<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 September 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 November 9, 1998, 29,047,539 shares of the Registrant's $.01 par
value common stock were outstanding, excluding treasury shares.
Exhibit Index is located on page 23.
<PAGE>
FIRST MIDWEST BANCORP, INC.
FORM 10-Q
TABLE OF CONTENTS
Part I. FINANCIAL INFORMATION Page
----
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 ........................... 11
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K .............................. 21
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FIRST MIDWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF CONDITION
(Amounts in thousands)
<TABLE>
<CAPTION>
September 30, December 31,
1998 /(1)/ 1997 /(1)/
------------- ------------
<S> <C> <C>
Assets
Cash and due from banks............................................... $ 160,391 $ 166,188
Federal funds sold and other short term investments................... 18,147 33,919
Mortgages held for sale............................................... 42,342 26,857
Securities available for sale, at market value........................ 1,765,188 1,377,134
Securities held to maturity, at amortized cost........................ 53,117 138,294
Loans................................................................. 2,925,729 3,044,794
Reserve for loan losses............................................... (44,837) (46,965)
------------- ----------
Net loans............................................................. 2,880,892 2,997,829
Premises, furniture and equipment..................................... 76,341 78,805
Accrued interest receivable........................................... 34,920 34,890
Investment in corporate owned life insurance.......................... 69,239 ---
Other assets.......................................................... 85,459 79,579
------------- ----------
Total assets.......................................................... $ 5,186,036 $4,933,495
============= ==========
Liabilities
Demand deposits....................................................... 649,390 659,226
Savings deposits...................................................... 519,035 537,874
NOW accounts.......................................................... 425,787 400,750
Money market deposits................................................. 518,695 466,531
Time deposits......................................................... 1,934,238 1,871,226
------------- ----------
Total deposits........................................................ 4,047,145 3,935,607
Short-term borrowings................................................. 622,773 483,601
Accrued interest payable.............................................. 16,237 18,935
Other liabilities..................................................... 43,275 35,633
------------- ----------
Total liabilities..................................................... 4,729,430 4,473,776
------------- ----------
Stockholders' equity
Preferred stock, no par value: 1,000 shares authorized, none issued... --- ---
Common stock, $.01 par value: 60,000 shares authorized; 30,365 and
30,070 shares issued at September 30,1998 and December 31, 1997,
respectfully 29,275 and 29,376 outstanding at September 30, 1998 and
December 31, 1997,respectively........................................ 293 294
Additional paid-in capital............................................ 87,834 87,137
Retained earnings..................................................... 389,098 375,117
Accumulated other comprehensive income................................ 12,370 12,011
Treasury stock, at cost:1,089 and 694 shares at September 30, 1998 and
December 31, 1997 respectively...................................... (32,989) (14,840)
------------- ----------
Total stockholders' equity............................................ 456,606 459,719
------------- ----------
Total liabilities and stockholders' equity............................ $ 5,186,036 $4,933,495
============= ==========
</TABLE>
- ---------------------
See notes to consolidated financial statements.
/(1)/ Unaudited
3
<PAGE>
FIRST MIDWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands, except per share data)
<TABLE>
<CAPTION>
Quarters ended Nine months ended
September 30,/(1)/ September 30,/(1)/
------------------ --------------------
Interest Income 1998 1997 1998 1997
------- ------- -------- --------
<S> <C> <C> <C> <C>
Loans .................................................... $65,611 $67,791 $198,480 $198,523
Securities available for sale ............................ 24,196 22,090 70,081 63,526
Securities held to maturity .............................. 1,106 1,795 1,637 5,324
Funds sold and other short-term investments .............. 1,807 782 5,019 1,683
------- ------- -------- --------
Total interest income ............................ 92,720 92,458 275,218 269,056
------- ------- -------- --------
Interest Expense
Deposits ................................................. 37,820 36,055 110,318 103,260
Short-term borrowings .................................... 7,957 7,314 22,749 21,351
------- ------- -------- --------
Total interest expense ........................... 45,777 43,369 133,067 124,611
------- ------- -------- --------
Net Interest income .............................. 46,943 49,089 142,151 144,445
Provision for Loan Losses ................................ 2,404 2,376 4,539 6,006
------- ------- -------- --------
Net interest income after provision for loan losses .. 44,539 46,713 137,612 138,439
------- ------- -------- --------
Noninterest Income
Service charges on deposit accounts ...................... 4,276 4,274 12,571 12,464
Trust and investment management fees ..................... 2,157 2,174 6,924 6,276
Other service charges, commissions and fees .............. 2,378 2,043 7,136 6,543
Mortgage banking revenues ................................ 2,020 1,665 5,533 4,446
Security gains (losses), net ............................ 633 669 1,107 983
Corporate owned life insurance income .................... 935 --- 2,239 ---
Other income ............................................. 1,440 1,206 4,239 3,635
------- ------- -------- --------
Total noninterest income ......................... 13,839 12,031 39,749 34,347
------- ------- -------- --------
Noninterest Expense
Salaries and wages ....................................... 15,798 15,108 47,229 44,590
Retirement and other employee benefits ................... 3,256 4,101 10,992 11,436
Occupancy expense of premises ............................ 3,017 2,940 9,036 8,990
Equipment expense ........................................ 1,873 2,176 6,149 6,319
Computer processing expense .............................. 2,442 2,324 7,644 6,663
Advertising and promotions ............................... 1,170 985 3,655 3,141
Professional services .................................... 1,891 1,794 5,853 5,611
Acquisition expense ...................................... 16,148 --- 16,148 ---
Other expenses ........................................... 5,657 6,160 16,357 18,454
------- ------- -------- --------
Total noninterest expense ........................ 51,252 35,588 123,063 105,204
------- ------- -------- --------
Income before income tax expense ......................... 7,126 23,156 54,298 67,582
Income tax expense ....................................... 2,471 7,343 16,918 22,324
------- ------- -------- --------
Net Income ........................................... $ 4,655 $15,813 $ 37,380 $ 45,258
======= ======= ======== ========
Per Share Data
Basic Earnings per share ............................. $ 0.16 $ 0.54 $ 1.26 $ 1.55
Diluted Earnings per share ........................... $ 0.16 $ 0.53 $ 1.25 $ 1.52
Cash dividends declared per share .................... 0.225 0.20 0.675 0.60
Weighted average shares outstanding .................. 29,616 29,248 29,579 29,245
Weighted average diluted shares outstanding .......... 29,878 29,850 30,011 29,812
</TABLE>
____________________________________
See notes to consolidated financial statements.
/(1)/ Unaudited
4
<PAGE>
FIRST MIDWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
w (Amounts in thousands)
<TABLE>
<CAPTION>
Nine months ended
September 30,/(1)/
-----------------------
1998 1997
----------- ---------
<S> <C> <C>
Operating Activities
Net income ...................................................... $ 37,380 $ 45,258
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses ....................................... 4,539 6,006
Provision for depreciation and amortization ..................... 6,547 6,617
Net amortization of premium of securities ....................... 6,791 2,493
Net (gains) on securities available for sale from securities .... (1,107) (984)
Net (gains) on sales of premises, furniture and equipment ....... (394) (233)
Net increase (decrease) in deferred income taxes ................ 5,203 (1,185)
Net amortization of purchase accounting adjustments, goodwill,
and other intangibles ......................................... 5,226 3,621
Changes in operating assets and liabilities:
Net (increase) decrease in loans held for sale .............. 15,485 (3,240)
Net decrease (increase) in accrued interest receivable ...... (30) (1,472)
Net (increase) in other assets .............................. (10,034) (19,246)
Net (increase) in corporate owned life insurance ............ (69,239) --
Net (decrease) in accrued interest payable .................. (2,698) 803
Net (decrease) in other liabilities ......................... 15,714 (59,518)
----------- ---------
Net cash (used) by operating activities ................. (17,587) (21,080)
----------- ---------
Investing Activities
Securities available for sale:
Proceeds from sales ............................................. 546,581 344,439
Proceeds from maturities, calls and paydowns .................... 1,316,724 505,852
Purchases ....................................................... (2,166,485) (858,060)
Securities held to maturity:
Proceeds from sales ............................................. 5,728
Proceeds from maturities, calls and paydowns .................... 3,264 8,153
Purchases ....................................................... (8,924) (8,658)
Loans made to customers, net of principal collected ................. 45,012 (44,257)
Proceeds from sales of foreclosed real estate ....................... 3,534 3,096
Proceeds from sales of premises, furniture and equipment ............ 363 1,701
Purchases of premises, furniture and equipment ...................... (4,052) (10,478)
----------- ---------
Net cash (used) provided by investing activities ........ (258,255) (58,212)
----------- ---------
Financing Activities
Net increase in deposit accounts .................................... 111,538 205,538
Net increase (decrease) in short-term borrowings .................... 139,172 (95,651)
Net (sales) purchases of treasury stock ............................. 21,879 (12,159)
Cash dividends ...................................................... (20,567) (15,917)
Exercise of stock options ........................................... 2,251 7,185
----------- ---------
Net cash provided (used) by financing activities ........ 254,273 88,996
----------- ---------
Net increase in cash and cash equivalents ............... (21,569) 9,704
Cash and cash equivalents at beginning of period ........ 200,107 186,068
----------- ---------
Cash and cash equivalents at end of period .............. $ 178,538 $ 195,772
=========== =========
Supplemental disclosures:
Interest paid to depositors and creditors ....................... $ 135,765 $ 112,578
Income taxes paid ............................................... 13,615 25,658
Non-cash transfers to foreclosed real estate from loans ......... 1,527 (1,896)
Non-cash transfers to securities available for sale from loans .. 85,519
=========== =========
</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.
Previously reported financial statements and other financial disclosures
included in this Form 10-Q have been restated to include the October 1, 1997
acquisition of SparBank, Incorporated and the July 1, 1998 acquisition of
Heritage Financial Services, Inc., both of which were accounted for as poolings
of interests, for all periods presented. Further disclosures regarding these
acquisitions are presented in Note 2 to the consolidated financial statements.
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 7: Earnings Per Common Share.
New Accounting Pronouncements--FASB No. 131, 132 and 133
In June 1997, 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 Report on Form 10-K.
In February 1998, FASB issued Statement No. 132, "Employer's Disclosures about
Pensions and Other Post retirement Benefits" ("FASB No. 132") which supersedes
the disclosure requirements in FASB No. 87, "Employers' Accounting for
Pensions," FASB No. 88, "Accounting for Settlements and Curtailments of Defined
Benefit Pension Plans and for Termination Benefits," and FASB No. 106,
"Employers' Accounting for Post retirement Benefits Other than Pensions."
6
<PAGE>
The overall objective of FASB No. 132 is to improve and standardize disclosures
about pensions and other Post retirement benefits and to make the required
information easier to prepare and more understandable. The statement addresses
disclosure issues only and does not change the measurement or recognition
provisions specified in the above statements.
FASB No. 132 is effective for fiscal years beginning after December 15, 1997.
First Midwest will include the disclosures required by FASB No. 132 in the 1998
Annual Report on Form 10-K.
In June 1998, FASB issued Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities ("FASB No. 133" or the "Statement"). The
Statement's establishes accounting and reporting standards requiring that
derivative instruments (including certain derivative instruments embedded in
other contracts) be recorded on 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 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 its 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). First Midwest has not yet quantified nor determined the extent to
which the Statement will alter its use of certain derivatives in the future and
the impact on its financial position or results of operations.
2. ACQUISITIONS
SparBank, Incorporated
On October 1, 1997 First Midwest consummated the acquisition of SparBank,
Incorporated ("SparBank"), the holding company for McHenry State Bank, ("MSB"),
in a transaction that was structured as a tax-free exchange and accounted for as
a pooling of interests, resulting 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, 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 SparBank acquisition, First Midwest recorded $6,742 in
acquisition-related 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>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
Reserve for Acquisition Expenses:
Employee severance, outplacement, retirement programs
and related costs ................................... 106 1,546
Contract termination fees and other related costs ..... 282 920
Investment advisor fees ............................... --- 1,401
Legal, accounting and other professional fees ......... 415 1,264
Other ................................................. 167 315
---- ------
$970 $5,446
==== ======
</TABLE>
Heritage Financial Services, Inc.
On July 1, 1998, First Midwest consummated the acquisition of Heritage Financial
Services, Inc. ("Heritage"), in a transaction accounted for as a pooling of
interests. Heritage, headquartered in the south suburban Chicago metropolitan
area, was a multi-bank holding company whose subsidiaries included a 17 branch
commercial bank, a trust company and a trust bank which also conducted an
insurance agency business. Heritage had total assets and stockholders' equity of
approximately $1.4 billion and $131 million, respectively, as of July 1, 1998.
Each outstanding share of Heritage common stock, no par value, was converted
into .7695 shares of First Midwest common stock, $.01 par value, resulting in
the issuance of approximately 9,628 million shares of First Midwest Common
Stock. Heritage's commercial bank was merged
7
<PAGE>
into First Midwest Bank, National Association, on October 23, 1998. First
Midwest anticipates merging Heritage's trust company into its subsidiary, First
Midwest Trust Company, N.A., in the fourth quarter 1998.
In connection with the acquisition, First Midwest recognized a third quarter
pre-tax merger related charge of $16,798 consisting of $16,148 in acquisition
expenses and $650 in provision for loan losses incident to conforming Heritage'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>
September 30, July 1,
1998 1998
------------- --------
<S> <C> <C>
Reserve for Acquisition Expenses:
Employee severance, outplacement, retirement programs
and related costs....................................... $ 887 $ 6,977
Contract termination fees and other related costs....... 505 922
Investment advisor fees................................. --- 4,238
Legal, accounting and other professional fees........... 210 1,312
Branch closings costs................................... 500 500
Other................................................... 215 2,198
------ -------
$2,317 $16,148
====== =======
</TABLE>
3. SECURITIES
Securities Available for Sale - The amortized cost and market value of
securities available for sale at September 30, 1998 and December 31, 1997 are as
follows:
<TABLE>
<CAPTION>
Securities Available for Sale
----------------------------------------------------------------------------------------------
September 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 $ 45,608 $ 640 $ -- $ 46,248 $ 128,564 $ 400 $ (14) $ 128,950
U.S. Agency securities 407,182 3,388 (36) 410,534 62,183 87 --- 62,270
Mortgage-backed securities 885,770 7,549 (9,498) 883,821 938,161 9,544 (1,164) 946,541
State and municipal
securities 372,038 18,579 (722) 389,895 194,994 10,551 (9) 205,536
Other securities 34,117 573 -- 34,690 33,435 421 (19) 33,837
---------- ------- -------- ---------- ---------- ------- ------- ----------
Total $1,744,715 $30,729 $(10,256) $1,765,188 $1,357,337 $21,003 $(1,206) $1,377,134
========== ======= ======== ========== ========== ======= ======= ==========
</TABLE>
In conjunction with the Heritage acquisition, First Midwest transferred certain
state and municipal securities with an amortized cost of $85,519 from the held-
to-maturity portfolio to available-for-sale incident to conforming the
securities acquired to First Midwest's interest rate and credit risk policies.
At the time of transfer the net unrealized gain on these securities totaled
$3,427.
Securities Held to Maturity - The amortized cost and market value of securities
held to maturity at September 30, 1998 and December 31, 1997 are as follows:
<TABLE>
<CAPTION>
Securities Held to Maturity
----------------------------------------------------------------------------------------------
September 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... $ 943 $ 9 $ -- $ 952 $ 1,099 $ 5 $ -- $ 1,104
U.S. Agency securities..... 254 -- -- 254 -- -- -- --
State and municipal
securities................ 32,040 1,815 -- 33,855 119,013 3,861 (71) 122,803
Other securities........... 19,880 1 -- 19,881 18,182 19 --- 18,201
------- ------ ------ ------- -------- ------ ------ --------
Total............. $53,117 $1,825 $ -- $54,942 $138,294 $3,885 $ (71) $142,108
======= ====== ====== ======= ======== ====== ====== ========
</TABLE>
The decrease in state and municipal securities is attributable to the
reclassification of Heritage Securities from the held to maturity portfolio to
available for sale portfolio on July 1, 1998. Additional information with
respect to such reclassification can be found in the previous section entitled
"Securities Available for Sale".
8
<PAGE>
4. LOANS
The following table provides the book value of loans, by major classification,
as of the dates indicated:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
Commercial and industrial...................... $ 820,340 $ 796,073
Real estate - commercial....................... 791,107 858,627
Real estate - construction..................... 149,507 129,290
Real estate - 1-4 family....................... 451,719 506,077
Direct installment............................. 125,641 98,847
Indirect installment........................... 356,368 386,226
---------- ----------
Total.......................................... $2,925,729 $3,044,794
========== ==========
</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.
5. RESERVE FOR LOAN LOSSES/IMPAIRED LOANS
Transactions in the reserve for loan losses for the quarters and nine months
ended September 30, 1998 and 1997 are summarized below:
<TABLE>
<CAPTION>
Quarters ended, Nine Months ended,
September 30, September 30,
------------------- ---------------------
1998 1997 1998 1997
-------- ------- ------- -------
<S> <C> <C> <C> <C>
Balance at beginning of period............................................ $45,054 $44,957 $46,965 $41,609
Provision for loan losses................................................. 2,404 2,376 4,539 6,006
Loans charged-off....................................................... (3,286) (2,711) (9,291) (8,727)
Recoveries of loans previously charged-off.............................. 665 1,064 2,624 6,798
-------- ------- ------- -------
Net loan charge-offs............................................. (2,621) (1,647) (6,667) (1,929)
-------- ------- ------- -------
Balance at end of period.................................................. $44,837 $45,686 $44,837 $45,686
======== ======= ======= =======
</TABLE>
Information with respect to impaired loans at September 30, 1998 and 1997 is
provided below:
<TABLE>
<CAPTION>
September 30,
--------------------
1998 1997
-------- -------
<S> <C> <C>
Recorded Investment in Impaired Loans:
Recorded investment requiring specific loan loss reserves /(1)/............. $ 5,414 $ 3,633
Recorded investment not requiring specific loan loss reserves............... 13,594 7,580
-------- -------
Total recorded investment in impaired loans......................... $19,008 $11,213
======== =======
Specific loan loss reserve related to impaired loans............................. $ 2,726 $ 1,290
======== =======
</TABLE>
/(1)/ These impaired loans require a specific reserve allocation because the
value of the loans is less than the recorded investments in the loans.
For the nine months ended September 30, 1998 and 1997, the average recorded
investment in impaired loans was approximately $18,002 and $14,099,
respectively.
9
<PAGE>
6. 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 nine months ended September 30, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
Quarters Ended Nine Months Ended
September 30, September 30,
------------------ -------------------
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net income................................................ $ 4,655 $15,813 $37,380 $45,258
Unrealized gains/(losses) on securities, net of
reclassification adjustment............................ 6,179 4,091 359 7,891
------- ------- ------- -------
Comprehensive income............................... $10,834 $19,904 $37,739 $53,149
======= ======= ======= =======
Disclosure of Reclassification Amount:
- --------------------------------------
Unrealized holding gains/(losses) arising
during the period...................................... $ 6,311 $ 4,206 $ 4,311 $ 8,013
Less: Reclassification adjustment for (gains)/losses
included in net income................................. (132) (115) (3,952) (122)
------- ------- ------- -------
Net unrealized gains/(losses) on securities........ $ 6,179 $ 4,091 $ 359 $ 7,891
======= ======= ======= =======
</TABLE>
7. EARNINGS PER COMMON SHARE
Basic earnings per share is the amount of earnings for the period available to
each share of common stock outstanding during the reporting period. Diluted
earnings per share is the amount of earnings available to each share of common
stock outstanding during the reporting period adjusted for the potential
issuance of common shares for stock options and the conversion impact of
convertible equity instruments.
The following table sets forth the computation of basic and diluted earnings per
share for the quarters and nine months ended September 30, 1998 and 1997.
<TABLE>
<CAPTION>
Quarters Ended Nine Months Ended
September 30, September 30,
------------------ -------------------
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net Income................................................ $ 4,655 $15,813 $37,380 $45,258
======= ======= ======= =======
Average common shares outstanding......................... 29,616 29,248 29,579 29,245
Dilutive effect of employee stock options................. 262 602 432 567
------- ------- ------- -------
Average diluted common shares outstanding................. 29,878 29,850 30,011 29,812
======= ======= ======= =======
Earnings per share
Basic................................................. $ 0.16 $ 0.54 $ 1.26 $ 1.55
Diluted............................................... $ 0.16 $ 0.53 $ 1.25 $ 1.52
</TABLE>
10
<PAGE>
8. CONTINGENT LIABILITIES AND OTHER MATTERS
There are certain legal proceedings pending against First Midwest and its
Subsidiaries in the ordinary course of business at September 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 nine months ended
September 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 nine months ended September 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 1, 1997 acquisition of SparBank and July 1, 1998 acquisition
of Heritage, both of which were accounted for as poolings of interests. Unless
otherwise stated, all earnings per share data included in this section and
throughout the remainder of this discussion are presented on a diluted basis.
All financial information is presented in thousands, except per share data.
Summary of Performance
First Midwest's net income for the third quarter of 1998 totaled $4,655 or $.16
per diluted share which included acquisition related charges, fully discussed in
Note 2 to the consolidated financial statements, of $16,798 ($12,533, or $.42
per share, after tax). Net income for the quarter, exclusive of acquisition
costs, increased 8.7% to $17,188 or $.58 per diluted share as compared to
$15,813 or $.53 per diluted share for the third quarter of 1997. On an
annualized basis, return on average assets and average stockholders' equity for
the third quarter of 1998 were .36% and 3.88%, respectively. Exclusive of
acquisition related charges, return on average assets and average stockholders'
equity were 1.32% and 14.34%, respectively, as compared to the year-ago quarter
of 1.29% and 14.30%, respectively.
Net income for nine months ended September 30, 1998 totaled $37,380 or $1.25 per
diluted share which included the acquisition charges described above and in Note
2 to the consolidated financial statements. Exclusive of such charges, net
income for the first nine months of 1998 increased 10.3% to $49,913 or $1.66 per
diluted share as compared to $45,258, or $1.52 per diluted share for the same
period in 1997. Annualized return on average assets and average stockholders'
equity were .99% and 10.67%, respectively. Based on net income before
acquisition charges, return on average assets and average stockholders' equity
increased to 1.32% and 14.25%, respectively, as compared to 1.27% and 14.22%,
respectively for the same period in 1997.
Net Interest Income
Net interest income on a tax equivalent basis totaled $48,989 for the third
quarter of 1998, representing a decrease of $2,785 or 5.4% over the year-ago
quarter totaling $51,774. As shown in the Volume/Rate Analysis on page 13, the
decrease in net interest income is attributable to decreased interest income of
$377 and higher interest expense of $2,408. The net interest margin for the
third quarter of 1998 decreased by 44 basis points to 4.09% as compared to 4.53%
for the same period in 1997. The decrease in net interest margin in 1998 is
primarily due to three factors; (i) a lower level of high yielding loan volumes;
(ii) a significantly higher level of public funds at lower spreads; and (iii)
the purchase of corporate owned life insurance. These factors are discussed
below.
As shown on the Volume/Rate Analysis, $2,137 of the reduction in net interest
income is due to a combination of both volume and rates earned on the loan
portfolio as compared to the third quarter of 1997. The year-to-year reduction
in loan volumes is due to two factors: a loan securitization and the planned
outplacement of certain higher risk loans. Approximately $67,000 in 1-4 family
residential real estate loans were securitized and transferred from the loan
portfolio to the securities available for sale portfolio in early 1998 as a
result of the integration of the MSB loan portfolio. Additionally, since January
1, 1998 First Midwest undertook the planned outplacement of approximately
$40,000 in higher
11
<PAGE>
risk loans from both the First Midwest and Heritage loan portfolios in an effort
to improve the risk profile of the consolidated portfolio.
Also contributing to the reduction in net interest margin in the third quarter
of 1998 was an increase in public funds deposited by local governments of
approximately $200,000 over 1997 levels. The net interest spread earned on
these public funds in the third quarter of 1998 was approximately 106 basis
points as compared to 204 basis points earned in the same quarter in 1997. The
increase in volumes was due primarily to a higher level of tax receipts and
operating funds deposited by this core customer base while the decrease in
interest spread was primarily due to the volatility in the interest rate markets
during the third quarter of 1998. The negative impact on net interest margin
for the third quarter of 1998 resulting from the higher level of earning assets
at the lower spread was approximately 14 basis points as compared to 1997.
Finally, First Midwest purchased approximately $69,000 in corporate owned life
insurance during the first quarter of 1998. No such investment existed in 1997.
The life insurance asset is reflected on the statement of condition as a non
earning asset. Although the cost of funding the corporate owned life insurance
flows through net interest income in the form of interest expense, the related
income from such investment is reflected in the non-interest income section of
the income statement. The earnings on corporate owned life insurance produces
an after-tax earnings rate of approximately 9.08%. The negative impact on net
interest margin for the third quarter of 1998 resulting from the exclusion of
this income in net interest income was approximately 8 basis points.
For the nine month period ended September 30, 1998, net interest margin
decreased to 4.27% from 4.56% for 1997. The Volume/Rate Analysis for the nine
months ended September 30, 1998 as compared to the like 1997 period is presented
on page 14.
12
<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 September 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 September 30, 1998 and 1997
------------------------------------------------------------------------------------------
Average Interest Interest
Average Balances Rates Earned/Paid Income/Expense
------------------------------------------------------------------------------------------
Basis
Increase Points Increase
1998 1997 (Decrease) 1998 1997 Inc/(Dec) 1998 1997 (Decrease)
---------- ---------- ---------- ----- ----- --------- ------- ------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Federal funds sold and other
short-term investments................ $ 78,104 $ 35,900 $ 42,204 4.47% 5.63% (1.16)% $ 872 $ 509 $ 363
Mortgages held for sale............... 47,148 14,340 32,808 7.92% 7.58% 0.34% 934 274 660
Securities available for sale/(1)/.... 1,660,481 1,337,840 322,641 6.25% 7.03% (0.78)% 25,940 23,702 2,238
Securities held to maturity/(1)/...... 55,118 136,605 (81,487) 8.51% 7.77% 0.74% 1,173 2,674 (1,501)
Loans, net of unearned discount/(1)/.. 2,950,660 3,011,647 (60,987) 8.93% 8.96% (0.03)% 65,847 67,984 (2,137)
---------- ---------- -------- ----- ----- ------- ------- ------- -------
Total interest-earning assets/(1)/.... $4,791,511 $4,536,332 $255,179 7.91% 8.32% (0.41)% $94,766 $95,143 $ (377)
========== ========== ======== ===== ===== ======= ======= ======= =======
Savings deposits...................... $ 526,215 $ 556,538 $(30,323) 2.66% 2.69% (0.03)% $ 3,494 $ 3,775 $ (281)
NOW accounts.......................... 448,654 436,092 12,562 2.40% 2.38% 0.02% 2,693 2,616 77
Money market deposits................. 511,504 424,974 86,530 4.04% 3.88% 0.16% 5,169 4,152 1,017
Time deposits......................... 1,908,637 1,813,605 95,032 5.55% 5.58% (0.03)% 26,464 25,513 951
Short-term borrowings................. 617,925 537,397 80,528 5.15% 5.40% (0.25)% 7,957 7,313 644
---------- ---------- -------- ----- ----- ------- ------- ------- -------
Total interest-bearing liabilities.... $4,012,935 $3,768,606 $244,329 4.56% 4.57% (0.01)% $45,777 $43,369 $ 2,408
========== ========== ======== ===== ===== ======= ======= ======= =======
Net interest margin/income/(1)/....... 4.09% 4.53% (0.44)% $48,989 $51,774 $(2,785)
===== ===== ======= ======= ======= =======
-------------------------------
Increase/(Decrease) in
Interest Income/Expense Due to:
-------------------------------
Volume Rate Total
------- ------- -------
Federal funds sold and other.......... $ 442 $ (79) $ 363
short-term investments................ 650 10 660
Mortgages held for sale............... 4,390 (2,152) 2,238
Securities available for sale/(1)/.... (1,758) 257 (1,501)
Securities held to maturity/(1)/...... (1,366) (771) (2,137)
Loans, net of unearned discount/(1)/.. ------- ------- -------
$ 2,358 $(2,735) $ (377)
Total interest-earning assets/(1)/.... ======= ======= =======
$ (202) $ (79) $ (281)
Savings deposits...................... 76 1 77
NOW accounts.......................... 869 148 1,017
Money market deposits................. 1,312 (361) 951
Time deposits......................... 1,004 (360) 644
Short-term borrowings................. -------- ------- -------
$ 3,059 $ (651) $ 2,408
Total interest-bearing liabilities.... ======= ======= =======
$ (701) $(2,084) $(2,785)
Net interest margin/income/(1)/....... ======= ======= =======
</TABLE>
/(1)/Interest income and yields are presented on a tax-equivalent basis.
13
<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 nine months ended September
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>
Nine Months Ended September 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 .................... $ 62,229 $ 25,074 $ 37,155 5.69% 5.58% 0.11%
Mortgages held for sale ............... 39,078 10,934 28,144 8.07% 7.76% 0.31%
Securities available for sale/(1)/ .... 1,491,026 1,287,699 203,327 6.51% 7.01% (0.50)%
Securities held to maturity/(1)/ ...... 116,030 134,351 (18,321) 7.22% 7.79% (0.57)%
Loans, net of unearned discount/(1)/ .. 2,980,283 2,987,076 (6,793) 8.91% 8.91% --
---------- ---------- -------- ----- ----- -----
Total interest-earning assets/(1)/ .... $4,688,646 $4,445,134 $243,512 8.06% 8.30% (0.24)%
========== ========== ======== ===== ===== =====
Savings deposits ...................... $ 536,444 $ 560,245 $(23,801) 2.62% 2.68% (0.06)%
NOW accounts .......................... 427,301 410,725 16,576 2.33% 2.31% 0.02%
Money market deposits ................. 482,205 412,175 70,030 3.98% 3.78% 0.20%
Time deposits ......................... 1,875,228 1,767,250 107,978 5.54% 5.54% --
Short-term borrowings ................. 577,556 536,635 40,921 5.25% 5.32% (0.07)%
---------- ---------- -------- ----- ----- -----
Total interest-bearing liabilities .... $3,898,734 $3,687,030 $211,704 4.55% 4.52% 0.03%
========== ========== ======== ===== ===== =====
Net interest margin/income/(1)/ ....... 4.27% 4.56% (0.29)%
===== ===== =====
<CAPTION>
Nine Months Ended September 30, 1998 and 1997
----------------------------------------------------------------
Increase/(Decrease)
Interest in Interest
Income/Expense 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 .................... $ 2,654 $ 1,047 $ 1,607 $ 1,583 $ 24 $ 1,607
Mortgages held for sale ............... 2,365 635 1,730 1,702 28 1,730
Securities available for sale/(1)/ .... 72,807 67,510 5,297 9,368 (4,071) 5,297
Securities held to maturity/(1)/ ...... 6,280 7,824 (1,544) (1,018) (556) (1,544)
Loans, net of unearned discount/(1)/ .. 199,152 199,099 53 (453) 506 53
-------- -------- ------- ------- ------- -------
Total interest-earning assets/(1)/ .... $283,258 $276,115 $ 7,143 $11,182 $(4,039) $ 7,143
======== ======== ======= ======= ======= =======
Savings deposits ...................... $ 10,552 $ 11,221 $ (669) $ (469) $ (200) $ (669)
NOW accounts .......................... 7,477 7,106 371 291 80 371
Money market deposits ................. 14,394 11,658 2,736 2,063 673 2,736
Time deposits ......................... 77,895 73,275 4,620 4,486 134 4,620
Short-term borrowings ................. 22,749 21,351 1,398 1,610 (212) 1,398
-------- -------- ------- ------- ------- -------
Total interest-bearing liabilities .... $133,067 $124,611 $ 8,456 $ 7,981 $ 475 $ 8,456
======== ======== ======= ======= ======= =======
Net interest margin/income/(1)/ ....... $150,191 $151,504 $(1,313) $ 3,201 $(4,514) $(1,313)
======== ======== ======= ======= ======= =======
</TABLE>
/(1)/Interest income and yields are presented on a tax-equivalent basis.
14
<PAGE>
Noninterest Income
Noninterest income totaled $13,839 for the quarter ended September 30,1998, as
compared to $12,031 for the same period in 1997. Exclusive of net security gains
which totaled $633 for the third quarter 1998 as compared to net security gains
of $669 for the like period in 1997, noninterest income increased by $1,844 or
16.2% with improvements occurring in most categories led by mortgage banking,
other service charges and commissions and corporate owned life insurance.
Mortgage banking revenues increased for the third quarter 1998 by $355 or 21.3%
due to strong demand for new and refinanced residential mortgages and increased
loan sales. Mortgage loan origination volumes were up by 169% from the same
quarter a year ago. Other service charges and commissions increased to $2,378 or
16.3% for the 1998 third quarter as compared to the 1997 third quarter level of
$2,043. This increase is a result of higher merchant fees, debit card income and
alternative investment revenues. A new source of revenues in 1998, corporate
owned life insurance, which is further discussed on Page 12 of this Form 10-Q,
totaled $935 for the quarter. Other income increased $234 or 19.4% for the 1998
quarter as compared to the 1997 third quarter primarily as a result of increased
ATM income and certain miscellaneous gains on asset sales.
Noninterest income totaled $39,749 for the nine months ended September 30, 1998
as compared to $34,347, increasing $5,402 over the same period in 1997.
Factoring out net security gains, noninterest income for 1998 compared to 1997
increased by $5,278, or 15.8%. In addition to the changes noted above, trust
revenues increased by $648 or 10.3% for the first nine months of 1998 as
compared to the like period a year ago as trust and investment assets under
management reached $2.3 billion, an increase of 21% from the year earlier level
due to both the result of general market appreciation and additional net new
business.
Noninterest Expense
Noninterest expense, exclusive of $16,148 in acquisition charges discussed
below, totaled $35,104 for the 1998 third quarter as compared to $35,588 for the
same period a year ago for a decrease of $484 or 1.4%. For the nine months ended
September 30, 1998, noninterest expense exclusive of acquisition charges,
increased $1,711 or 1.6% compared to the same period a year ago. The current
quarter decline in noninterest expense is primarily attributable to reduced
employee related costs, equipment expense and other operating expenses primarily
resulting from the Heritage integration activities in the third quarter of 1998.
The increase in salary and wage expense for the quarter and nine months ending
September 30, 1998 are attributable to general merit raises and higher
commissions paid to mortgage banking personnel due to increased sales volumes.
Retirement and other employee benefits decreased $845, or 20.7% for the 1998
quarter due to lower profit sharing and pension plan costs as a result of
changes to the First Midwest benefit plans effective January 1, 1998. As shown
by the comparison of the nine months ended September 30, 1998 as compared to the
1997 period, the rate of increase in salary and wage expense decelerated in the
third quarter of 1998 as compared to the nine month period, while the rate of
decrease in retirement and benefit expense for the third quarter of 1998
accelerated. These positive comparisons result primarily from the completion of
the integration of the MSB acquisition in February 1998 and the initiation of
the Heritage integration activities in July 1998, both of which have positively
affected personnel and personnel related expenses.
Equipment expense for the 1998 third quarter and nine months declined 14.0% and
2.7% respectively, as compared to the same periods a year ago due to reduced
depreciation expense resulting from the elimination of duplicate equipment
during the consolidation into First Midwest of both MSB and Heritage. Computer
processing costs increased $118 for the current 1998 quarter and $981 for the
1998 nine month period as compared to the 1997 like period levels is primarily
attributable to system conversion costs associated with the Heritage and MSB
loan, deposit and trust systems integration into First Midwest subsidiaries.
Advertising and promotions expense rose $514 for the nine months ended September
30, 1998 as compared to prior years like period due to the implementation of a
television advertising campaign coupled with the MSB and Heritage consolidations
and the attendant costs related to customer retention and communication. As a
result of new outsourcing in 1998, professional services expense increased 5.4%
and 4.3% for the 1998 third quarter and nine months ended September 30, 1998,
respectfully, as compared to the prior year like periods. Other operating
expense levels are reflective of the elimination of certain redundant expenses
incurred by both MSB and Heritage that have been eliminated as a result of the
integration activities.
15
<PAGE>
Incident to the July 1, 1998 acquisition of Heritage, a one time acquisition
related charge totaling $16,148 was recognized in the third quarter 1998,
consisting of investment banker and professional fees, severance and related
benefits due to staff reductions and conforming accounting adjustments. Further
disclosures are presented in Note 2 to the consolidated financial statements.
Exclusive of acquisition charges, the efficiency ratio for the quarter ended
September 30, 1998 was 55.00% as compared to the 1997 third quarter ratio of
55.97%. The efficiency ratios for the nine months ended September 30, 1998 and
1997 were 56.22% and 56.52%, respectively.
Income Tax Expense
Income tax expense totaled $2,471 for the quarter ended September 30,1998, a
decrease from $7,343 for the same period in 1997 and reflects effective income
tax rates of 34.6% and 31.7%, respectively. Income tax expense totaled $16,918
for the nine months ended September 30, 1998 a decrease from $22,324 for the
1997 nine month period and reflects effective tax rates of 31.1% and 33.0%,
respectively. Certain acquisition related expenses recorded during the third
quarter of 1998 were not deductible for income tax purposes. Factoring out the
acquisition related charge from the third quarter and nine months of 1998, the
effective tax rate would have been 27.8% and 29.7%, respectively. The decrease
in effective tax rate for both periods as compared to the like periods in 1997
is due primarily to planned increases in state tax exempt income.
Nonperforming Assets and 90 Day Past Due Loans
At September 30, 1998, nonperforming assets totaled $25,683 and loans past due
90 days or more and still accruing interest totaled $11,044. 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>
1998 1997
Nonperforming Assets and -------------------------------------------------------
90 Day Past Due Loans Sept. 30, June 30, March 31, Dec. 31 Sept. 30,
--------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C>
Nonaccrual loans $22,326 $23,755 $20,767 $11,699 $12,955
Renegotiated loans -- -- -- 139 139
------- ------- ------- ------- -------
Total nonperforming loans 22,326 23,755 20,767 11,838 13,094
Foreclosed real estate 3,357 3,160 4,074 5,119 5,634
------- ------- ------- ------- -------
Total nonperforming assets $25,683 $26,915 $28,841 $16,957 $18,728
======= ======= ======= ======= =======
% of total loans plus foreclosed real estate 0.88% 0.94% 0.83% 0.56% 0.62%
======= ======= ======= ======= =======
90 days past due loans accruing interest $11,044 $ 7,408 $ 9,254 $ 5,736 $ 5,320
======= ======= ======= ======= =======
</TABLE>
Nonaccrual loans, totaling $22,326 at September 30, 1998 are comprised of
commercial and agricultural loans (63%) real estate loans (29%) and consumer
loans (8%). 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. The increase in 90 day past due loans in the third
quarter of 1998 is split approximately evenly between Commercial and Consumer
Loans. Foreclosed real estate, totaling $3,357 at September 30, 1998, primarily
represents commercial real estate properties.
First Midwest's disclosure with respect to impaired loans is contained in Note 5
to the consolidated financial statements, located on page 9.
16
<PAGE>
Provision and Reserve for Loan Losses
Transactions in the reserve for loan losses during the three and nine months
ended September 30, 1998 and 1997 are summarized in the following table:
<TABLE>
<CAPTION>
Quarters Ended Nine Months Ended
September 30, September 30,
----------------- -----------------
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Balance at beginning period................... $45,054 $44,957 $46,965 $41,609
Provision for loan losses................... 2,404 2,376 4,539 6,006
Loans charged off........................... (3,286) (2,711) (9,291) (8,727)
Recoveries of loans previously charged-off.. 665 1,064 2,624 6,798
------- ------- ------- -------
Net loan (charge-offs).................... (2,621) (1,647) (6,667) (1,929)
------- ------- ------- -------
Balance at end of period...................... $44,837 $45,686 $44,837 $45,686
======= ======= ======= =======
</TABLE>
The provision for loan losses charged to operating expense for the third quarter
of 1998 totaled $2,404 as compared to $2,376 for the same quarter in 1997.
Contributing in part to the current quarter 1998 increase in provision for loan
losses was a one time provisioning of $650 in connection to the Heritage
acquisition incident to conforming Heritages credit policies to First Midwest's.
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 $2,621, or .35% of
average loans in 1998 as compared to 1997 loan charge-offs of 1,647 or .22%. A
major component of loan recoveries for the nine months of 1997 were proceeds
received in the first quarter of 1997 totaling $4,050 received in settlement of
a 1993 lawsuit related to loans charged off in 1992. Since the receipt of the
settlement in the first quarter of 1997, First Midwest has provided for loan
losses, on an aggregate basis from the first quarter of 1997 through the third
quarter of 1998, in excess of aggregate net charge-offs for the same period.
Furthermore, at September 30, 1998, the reserve for loan losses totaled $44,837
or 1.53% of total loans outstanding.
The reserve for loan losses at September 30, 1998 was comprised of three parts:
allocated for specific impaired loans, $2,726; allocated for general segments of
unimpaired loans, $14,235; and unallocated, $27,876. That part of the reserve
allocated for specific impaired loans is discussed in Note 5 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 judgment 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. The 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 4 to the
consolidated financial statements. 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 Miwest'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 banking
subsidiaries, First Midwest Bank, N.A. ("FMB, N.A."), and Heritage Bank
("Heritage"), to their primary regulators. First Midwest, FMB, N.A. and Heritage
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
17
<PAGE>
regulatory authorities to be considered "well-capitalized" which is the highest
capital category established under the FDICIA.
<TABLE>
<CAPTION>
As of September 30, 1998
---------------------------------------------------------------------------
Bank Holding Company Subsidiary Banks
-------------------- --------------------------------------------------
Minimum
Minimum Regulatory Well-
First Required FMB, Minimum Capitalized
Midwest FRB N.A. Heritage Capital FDICIA
------- -------- ------ -------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Tier I capital to risk-
based assets ......... 11.82% 4.00% 9.59% 9.91% 4.00% 6.00%
Total capital to risk-
based assets ......... 13.07% 8.00% 10.84% 11.16% 8.00% 10.00%
Leverage ratio ......... 8.12% 3.00% 6.88% 5.58% 3.00% 5.00%
====== ===== ====== ====== ===== ======
</TABLE>
Dividends
First Midwest's strong earnings and capital position have 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 $.225 13%
November 1996 $ .20 18%
February 1996 $ .17 13%
February 1995 $ .15 15%
February 1994 $ .13 13%
</TABLE>
On September 2, 1998, the First Midwest Board of Directors authorized the
repurchase of up to 850,000 shares of its common stock on the open market or in
private transactions. The repurchase shares will be reserved for future issuance
in conjunction with First Midwest's dividend reinvestment plan, qualified and
nonqualified retirement plans and stock option plans, as well as for other
general corporate purposes. First Midwest repurchased 581,903 shares during the
third quarter of 1998.
YEAR 2000 READINESS DISCLOSURE
INTRODUCTION
Notice is hereby given that the Year 2000 statement set forth below is being
designated a Year 2000 Readiness Disclosure in accordance with Section 7(b) of
the Year 2000 Information and Readiness Disclosure Act.
For a number of months, First Midwest has been engaged in the process of
addressing a potential problem that is facing all users of automated information
systems, including personal computers, that is generally referred to as the Year
2000 Issue. The problem is the result of computer systems processing
transactions based upon 2 digits representing the year of the transaction rather
than 4 full digits (i.e. 97 for 1997). These computer systems may not operate
properly when the last two digits become "00", as will occur on January 1, 2000.
In some cases, this could result in a system failure, miscalculations causing
disruptions of operations, temporary inability to process transactions, send
invoices or engage in similar normal business activities. The problem could
effect a wide variety of automated information systems such as main frame
computer applications, personal computers, communications systems, including
telephone systems, and other information systems utilized by not only First
Midwest but also its vendors and customers.
18
<PAGE>
The most significant of First Midwest's automated information systems affected
by the Year 2000 Issue are the data processing systems used to process
transactions and information for loan, deposit and trust customers. First
Midwest currently purchases the services for these systems from two nationally
recognized data processing vendors. Other programs and applications used in
First Midwest's operations that will be affected by the Year 2000 Issue includes
building and security systems equipment (including proof machines, sorters and
cash dispensers), hardware (including routers, servers, printers and
controllers), ATM modems and computer software. The majority of these items have
been purchased from outside vendors who are responsible for maintenance of the
systems and modifications to enable uninterrupted usage. Additionally, First
Midwest does have some in-house applications, interface equipment and interfaces
that must be reviewed and modified.
A detailed discussion of the state of readiness, risks, contingency plans and
costs associated with First Midwest's plan to address the Year 2000 issue are
discussed below:
STATE OF READINESS
First Midwest's Year 2000 plan process began in April 1997. At that time the
Chief Information Officer/Executive Vice President of Bank was appointed the
Year 2000 plan coordinator and a steering committee was formed consisting of
representatives from the appropriate disciplines across the Company. The Year
2000 steering committee has been meeting regularly since August 1997. The
Company's internal auditor is a participant at the Committee meetings. To date,
First Midwest has completed the initial awareness phase as well as the
assessment phase, identifying all mission critical applications, vendors and
external agents. First Midwest is currently progressing on schedule with the
finalization of the renovation process and the testing (validation) of hardware
and software. First Midwest anticipates that Year 2000 compliance will be
achieved for substantially all mission critical applications by the end of 1998.
Further renovation and testing will occur in first quarter 1999, the timing
dictated by external vendors scheduling.
First Midwest relies on outsourced data processing for core banking applications
from two nationally recognized data processing vendors. For both vendors the
computer programming language ("code") affected by the Year 2000 issue has been
fully renovated, tested, and placed in production as of October 31, 1998. Year
2000 compliance testing of the mainframe banking applications is planned for the
first quarter of 1999. This will occur with the existing live code which was
renovated, tested and placed in production in October 1998.
The Year 2000 plan has been fully documented in a narrative format which
outlines the procedures and processes used to achieve compliance. Of the 509
mission critical applications requiring renovation, approximately 18% have been
renovated and 82% are scheduled for renovation. In terms of software, hardware
and equipment 44% are compliant, 24% required renovation and are now compliant,
12% are scheduled to be renovated and 20% are awaiting scheduling.
The Year 2000 plan is divided into a number of sections focusing on applications
(software, hardware, equipment, forms, etc.), third party vendors, and customer
or external agent relationships. In March 1997 a review of the plan was
conducted by a consulting firm with expertise in Year 2000 compliance. The final
report was rendered in June 1998 containing two recommendations for enhancement
to the plan, both of which were implemented. The Year 2000 plan coordinator
periodically submits written reports to the Board of Directors relative to the
Company's Year 2000 plan status and compliance.
RISKS FROM YEAR 2000 ISSUES
The predominant risk associated with the Year 2000 issue for First Midwest rests
with the functionality of the mainframe systems. Since First Midwest relies
heavily on outsourced processing, the preparedness of both outside vendors are
of paramount importance. The risks associated with the inability to process
mainframe information would be detrimental to and for this reason the Company
has entered into an agreement for contingency processing with a third nationally
recognized data processing vendor in the event of Year 2000 noncompliance by
either primary data processing vendor. In addition, efforts are being made to
remain abreast of the progress of its vendors with regard to their respective
preparedness. The Year 2000 renovated code is currently functional in the live
system and has been tested by both of First Midwest's primary data processing
vendors. Proxy test results are being reviewed and maintained for further
assurance of the compliance of these organizations.
19
<PAGE>
With regard to other turnkey systems and hardware, First Midwest has a program
of renovation in process with testing to occur in the latter part of November
1998.
Customers present potential risk relative to their compliance with Year 2000
within their own organizations. First Midwest has identified critical
relationships and has initiated a plan to assess the Year 2000 sufficiency of
the customer base. As of November 1998 the identified portfolio of mission
critical customer relationships has been rated "low" on a scale of high,
moderate or low Year 2000 risk. In addition, for all such customers rated "high"
risk, a follow up review is conducted every 3 weeks, while for "moderate"
ratings a follow up review is conducted every 4 weeks, and "low" risk customers,
a follow up review is conducted every ninety days. Although it is very difficult
to assess or quantify the Year 2000 risk level of customer relationships, the
percentage of mission critical customers rated "high" is 12%.
Vendors and other third party relationships are also under evaluation. First
Midwest relies on a number of critical vendors, with whom communications
relative to Year 2000 risk levels are regularly reviewed. Of such vendors one of
the most critical is the outsourced item processing vendor. That vendor, a
nationally recognized data processor appears to be well advanced with Year 2000
compliance efforts. Of third party vendors and suppliers, perhaps the most
difficult assessment of Year 2000 risk are utility companies, such as
electrical, gas and telephone utilities. This is a risk that is shared by
everyone and cannot be accurately quantified at this time.
CONTINGENCY PLANS
The primary contingency plan of First Midwest is the contingency processing
agreement with the vendor discussed above. The purpose of this agreement is to
hold a place for converting to that data processor in the event that either or
both primary processing vendors do not become Year 2000 compliant and First
Midwest elects to proceed with this contingency plan.
First Midwest, as part of its contingency plan, has identified the core business
units of the Company and the associated computer applications pertinent to these
core business units. Trigger dates and contingency plans have been identified
for each of the "mission critical" systems applicable to these units, none of
which have required execution at this time. Furthermore, First Midwest has
identified failure scenarios and is in the process of developing information to
identify (1) the minimum level of output and services, (2) critical
requirements/tools to produce the minimum level of outputs and services and (3)
recovery plans for minimum levels of outputs and services.
A formal conversion process along with a designated team of internal managers
will prepare for the century turn beginning in October 1999 and respond to
operational problems and issues that may arise. This readiness process is
intended to mitigate further problems and define the support structure to
respond to the issues that arise after the century turn.
COSTS TO ADDRESS YEAR 2000 ISSUES
First Midwest's plan to become Year 2000 compliant is being executed with
internal resources, primarily through its Information Systems staff. First
Midwest currently expects to utilize minimal contract consulting to supplement
its internal staff. As First Midwest relies predominantly on outsourced vendors
for most of the core applications, significant costs associated with Year 2000
renovation are not expected to be experienced. First Midwest has been informed
by its primary data processing vendors that they have no current expectation to
pass on Year 2000 compliance costs to First Midwest as the service contracts
with these vendors make no such provision. As a result, the primary costs that
are expected to be incurred with the Year 2000 plan involve micro-computer
hardware replacement and upgrades, operating system upgrades, software
replacement and equipment and forms upgrades. These costs, as well as the
payroll costs and consulting expenses incurred will be expensed as incurred.
20
<PAGE>
Based on the Year 2000 plan as currently being executed and the best available
information, First Midwest does not anticipate the cost to address the Year 2000
issues will have a material adverse impact on its financial condition, results
of operation or liquidity.
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: cost savings related
to the integration of the MSB and Heritage acquisition; 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; dividends to
shareholders and the Company's state of readiness, risks plus and costs relative
to the Year 2000 issue.
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; operational limitations and costs related
to changing technologies and their effect on the Company's ability to sustain
efficient operations; deviations from the assumptions used to evaluate the
appropriate level of the reserve for loan losses; the impact of future earnings
performance and capital levels on dividends declared by the Board of Directors;
and the steps necessary to address the Year 2000 Issue including ensuring that
not only First Midwest's automated systems, but also those of vendors and
customers, can become Year 2000 compliant.
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.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - See Exhibit Index appearing on page 23.
(b) Form 8-K:
- On July 1, 1998 First Midwest filed a report on Form 8-K announcing
the consummation of the acquisition of Heritage Financial Services,
Inc. on July 1, 1998.
- On August 20, 1998 First Midwest filed a report on Form 8-K to report
30 days combined financial performance as a result of the acquisition
of Heritage Financial Services, Inc. by First Midwest on July 1, 1998.
- On September 2, 1998 First Midwest filed a report on Form 8-K to
announce the Company's intention to repurchase up to 850,000 shares of
its common stock outstanding.
21
<PAGE>
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: November 12, 1998 Donald J. Swistowicz
Executive Vice President *
* Duly authorized to sign on behalf of the Registrant.
22
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Sequential
Number Description of Documents Page Number
- ------- ------------------------ -----------
<S> <C> <C>
27 Financial Data Schedule 24
</TABLE>
23
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 160,391
<INT-BEARING-DEPOSITS> 764
<FED-FUNDS-SOLD> 17,383
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 1,765,188
<INVESTMENTS-CARRYING> 53,117
<INVESTMENTS-MARKET> 54,942
<LOANS> 2,925,729
<ALLOWANCE> 44,837
<TOTAL-ASSETS> 5,186,036
<DEPOSITS> 4,047,145
<SHORT-TERM> 622,773
<LIABILITIES-OTHER> 59,512
<LONG-TERM> 0
<COMMON> 293
0
0
<OTHER-SE> 456,313
<TOTAL-LIABILITIES-AND-EQUITY> 5,186,036
<INTEREST-LOAN> 198,480
<INTEREST-INVEST> 71,718
<INTEREST-OTHER> 5,019
<INTEREST-TOTAL> 275,218
<INTEREST-DEPOSIT> 110,318
<INTEREST-EXPENSE> 133,067
<INTEREST-INCOME-NET> 142,151
<LOAN-LOSSES> 4,539
<SECURITIES-GAINS> 1,107
<EXPENSE-OTHER> 123,063
<INCOME-PRETAX> 54,298
<INCOME-PRE-EXTRAORDINARY> 54,298
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 37,380
<EPS-PRIMARY> 1.26
<EPS-DILUTED> 1.25
<YIELD-ACTUAL> 4.27
<LOANS-NON> 22,326
<LOANS-PAST> 11,044
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 33,370
<ALLOWANCE-OPEN> 46,965
<CHARGE-OFFS> 9,291
<RECOVERIES> 2,624
<ALLOWANCE-CLOSE> 44,837
<ALLOWANCE-DOMESTIC> 16,961
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 27,876
</TABLE>
