<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, 1999 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, 1999, 27,364,916 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....................................... 10
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K................................ 22
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,
1999(1) 1998
------------- ------------
<S> <C> <C>
Assets
Cash and due from banks.......................................... $ 171,772 $ 156,524
Federal funds sold and other short term investments.............. 3,562 12
Mortgages held for sale.......................................... 28,295 75,235
Securities available for sale, at market value................... 2,048,189 1,979,115
Securities held to maturity, at amortized cost................... 48,986 48,964
Loans............................................................ 2,868,496 2,664,417
Reserve for loan losses.......................................... (42,598) (43,290)
---------- ----------
Net loans........................................................ 2,825,898 2,621,127
Premises, furniture and equipment................................ 78,934 78,168
Accrued interest receivable...................................... 44,136 36,362
Investment in corporate owned life insurance..................... 104,010 100,135
Other assets..................................................... 113,444 97,245
---------- ----------
Total assets..................................................... $5,467,226 $5,192,887
========== ==========
Liabilities
Demand deposits.................................................. 661,515 $ 695,484
Savings deposits................................................. 492,895 529,322
NOW accounts..................................................... 461,437 452,028
Money market deposits............................................ 467,168 516,512
Time deposits.................................................... 1,939,216 1,857,105
---------- ----------
Total deposits................................................... 4,022,231 4,050,451
Short-term borrowings............................................ 1,008,195 623,899
Accrued interest payable......................................... 19,288 17,245
Other liabilities................................................ 41,201 48,394
---------- ----------
Total liabilities................................................ 5,090,915 4,739,989
---------- ----------
Stockholders' equity
Preferred stock, no par value: 1,000 shares authorized,
none issued.................................................... --- ---
Common stock, $.01 par value: 60,000 shares authorized;
30,366 and 30,364 shares issued at September 30, 1999 and
December 31, 1998, respectfully; 27,577 and 29,032 shares
outstanding at September 30, 1999 and December 31, 1998,
respectively................................................... 276 290
Additional paid-in capital....................................... 83,329 86,054
Retained earnings................................................ 432,000 399,446
Accumulated other comprehensive (loss) income.................... (39,240) 9,875
Treasury stock, at cost: 2,789 and 1,332 shares at
September 30, 1999 and December 31, 1998, respectively......... (100,054) (42,767)
---------- ----------
Total stockholders' equity....................................... 376,311 452,898
---------- ----------
Total liabilities and stockholders' equity....................... $5,467,226 $5,192,887
========== ==========
</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)/
------------------- -------------------
1999 1998 1999 1998
-------- ------- -------- --------
<S> <C> <C> <C> <C>
Interest Income
Loans................................................. $59,158 $65,612 $172,101 $198,480
Securities available for sale......................... 30,558 24,196 88,815 70,081
Securities held to maturity........................... 739 1,105 2,150 1,637
Funds sold and other short-term investments........... 1,340 1,807 3,360 5,019
------- ------- -------- --------
Total interest income............................ 91,795 92,720 266,426 275,217
------- ------- -------- --------
Interest Expense
Deposits.............................................. 32,273 37,821 95,508 110,318
Short-term borrowings................................. 11,062 7,957 26,044 22,749
------- ------- -------- --------
Total interest expense........................... 43,335 45,778 121,552 133,067
------- ------- -------- --------
Net interest income............................. 48,460 46,942 144,874 142,150
Provision for Loan Losses............................. 1,784 2,404 4,276 4,539
------- ------- -------- --------
Net interest income after provision for loan losses. 46,676 44,538 140,598 137,611
------- ------- -------- --------
Noninterest Income
Service charges on deposit accounts................... 4,904 4,276 13,550 12,571
Trust and investment management fees income........... 2,476 2,158 7,526 6,925
Other service charges, commissions and fees........... 3,513 2,545 8,787 7,632
Mortgage banking revenues............................. 891 2,019 4,670 5,533
Corporate owned life insurance income................. 1,323 935 3,875 2,239
Security (losses) gains, net.......................... (371) 632 (304) 1,106
Other income.......................................... 1,604 1,438 4,990 4,237
------- ------- -------- --------
Total noninterest income......................... 14,340 14,003 43,094 40,243
------- ------- -------- --------
Noninterest Expense
Salaries and wages.................................... 15,896 15,797 47,888 47,229
Retirement and other employee benefits................ 3,805 3,257 11,371 10,992
Occupancy expense of premises......................... 3,255 3,017 10,141 9,036
Equipment expense..................................... 2,148 1,874 6,429 6,150
Computer processing expense........................... 2,490 2,442 7,235 7,644
Advertising and promotions............................ 1,004 1,170 3,134 3,655
Professional services................................. 2,426 1,891 6,473 5,853
Acquisition charge.................................... -- 16,148 -- 16,148
Other expenses........................................ 6,185 5,821 19,796 16,848
------- ------- -------- --------
Total noninterest expense........................ 37,209 51,417 112,467 123,555
------- ------- -------- --------
Income before income tax expense...................... 23,807 7,124 71,225 54,299
Income tax expense.................................... 5,805 2,470 18,448 16,918
------- ------- -------- --------
Net Income....................................... $18,002 $ 4,654 $ 52,777 $ 37,381
======= ======= ======== ========
Per Share Data
Basic Earnings per share......................... $0.65 $0.16 $1.86 $1.26
Diluted Earnings per share....................... $0.64 $0.16 $1.85 $1.25
Cash dividends declared per share................ $0.240 $0.225 $0.720 $0.675
Weighted average shares outstanding.............. 27,840 29,536 28,325 29,579
Weighted average diluted shares outstanding...... 28,054 29,840 28,542 30,025
======= ======= ======== ========
</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>
Nine months ended
September 30,/(1)/
-------------------------
1999 1998
--------- ---------
<S> <C> <C>
Operating Activities
Net income............................................................................. $ 52,777 $ 37,381
Adjustments to reconcile net income to net cash provided (used) by operating
activities:
Provision for loan losses.............................................................. 4,276 4,539
Depreciation and amortization.......................................................... 6,710 6,547
Net amortization of premium on securities.............................................. 1,368 6,791
Net losses (gains) on sales of securities.............................................. 304 (1,106)
Net (gains) losses on sales of other real estate owned................................. (243) 444
Net (gains) on sales of premises, furniture and equipment.............................. (454) (394)
Net (decrease) increase in deferred income taxes....................................... (2,954) 5,203
Net amortization of goodwill and other intangibles..................................... 2,341 5,226
Changes in operating assets and liabilities:
Originations and purchases of mortgage loans held for sale........................... (338,305) (380,651)
Proceeds from sales of mortgage loans held for sale.................................. 385,245 365,166
Net (increase) in accrued interest receivable....................................... (7,774) (30)
Net decrease (increase) in other assets.............................................. 10,039 (10,479)
Net (increase) in corporate owned life insurance..................................... (3,875) (69,239)
Net increase (decrease) in accrued interest payable.................................. 2,043 (2,698)
Net (decrease) increase in other liabilities......................................... (819) 15,714
--------- ---------
Net cash provided (used) by operating activities................................. 110,679 (17,587)
--------- ---------
Investing Activities
Securities available for sale:
Proceeds from maturities, calls and paydowns......................................... 407,618 1,316,724
Proceeds from sales.................................................................. 363,664 546,581
Purchases............................................................................ (922,447) (2,166,485)
Securities held to maturity:
Proceeds from maturities, calls and paydowns......................................... 4,971 8,992
Purchases............................................................................ (5,105) (8,924)
Loans made to customers, net of principal collected....................................... (213,468) 45,012
Proceeds from sales of other real estate owned............................................ 4,150 3,534
Proceeds from sales of premises, furniture and equipment.................................. 874 363
Purchases of premises, furniture and equipment............................................ (7,967) (4,052)
--------- ---------
Net cash (used) by investing activities......................................... (367,710) (258,255)
--------- ---------
Financing Activities
Net (decrease) increase in deposit accounts............................................... (28,220) 111,538
Net increase in short-term borrowings..................................................... 384,296 139,172
Net (purchases) sales of treasury stock................................................... (61,318) 21,879
Cash dividends............................................................................ (20,221) (20,567)
Exercise of stock options................................................................. 1,292 2,251
--------- ---------
Net cash provided by financing activities....................................... 275,829 254,273
--------- ---------
Net increase (decease) in cash and cash equivalents............................. 18,798 (21,569)
Cash and cash equivalents at beginning of period................................ 156,536 200,107
--------- ---------
Cash and cash equivalents at end of period...................................... $ 175,334 $ 178,538
========= =========
Supplemental disclosures:
Interest paid to depositors and creditors............................................ $ 119,509 $ 135,765
Income taxes paid.................................................................... 17,168 13,615
Non-cash transfers to other real estate owned from loans............................. 4,421 1,527
Non-cash transfers of securities available for sale from securities held to maturity. --- 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") has 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 1998 data to conform
to the 1999 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, 1998.
Disclosures about Segments of an Enterprise and Related Information
First Midwest's chief operating decision maker evaluates the operations of the
Company as one operating segment, commercial banking. Due to the materiality of
the commercial banking operation to the Company's consolidated financial
condition and results of operations, separate segment disclosures are not
required. First Midwest offers the following primary lines of products and
services to external customers: deposits, loans, mortgage banking and related
services and trust services. Revenues for each of these products and services
are disclosed separately in the Consolidated Statements of Income.
Accounting for Derivative Instruments and Hedging Activities
In June 1998, FASB issued Statement No. 133 "Accounting for Derivative
Instruments and Hedging Activities". The Statement 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
the company document, designate, and assess the effectiveness of transactions
that qualify for hedge accounting. The effective date for FASB No. 133 was
delayed by one year pursuant to the issuance of Statement No. 137 "Accounting
for Derivative Instruments and Hedging Activities - Deferral of the Effective
Date of FASB Statement 133". The revised effective date for FASB No. 133 is for
fiscal years beginning after June 15, 2000. 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
operation.
2. MERGER
Heritage Financial Services, Inc.
On July 1, 1998, First Midwest consummated the merger 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.
First Midwest merged Heritage's commercial bank and trust company, into First
Midwest Bank, National Association and First Midwest Trust Company,
respectively, in the fourth quarter 1998. The remaining subsidiary, Heritage
Bank, National Association, continues to offer trust services to customers of
First Midwest; the insurance agency business formerly operated
6
<PAGE>
by this subsidiary was transferred to First Midwest Bank, National Association
in connection with the commercial bank merger.
In conjunction with the merger, First Midwest recognized a third quarter pre-tax
1998 merger related charge of $16,798 consisting of $16,148 in merger expenses
and $650 in provision for loan losses incident to conforming Heritage's credit
policies to First Midwest's. The merger expenses, certain of which are
nondeductible for income tax purposes, were recorded through the establishment
of a reserve, the balance of which was $62 and $1,590 at September 30, 1999 and
December 31, 1998, respectively. The September 30, 1999 balance represents
remaining employee severance costs.
3. SECURITIES
Securities Available for Sale - The amortized cost, gross unrealized gains and
(losses) before taxes and market value of securities available for sale at
September 30, 1999 and December 31, 1998 are as follows:
<TABLE>
<CAPTION>
Securities Available For Sale
-------------------------------------------------
September 30, 1999
-------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
U.S. Treasury securities......... $ 2,538 $ 6 $ --- $ 2,544
U.S. Agency securities........... 638,733 236 (4,281) 634,688
Mortgage-backed securities....... 947,934 1,143 (31,561) 917,516
State and municipal securities... 488,933 1,726 (29,217) 461,442
Other securities................. 34,381 22 (2,404) 31,999
---------- ------ --------- ----------
Total $2,112,519 $3,133 $ (67,463) $2,048,189
========== ====== ========= ==========
</TABLE>
<TABLE>
<CAPTION>
Securities Available For Sale
-------------------------------------------------
December 31, 1998
-------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
U.S. Treasury securities......... $ 19,575 $ 156 $ --- $ 19,731
U.S. Agency securities........... 283,920 251 (312) 283,859
Mortgage-backed securities....... 1,258,184 8,172 (8,020) 1,258,336
State and municipal securities... 392,633 17,567 (1,644) 408,556
Other securities................. 8,609 24 --- 8,633
---------- ------- ------- ----------
Total $1,962,921 $26,170 $(9,976) $1,979,115
========== ======= ======= ==========
</TABLE>
For additional discussion of the securities available for sale portfolio and the
related impact of unrealized gains/(losses) on thereon, see Note 6 to the
interim consolidated financial statements and Management's Discussion and
Analysis on page 16.
Securities Held to Maturity - The amortized cost, gross unrealized gains and
(losses) before taxes and market value of securities held to maturity at
September 30, 1999 and December 31, 1998 are as follows:
<TABLE>
<CAPTION>
Securities Held to Maturity
---------------------------------------------
September 30, 1999
---------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- -------
<S> <C> <C> <C> <C>
U.S. Treasury securities......... $ 674 $--- $--- $ 674
U.S. Agency securities........... 402 --- --- 402
State and municipal securities... 26,577 821 (23) 27,375
Other securities................. 21,333 --- --- 21,333
------- ---- ---- -------
Total $48,986 $821 $(23) $49,784
======= ==== ==== =======
</TABLE>
<TABLE>
<CAPTION>
Securities Held to Maturity
---------------------------------------------
December 31, 1998
---------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- -------
<S> <C> <C> <C> <C>
U.S. Treasury securities......... $ 896 $ 3 $--- $ 899
U.S. Agency securities........... 403 2 (1) 404
State and municipal securities... 26,388 1,825 --- 28,213
Other securities................. 21,277 1 --- 21,278
------- ------ ---- -------
Total $48,964 $1,831 $ (1) $50,794
======= ====== ==== =======
</TABLE>
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,
------------- ------------
1999 1998
------------- ------------
<S> <C> <C>
Commercial, industrial and agricultural $ 807,359 $ 800,353
Real estate - commercial 812,308 769,514
Real estate - construction 180,120 148,469
Real estate - 1-4 family 245,134 257,307
Consumer 823,575 688,774
---------- ----------
Total $2,868,496 $2,664,417
========== ==========
</TABLE>
7
<PAGE>
5. RESERVE FOR LOAN LOSSES/IMPAIRED LOANS
Transactions in the reserve for loan losses for the quarters and nine months
ended September 30, 1999 and 1998 are summarized below:
<TABLE>
<CAPTION>
Quarters ended, Nine Months ended,
September 30, September 30,
-------------------- ---------------------
1999 1998 1999 1998
------- ------- ------- --------
<S> <C> <C> <C> <C>
Balance at beginning of period...... $42,615 $45,054 $43,290 $46,965
Provision for loan losses........... 1,784 2,404 4,276 4,539
Loans charged-off.............. (2,467) (3,286) (6,950) (9,291)
Recoveries of loans
previously charged-off.... 666 665 1,982 2,624
------- ------- ------- -------
Net loan (charge-offs).... (1,801) (2,621) (4,968) (6,667)
------- ------- ------- -------
Balance at end of period........... $42,598 $44,837 $42,598 $44,837
======= ======= ======= =======
</TABLE>
Information with respect to impaired loans at September 30, 1999 and 1998 is
provided below:
<TABLE>
<CAPTION>
September 30,
--------------------
1999 1998
-------- -------
<S> <C> <C>
Recorded Investment in Impaired Loans:
Recorded investment requiring specific loan loss reserves /(1)/.. $ 348 $ 4,780
Recorded investment not requiring specific loan loss reserves.... 16,859 11,579
------- -------
Total recorded investment in impaired loans................. $17,207 $16,359
======= =======
Specific loan loss reserve related to impaired loans.................. $ 333 $ 2,726
======= =======
</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 nine months ended September 30, 1999 and 1998, the average recorded
investment in impaired loans was approximately $14,921 and $15,711,
respectively.
A discussion of the impaired loan criteria, including a definition of impaired
loans, is included in Note 1 to the 1998 Annual Report on Form 10-K beginning on
page 6.
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.
The components of comprehensive income, net of related taxes, for the quarters
and nine months ended September 30, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
Quarters ended Nine Months ended
September 30, September 30,
--------------------- --------------------
1999 1998 1999 1998
-------- ------- ------- -------
<S> <C> <C> <C> <C>
Net income.......................................... $18,002 $ 4,654 $52,777 $37,381
Unrealized (losses) gains on securities available
for sale, net of reclassification adjustment... (14,058) 6,179 (49,115) 359
-------- ------- ------- --------
Comprehensive income................. $ 3,944 $10,833 $ 3,662 $37,740
======== ======= ======= ========
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
Quarters ended Nine Months ended
September 30, September 30,
-------------------- ----------------------
<S> <C> <C>
1999 1998 1999 1998
Disclosure of Reclassification Amount:
-------------------------------------
Unrealized holding (losses) gains on securities
available for sale arising during the period..... $(14,284) $6,279 $(49,300) $715
Less: Reclassification adjustment for
(losses) gains on securities available for sale
included in net income........................... (226) 100 (185) 356
--------- ------ --------- -------
Net unrealized (losses) gains on securities
available for sale.......................... $(14,058) $6,179 $(49,115) 359
========= ====== ========= =======
</TABLE>
The change in accumulated other comprehensive income from December 31, 1998 is
provided below:
<TABLE>
<CAPTION>
Accumulated
Other
Comprehensive
Income
-------------
<S> <C>
Balance as of December 31, 1998...................................................................... $ 9,875
Year to date increase in unrealized gains or (losses) on securities available for sale, net of tax... (49,115)
-------------
Balance as of September 30, 1999..................................................................... $(39,240)
=============
</TABLE>
For additional discussion of the securities available for sale portfolio and the
related impact of unrealized gains/(losses) thereon, see Note 3 to the interim
consolidated financial statements and Management's Discussion and Analysis on
page 16.
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.
The following table sets forth the computation of basic and diluted earnings per
share for the quarters ended September 30, 1999 and 1998.
<TABLE>
<CAPTION>
Quarters ended Nine months ended
September 30, September 30,
------------------- -------------------
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net Income................................ $18,002 $ 4,654 $52,777 $37,381
======= ======= ======= =======
Average common shares outstanding......... 27,840 29,536 28,325 29,579
Dilutive effect of employee stock options. 214 304 217 446
------- ------- ------- -------
Average diluted common shares outstanding. 28,054 29,840 28,542 30,025
======= ======= ======= =======
Earnings per share:
Basic.................................. $ 0.65 $ 0.16 $ 1.86 $ 1.26
Diluted................................ $ 0.64 $ 0.16 $ 1.85 $ 1.25
</TABLE>
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, 1999. 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.
9
<PAGE>
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, 1999 as compared to the same periods in 1998. 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 1998 Annual Report on Form 10-K. Results of
operations for the quarter and nine months ended September 30, 1999 are not
necessarily indicative of results to be expected for the full year of 1999.
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
Net income for the third quarter ended September 30, 1999 increased to $18,002,
or $.64 per share, from 1998's third quarter net income before special charges
of $17,187, or $.58 per share, representing a 10.3% increase on a per share
basis. The special charges incurred in 1998 were in connection with the Heritage
Financial Services, Inc. acquisition consummated on July 1, 1998 and are fully
discussed in Note 2 to the consolidated financial statements. Net income for the
nine months ended September 30, 1999 totaled $52,777, or $1.85 per share, as
compared to last year's net income before special charges of $49,914, or $1.66
per share, for an increase on a per share basis of 11.4%.
Return on average assets was 1.33% for the third quarter of 1999 as compared to
1998's third quarter return on average assets before special charges of 1.32%.
Return on average assets was 1.35% for the nine months ended September 30, 1999
as compared to the year ago like period return on average assets before special
charges of 1.32%.
Return on average stockholders' equity was 18.33% and 16.77% for the quarter and
nine months end September 30, 1999, respectively, as compared to the year ago
like periods before special charges of 14.34% and 14.25% for the quarter and
nine months ended September 30, 1998, respectively.
Net Interest Income
Net interest income on a tax equivalent basis totaled $52,274 for the third
quarter of 1999, representing an increase of $2,342, or 4.7%, over the year-ago
quarter totaling $49,932. As shown in the Volume/Rate Analysis on page 12, the
increase in net interest income is attributable to lower interest income of $101
net of lower interest expense of $2,443. Net interest margin for the third
quarter of 1999 increased to 4.21% as compared to 4.17% for the same period in
1998. The increase in net interest margin is primarily due to a reduction in
rates paid during the 1999 period. Also contributing to the improvement was a
higher volumes in the securities available for sale portfolio. The effect of
these factors on net interest income is discussed below.
As shown on the Volume/Rate Analysis, $6,511 of the reduction in net interest
income is due to approximately equal lower volumes and lower rates earned on the
loan portfolio as compared to the third quarter in 1998. The year-to-year
reduction in loan volumes is due to two factors; securitized loans transferred
to the securities available for sale portfolio and the planned outplacement of
certain higher risk loans. During the fourth quarter of 1998, First Midwest
securitized approximately $178 million in 1 - 4 family residential real estate
loans and transferred them to the securities available for sale portfolio.
Additionally, during 1998 First Midwest undertook the planned outplacement of
approximately $50 million in higher risk loans from both the First Midwest and
Heritage loan portfolios in an effort to improve the risk profile of the
consolidated portfolio. These activities, in conjunction with more stringent
underwriting standards resulted in a drop of $152 million in average loans in
the third quarter of 1999 as compared to the like period in 1998. Factoring out
the securitization and outplacement of loans, the $152,739 reduction in average
loans in the third quarter of 1999 as compared to 1998's quarter would have
reflected an increase in average loan levels of approximately $75,000,
reflecting growth in core lending.
Competitive conditions resulted in the generally lower pricing of credit in the
1999 period which contributed to the drop in average rates earned on the loan
portfolio of 44 basis points to 8.49% in the third quarter of 1999 as compared
to 8.93% in the 1998 period.
To offset the decline in interest income resulting from the conditions outlined
above and in response to a general drop in interest rates in the markets it
serves, First Midwest decreased deposit rates during the fourth quarter of 1998
and again during the mid-first quarter of 1999. This reduction in deposit rates,
resulted in a reduction of 47 basis points in overall
10
<PAGE>
interest paid on interest bearing liabilities during the third quarter of 1999
as compared to the 1998 quarter and offset the drop in total interest income in
the third quarter of 1999 as compared to 1998.
Also contributing to the improvement in net interest income during the third
quarter of 1999 as compared to 1998 was the investment by First Midwest in a
leveraged arbitrage transaction. Early in the third quarter of 1999 First
Midwest purchased approximately $200 million in U.S. Agency Securities and
financed such purchase with 1 year variable rate financing. As part of the
overall transaction, First Midwest also entered into interest rates swaps to fix
the financing costs, resulting in a one year matched arbitrage with a locked
interest rate spread of approximately 75 basis points. The transaction accounts
for most of the increase in the securities available for sale and short term
borrowings average balances for the third quarter of 1999 and the relating
increases in the interest income and interest expense thereon. Additionally,
since this transaction resulted in a higher level of interest earning assets at
a narrow interest rate spread, it negatively impacted net interest margin for
the third quarter and nine months of 1989 by approximately 14 and 5 basis
points, respectively.
For the nine month period ended September 30, 1999, net interest margin
increased to 4.31% from 4.27% for 1998. The Volume/Rate Analysis for the nine
months ended September 30, 1999 as compared to the like 1998 period is presented
on page 13.
11
<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 September 30,
1999 and 1998. 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, 1999 and 1998
--------------------------------------------------------------------------------------------
Average Interest
Average Balances Rates Earned/Paid
--------------------------------------------------------------------------------------------
Basis
Increase/ Points
1999 1998 (Decrease) 1999 1998 Inc/(Dec)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Federal funds sold and other
short-term investments........... $ 42,189 $ 78,104 $ (35,915) 5.22% 4.47% 0.75%
Mortgages held for sale 41,804 47,148 (5,344) 7.55% 7.93% (0.38)%
Securities available for
sale/(1)/........................ 2,041,260 1,660,481 380,779 6.67% 6.46% 0.21%
Securities held to
maturity/(1)/.................... 47,652 55,118 (7,466) 7.27% 8.79% (1.52)%
Loans, net of unearned
discount/(1)/.................... 2,797,921 2,950,660 (152,739) 8.49% 8.93% (0.44)%
---------- ---------- --------- ----- ----- -------
Total interest-earning
assets/(1)/...................... $4,970,825 $4,791,511 $ 179,315 7.69% 7.99% (0.30)%
========== ========== ========= ===== ===== =======
Savings deposits................. $ 511,796 $ 526,215 $ (14,419) 1.86% 2.66% (0.80)%
NOW accounts..................... 474,484 448,654 25,830 1.85% 2.40% (0.55)%
Money market deposits............ 466,836 511,504 (44,668) 3.48% 4.04% (0.56)%
Time deposits.................... 1,907,802 1,908,637 (835) 4.96% 5.55% (0.59)%
Short-term borrowings............ 880,079 617,925 262,154 5.03% 5.15% (0.12)%
---------- ---------- --------- ----- ----- -------
Total interest-bearing
liabilities...................... $4,240,997 $4,012,935 $ 228,062 4.09% 4.56% (0.47)%
========== ========== ========= ===== ===== =======
Net interest margin/
income/(1)/...................... 4.21% 4.17% 0.04%
===== ===== =======
Interest Increase/(Decrease) in
Income/Expense Interest Income/Expense Due to:
--------------------------------------------------------------------------
Increase
1999 1998 (Decrease) Volume Rate Total
--------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C>
Federal funds sold and other
short-term investments........... 551 $ 872 $ (321) $ (509) $ 188 $ (321)
Mortgages held for sale 789 935 (146) (102) (44) (146)
Securities available for
sale/(1)/........................ 34,025 26,803 7,222 6,322 900 7,222
Securities held to
maturity/(1)/.................... 866 1,211 (345) (152) (193) (345)
Loans, net of unearned
discount/(1)/.................... 59,378 65,889 (6,511) (3,325) (3,186) (6,511)
------- ------- ------- ------- ------- -------
Total interest-earning
assets/(1)/...................... $95,609 $95,710 $ (101) $ 2,234 $(2,335) $ (101)
======= ======= ======= ======= ======= =======
Savings deposits................. $ 2,381 $ 3,494 $(1,113) $ (92) $(1,021) $(1,113)
NOW accounts..................... 2,193 2,693 (500) 170 (670) (500)
Money market deposits............ 4,056 5,169 (1,113) (428) (685) (1,113)
Time deposits.................... 23,643 26,465 (2,822) (12) (2,810) (2,822)
Short-term borrowings............ 11,062 7,957 3,105 3,290 (185) 3,105
------- ------- ------- ------- ------- -------
Total interest-bearing
liabilities...................... $43,335 $45,778 $(2,443) $ 2,928 $(5,371) $(2,443)
======= ======= ======= ======= ======= =======
Net interest margin/
income/(1)/...................... $52,274 $49,932 $ 2,342 $ (694) $ 3,036 $ 2,342
======= ======= ======= ======= ======= =======
</TABLE>
/(1)/ Interest income and yields are presented on a tax-equivalent basis.
<TABLE>
<CAPTION>
1999 1998
--------------------- -----------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Interest Margin Trend 3/rd/ 2/nd/ 1/st/ 4/th/ 3/rd/ 2/nd/ 1/st/
by Quarter 1999 and 1998.. 4.21% 4.42% 4.23% 4.02% 4.17% 4.17% 4.48%
</TABLE>
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 nine months ended September
30, 1999 and 1998. 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, 1999 and 1998
---------------------------------------------------------------------------------------------------
Average Interest
Average Balances Rates Earned/Paid
---------------------------------------------- -----------------------------------------------
Basis
Increase Points
1999 1998 (Decrease) 1999 1998 Inc/(Dec)
----------- ------------ ------------ -------- -------- ------------------
<S> <C> <C> <C> <C> <C> <C>
Federal funds sold and other
short-term investments........ $ 22,107 $ 62,229 $ (40,122) 5.11% 5.69% (0.58)%
Mortgages held for sale........ 46,653 39,078 7,575 7.18% 8.07% (0.89)%
Securities available for
sale/(1)/..................... 1,969,478 1,491,026 478,452 6.65% 6.51% 0.14%
Securities held to
maturity/(1)/................. 48,334 116,030 (67,696) 7.04% 7.22% (0.18)%
Loans, net of unearned
discount/(1)/................. 2,716,727 2,980,283 (263,556) 8.48% 8.91% (0.43)%
---------- ---------- --------- ----- ----- -------
Total interest-earning
assets/(1)/................... $4,803,299 $4,688,646 $114,653 7.69% 8.06% (0.37)%
========== ========== ======== ===== ===== =======
Savings deposits............... $ 524,113 $ 536,444 $(12,331) 1.94% 2.62% (0.68)%
NOW accounts................... 454,219 427,301 26,918 1.79% 2.33% (0.54)%
Money market deposits.......... 482,820 482,205 615 3.37% 3.98% (0.61)%
Time deposits.................. 1,877,384 1,875,228 2,156 4.94% 5.54% (0.60)%
Short-term borrowings.......... 719,988 577,556 142,432 4.82% 5.25% (0.43)%
---------- ---------- -------- ----- ----- -------
Total interest-bearing
liabilities................... $4,058,524 $3,898,734 $159,790 3.99% 4.55% (0.56)%
========== ========== ======== ===== ===== =======
Net interest
margin/income/(1)/............ 4.31% 4.27% 0.04%
===== ===== =====
Nine Months Ended September 30, 1999 and 1998
---------------------------------------------------------------------------------------------------
Interest Increase/(Decrease) in
Income/Expense Interest Income/Expense Due to:
---------------------------------------------- -----------------------------------------------
Increase
1999 1998 (Decrease) Volume Rate Total
-------- ---------- ------------ --------- --------- ------------------
<S> <C> <C> <C> <C> <C> <C>
Federal funds sold and other
short-term investments........ $ 848 $ 2,654 $ (1,806) $ (1,562) $ (244) $ (1,806)
Mortgages held for sale........ 2,512 2,365 147 339 (192) 147
Securities available for
sale/(1)/..................... 98,229 72,804 25,425 23,832 1,593 25,425
Securities held to
maturity/(1)/................. 2,553 6,280 (3,727) (3,579) (148) (3,727)
Loans, net of unearned
discount/(1)/................. 172,744 199,151 (26,407) (17,061) (9,346) (26,407)
-------- -------- -------- -------- ------- --------
Total interest-earning
assets/(1)/................... $276,886 $283,254 $ (6,368) $ 1,969 $ (8,337) $ (6,368)
======== ======== ======== ======== ======= ========
Savings deposits............... $ 7,640 $ 10,551 $ (2,911) $ (236) $ (2,675) $ (2,911)
NOW accounts................... 6,113 7,477 (1,364) 515 (1,879) (1,364)
Money market deposits.......... 12,195 14,393 (2,198) 17 (2,215) (2,198)
Time deposits.................. 69,560 77,897 (8,337) 90 (8,427) (8,337)
Short-term borrowings.......... 26,044 22,749 3,295 4,925 (1,630) 3,295
-------- -------- -------- -------- -------- --------
Total interest-bearing
liabilities................... $121,552 $133,067 $(11,515) $ 5,311 $(16,826) $(11,515)
======== ======== ======== ======== ======== ========
Net interest
margin/income/(1)/............ $155,334 $150,187 $ 5,147 $ (3,342) $ 8,489 $ 5,147
======== ======== ======== ======== ======== ========
</TABLE>
/(1)/Interest income and yields are presented on a tax-equivalent basis.
13
<PAGE>
Noninterest Income
Noninterest income totaled $14,340 for the quarter ended September 30,1999, as
compared to $14,003 for the same period in 1998. Exclusive of net security
(losses) which totaled ($371) for the third quarter 1999 as compared to net
security gains of $632 for the like period in 1998, noninterest income increased
by 1,340, or 10.0%, with all major components of noninterest income excluding
mortgage banking revenues contributing to the increase.
Service charges on deposit accounts increased 14.7% to $4,904 in the third
quarter in 1999 as compared to $4,276 in the same 1998 period. The $628
increase is primarily attributable to NSF fees and service charges on business
accounts. Growth in trust business produced $318 in higher trust and investment
management fees in the 1999 quarter as compared to 1998. Other service charges,
commissions and fees increased $968 to $3,513 over the year ago like quarter of
$2,545 primarily due to higher other earnings and commissions on official check
outsourcing commissions, debit card fee income and check printing fees.
The decline in mortgage banking revenues for the third quarter in 1999 is
directly related to general mortgage loans rate increases resulting in lower
refinancing volumes and lower gains on sales of mortgage loans into the
secondary market. First Midwest's investment in corporate owned life insurance
averaged $103,151 for the third quarter of 1999 as compared to $68,778 for the
1998 like period generating $1,323 in income for the 1999 quarter for an
increase of $388, or 41.5%, as compared to the same 1998 period. Other income
increased $166, or 11.5%, for the 1999 quarter as compared to the 1998 third
quarter due to increased ATM income.
Noninterest income totaled $43,094 for the nine months ended September 30, 1999
as compared to $40,243 for the same period in 1998. Factoring out net security
(losses) gains totaling ($304) for the 1999 nine month period as compared to
$1,106 for the like 1998 period, noninterest income increased by $4,261, or
10.9%. The reasons for the increase in noninterest income for the nine month
period generally followed those described above for the third quarter.
Noninterest Expense
Exclusive of the $16,148 acquisition charge recorded in the 1998 third quarter
in connection with the acquisition of Heritage Financial Services, Inc. as fully
discussed in Note 2 to the consolidated financial statements, noninterest
expense totaled $37,209 for the quarter ended September 30, 1999 as compared to
the year ago like period of $35,269 for an increase of $1,940 or 5.5%.
For the nine months ended September 30, 1999 and exclusive of the 1998
acquisition charge described above, noninterest expense increased $5,060, or
4.7%, to $112,467 as compared to the same 1998 period of $107,407.
Salaries and wages increased to $15,896 for the third quarter of 1999, up $99 or
.6% from the same period in 1998. The increase is attributable to merit
increases to hourly employees based upon annual evaluations conducted in August.
The tight control over this largest component of noninterest expense is in large
part reflective of the cost savings achieved through the integration of the
merger of Heritage during the second half of 1998.
Retirement and other employee benefits increased by $548 or 16.8% to $3,805 in
the third quarter of 1999 from $3,257 in the 1998 period. The increase in 1999
over 1998 relates primarily from certain one-time adjustments made in the 1998
quarter that reduced both pension and profit sharing expense. This expense
category averaged approximately $3,900 for the first two quarters of 1998 and
has averaged approximately $3,800 for each of the three 1999 quarters.
Occupancy expense increased $238, or 7.9%, to $3,255 for the 1999 third quarter
as compared to $3.017 in the year ago period due to increased real estate taxes
and janitorial services related to the outsourcing of facilities management.
Combined equipment expense and computer processing expense for the 1999 third
quarter and nine months increased 14.6% and 2.0%, respectively, as compared to
the same periods a year ago. The third quarter increase is primarily
attributable to higher equipment maintenance contracts and software maintenance
expense.
Advertising and promotions expense decreased by $166, or 14.2%, for the 1999
third quarter and by $521, or 14.3%, for the nine months ending September 30,
1999 as compared to the year ago like periods. Certain one time costs recorded
in 1998 affect the year-to-year comparisons. Such costs are related to the
implementation of a new multi media advertising campaign which commenced in
1998, in addition to costs resulting from the 1998 McHenry State Bank
consolidation into First Midwest Bank, N.A. and the attendant costs related to
customer retention and communication.
14
<PAGE>
For the 1999 third quarter and nine months, professional services increased
28.3% and 10.6%, respectively, as compared to the 1998 like periods largely due
to loan related costs associated with a third quarter home equity loan promotion
and consultancy fees applicable to outsourced trust record keeping services.
Other expenses increased $364, or 6.3%, and $2,948, or 17.5%, for the 1999 third
quarter and nine months as compared to the 1998 like periods. The nine months
increase is due to higher freight and express expense, merchant credit card
expense and costs applicable to a review of certain branch operations.
The efficiency ratio for the quarter ended September 30, 1999 was 54.6% as
compared to the 1998 third quarter ratio of 60.8%, exclusive of the acquisition
charge. The efficiency ratio for the nine months ended September 30, 1999 was
55.7%, as compared to 58.2% exclusive of the acquisition charge for the same
1998 period. The 1999 quarter and nine month ratios reflect well-controlled
noninterest expenses and the realization of cost benefits from the fourth
quarter 1998 Heritage integration.
Income Tax Expense
Income tax expense totaled $5,805 for the quarter ended September 30, 1999,
increasing from $2,470 for the same period in 1998 and reflects effective income
tax rates of 24.4% and 34.7%, respectively. Income tax expense totaled $18,448
for the nine months ended September 30, 1999 increasing from $16,918 for the
1998 nine month period and reflects effective tax rates of 25.9% and 31.2%,
respectively. The decrease in effective tax rate is primarily attributable to
increases in federal and state tax exempt income in 1999. Certain acquisition
related expenses recorded during the third quarter of 1998 were not deductible
for income tax purpose and 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.
Nonperforming Assets and 90 Day Past Due Loans
At September 30, 1999, nonperforming assets totaled $22,434 and loans past due
90 days or more and still accruing interest totaled $4,998. 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>
1999 1998
-------------------------------- --------------------
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........................ $20,905 $18,995 $18,055 $20,638 $22,326
Renegotiated loans...................... -- -- -- -- --
------- ------- ------- ------- -------
Total nonperforming loans............... $20,905 $18,995 $18,055 $20,638 $22,326
Foreclosed real estate.................. 1,529 1,792 1,960 1,015 3,357
------- ------- ------- ------- -------
Total nonperforming assets............ $22,434 $20,787 $20,015 $21,653 $25,683
======= ======= ======= ======= =======
% of total loans plus foreclosed real
estate................................ 0.78% 0.75% 0.75% 0.77% 0.88%
======= ======= ======= ======= =======
90 days past due loans accruing interest $ 4,998 $ 5,195 $ 5,005 $ 5,342 $11,044
======= ======= ======= ======= =======
</TABLE>
Nonaccrual loans, totaling $20,905 at September 30, 1999 are comprised of
commercial and agricultural loans (35%), real estate loans (61%) and consumer
loans (4%). Foreclosed real estate, totaling $1,529 at September 30, 1999,
primarily represents real estate 1-4 family properties.
First Midwest's disclosure with respect to impaired loans is contained in
Note 5 to the interim consolidated financial statements, located on page 8.
15
<PAGE>
Provision and Reserve for Loan Losses
Transactions in the reserve for loan losses during the three and nine months
ended September 30, 1999 and 1998 are summarized in the following table:
<TABLE>
<CAPTION>
Quarters ended Nine Months ended
September 30, September 30,
----------------------- --------------------
1999 1998 1999 1998
--------- ---------- ------- -------
<S> <C> <C> <C> <C>
Balance at beginning period.................... $42,615 $45,054 $43,290 $46,965
Provision for loan losses..................... 1,784 2,404 4,276 4,539
Loans charged off............................. (2,467) (3,286) (6,950) (9,291)
Recoveries of loans previously charged-off.... 666 665 1,982 2,624
------- ------- ------- -------
Net loan (charge-offs)...................... (1,801) (2,621) (4,968) (6,667)
------- ------ ------ -------
Balance at end of period....................... $42,598 $44,837 $42,598 $44,837
======= ======= ======= =======
</TABLE>
The provision for loan losses charged to operating expense for the third quarter
of 1999 totaled $1,784 as compared to $2,404 for the same quarter in 1998. 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 $1,801, or .26% of
average loans in 1999 as compared to 1998 loan charge-offs of $2,621 or .35% of
average loans in 1998.
First Midwest maintains a reserve for loan losses to absorb losses inherent
in the loan portfolio. The appropriate level of the reserve for loan losses
is determined by systematically performing a review of the loan portfolio
quality as required by First Midwest's credit administration policies. The
reserve for loan losses consists of three elements; (I) specific -
reserves established for specific loans developed through detailed credit
reviews; (ii) general allocated - reserves based on historical loan loss
experience; and, (iii) general unallocated - reserves based on general
economic conditions as well as specific economic factors in the markets
in which First Midwest operates.
The specific reserves are based on the detailed analysis of loans over a
specified dollar limit as well as loans where the internal credit rating is
below a predetermined classification. See Note 5 to the interim consolidated
financial statements for additional discussions on specific impaired loans. The
general allocated portion of the reserve is determined statistically using a
loss migration analysis that examines loss experience and the related internal
rating of loans charged-off. The loss migration analysis is performed quarterly
and loss factors are periodically updated based on actual experience. The
general unallocated portion considers general economic conditions and involves a
higher degree of subjectivity in its determination. This segment of the reserve
considers risk factors that may not have manifested themselves in First
Midwest's historical loss experience used to determine the allocated component
of the reserve.
The distribution of the loan portfolio is presented in Note 4 to the interim
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.
Securities Available for Sale Portfolio
Securities which Management believes could be sold prior to maturity in order to
manage interest rate risk, prepayment and liquidity risk are classified as
securities available for sale and are carried at fair-market value on the
consolidated statement of condition. Note 3 to the interim consolidated
financial statements provides an analysis of this portfolio.
Changes in unrealized gains or losses that affect the market value of the
portfolio are reported in stockholders' equity net of related taxes as
accumulated other comprehensive income in the consolidated statement of
condition. Note 6 to the interim consolidated financial statements shows the
changes in the accumulated other comprehensive income for the quarters and nine
months ended September 30, 1999 and 1998.
As shown in Note 3 to the consolidated financial statements, the portfolio had a
net unrealized gain as of December 31, 1998 totaling $16,194. During the period
between year-end 1998 and September 30, 1999 market interest rates rose by
approximately 150 basis points, resulting in a negative impact on the market
value of the mortgage backed securities and
16
<PAGE>
state and municipal securities components of the portfolio. As a result, as of
September 30, 1999 the portfolio has a net unrealized loss of $64,330.
The decrease in the market value of the mortgage backed securities results
primarily from the general increase in mortgage rates over the first nine months
of 1999, partially offset by a reduction in mortgage loan prepayments. The
duration of the mortgage backed securities component of the portfolio at
September 30 was approximately 4.3 years with a tax equivalent yield to maturity
of 6.8%.
Similarly, the rise in market interest rates also negatively affected the state
and municipal securities component of the portfolio which consists of longer
term tax exempt securities. As of September 30, 1999 the duration of the state
and municipal securities portfolio was approximately 7 years with a tax
equivalent yield to maturity of 7.1%.
As of September 30, 1999 the securities available for sale portfolio, totaling
$2,048,189, had a duration of 4.2 years and a tax equivalent yield to maturity
of 6.7%.
Capital
Capital Measurements
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 September 30, 1999
---------------------------------------------------------------
Bank Holding Company Subsidiary Bank
-------------------- --------------------------------------
Minimum
Minimum Minimum Well-
First Required Required Capitalized
Midwest FRB FMB, N.A. OCC FDICIA
------- -------- --------- -------- -----------
<S> <C> <C> <C> <C> <C>
Tier I capital to risk-based assets..... 10.35% 4.00% 8.94% 4.00% 6.00%
Total capital to risk-based assets...... 11.48% 8.00% 10.07% 8.00% 10.00%
Leverage ratio.......................... 7.30% 3.00% 6.30% 3.00% 5.00%
===== ==== ===== ==== =====
</TABLE>
<TABLE>
<CAPTION>
As of December 31, 1998
---------------------------------------------------------------
Bank Holding Company Subsidiary Bank
-------------------- --------------------------------------
Minimum
Minimum Minimum Well-
First Required Required Capitalized
Midwest FRB FMB, N.A. OCC FDICIA
------- -------- --------- -------- -----------
<S> <C> <C> <C> <C> <C>
Tier I capital to risk-based assets... 12.04% 4.00% 10.02% 4.00% 6.00%
Total capital to risk-based assets.... 13.29% 8.00% 11.27% 8.00% 10.00%
Leverage ratio........................ 8.04% 3.00% 6.64% 3.00% 5.00%
===== ==== ===== ==== =====
</TABLE>
17
<PAGE>
Dividends
First Midwest's 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 1998:
<TABLE>
<CAPTION>
Quarterly Rate
Date Per Share % Increase
- ------------- -------------- ----------
<S> <C> <C>
November 1998 $.24 7%
November 1997 $.23 13%
November 1996 $.20 18%
February 1996 $.17 13%
February 1995 $.15 15%
February 1994 $.13 13%
</TABLE>
Stock Repurchase - Treasury Stock
On February 17, 1999, the First Midwest Board of Directors authorized the
repurchase of up to 2,000 shares of its common stock on the open market or in
private transactions. Pursuant to the repurchase authorization, as of September
30, 1999 First Midwest has repurchased 1,557 shares.
YEAR 2000 READINESS DISCLOSURE
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.
Introduction
Since April 1997, 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 issue 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. 99 for 1999). 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 or the temporary inability to process transactions, send invoices or
engage in similar normal business activities. The issue 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 customers and vendors.
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, and for
First Midwest's mortgage loan origination and servicing activities. 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 include
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 vendors who are responsible for maintenance of the systems
and modifications to enable uninterrupted usage.
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.
18
<PAGE>
State of Readiness
First Midwest's Year 2000 planning process began in April 1997. At that time,
the Chief Information Officer/Executive Vice President of First Midwest Bank,
N.A. was appointed the Company's 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. A representative of the Company's internal
audit function is a participant at the Committee meetings. The Year 2000 plan
has been fully documented in a narrative format which outlines the procedures
and processes used to achieve compliance. 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 1998, a review of the plan was conducted by a consulting firm with
expertise in Year 2000 compliance resulting in two recommendations for
enhancement to the plan, both of which were implemented. Additionally during
1998 and 1999, the compliance plan and activities of both First Midwest Bank,
N.A. and First Midwest Trust Company were formally reviewed quarterly by the
OCC, their primary bank regulator. The Year 2000 plan coordinator periodically
submits written reports to the Company's Board of Directors relative to Year
2000 plan status and compliance.
To date, First Midwest has completed all renovation, testing and implementation
of mission critical applications. A consulting firm with expertise in Year 2000
compliance was retained to review the testing of Year 2000 mission critical
applications. This review has been completed with a satisfactory assessment. A
final report was rendered to the Board of Directors in August, 1999.
First Midwest relies on outsourced data processing for core banking applications
from two nationally recognized data processing vendors. Both vendors have
advised First Midwest that the computer programming language ("code") affected
by the Year 2000 Issue has been fully renovated and tested, and was placed in
production in October 1998. Year 2000 compliance testing of the mainframe
banking applications has been successfully completed. Renovation and testing has
been completed on all internal mission critical applications. First Midwest is
now fully Year 2000 compliant with all known mission critical applications.
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 the two vendors are of
paramount importance. The inability of these vendors to process mainframe
information would be detrimental to the Company's ability to process
transactions and serve customers. The Company continues to closely monitor the
progress of these vendors with regard to their preparedness as stated above. At
this time the Year 2000 renovated code is currently functional in the live
system and has been tested by both of the primary data processing vendors. Proxy
test results have been reviewed and maintained for further assurance of
compliance by these two vendors. With regard to other turnkey systems and
hardware, First Midwest has renovated and tested 100% of all mission critical
systems.
Customers also 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
its customer base. As of this date the identified portfolio of mission critical
customer relationships remains at the "low risk" rating on a scale of high,
moderate or low Year 2000 risk. In addition, for any customers rated "high"
risk, a follow-up review is conducted every 3 weeks, for "moderate" ratings a
follow-up review is conducted every 4 weeks, and for "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" approximates 12% off the
balance in the loan portfolio at the end of the third quarter of 1999.
Vendors and other third party relationships are also under continuing
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 more critical is First Midwest's outsourced item processing
vendor. That vendor, another nationally recognized data processor, has completed
testing and implementation of their systems. Of all vendors and suppliers,
perhaps the most difficult assessment of Year 2000 risk are utility companies,
such as electrical, gas and telephone. This is a risk that is shared by everyone
and cannot be accurately quantified at this time.
19
<PAGE>
Contingency Plans
First Midwest, as part of its contingency plan, has identified the core business
units and functions of the Company and the associated computer applications
pertinent to these core business units and functions. Trigger dates and
contingency plans have been identified for each of the mission critical systems
applicable to these units and functions, none of which have required execution
at this time. Furthermore, First Midwest has identified failure scenarios and
has developed 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. The Year 2000 steering committee is addressing business resumption
plans to ensure that the critical components of First Midwest's operations will
continue in the event of a failure scenario. This process includes analyzing the
critical risk factors and preparing in advance to mitigate such risks. Business
resumption contingency plans are complete. Testing of these plans is also
complete and has been validated by First Midwest's internal compliance
department.
A formal conversion process along with a designated team of internal managers is
preparing for the century turn and will respond to operational problems and
issues that may arise. This readiness process is intended to further mitigate
problems and define the support structure to respond to the issues that arise
after the century turn. A moratorium on vacations has been initiated the week
prior to and following January 1, 2000. In addition, a liquidity plan has been
developed to address any short-term increased cash requirements for bank
branches. This plan is expected to be implemented at the end of November, 1999.
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 is utilizing 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.
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 operations 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 beliefs concerning
future events including, but not limited to, the following: the impact of market
interest rates and future loan generation efforts and the level of net interest
income; cost savings related to the integration of the Heritage merger; 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; the
effect of market interest rates on the fair market value of the securities
available for sale portfolios; dividends to shareholders and the Company's state
of readiness, risks plans and costs relative to the Year 2000 issue.
The Company 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: fluctuations in
market interest rates and the effect of competition and borrowers' credit needs
on the ability to grow the loan portfolio; 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; volatility in interest
rates, mortgage prepayments and their resulting effect on the fair market value
of the mortgaged backed securities, state and municipal securities and other
components of the securities available for sale portfolio; the impact of a
diminution in the fair market value of the securities available for sale
portfolio on First Midwest's excess capital; the impact of future earnings
20
<PAGE>
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.
21
<PAGE>
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: None
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: 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
99 Independent Accountant's Review Report 26
</TABLE>
23
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JUL-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 171,772
<INT-BEARING-DEPOSITS> 1,538
<FED-FUNDS-SOLD> 2,024
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 2,048,189
<INVESTMENTS-CARRYING> 48,986
<INVESTMENTS-MARKET> 49,784
<LOANS> 2,868,496
<ALLOWANCE> (42,598)
<TOTAL-ASSETS> 5,467,226
<DEPOSITS> 4,022,231
<SHORT-TERM> 1,008,195
<LIABILITIES-OTHER> 60,489
<LONG-TERM> 0
0
0
<COMMON> 276
<OTHER-SE> 376,035
<TOTAL-LIABILITIES-AND-EQUITY> 5,467,226
<INTEREST-LOAN> 59,158
<INTEREST-INVEST> 31,297
<INTEREST-OTHER> 1,340
<INTEREST-TOTAL> 91,795
<INTEREST-DEPOSIT> 32,273
<INTEREST-EXPENSE> 43,335
<INTEREST-INCOME-NET> 48,460
<LOAN-LOSSES> 1,784
<SECURITIES-GAINS> (371)
<EXPENSE-OTHER> 37,209
<INCOME-PRETAX> 23,807
<INCOME-PRE-EXTRAORDINARY> 23,807
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 18,002
<EPS-BASIC> 0.65
<EPS-DILUTED> 0.64
<YIELD-ACTUAL> 4.21
<LOANS-NON> 20,905
<LOANS-PAST> 4,998
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 30,620
<ALLOWANCE-OPEN> 42,615
<CHARGE-OFFS> 2,467
<RECOVERIES> 666
<ALLOWANCE-CLOSE> 42,598
<ALLOWANCE-DOMESTIC> 8,382
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 34,216
</TABLE>
<PAGE>
Exhibit 99
Independent Accountants's Review Report
The Board of Directors
First Midwest Bancorp, Inc.
We have reviewed the accompanying condensed consolidated balance sheet of First
Midwest Bancorp, Inc. and subsidiaries as of September 30, 1999, and the related
condensed consolidated statement of income for the three-month and nine month
periods ended September 30, 1999, and the condensed consolidated statement of
cash flows for the nine month period ended September 30, 1999. These financial
statements are the responsibility of the Company's management. We did not make
a similar review of the condensed consolidated financial statements for the
corresponding period of the prior year (1998).
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data, and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, which will be performed
for the full year with the objective of expressing an opinion regarding the
financial statements taken as a whole. Accordingly, we do not express such an
opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying condensed consolidated financial statements
referenced to above for them to be in conformity with generally accepted
accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of First Midwest Bancorp, Ind. as of
December 31, 1998, and the related consolidated statements of income,
shareholders' equity, and cash flows for the year then ended (not presented
herein) and in our report dated January 20, 1999, we expressed an unqualified
opinion on those consolidated financial statements. In our opinion, the
information set forth in the accompanying condensed consolidated balance sheet
as of December 31, 1998, is fairly stated, in all material respects, in relation
to the consolidated balance sheet from which it has been derived.
/s/ Ernst & Young, LLP
November 5, 1999
26
