEST BANCORP, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 36-3161078
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
300 PARK BLVD., SUITE 405, P.O. BOX 459
ITASCA, ILLINOIS 60143-0459
(Address of principal executive offices) (zip code)
(630) 875-7450
(Registrant's telephone number, including area code)
COMMON STOCK, $.01 PAR VALUE
PREFERRED SHARE PURCHASE RIGHTS
Securities Registered Pursuant to Section 12(g) of the Act
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
As of August 11, 1998, 29,756,463 shares of the Registrant's $.01 par value
common stock were outstanding, excluding treasury shares.
Exhibit Index is located on page 19.
<PAGE>
FIRST MIDWEST BANCORP, INC.
FORM 10-Q
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
----
<S> <C>
Item 1. Financial Statements
Consolidated Statements of Condition ............................................................................. 3
Consolidated Statements of Income ................................................................................ 4
Consolidated Statements of Cash Flows ............................................................................ 5
Notes to Consolidated Financial Statements ....................................................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ....................... 10
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K ............................................................................ 18
</TABLE>
The financial information included herein reflects First Midwest Bancorp, Inc.
stand alone and has not been restated for the acquisition of Heritage Financial
Services, Inc. which was consummated on July 1, 1998. See Exhibit 99 to this
Form 10-Q for pro forma condensed statements of condition and income as of, and
for the quarters and six months ended June 30, 1998 and 1997.
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FIRST MIDWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF CONDITION
(Amounts in thousands)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998/(1)/ 1997/(2)/
---------------- ----------------
ASSETS
<S> <C> <C>
Cash and due from banks .................................................. $ 160,248 117,974
Federal funds sold and other short term investments ...................... 7,155 31,055
Mortgages held for sale .................................................. 42,594 26,857
Securities available for sale, at market value ........................... 1,126,347 974,467
Securities held to maturity, at amortized cost ........................... 21,921 20,323
Loans .................................................................... 2,196,328 2,333,252
Reserve for loan losses .................................................. (35,098) (37,344)
--------------- ---------
Net loans ................................................................ 2,161,230 2,295,908
Premises, furniture and equipment ........................................ 57,978 59,219
Accrued interest receivable .............................................. 25,442 26,968
Investment in corporate owned life insurance ............................. 68,304 --
Other assets ............................................................. 61,007 61,402
--------------- ---------
TOTAL ASSETS ............................................................. $3,732,226 3,614,173
=============== =========
LIABILITIES
Demand deposits .......................................................... 474,829 472,868
Savings deposits ......................................................... 344,212 348,746
NOW accounts ............................................................. 328,160 318,413
Money market deposits .................................................... 273,592 286,189
Time deposits ............................................................ 1,416,664 1,369,759
--------------- ---------
Total deposits ........................................................... 2,837,457 2,795,975
Short-term borrowings .................................................... 509,490 438,032
Accrued interest payable ................................................. 12,593 15,447
Other liabilities ........................................................ 26,936 27,207
--------------- ---------
TOTAL LIABILITIES ........................................................ 3,386,476 3,276,661
--------------- ---------
SHAREHOLDERS' EQUITY
Preferred stock, no par value: 1,000 shares authorized, none issued ...... -- --
Common stock, $.01 par value: 60,000 shares authorized; 20,737 shares ...
issued at June 30,1998 and December 31, 1997, 20,129 and 20,072 .........
outstanding at June 30, 1998 and December 31, 1997, respectively.......... 201 201
Additional paid-in capital ............................................... 62,482 63,049
Retained earnings ........................................................ 295,969 281,770
Accumulated other comprehensive income ................................... (469) 6,644
Treasury stock, at cost: 609 and 665 shares at June 30, 1998 and .........
December 31, 1997 respectively ......................................... (12,433) (14,152)
--------------- ---------
TOTAL STOCKHOLDERS' EQUITY ............................................... 345,750 337,512
--------------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ............................... $3,732,226 3,614,173
=============== =========
</TABLE>
__________________________________________________
See notes to consolidated financial statements.
/(1)/Unaudited
/(2)/Audited - See December 31, 1997 Form 10-K for Auditors' Report.
3
<PAGE>
FIRST MIDWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands, except per share data)
<TABLE>
<CAPTION>
QUARTERS ENDED SIX MONTHS ENDED
JUNE 30, /(1)/ JUNE 30,/(1)/
--------------------------------------------------
INTEREST INCOME 1998 1997 1998 1997
---------- -------- ---------- -----------
<S> <C> <C> <C> <C>
Loans............................................... $50,809 $51,591 $102,767 $102,613
Securities available for sale....................... 14,515 13,831 29,874 27,862
Securities held to maturity......................... 330 340 664 692
Funds sold and other short-term investments......... 1,499 425 2,356 816
---------- -------- ---------- -----------
TOTAL INTEREST INCOME.......................... 67,153 66,187 135,661 131,982
---------- -------- ---------- -----------
INTEREST EXPENSE
Deposits............................................ 25,936 23,874 51,502 47,732
Short-term borrowings............................... 7,523 6,365 13,876 12,934
---------- -------- ---------- ----------
TOTAL INTEREST EXPENSE......................... 33,459 30,239 65,378 60,666
---------- -------- ---------- ----------
NET INTEREST INCOME............................ 33,694 35,948 70,283 71,316
PROVISION FOR LOAN LOSSES........................... 717 1,222 1,835 3,330
---------- -------- ---------- ----------
Net interest income after provision for loan losses 32,977 34,726 68,448 67,986
---------- -------- ---------- ----------
NONINTEREST INCOME
Service charges on deposit accounts................. 3,020 3,005 5,921 5,865
Trust and investment management fees income......... 2,169 1,792 4,340 3,692
Other service charges, commissions and fees......... 1,802 1,738 3,502 3,467
Mortgage banking revenues........................... 1,812 1,323 3,494 2,775
Security gains (losses), net....................... 161 (148) 121 214
Corporate owned life insurance income 819 --- 1,304 ---
Other income........................................ 1,025 788 1,897 1,820
---------- -------- --------- ---------
TOTAL NONINTEREST INCOME....................... 10,808 8,498 20,579 17,833
---------- -------- --------- ---------
NONINTEREST EXPENSE
Salaries and wages.................................. 12,243 11,497 24,345 22,754
Retirement and other employee benefits.............. 2,640 2,367 5,612 5,449
Occupancy expense of premises....................... 2,293 2,128 4,485 4,382
Equipment expense................................... 1,712 1,648 3,438 3,317
Computer processing expense......................... 2,077 1,961 4,053 3,744
Advertising and promotions.......................... 990 828 2,085 1,773
Professional services............................... 1,703 2,117 3,148 3,037
Other expenses...................................... 3,140 4,979 8,076 9,507
---------- -------- --------- ----------
TOTAL NONINTEREST EXPENSE...................... 26,798 27,525 55,242 53,963
---------- -------- --------- ----------
Income before income tax expense.................... 16,987 15,699 33,785 31,856
Income tax expense.................................. 5,124 5,246 10,480 10,994
---------- -------- --------- ----------
Net Income..................................... $11,863 $10,453 $ 23,305 $ 20,862
========== ======== ========= ==========
PER SHARE DATA
Basic Earnings per share....................... $ 0.59 $ 0.53 $ 1.16 $ 1.05
Diluted Earnings per share..................... $ 0.58 $ 0.52 $ 1.14 $ 1.04
Cash dividends declared per share.............. $ 0.23 $ 0.20 $ 0.45 $ 0.40
Weighted average shares outstanding............ 20,106 19,893 20,092 19,945
Weighted average diluted shares outstanding.... 20,471 20,110 20,449 20,153
========== ======== ========= ==========
</TABLE>
__________________________________________________
See notes to consolidated financial statements.
/(1)/ Unaudited
4
<PAGE>
FIRST MIDWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, /(1)/
-----------------------
1998 1997
--------- ---------
OPERATING ACTIVITIES
<S> <C> <C>
Net income $ 23,305 $ 20,862
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses.......................................................... 1,835 3,330
Provision for depreciation and amortization........................................ 3,565 3,440
Net amortization of premium of securities.......................................... 6,662 433
Net (gains) on securities available for sale from securities....................... (121) (214)
Net (gains) on sales of premises, furniture and equipment.......................... (57) (202)
Net increase (decrease) in deferred income taxes................................... 4,013 (1,407)
Net amortization of purchase accounting adjustments, goodwill,
and other intangibles.......................................................... 2,371 1,147
Changes in operating assets and liabilities:
Net (increase) decrease in loans held for sale................................... (15,737) 5,389
Net decrease (increase) in accrued interest receivable........................... 1,526 (326)
Net (increase) in other assets................................................... (2,948) (7,105)
Net (increase) in corporate owned life insurance................................. (68,304) ---
Net (decrease) in accrued interest payable....................................... (2,854) (503)
Net (decrease) in other liabilities.............................................. (271) (61,812)
------------ ----------
NET CASH (USED) BY OPERATING ACTIVITIES...................................... (47,015) (36,967)
------------ ----------
INVESTING ACTIVITIES
Securities available for sale:
Proceeds from sales.............................................................. 498,054 213,666
Proceeds from maturities, calls and paydowns..................................... 404,498 330,598
Purchases........................................................................ (1,006,062) (559,655)
Securities held to maturity:
Proceeds from maturities, calls and paydowns..................................... 6,081 3,356
Purchases........................................................................ (7,623) (1,876)
Loans made to customers, net of principal collected................................... 65,457 45,893
Proceeds from sales of foreclosed real estate......................................... 2,265 1,368
Proceeds from sales of premises, furniture and equipment.............................. 179 244
Purchases of premises, furniture and equipment........................................ (2,446) (5,449)
------------ ---------
NET CASH (USED) PROVIDED BY INVESTING ACTIVITIES............................. (39,597) 28,145
------------ ---------
FINANCING ACTIVITIES
Net increase in deposit accounts...................................................... 41,482 13,996
Net increase in short-term borrowings................................................. 71,458 54,957
Net (sales) purchases of treasury stock............................................... 788 (10,047)
Cash dividends........................................................................ (9,107) (8,561)
Exercise of stock options............................................................. 365 1,443
------------ ---------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES............................ 104,986 51,788
------------ ---------
Net increase in cash and cash equivalents................................... 18,734 42,966
Cash and cash equivalents at beginning of period............................ 149,029 142,238
------------ ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.................................. $ 167,403 $ 185,204
============ =========
Supplemental disclosures:
Interest paid to depositors and creditors........................................ $ 68,232 $ 61,169
Income taxes paid................................................................ 8,050 13,718
Non-cash transfers to foreclosed real estate from loans.......................... 759 1,411
Non-cash transfers to securities available for sale from loans................... 66,627 --
============= ==========
</TABLE>
_______________________________________
See notes to consolidated financial statements.
/(1)/ Unaudited
5
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share data)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited interim consolidated financial statements of First
Midwest Bancorp, Inc. ("First Midwest") have been prepared in accordance with
generally accepted accounting principles and with the rules and regulations of
the Securities and Exchange Commission for interim financial reporting.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of Management, all normal and recurring adjustments which are
necessary to fairly present the results for the interim periods presented have
been included. The preparation of financial statements requires Management to
make estimates and assumptions that affect the recorded 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 reported period. Actual results could differ from those estimates.
In addition, certain reclassifications have been made to the 1997 data to
conform to the 1998 presentation. For further information with respect to
significant accounting policies followed by First Midwest in the preparation of
its consolidated financial statements, refer to First Midwest's Annual Report on
Form 10-K for the year ended December 31, 1997.
On October 1, 1997, First Midwest acquired SparBank, Incorporated ("SparBank"),
whose principal subsidiary was McHenry State Bank ("MSB"), in a transaction
accounted for as a pooling of interests. Accordingly, prior period financial
statements and other financial disclosures have been restated as if the
combining entities had been consolidated for all periods presented. SparBank
had total assets and stockholders' equity of approximately $437 million and $52
million, respectively, as of October 1, 1997.
EARNINGS PER SHARE
Effective December 31, 1997, First Midwest adopted Financial Accounting
Standards Board ("FASB") Statement No. 128 ("FASB No. 128"), "Earnings Per
Share" which establishes standards for computing and presenting earnings per
share ("EPS") and applies to entities with publicly held common stock or
potential common stock. It replaces the presentation of primary EPS with
earnings per common share ("basic EPS") which is computed by dividing net income
by the weighted average number of common shares outstanding for the period. The
basic EPS computation excludes the dilutive effect of all common stock
equivalents. Further, FASB No. 128 requires additional disclosures including
dual presentation of basic and diluted EPS on the face of the Statement of
Income for all periods presented. Diluted EPS reflects the potential dilution
that could occur if securities or other contracts to issue common stock were
exercised or converted into common stock. First Midwest's potential common
shares represent shares issuable under its stock option plans. Such common
stock equivalents are computed based on the treasury stock method using the
average market price for the period. In accordance with FASB No. 128, First
Midwest has restated all prior period earnings per share. Further disclosures
are presented in Note 8: Earnings Per Common Share.
NEW ACCOUNTING PRONOUNCEMENTS - FASB NO. 131 AND 133
In June 1997, the FASB issued Statement No. 131 "Disclosures About Segments of
an Enterprise and Related Information" ("FASB No. 131") which establishes
standards for public companies to report certain financial information about
operating segments in interim and annual financial statements. Operating
segments are components of a business about which separate financial information
is available and that are evaluated regularly by company management in deciding
how to allocate resources and assessing performance. The statement also
requires public companies to report certain information about their products,
services and the geographic areas in which they operate. FASB No. 131 is
effective for financial statements for fiscal years beginning after December 15,
1997. The statement does not need to be applied to interim financial statements
in the initial year of its application, but such comparative information will be
required in interim statements the second year. At this time, Management is
assessing this statement and has not determined whether the new reporting
provisions will require supplemental disclosures by First Midwest. If
applicable, however, First Midwest will begin reporting segment information in
the 1998 annual consolidated financial statements.
In June 1998, the FASB issued Statement No. 133 "Accounting for Derivative
Instruments and Hedging Activities ("FASB No. 133" or "the Statement"). The
Statement establishes accounting and reporting standards requiring that
derivative instruments (including certain derivative instruments embedded in
other contracts) be recorded in the balance sheet as either assets or
liabilities measured at fair value. FASB No. 133 requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Special accounting for qualifying hedges
allows a derivative's gains and losses to offset related changes in value of the
hedged item in the income statement, and requires that a company document,
designate, and assess the effectiveness of transactions that qualify for hedge
accounting. FASB
6
<PAGE>
No. 133 is effective for fiscal years beginning after June 15, 1999. A company
may also implement the Statement as of the beginning of any fiscal quarter after
issuance (that is, fiscal quarters beginning June 16, 1998 and thereafter). FASB
No. 133 cannot be applied retroactively; it must be applied to (a) derivative
instruments and (b) certain derivative instruments embedded in hybrid contracts
that were issued, acquired, or substantively modified after December 31, 1997 (
and, at the company's election, before January 1, 1998). Management has not yet
determined what the effect of FASB No. 133 will be on First Midwest's financial
position or results of operations.
2. ACQUISITION
The acquisition of SparBank was affected through a merger of First Midwest and
SparBank, that was structured as a tax-free exchange and accounted for as a
pooling-of-interests, and resulted in the issuance of 3,231 shares of First
Midwest common stock to SparBank stockholders. As a result of the merger,
SparBank's only subsidiary, McHenry State Bank ("MSB"), became a subsidiary of
First Midwest. On February 23, 1998, MSB was merged into First Midwest's
principal banking subsidiary, First Midwest Bank, National Association.
Coincident with the acquisition, First Midwest recorded $6,742 in costs
consisting of $5,446 in acquisition expenses and $1,296 in provisions for loan
losses incident to conforming MSB's credit policies to First Midwest's. The
acquisition expenses, certain of which are nondeductible for income tax
purposes, were recorded through the establishment of a reserve which is
comprised of the following components as of the dates indicated:
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
----------- -----------
<S> <C> <C>
Reserve for Acquisition Expenses:
Employee severance, outplacement, retirement programs and related cost.... $ 1,152 $ 1,546
Contract termination fees and other related costs......................... 903 920
Investment advisor fees................................................... 2 1,401
Legal, accounting and other professional fees............................. 518 1,264
Other..................................................................... 38 315
-------- ---------
$ 2,613 $ 5,446
======== =========
</TABLE>
3. PENDING ACQUISITION
On January 14, 1998, First Midwest, First Midwest Acquisition Corporation, a
wholly owned subsidiary of First Midwest ("Acquisition Corporation") and
Heritage Financial Services, Inc. ("Heritage") entered into an Agreement and
Plan of Merger ("Merger Agreement") whereby Heritage will be merged with and
into Acquisition Corporation (the "Merger"). Heritage, headquartered in suburban
Chicago, is a multi-bank holding company whose subsidiaries include a 17 branch
commercial bank, a trust company and a trust bank which also conducts an
insurance agency business. Heritage had total assets and stockholders' equity
of approximately $1.4 billion and $131 million, respectively, as of June 30,
1998. For the six months ended June 30, 1998, Heritage recorded net income of
$9,421 resulting in return on assets and stockholders' equity of 1.43% and
15.22%, respectively.
Pursuant to the Merger Agreement, the transaction was structured as a tax-free
exchange and will be accounted for as a pooling-of-interests. Each outstanding
share of Heritage common stock, no par value, will be converted into .7695
shares of First Midwest common stock, $.01 par value, resulting in the issuance
of approximately 9.7 million shares of First Midwest Common Stock.
The acquisition was consummated on July 1, 1998. A pre-tax merger related
charge of approximately $15.4 - $16.0 million will be recognized in the third
quarter in conjunction with the transaction closing which include investment
advisor fees, severance and personnel exit costs, contract termination fees,
legal and accountant fees, and a one time provision for loan losses incident to
conforming Heritage Bank credit policies to First Midwests'. First Midwest
anticipates merging Heritage's commercial bank and trust company into its
subsidiaries, First Midwest Bank, N.A. and First Midwest Trust Company,
respectively, in the fourth quarter 1998.
The pro forma condensed consolidated statements of condition and income of First
Midwest and Heritage as of, and for the quarters and six months ended, June 30,
1998 and 1997 are included as Exhibit 99 to this Form 10-Q.
7
<PAGE>
4. SECURITIES
SECURITIES AVAILABLE FOR SALE - The amortized cost and market value of
securities available for sale at June 30, 1998 and December 31, 1997 are as
follows:
<TABLE>
<CAPTION>
Securities Available for Sale
---------------------------------------------------------------------------------------------
June 30, 1998 December 31, 1997
--------------------------------------------- ----------------------------------------------
Gross Gross Gross Gross
Amortized Unrealized Unrealized Market Amortized Unrealized Unrealized Market
Cost Gains Losses Value Cost Gains Losses Value
---------- ---------- ---------- ------ --------- ---------- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury security $ 102,394 $ 294 $ - $ 102,688 $122,557 $ 394 $ (7) $122,944
U.S. Agency securities..... 305,546 97 (114) 305,529 62,183 87 --- 62,270
Mortgage-backed securities. 616,881 1,583 (6,435) 612,029 632,854 2,664 (1,063) 634,455
State and municipal
securities................ 96,230 3,935 (158) 100,007 142,616 8,793 (1) 151,408
Other securities........... 6,064 30 --- 6,094 3,364 26 --- 3.390
---------- ------ ------- ---------- -------- ------- ------- --------
Total..................... $1,127,115 $5,939 $(6,707) $1,126,347 $963,574 $11,964 $(1,071) $974,467
========== ====== ======= ========== ======== ======= ======= ========
</TABLE>
SECURITIES HELD TO MATURITY - The amortized cost and market value of securities
held to maturity at June 30, 1998 and December 31, 1997 are as follows:
<TABLE>
<CAPTION>
Securities Held to Maturity
--------------------------------------------------------------------------------------------
June 30, 1998 December 31, 1997
--------------------------------------------- -------------------------------------------
Gross Gross Gross Gross
Amortized Unrealized Unrealized Market Amortized Unrealized Unrealized Market
Cost Gains Losses Value Cost Gains Losses Value
------- --------- ---------- ------- --------- ---------- ---------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury securities... $ 990 $ 5 $ --- $ 995 $ 1,099 $ 5 $ --- $ 1,104
State and municipal
securities................ 6,320 368 --- 6,688 5,912 347 --- 6,259
Other securities........... 14,611 1 --- 14,612 13,312 19 --- 13,331
--------- -------- -------- ------- ------- -------- ------ -------
Total..................... $ 21,921 $ 374 $ --- $22,295 $ 20,323 $ 371 $ --- $20,694
========= ======== ======== ======= ======== ======== ====== =======
</TABLE>
5. LOANS
The following table provides the book value of loans, by major classification,
as of the dates indicated:
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
------------ -------------
<S> <C> <C>
Commercial and industrial.............................. $ 587,164 $ 571,128
Agricultural........................................... 47,455 39,014
Direct home equity..................................... 176,577 173,730
Other direct installment............................... 83,866 91,499
Indirect installment................................... 368,468 386,226
Real estate - 1-4 family............................... 141,437 231,151
Real estate - commercial............................... 642,408 701,411
Real estate - construction............................. 136,806 117,102
Other.................................................. 12,147 21,991
------------ ------------
Total.................................................. $ 2,196,328 $ 2,333,252
============ ============
</TABLE>
During the second quarter of 1998, First Midwest securitized approximately
$67,000 in 1 - 4 family real estate loans, retaining such assets in its
securities available for sale portfolio as mortgage-backed securities.
8
<PAGE>
6. RESERVE FOR LOAN LOSSES/IMPAIRED LOANS
Transactions in the reserve for loan losses for the quarters and six months
ended June 30, 1998 and 1997 are summarized below:
<TABLE>
<CAPTION>
Quarters ended, Six Months ended,
June 30, June 30,
-------------------- -----------------------
1998 1997 1998 1997
--------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Balance at beginning of period $35,822 $35,845 $37,344 $32,202
Provision for loan losses 717 1,222 1,835 3,330
Loans charged-off (2,440) (2,570) (5,895) (5,641)
Recoveries of loans previously charged-off 999 922 1,814 5,528
--------- --------- --------- ----------
Net loan (charge-offs)/recoveries (1,441) (1,648) (4,081) (113)
--------- --------- --------- ----------
Balance at end of period $35,098 $35,419 $35,098 $35,419
========= ========= ========= ==========
</TABLE>
Information with respect to impaired loans at June 30, 1998 and 1997 is provided
below:
<TABLE>
<CAPTION>
June 30,
------------------
1998 1997
------- --------
<S> <C> <C>
Recorded Investment in Impaired Loans:
Recorded investment requiring specific loan loss reserves /(1)/......... $ 6,063 $ 2,292
Recorded investment not requiring specific loan loss reserves........... 11,230 8,093
------- -------
Total recorded investment in impaired loans......................... $17,293 $11,195
======= =======
Specific loan loss reserve related to impaired loans...................... $ 2,437 $ 1,486
======= =======
</TABLE>
/(1)/ These impaired loans require a specific reserve allocation because the
value of the loans are less than the recorded investments in the loans.
For the six months ended June 30, 1998 and 1997, the average recorded investment
in impaired loans was approximately $16,386 and $13,449, respectively.
7. COMPREHENSIVE INCOME
Effective January 1, 1998, First Midwest adopted FASB Statement No. 130,
"Reporting Comprehensive Income" ("FASB No. 130") which establishes standards
for reporting and display of comprehensive income and its components in a full
set of financial statements. Comprehensive income is the total of income and
all other revenues, expenses, gains and losses, that, under generally accepted
accounting principles, bypass reported net income. FASB No. 130 requires First
Midwest's unrealized gains or losses (net of tax) on securities available for
sale to be included in other comprehensive income, which, prior to adoption,
were reported separately in stockholders' equity. Prior year financial
statements have been reclassified to conform to the requirements of FASB No.
130.
The components of comprehensive income, net of related taxes, for the quarters
and six months ended June 30, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
Quarters Ended Six Months Ended
June 30, June 30,
-------------------- ----------------------
1998 1997 1998 1997
--------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Net income $11,863 $10,453 $23,305 $20,862
Unrealized gains (losses) on securities, net of
reclassification adjustment (1,660) 6,892 (7,113) 3,455
--------- --------- ---------- ---------
Comprehensive income $10,203 $17,345 $16,192 $24,317
========= ========= ========== =========
Disclosure of Reclassification Amount:
-------------------------------------
Unrealized holding gains (losses) arising during the
period $ (386) $ 6,895 $(3,528) $ 3,561
Less: Reclassification adjustment for (gains) losses
included in net income (1,274) (3) (3,585) (106)
--------- --------- ---------- ---------
Net unrealized gains (losses) on securities $(1,660) $ 6,892 $(7,113) $ 3,455
========= ========= ========== =========
</TABLE>
9
<PAGE>
8. EARNINGS PER COMMON SHARE
The following table sets forth the computation of basic and diluted earnings per
share for the quarters and six months ended June 30, 1998 and 1997.
<TABLE>
<CAPTION>
Quarters Ended Six Months Ended
June 30, June 30,
-------------------- ----------------------
1998 1997 1998 1997
--------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Net Income $11,863 $10,453 $23,305 $20,862
========= ========= ========== =========
Weighted average common shares outstanding used in
basic earnings per share calculation 20,106 19,893 20,092 19,945
Diluted effect of employee stock options after
application of treasury stock method 365 217 357 208
--------- --------- ---------- ---------
Weighted average common shares outstanding adjusted
for the effect of diluted securities 20,471 20,110 20,449 20,153
========= ========= ========== =========
Basic earnings per share $ 0.59 $ 0.53 $ 1.16 $ 1.05
========= ========= ========== =========
Diluted earnings per share $ 0.58 $ 0.52 $ 1.14 $ 1.04
========= ========= ========== =========
</TABLE>
9. CONTINGENT LIABILITIES AND OTHER MATTERS
There are certain legal proceedings pending against First Midwest and its
Subsidiaries in the ordinary course of business at June 30, 1998. In assessing
these proceedings, including the advice of counsel, First Midwest believes that
liabilities arising from these proceedings, if any, would not have a material
adverse effect on the consolidated financial condition of First Midwest.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The discussion presented below provides an analysis of First Midwest's results
of operations and financial condition for the quarters and six months ended June
30, 1998 as compared to the same periods in 1997. Management's discussion and
analysis should be read in conjunction with the consolidated financial
statements and accompanying notes presented elsewhere in this report as well as
First Midwest's 1997 Annual Report on Form 10-K. Results of operations for the
quarter and six months ended June 30, 1998 are not necessarily indicative of
results to be expected for the full year of 1998.
The consolidated financial statements and financial information for all
previously reported periods presented herein have been restated to include First
Midwest's October 1997 acquisition of SparBank which was accounted for as a
pooling-of-interests. All financial information is presented in thousands,
except per share data.
SUMMARY OF PERFORMANCE
Net income for the second quarter increased to $11,863 or $.59 per share from
last year's second quarter of $10,453 or $.53 per share representing an increase
of 11.3% on a per share basis. Net income for the six months ended June 30, 1998
totaled $23,305, or $1.16 per share as compared to $20,862 and $1.05 for the
same periods in 1997.
Return on average assets was 1.28% for the second quarter of 1998 as compared to
1.22% for the same quarter in 1997. Return on average assets was 1.28% for the
six months ended June 30, 1998 as compared to 1.22% for the same period of 1997.
Return on average stockholders' equity was 13.94% the second quarter of 1998, as
compared to 13.40% for the same 1997 quarter. Return on average stockholders'
equity was 13.84% for the six months ended June 30, 1998 as compared to 13.50%
for the same period of 1997.
10
<PAGE>
NET INTEREST INCOME
Net interest income on a tax equivalent basis totaled $35,128 for the second
quarter of 1998, representing a decrease of $1,908 or 5% over the year-ago
quarter totaling $37,036. As shown in the Volume/Rate Analysis on page 12, the
decrease in net interest income is attributable to increased interest income of
$1,312 net of higher interest expense of $3,220. Net interest margin for the
second quarter of 1998 decreased to 4.10% as compared to 4.63% for the same
period in 1997. The reduction in net interest margin is primarily due to higher
interest costs for paying liabilities and a reduction in the yield on mortgage
backed securities, as described below.
Also contributing to the reduction of net interest margin in 1998 is the
purchase of approximately $68 million in corporate owned life insurance,
compared to no such investment in 1997. The cost of funding the corporate owned
life insurance flows through net interest margin in the form of interest expense
while the relating income from such investment is reflected in the noninterest
income section of the income statement. The earnings on corporate owned life
insurance produce an after-tax earnings rate of approximately 5.45%. The
negative impact on net interest margin for the second quarter and first six
months of 1998 resulting from the exclusion of the income on corporate owned
life insurance from net interest income was approximately 8 and 10 basis points,
respectively.
As shown in the Volume/Rate Analysis, the $1,312 increase in interest income for
the second quarter is primarily attributable to volume increases on federal
funds sold, mortgages held for sale and securities. The majority of the
securities portfolio interest income variance resulted from securities volumes,
which increased by $214,218 in the current quarter as compared to the like
quarter last year and was partially offset by lower effective rates. Such volume
increase was partially due to the securitization of approximately $67,000 in 1 -
4 family residential real estate loans and transferred from the loan portfolio
to the securities available for sale portfolio. The decrease in security rate is
the result of the overall low rate environment and its impact on mortgage
refinancings generally. As a result of the trend in refinancings, mortgage loan
prepayments, and the resulting prepayments on the collateralized mortgage
obligation portfolio of mortgage backed securities, the overall yield on
investments is lower. The yield reduction has also resulted in a net decrease in
the market value of the mortgages backed securities portfolio at June 30, 1998
from December 31, 1998 This decrease is detailed in Note 4 to the consolidated
financial statements on page 8 of this Form 10-Q.
The $3,220 increase in interest expense resulted primarily from increases in
volumes of interest bearing liabilities. A major contributor to the increase in
interest expense occurred in higher volumes of time deposits and short-term
borrowings. The increase in volume and rate on time deposits resulted from
promotional efforts to attract certain deposit maturities to better match and
fund term assets. The second quarter 1998 security portfolio volume increases
were primarily funded by short-term borrowings which increased by $97,774, or
22% as compared to the same period in 1997.
For the six month period ended June 30, 1998, net interest margin decreased to
4.30% from 4.59% for 1997. The Volume/Rate Analysis for the six months ended
June 30, 1998 as compared to the like 1997 period is presented on page 13.
11
<PAGE>
Volume/Rate Analysis
The table below summarizes the changes in average interest-earning assets and
interest-bearing liabilities as well as the average rates earned and paid on
these assets and liabilities, respectively, for the quarters ended June 30, 1998
and 1997. The table also details the increase and decrease in income and expense
for each major category of assets and liabilities and analyzes the extent to
which such variances are attributable to volume and rate changes.
<TABLE>
<CAPTION>
Quarters Ended June 30, 1998 and 1997
---------------------------------------------------------------------------------------------
Average Interest
Average Balances Rates Earned/Paid
------------------------------------------------- ----------------------------------------
Basis
Increase Points
1998 1997 (Decrease) 1998 1997 Inc/(Dec)
------------- -------------- --------------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
Federal funds sold and other
short-term investments............ $ 42,681 $ 17,106 $ 25,575 5.87% 5.44% 0.43%
Mortgages held for sale........... 42,217 9,651 32,566 8.30% 8.02% 0.28%
Securities available for sale /(1)/ 1,085,448 871,230 214,218 5.83% 6.80% (0.97)%
Securities held to maturity /(1)/... 23,667 19,569 4,098 6.30% 7.73% (1.43)%
Loans, net of unearned
discount /(1)/...................... 2,245,689 2,293,697 (48,008) 9.10% 9.04% 0.06%
------------- -------------- --------------- ---------- ---------- -------------
Total interest-earning assets /(1)/ $ 3,439,702 $ 3,211,253 $ 228,449 8.00% 8.40% (0.40)%
============= ============== =============== ========== ========== =============
Savings deposits.................. $ 351,143 $ 360,553 $ (9,410) 2.66% 2.64% 0.02%
NOW accounts...................... 349,778 330,380 19,398 2.37% 2.32% 0.05%
Money market deposits............. 277,567 273,470 4,097 3.65% 3.60% 0.05%
Time deposits..................... 1,367,198 1,245,487 121,711 5.58% 5.52% 0.06%
Short-term borrowings............. 552,335 454,561 97,774 5.46% 5.62% (0.16)%
------------- -------------- --------------- ---------- ---------- -------------
Total interest-bearing liabilities $ 2,898,021 $ 2,664,451 $ 233,570 4.63% 4.55% 0.08%
============= ============== =============== ========== ========== =============
Net interest margin/income /(1)/ 4.10% 4.63% (0.53)%
========== ========== =============
<CAPTION>
--------------------------------------------------------------------------------------
Interest Increase/(Decrease) in
Income/Expense Interest Income/Expense Due to:
-------------------------------------------- --------------------------------------
Increase
1998 1997 (Decrease) Volume Rate Total
------------ ------------ -------------- ---------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
Federal funds sold and other
short-term investments............ $ 625 $ 232 $ 393 $ 373 $ 20 $ 393
Mortgages held for sale........... 874 193 681 674 7 681
Securities available for sale /(1)/ 15,777 14,769 1,008 2,398 (1390) 1,008
Securities held to maturity /(1)/... 372 377 (5) (40) 35 (5)
Loans, net of unearned
discount /(1)/...................... 50,939 51,704 (765) (1,091) 326 (765)
------------ ------------ -------------- ---------- ------------ ----------
Total interest-earning assets /(1)/ $ 68,587 $ 67,275 $ 1,312 $ 2,314 $ (1,002) $ 1,312
============ ============ ============== ========== ============ ==========
Savings deposits.................. $ 2,332 $ 2,372 $ (40) $ (63) $ 23 $ (40)
NOW accounts...................... 2,069 1,915 154 115 39 154
Money market deposits............. 2,528 2,452 76 36 40 76
Time deposits..................... 19,007 17,135 1,872 1,691 181 1,872
Short-term borrowings............. 7,523 6,365 1,158 1,327 (169) 1,158
------------ ------------ -------------- ---------- ------------ ----------
Total interest-bearing liabilities $ 33,459 $ 30,239 $ 3,220 $ 3,106 $ 114 $ 3,220
============ ============ ============== ========== ============ ==========
Net interest margin/income /(1)/ $ 35,128 $ 37,036 $ (1,908) $ (792) $ (1,116) $ (1,908)
============ ============ ============== ========== ============ ==========
</TABLE>
/(1)/ Interest income and yields are presented on a tax-equivalent basis.
12
<PAGE>
VOLUME/RATE ANALYSIS
The table below summarizes the changes in average interest-bearing assets and
interest-bearing liabilities as well as the average rates earned and paid on
these assets and liabilities, respectively, for the quarters ended June 30, 1998
and 1997. The table also details the increase and decrease in income and expense
for each major category of assets and liabilities and analyzes the extent to
which such variances are attributable to volume and rate changes.
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
---------------------------------------------------------------------------------------------
AVERAGE INTEREST
AVERAGE BALANCES RATES EARNED/PAID
------------------------------------------------- ----------------------------------------
Basis
Increase/ Points
1998 1997 (Decrease) 1998 1997 Inc/(Dec)
------------- --------------- ------------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Federal funds sold and other
short-term investments............. $ 32,122 $ 16,374 $ 15,748 5.81% 5.60% 0.21%
Mortgages held for sale............ 34,976 9,202 25,774 8.24% 7.91% 0.33%
Securities available for
sale /(1)/......................... 1,034,345 874,862 159,483 6.18% 6.86% (0.68)%
Securities held to
maturity /(1)/..................... 22,683 19,596 3,087 6.66% 8.08% (1.42)%
Loans, net of unearned
discount /(1)/..................... 2,272,714 2,313,798 (41,084) 9.14% 8.96% 0.18%
------------- --------------- ------------- ---------- ---------- ------------
Total interest-earning
assets /(1)/....................... $ 3,396,840 $ 3,233,832 $ 163,008 8.18% 8.44% (0.19)%
============= =============== ============= ========== ========== ============
Savings deposits................... $ 352,359 $ 361,615 $ (9,256) 2.66% 2.63% 0.03%
NOW accounts....................... 331,340 316,340 15,000 2.38% 2.33% 0.05%
Money market deposits.............. 278,344 275,740 2,604 3.65% 3.53% 0.12%
Time deposits...................... 1,363,348 1,257,923 105,425 5.61% 5.54% 0.07%
Short-term borrowings.............. 512,496 479,492 33,004 5.46% 5.44% 0.02%
------------- --------------- ------------- ---------- ---------- ------------
Total interest-bearing
liabilities........................ $ 2,837,887 $ 2,691,110 $ 146,777 4.65% 4.55% 0.10%
============= =============== ============= ========== ========== ============
Net interest margin/income /(1)/... 4.30% 4.59% (0.29)%
========== ========== ============
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
---------------------------------------------------------------------------------------
INTEREST INCREASE/(DECREASE) IN
INCOME/EXPENSE INTEREST INCOME/EXPENSE DUE
TO:
--------------------------------------------- --------------------------------------
Increase
1998 1997 (Decrease) Volume Rate Total
------------ ------------ ------------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Federal funds sold and other
short-term investments.............. $ 925 $ 455 $ 470 $ 452 $ 18 $ 470
Mortgages held for sale............. 1,430 361 1,069 1,053 16 1,069
Securities available for
sale /(1)/.......................... 32,284 29,777 2,507 4,602 (2,095) 2,507
Securities held to
maturity /(1)/...................... 749 785 (36) 319 (355) (36)
Loans, net of unearned
discount /(1)/...................... 103,033 102,836 197 (1,544) 1,741
------------- ------------ ------------- ---------- ---------- ----------
Total interest-earning
assets /(1)/........................ $ 138,421 $ 134,214 $ 4,207 $ 4,882 $ (675) $ 4,207
============= ============ ============= ========== ========== ==========
Savings deposits.................... $ 4,652 $ 4,717 $ (65) $ (123) $ 58 $ (65)
NOW accounts........................ 3,907 3,648 259 177 82 259
Money market deposits............... 5,034 4,831 203 45 158 203
Time deposits....................... 37,909 34,536 3,373 2,927 446 3,373
Short-term borrowings............... 13,876 12,934 942 893 49 942
------------- ------------ ------------- ---------- ---------- ----------
Total interest-bearing
liabilities......................... $ 65,378 $ 60,666 $ 4,712 $ 3,919 $ 793 $ 4,712
============= ============ ============= =========== ========= =========
Net interest margin/income /(1)/.... $ 73,043 $ 73,548 $ (505) $ 963 $ (1,468) $ (505)
============= ============ ============= ========== ========= =========
</TABLE>
/(1)/ Interest income and yields are presented on a tax-equivalent basis.
13
<PAGE>
NONINTEREST INCOME
Noninterest income totaled $10,808 for the quarter ended June 30,1998, as
compared to $8,498 for the same period in 1997. Exclusive of net security gains
which totaled $161 for the second quarter 1998 as compared to net security
losses of $148 for the like period in 1997, noninterest income increased by
$2,001 or 23% with most components of noninterest income contributing to the
increase.
Mortgage banking revenues improved $489 as a result of growth in real estate
loan originations and their subsequent sale into the secondary market.
Originations totaled $131,500 in the second quarter of 1998 compared with
$44,000 in the same period of 1997. Growth in trust business produced $377 in
higher trust and investment management fees. A new source of revenues in 1998,
corporate owned life insurance, which is further discussed on Page 11 of this
Form 10-Q, income totaled $819 for the quarter.
Noninterest income totaled $20,579 for the six months ended June 30, 1998 as
compared to $17,833 for the same period in 1997. Factoring out net security
gains totaling $121 for the 1998 six month period as compared to $214 for the
1997 period, noninterest income increased by $2,839, or 16%. The reasons for
the increase in noninterest income for the six month period generally followed
those described above for the second quarter.
NONINTEREST EXPENSE
Noninterest expense in the 1998 second quarter decreased $727 or 3% compared to
the same period in 1997. For the six months ended June 30, 1998, noninterest
expense increased $1,279 or 2.4% compared to the same period a year ago. The
current quarter decline in noninterest expense is primarily attributable to
reduced other operating expenses offset in part by higher salaries and benefits
and computer processing costs.
Salaries and other employee benefits, the largest component of noninterest
expense, increased to a combined $14,883 for the second quarter of 1998 from the
same period in 1997 for an increase of $1,019, or 7%. The majority of such
increase is attributable to normal salary increases effective January 1998 and
incentive payments offset by decreases in pension, profit sharing and ESOP
expenses.
Occupancy expense increased by $165 from the second quarter of 1997 due to the
outsourcing of facilities management. Equipment expense and computer processing
expense increased by a combined $180 or 5% in the second quarter of 1998 as
compared to the like period in 1997. Such increase primarily reflects system
conversion costs associated with the McHenry State Bank loan, deposit and trust
systems integration into First Midwest subsidiaries.
A decrease in professional services of $414 in the second quarter of 1998
related to the resolution of litigation on problem loans. Advertising and
promotional expenses rose $162 in part due to the implementation of a television
advertising campaign coupled with the MSB consolidation into First Midwest Bank,
N. A. and the attendant costs related to customer retention and communication.
Other expenses decreased $1,839 or 37% in the 1998 second quarter compared to
the 1997 like period. The decrease for the quarter is related to reduced
correspondent bank service fees, repossession and foreclosed property costs and
expense control.
The efficiency ratio for the quarter ended June 30, 1998 was 57.87% as compared
to the 1997 second quarter ratio of 59.47%, while the efficiency ratio for the
six months ended June 30, 1998 was 58.65%, the same as that for the same period
in 1997. The 1998 six month ratio reflects well-controlled noninterest expenses
and the realization of cost benefits from the fourth quarter 1997 SparBank, Inc.
acquisition.
INCOME TAX EXPENSE
Income tax expense totaled $5,124 for the quarter ended June 30,1998, decreasing
from $5,246 for the same period in 1997 and reflects effective income tax rates
of 30.2% and 33.4% respectively. Income tax expense totaled $10,480 for the six
months ended June 30, 1998 decreasing from $10,994 for the 1997 six month period
and reflects effective tax rates of 31% and 34.5%, respectively. The decrease
in effective tax rate is primarily attributable to increases in federal and
state tax exempt income in the 1998.
<PAGE>
NONPERFORMING ASSETS AND 90 DAY PAST DUE LOANS
At June 30, 1998, nonperforming assets totaled $21,053 and loans past due 90
days or more and still accruing interest totaled $6,601. The following table
summarizes nonperforming assets and loans past due 90 days or more and still
accruing, as of the close of the last five calendar quarters:
<TABLE>
<CAPTION>
Nonperforming Assets and 1998 1997
------------------- ----------------------------
90 Day Past Due Loans June 30 March 31 Dec. 31 Sept.30 June 30
- ----------------------------------------------- -------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Nonaccrual loans............................... $21,053 $19,272 $10,796 $11,284 $13,812
Renegotiated loans............................. --- --- --- --- ---
------- ------- ------- ------- -------
Total nonperforming loans...................... 21,053 19,272 10,796 11,284 13,812
Foreclosed real estate......................... 2,941 3,530 4,397 5,035 5,739
------- ------- ------- ------- -------
Total nonperforming assets.................... $23,994 $22,802 $15,193 $16,319 $19,551
======= ======= ======= ======= =======
% of total loans plus foreclosed real estate.. 1.09% 1.00% 0.65% 0.70% 0.85%
======= ======= ======= ======= =======
90 days past due loans accruing interest....... $ 6,601 $ 9,080 $ 5,520 $ 4,294 $ 5,841
======= ======= ======= ======= =======
</TABLE>
Nonaccrual loans, totaling $21,503 at June 30, 1998 are comprised of commercial
and agricultural loans (66%), real estate loans (27%) and consumer loans (7%).
The increase in nonaccrual loans in the first quarter of 1998 is attributable to
two commercial loan customers, each comprising approximately one-half of the
increase. Foreclosed real estate, totaling $2,941 at June 30, 1998, primarily
represents commercial real estate properties.
First Midwest's disclosure with respect to impaired loans is contained in Note 6
to the consolidated financial statements, located on page 9.
PROVISION AND RESERVE FOR LOAN LOSSES
Transactions in the reserve for loan losses during the three and six months
ended June 30, 1998 and 1997 are summarized in the following table:
<TABLE>
<CAPTION>
Quarters Ended Six Months Ended
June 30, June 30.
------------------------ ---------------------------
1998 1997 1998 1997
---------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Balance at beginning period $ 35,822 $ 35,845 $ 37,344 $ 32,202
Provision for loan process 717 1,222 1,835 3,330
Loans charged off (2,440) (2,570) (5,895) (5,641)
Recoveries of loans previously charged-off 999 922 1,814 5,528
---------- -------- --------- --------
Net loan (charge-offs) recoveries (1,441) (1,648) (4,081) (1,137)
---------- -------- --------- --------
Balance at end of period $ 35,098 $ 35,419 $ 35,098 $ 35,419
========== ======== ========= ========
</TABLE>
The provision for loan losses charged to operating expense for the second
quarter of 1998 totaled $717 as compared to $1,222 for the same quarter in 1997.
The amount of the provision for loan losses in any given period is dependent
upon many factors, including loan growth, changes in the composition of the loan
portfolio, net charge-off levels, delinquencies, collateral values, and
Management's assessment of current and prospective economic conditions. Loan
charge-offs, net of recoveries, for the quarter totaled $1,441, or .26% of
average loans in 1998 as compared to 1997 loan charge-offs of $1,648 or. 29%. A
major component of loan recoveries for the six months of 1997 were proceeds
totaling $4,050 received in settlement of a 1993 lawsuit related to loans
charged off in 1992.
15
<PAGE>
The reserve for loan losses at June 30, 1998 was comprised of three parts:
allocated for specific impaired loans, $2,437; allocated for general segments of
unimpaired loans, $8,660; and unallocated, $24,001. That part of the reserve
allocated for specific impaired loans is discussed in Note 6 to the consolidated
financial statements located on page 9. That part of the reserve allocated for
unimpaired general loan segments represents First Midwest's best judgement as to
potential loss exposure based upon both historical loss trends as well as loan
ratings and qualitative evaluations of such segments. The unallocated portion
of the reserve is that part not allocated to either a specific loan on which
loss is anticipated or allocated to general segments of the unimpaired loan
portfolio.
At June 30, 1998, the reserve for loan losses totaled $35,098, or 1.60% of total
loans outstanding as compared to $35,419, or 1.54% at June 30, 1997. Such
reserve level is considered adequate in relation to the estimated risk of future
losses within the loan portfolio.
The distribution of the loan portfolio is presented in Note 5 to the
consolidated financial statement located on page 8. The loan portfolio,
consists predominantly of loans originated by First Midwest from its primary
markets and generally represents credit extension to multi-relationship
customers.
CAPITAL
The table below compares First Midwest's capital structure to the minimum
capital ratios required by its primary regulator, the Federal Reserve Board
("FRB"). Also provided is a comparison of capital ratios for First Midwest's
national banking subsidiary, First Midwest Bank, N.A. ("FMB, N.A."), to its
primary regulator, the Office of the Comptroller of the Currency ("OCC)". Both
First Midwest and FMB, N.A. are subject to the minimum capital ratios defined by
banking regulators pursuant to the FDIC Improvement Act ("FDICIA") and have
capital measurements in excess of the levels required by their respective bank
regulatory authorities to be considered "well-capitalized" which is the highest
capital category established under the FDICIA.
<TABLE>
<CAPTION>
As of June 30, 1998
-----------------------------------------------------------
Bank Holding Company National Bank
---------------------- -----------------------------------
Minimum
Minimum Minimum Well-
First Required FMB, Required Capitalized
Midwest FRB N.A. OCC FDICIA
---------------------- -----------------------------------
<S> <C> <C> <C> <C> <C>
Tier I capital to risk-based assets 12.30% 4.00% 9.75% 4.00% 6.00%
Total capital to risk-based assets 13.55% 8.00% 11.00% 8.00% 10.00%
Leverage ratio 9.09% 3.00% 7.09% 3.00% 5.00%
====== ===== ====== ===== ======
</TABLE>
DIVIDENDS
First Midwest's strong earnings and capital position has allowed the Board of
Directors to increase the quarterly dividend every year since 1993. The
following table summarizes the dividend increases declared during the years 1994
through 1997:
<TABLE>
<CAPTION>
Quarterly Rate
Date Per Share % Increase
---- -------------- ----------
<S> <C> <C>
November 1997 $.23 13%
November 1996 $.20 18%
February 1996 $.17 13%
February 1995 $.15 15%
February 1994 $.13 13%
</TABLE>
16
<PAGE>
FORWARD LOOKING STATEMENTS
The preceding "Management's Discussion and Analysis of Financial Condition and
Results of Operations" sections of this Form 10-Q contain various "forward
looking statements" within the meaning of Section 27 A of the Securities Act of
1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended, which represents First Midwest's expectations and benefits concerning
future events including, but not limited to, the following: the loan loss
reserve levels going forward; Management's assessment of its provision and
reserve for loan loss levels based upon future changes in the composition of its
loan portfolio, loan losses, collateral value and economic conditions; and
dividends to shareholders.
First Midwest cautions that these statements are further qualified by important
factors that could cause actual results to differ materially from those set
forth in the forward looking statements due to market, economic and other
business related risks and uncertainties effecting the realization of such
statements. Certain of these risks and uncertainties included in such forward
looking statements include, without limitations, the following: significant
fluctuations in market interest rates; limitations on the First Midwest's
ability to increase fee-based income without negatively impacting customer
relationships and related account balances; operational limitations and costs
related to changing technologies; deviations from the assumptions used to
evaluate the appropriate level of the reserve for loan losses; the trend in
mortgage refinancings and the related impact on the yield and market value of
the mortgage-backed securities portfolio; and the impact of future earnings
performance and capital levels on dividends declared by the Board of Directors.
Accordingly, results actually achieved may differ materially from expected
results in these statements. First Midwest does not undertake, and specifically
disclaims, any obligation to update any forward looking statements to reflect
events or circumstances occurring after the date of such statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At First Midwest's Annual Meeting of Shareholders held on June 17, 1998, the
following matters were submitted to vote:
<TABLE>
<CAPTION>
Number of Shares Voted
------------------------------
For Against Abstain
------------------------------
<S> <C> <C> <C>
. Approving a proposal to issue shares of Company Common Stock pursuant to the
Agreement and Plan of Merger dated January 14, 1998, by and between Heritage
Financial Services, Inc. ("Heritage") and the Company, and First Midwest
Acquisition Corporation ("Acquisition Corp.") which provides for the merger
of Heritage with and into Acquisition Corp. and the conversion, upon the
consummation of the merger, of each outstanding share of Heritage Common
Stock into .7695 of a share of Company Stock /(1)/ 15,715,099 14,317 205,534
. Approving a proposal to amend the Restated Certificate of Incorporation
of the Company increasing the number of authorized shares of common
stock from 30,000,000 to 60,000,000 /(2)/ 15,657,049 81,479 207,205
1 Election of two directors: /(3)/
John M. O'Meara 16,799,665 32,659 39,221
J. Stephen Vanderwoude 16,801,168 31,156 39,221
</TABLE>
_____________________
/(1)/ Represents 93% of shares voted.
/(2)/ Represents 78% of shares outstanding.
/(3)/ Represents 99% of shares voted.
17
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - See Exhibit Index appearing on page 19.
(b) Form 8-K:
- On April 28, 1998, First Midwest reported the death of C.D.
Oberwortmann, Chairman of the Board.
- On May 28, 1998, First Midwest announced the election of Robert P.
O'Meara as Chairman of the Board and Chief Executive Officer and John
M. O'Meara as President and Chief Operating Officer.
- On June 22, 1998, First Midwest announced the approval of all matters
put forth to its shareholders at its Annual Meeting held on June 17,
1998.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
First Midwest Bancorp, Inc.
---------------------------------------
DONALD J. SWISTOWICZ
---------------------------------------
Date: August 11, 1998 Donald J. Swistowicz
Executive Vice President *
* Duly authorized to sign on behalf of the Registrant.
18
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Sequential
Number Description of Documents Page Number
- ------- ------------------------ -----------
<S> <C> <C>
3 Amendment to the Restated Certificate of Incorporation 20
4 Amended Certificate of Designation of Series A Preferred Stock of First Midwest 21
27 Financial Data Schedule 22
99 Pro forma financial statements 23
</TABLE>
19
<PAGE>
Exhibit 3
CERTIFICATE OF AMENDMENT
OF
RESTATED CERTIFICATE OF INCORPORATION
OF
FIRST MIDWEST BANCORP, INC.
It is hereby certified that:
1. The name of the Corporation (hereinafter called the "Corporation") is:
FIRST MIDWEST BANCORP, INC.
2. The first paragraph of the Restated Certificate of Incorporation of the
Corporation is hereby amended to read as follows:
ARTICLE FOURTH - Authorized Stock.
----------------------------------
The total number of shares of stock which the Corporation shall have
authority to issue is Sixty-One Million (61,000,000) shares, of which One
Million (1,000,000) shares shall be of Preferred Stock without par value
(hereinafter sometimes referred to as "Preferred Stock"), and Sixty Million
(60,000,000) shares shall be shares of Common Stock, $0.01 par value per
share (hereinafter sometimes referred to as "Common Stock").
3. This Amendment to the Restated Certificate of Incorporation herein certified
has been duly adopted in accordance with the applicable provisions of Section
242 of the General Corporation Law of the State of Delaware, as amended.
IN WITNESS WHEREOF, this Certificate of Amendment to the Restated Certificate
of Incorporation has been signed by the Executive Vice President and attested
by the Secretary of First Midwest Bancorp, Inc., as of the 17/th/ day of
June, 1998.
DONALD J. SWISTOWICZ
________________________
Donald J. Swistowicz, Executive Vice President
ATTEST:
JAMES M. ROOLF
_____________________________
James M. Roolf, Secretary
<PAGE>
EXHIBIT 4
AMENDED CERTIFICATE OF DESIGNATION OF SERIES A PREFERRED STOCK
OF FIRST MIDWEST BANCORP, INC.
PURSUANT TO SECTION 151 OF THE GENERAL CORPORATION LAW OF THE STATE OF DELAWARE
WE, Robert P. O'Meara, President and Chief Executive Officer, and James M.
Roolf, Senior Vice President and Corporate Secretary, of First Midwest Bancorp,
Inc., a corporation organized and existing under the General Corporation Law of
the State of Delaware, in accordance with the provisions of Section 103 thereof,
DO HEREBY CERTIFY, that a meeting of the Board of Directors of First Midwest
Bancorp, Inc. was duly called, convened and held on May 20, 1998 and at such
meeting the Board of Directors approved the adoption of the following resolution
pursuant to the authority conferred upon the Board of Directors:
WHEREAS, on February 15, 1989, this Board of Directors adopted resolutions
creating a series of 120,000 shares of Preferred Stock designated as Series A
Preferred Stock; and,
WHEREAS, on May 19, 1993, this Board of Directors adopted resolutions
increasing the number of shares of Series A Preferred Stock from 120,000 to
130,000, on November 15, 1995, this Board of Directors adopted resolutions
increasing the number of shares of Series A Preferred Stock from 130,000 to
200,000 and on September 2, 1997, this Board of Directors adopted resolutions
increasing the number of shares of Series A Preferred Stock from 200,000 to
300,000; and,
WHEREAS, no shares of Series A Preferred Stock have been issued; and,
WHEREAS, this Board of Directors desires to increase the number of shares of
Series A Preferred Stock from 300,000 to 600,000.
NOW, THEREFORE, BE IT RESOLVED, that the first sentence of Section (a) of
the Form of Certificate of Designation of Series A Preferred Stock of this
Corporation is hereby amended to read as follows:
(a) Designation and Number of Shares. The distinctive designation of
--------------------------------
such series shall be "Series A Preferred Stock" (hereinafter sometimes
called the "Series A Preferred Stock") and the number of shares constituting
such series shall be 600,000.
FURTHER RESOLVED, that the statements contained in the foregoing resolution
amending the said Series A Preferred Stock by creating 300,000 new shares of
Series A Preferred Stock shall, upon the effective date of said amendment, be
deemed to be included in and be a part of the Restated Certificate of
Incorporation of this Corporation pursuant to the provisions of Sections 104 and
151 of the General Corporation Law of Delaware.
IN WITNESS WHEREOF, we have executed and subscribed this Amended Certificate
and do affirm the foregoing as true under the penalties of perjury as of the
17/th/ date of June, 1998.
FIRST MIDWEST BANCORP, INC.
ROBERT P. O'MEARA
----------------------------------
Robert P. O'Meara, President
and Chief Executive Officer
JAMES M. ROOLF
----------------------------------
James M. Roolf, Senior Vice
President and Corporate Secretary
21
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 160,248
<INT-BEARING-DEPOSITS> 1,787
<FED-FUNDS-SOLD> 5,368
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 1,126,347
<INVESTMENTS-CARRYING> 21,921
<INVESTMENTS-MARKET> 22,295
<LOANS> 2,196,328
<ALLOWANCE> 35,098
<TOTAL-ASSETS> 3,732,226
<DEPOSITS> 2,834,457
<SHORT-TERM> 509,490
<LIABILITIES-OTHER> 39,529
<LONG-TERM> 0
201
0
<COMMON> 0
<OTHER-SE> 345,549
<TOTAL-LIABILITIES-AND-EQUITY> 3,732,226
<INTEREST-LOAN> 102,767
<INTEREST-INVEST> 30,538
<INTEREST-OTHER> 2,356
<INTEREST-TOTAL> 135,674
<INTEREST-DEPOSIT> 51,502
<INTEREST-EXPENSE> 65,378
<INTEREST-INCOME-NET> 70,283
<LOAN-LOSSES> 1,835
<SECURITIES-GAINS> 121
<EXPENSE-OTHER> 55,242
<INCOME-PRETAX> 33,785
<INCOME-PRE-EXTRAORDINARY> 23,305
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 23,305
<EPS-PRIMARY> 1.16
<EPS-DILUTED> 1.14
<YIELD-ACTUAL> 4.10
<LOANS-NON> 21,053
<LOANS-PAST> 6,601
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 24,324
<ALLOWANCE-OPEN> 37,344
<CHARGE-OFFS> 5,895
<RECOVERIES> 1,814
<ALLOWANCE-CLOSE> 35,098
<ALLOWANCE-DOMESTIC> 11,097
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 24,001
</TABLE>
<PAGE>
EXHIBIT 99
First Midwest Bancorp, Inc. and Heritage Financial Services, Inc.
Pro forma Condensed Statements of Condition (unaudited)
and
Pro forma Condensed Statements of Income (unaudited)
as of, and for the quarters and six months ended,
June 30, 1998 and 1997
(Amounts in thousands except per share data)
**********
The accompanying financial information presents the statements of condition and
statements of income of First Midwest and Heritage on a pro forma basis as if
the transaction had been consummated on January 1, 1997, with all prior periods
being restated. The pro forma financial statements do not reflect the effect of
the acquisition charge incident to the acquisition of Heritage or of any
financial statement adjustments related thereto.
23
<PAGE>
FIRST MIDWEST BANCORP, INC. AND HERITAGE FINANCIAL SERVICES, INC.
PRO FORMA CONDENSED STATEMENTS OF CONDITION (UNAUDITED)
<TABLE>
<CAPTION>
As of June 30,
-------------------------
1998 1997
----------- ----------
<S> <C> <C>
ASSETS
Cash and due from banks....................................................... $ 202,871 $ 225,619
Funds sold and other short-term investments................................... 49,749 16,339
Securities available for sale................................................. 1,538,476 1,345,291
Securities held to maturity................................................... 133,134 134,125
Trading account securities.................................................... 471 321
Loans......................................................................... 2,952,831 2,990,110
Reserve for loan losses....................................................... (45,054) (44,957)
---------- ----------
Net loans.................................................................. 2,907,777 2,945,153
---------- ----------
Premises, furniture and equipment............................................. 76,967 79,783
Accrued interest receivable and other assets.................................. 180,245 116,202
---------- ----------
Total Assets............................................................... $5,089,690 $4,862,833
========== ==========
LIABILITIES
Deposits...................................................................... $3,995,931 $3,745,408
Short-term borrowings......................................................... 567,689 632,802
Accrued interest payable and other liabilities................................ 49,010 53,401
---------- ----------
Total liabilities.......................................................... $4,612,630 $4,431,611
---------- ----------
STOCKHOLDERS' EQUITY
Common Stock.................................................................. 298 292
Additional paid-in capital.................................................... 89,823 86,661
Retained earnings............................................................. 393,181 359,400
Accumulated other comprehensive income........................................ 6,191 6,319
Less: Treasury stock.......................................................... (12,433) (21,450)
---------- ----------
Total stockholders' equity................................................. 477,060 431,222
---------- ----------
Total Liabilities and Stockholders' Equity................................. $5,089,690 $4,862,833
========== ==========
CAPITAL RATIOS
- --------------
Total Equity to Assets........................................................ 9.37% 8.87%
Tangible Equity to Assets..................................................... 8.88% 8.29%
</TABLE>
24
<PAGE>
FIRST MIDWEST BANCORP, INC. AND HERITAGE FINANCIAL SERVICES, INC.
PRO FORMA CONDENSED STATEMENTS OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
QUARTERS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------- ----------------------------
1998 1997 1998 1997
----------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans............................................ $ 65,997 $ 65,900 $ 132,868 $ 130,732
Interest on securities................................................ 22,591 22,366 46,418 44,966
Interest on funds sold and other short-term investments............... 2,055 497 3,213 900
----------- ----------- ---------- -----------
Total interest income............................................ 90,643 88,763 182,499 176,598
----------- ----------- ---------- -----------
INTEREST EXPENSE
Interest on deposits.................................................. 36,480 33,867 72,499 67,205
Interest on short-term borrowings..................................... 7,961 6,891 14,792 14,037
----------- ----------- ---------- -----------
Total interest expense............................................ 44,441 40,758 87,291 81,242
----------- ----------- ---------- -----------
NET INTEREST INCOME............................................... 46,202 48,005 95,208 95,356
PROVISION FOR LOAN LOSSES............................................. 867 1,372 2,135 3,630
----------- ----------- ---------- -----------
Net interest income after provision for loan losses............... 45,335 46,633 93,073 91,726
NONINTEREST INCOME.................................................... 13,533 10,719 25,911 22,315
NONINTEREST EXPENSE................................................... 35,364 35,444 71,810 69,616
----------- ----------- ---------- -----------
Income before income tax expense.................................. 23,504 21,908 47,174 44,425
INCOME TAX EXPENSE.................................................... 6,965 7,203 14,448 14,980
----------- ----------- ---------- -----------
Net Income........................................................ $ 16,539 $ 14,705 $ 32,726 $ 29,445
=========== =========== ========== ===========
Basic Earnings Per Share.......................................... $ 0.56 $ 0.50 $ 1.11 $ 1.01
Diluted Earnings Per Share........................................ $ 0.55 $ 0.49 $ 1.09 $ 0.99
Average Shares Outstanding........................................ 29,709 29,240 29,560 29,192
Average Diluted Shares Outstanding................................ 30,128 29,749 30,096 29,801
_______________________________
PERFORMANCE RATIOS
- ------------------
Return on Assets...................................................... 1.31% 1.26% 1.32% 1.27%
Return on Equity...................................................... 14.17% 14.06% 14.21% 14.20%
Net Interest Margin................................................... 4.17% 4.59% 4.33% 4.57%
Efficiency Ratio...................................................... 56.25% 57.45% 56.69% 56.81%
</TABLE>
25
