<PAGE>
SECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
Washington, D.C. 20549
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarter ended
June 30, 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 August 11,1999, 27,771,014 shares of the Registrant's $.01 par value
common stock were outstanding, excluding treasury shares.
Exhibit Index is located on page 20.
<PAGE>
FIRST MIDWEST BANCORP, INC.
FORM 10-Q
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Part I. FINANCIAL INFORMATION Page
----
<S> <C>
Item 1. Financial Statements
Consolidated Statements of Condition................... 3
Consolidated Statements of Income...................... 4
Consolidated Statements of Cash Flows.................. 5
Notes to Consolidated Financial Statements............. 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations..... 9
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.................. 19
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FIRST MIDWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF CONDITION
(Amounts in thousands)
<TABLE>
<CAPTION>
June 30, December 31,
1999 /(1)/ 1998
----------------- ----------------
<S> <C> <C>
ASSETS
Cash and due from banks.......................................... $ 180,892 $ 156,524
Federal funds sold and other short term investments.............. 5,275 12
Mortgages held for sale.......................................... 35,073 75,235
Securities available for sale, at market value................... 1,846,653 1,979,115
Securities held to maturity, at amortized cost................... 48,454 48,964
Loans............................................................ 2,768,412 2,664,417
Reserve for loan losses.......................................... (42,615) (43,290)
--------------- ----------------
Net loans........................................................ 2,725,797 2,621,127
Premises, furniture and equipment................................ 78,121 78,168
Accrued interest receivable...................................... 33,575 36,362
Investment in corporate owned life insurance..................... 102,687 100,135
Other assets..................................................... 111,314 97,245
--------------- ----------------
Total assets..................................................... $5,167,841 $ 5,192,887
=============== ================
Liabilities
Demand deposits.................................................. 702,681 $ 695,484
Savings deposits................................................. 519,616 529,322
NOW accounts..................................................... 441,679 452,028
Money market deposits............................................ 469,407 516,512
Time deposits.................................................... 1,904,043 1,857,105
--------------- ----------------
Total deposits................................................... 4,037,426 4,050,451
Short-term borrowings............................................ 672,038 623,899
Accrued interest payable......................................... 12,773 17,245
Other liabilities................................................ 40,806 48,394
--------------- ----------------
Total liabilities................................................ 4,763,043 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;
30,364 shares issued at June 30,1999 and December 31,
1998; 28,206 and 29,032 outstanding at June 30, 1999
and December 31, 1998, respectively............................ 282 290
Additional paid-in capital....................................... 83,696 86,054
Retained earnings................................................ 420,629 399,446
Accumulated other comprehensive income........................... (25,182) 9,875
Treasury stock, at cost: 2,158 and 1,332 shares at June 30,
1999 and December 31, 1998, respectively....................... (74,627) (42,767)
--------------- ----------------
Total stockholders' equity....................................... 404,798 452,898
--------------- ----------------
Total liabilities and stockholders' equity....................... $5,167,841 $ 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 Six months ended
June 30, /(1)/ June 30, /(1)/
------------------------ ------------------
Interest Income 1999 1998 1999 1998
-------- ------- ----- -----
<S> <C> <C> <C> <C>
Loans..................................................... $57,082 $65,998 $112,943 $132,869
Securities available for sale............................. 28,427 20,761 58,257 42,775
Securities held to maturity............................... 719 1,829 1,411 3,641
Funds sold and other short-term investments............... 974 2,053 2,020 3,212
---------- ---------- -------- --------
Total interest income................................ 87,202 90,641 174,631 182,497
---------- ---------- -------- --------
Interest Expense
Deposits.................................................. 31,141 36,483 63,235 72,498
Short-term borrowings..................................... 7,409 7,959 14,982 14,791
---------- ---------- -------- --------
Total interest expense 38,550 44,442 78,217 87,289
---------- ---------- -------- --------
Net interest income................................. 48,652 46,199 96,414 95,208
Provision for Loan Losses................................. 1,205 867 2,492 2,135
---------- ---------- -------- --------
Net interest income after provision for loan losses..... 47,447 45,332 93,922 93,073
---------- ---------- -------- --------
Noninterest Income
Service charges on deposit accounts....................... 4,536 4,202 8,646 8,295
Trust and investment management fees income............... 2,482 2,383 5,050 4,767
Other service charges, commissions and fees............... 2,841 2,692 5,274 5,088
Mortgage banking revenues................................. 1,477 1,826 3,779 3,514
Security gains, net....................................... 68 161 67 474
Corporate owned life insurance income..................... 1,293 819 2,552 1,304
Other income.............................................. 1,806 1,614 3,386 2,798
---------- ------- -------- --------
Total noninterest income 14,503 13,697 28,754 26,240
---------- ------- -------- --------
Noninterest Expense
Salaries and wages........................................ 15,948 15,865 31,992 31,432
Retirement and other employee benefits.................... 3,781 3,794 7,566 7,735
Occupancy expense of premises............................. 3,208 3,074 6,886 6,019
Equipment expense......................................... 2,068 2,131 4,281 4,276
Computer processing expense............................... 2,571 2,727 4,745 5,202
Advertising and promotions................................ 1,069 1,214 2,130 2,485
Professional services..................................... 2,240 2,131 4,047 3,962
Other expenses............................................ 6,897 4,593 13,611 11,027
---------- ------- -------- --------
Total noninterest expense 37,782 35,529 75,258 72,138
---------- ------- -------- --------
Income before income tax expense.......................... 24,168 23,500 47,418 47,175
Income tax expense........................................ 6,284 6,965 12,643 14,448
---------- ------- -------- --------
Net Income........................................... $17,884 $16,535 $ 34,775 32,727
========== ======= ======== ========
Per Share Data
Basic Earnings per share............................. $ 0.63 $ 0.56 $ 1.22 $ 1.11
Diluted Earnings per share........................... $ 0.63 $ 0.55 $ 1.21 $ 1.09
Cash dividends declared per share................... $ 0.240 $ 0.225 $ 0.480 0.450
Weighted average shares outstanding................. 28,251 29,709 28,571 29,560
Weighted average diluted shares outstanding.......... 28,474 30,112 28,790 30,078
========== ======= ======== ========
</TABLE>
____________________________________
See notes to consolidated financial statements.
/(1)/ Unaudited
4
<PAGE>
FIRST MIDWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
<TABLE>
<CAPTION>
Six months ended
June 30,/ (1)/
-------------------------
1999 1998
-------------------------
Operating Activities
<S> <C> <C>
Net income $ 34,775 $ 32,727
Adjustments to reconcile net income to net cash provided by operating
activities:...............................................................
Provision for loan losses.................................................. 2,492 2,135
Depreciation and amortization.............................................. 4,508 4,509
Net amortization of premium on securities.................................. 1,604 5,780
Net (gains) on sales of securities......................................... (67) (474)
Net (gains) on sales of premises, furniture and equipment.................. (381) (57)
Net increase (decrease) in deferred income taxes........................... (2,357) 3,819
Net amortization of purchase accounting adjustments, goodwill,
and other intangibles..................................................
Changes in operating assets and liabilities:
Originations and purchases of mortgage loans held for sale............... (289,119) (131,708)
Proceeds from sales of mortgage loans held for sale...................... 329,281 115,971
Net decrease in accrued interest receivable.............................. 2,787 1,124
Net decrease (increase) in other assets.................................. 3,762 (3,290)
Net (increase) in corporate owned life insurance......................... (2,552) (68,304)
Net (decrease) in accrued interest payable............................... (4,472) (3,043)
Net (decrease) in other liabilities...................................... (1,214) (3,174)
Other, net............................................................... (307) (543)
---------- -----------
Net cash provided (used) by operating activities 80,303 (41,128)
--------- -----------
Investing Activities
Securities available for sale:
Proceeds from maturities, calls and paydowns............................. 356,713 545,198
Proceeds from sales...................................................... 239,617 415,802
Purchases................................................................ (522,775) (1,066,246)
Securities held to maturity:..................................................
Proceeds from maturities, calls and paydowns............................. 4,603 8,324
Purchases................................................................ (4,205) (8,070)
Loans made to customers, net of principal collected........................... (109,226) 20,547
Proceeds from sales of other real estate owned................................ 1,434 2,884
Proceeds from sales of premises, furniture and equipment...................... 720 179
Purchases of premises, furniture and equipment................................ (4,848) (2,841)
--------- -----------
Net cash (used) by investing activities (37,967) (84,223)
--------- -----------
Financing Activities
Net (decrease) increase in deposit accounts................................... (13,025) 60,356
Net increase in short-term borrowings......................................... 48,139 84,088
Net (purchases) sales of treasury stock....................................... (35,114) 788
Cash dividends................................................................ (13,592) (11,282)
Exercise of stock options..................................................... 887 1,320
--------- -----------
Net cash (used) provided by financing activities.................... (12,705) 135,270
--------- -----------
Net increase in cash and cash equivalents........................... 29,631 9,919
Cash and cash equivalents at beginning of period.................... 156,536 200,107
--------- -----------
Cash and cash equivalents at end of period.......................... $ 186,167 $ 210,026
========= ===========
Supplemental disclosures:
Interest paid to depositors and creditors................................ $ 82,689 $ 90,177
Income taxes paid........................................................ 12,315 12,192
Non-cash transfers to other real estate owned from loans................. 2,064 841
Non-cash transfers to securities available for sale from loans........... --- 66,627
========= ===========
</TABLE>
____________________________________
See notes to consolidated financial statements.
/(1)/ Unaudited
5
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share data)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited interim consolidated financial statements of First
Midwest Bancorp, Inc. ("First Midwest") have been prepared in accordance with
generally accepted accounting principles and with the rules and regulations of
the Securities and Exchange Commission for interim financial reporting.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of Management, all normal and recurring adjustments which are
necessary to fairly present the results for the interim periods presented have
been included. The preparation of financial statements requires Management to
make estimates and assumptions that affect the recorded amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reported period. Actual results could differ from those estimates. In
addition, certain reclassifications have been made to the 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.
Previously reported financial statements and other financial disclosures
included in this Form 10-Q have been restated to include the July 1, 1998 merger
of Heritage Financial Services, Inc., which was accounted for as a pooling-of-
interests, for all periods presented. Further disclosures regarding the merger
are presented in Note 2 to the consolidated financial statements.
Disclosures about Segments of an Enterprise and Related Information
In June 1997, the FASB issued Statement No. 131, "Disclosures About Segments of
an Enterprise and Related Information," 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 the chief operating decision maker in deciding how to
allocate resources and assessing performance. The statement also requires public
companies to report certain information about their products and services, the
geographic areas in which they operate and certain information about their
products. FASB No. 131 was effective for financial statements for fiscal years
beginning after December 15, 1997. 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.
New Accounting Pronouncement - FASB No. 133
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.
6
<PAGE>
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 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 $61 and $1,590 at June 30, 1999 and
December 31, 1998, respectively. The June 30, 1999 balance is primarily
comprised of anticipated employee severance and related personnel exit costs.
3. SECURITIES
Securities Available for Sale - The amortized cost and market value of
securities available for sale at June 30, 1999 and December 31, 1998 are as
follows:
<TABLE>
<CAPTION>
Securities Available for Sale
----------------------------------------------------------------------------------------------------
June 30, 1999 December 31, 1998
----------------------------------------------------------------------------------------------------
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... $ 17,238 $34 $ (1) $ 17,271 $ 19,575 $ 156 $ --- $ 19,731
U.S. Agency securities..... 271,840 526 (2,642) 269,724 283,920 251 (312) 283,859
Mortgage-backed securities. 1,054,598 2,037 (27,622) 1,029,013 1,258,184 8,172 (8,020) 1,258,336
State and municipal
securities................ 508,842 5,210 (17,098) 496,954 392,633 17,567 (1,644) 408,556
Other securities........... 35,418 23 (1,750) 33,691 8,609 24 --- 8,633
---------- ----------- --------- ----------- ---------- ---------- ----------- ----------
Total..................... $1,887,936 $ 7,830 $(49,113) $1,846,653 $1,962,921 $ 26,170 $ (9,976) $1,979,115
========== ========== ========= =========== ========== ========== =========== ==========
</TABLE>
Securities Held to Maturity - The amortized cost and market value of securities
held to maturity at June 30, 1999 and December 31, 1998 are as follows:
<TABLE>
<CAPTION>
Securities Held to Maturity
-----------------------------------------------------------------------------------------------
June 30, 1999 December 31, 1998
-----------------------------------------------------------------------------------------------
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... $ 674 $ 4 $ --- $ 678 $ 896 $ 3 $ --- $ 899
U.S. Agency securities..... 402 --- (4) 398 403 2 (1) 404
State and municipal
securities................ 26,041 939 (13) 26,967 26,388 1,825 --- 28,213
Other securities........... 21,337 --- (4) 21,333 21,277 1 --- 21,278
--------- ---------- --------- --------- ---------- ----------- --------- --------
Total..................... $ 48,454 $ 943 $ (21) $ 49,376 $ 48,964 $ 1,831 $ (1) $ 50,794
========= ========== ========= ========= ========== =========== ========= ========
</TABLE>
7
<PAGE>
4. LOANS
The following table provides the book value of loans, by major classification,
as of the dates indicated:
<TABLE>
<CAPTION>
June 30, December 31,
------------------------------
1999 1998
------------- ------------
<S> <C> <C>
Commercial, industrial and agricultural...................... $ 820,985 $ 800,353
Real estate - commercial..................................... 787,607 769,514
Real estate - construction................................... 179,068 148,469
Real estate - 1 - 4 family................................... 242,322 257,307
Consumer..................................................... 738,430 688,774
------------- ------------
Total $2,768,412 $2,664,417
============= ============
</TABLE>
5. RESERVE FOR LOAN LOSSES/IMPAIRED LOANS
Transactions in the reserve for loan losses for the quarters and six months
ended June 30, 1999 and 1998 are summarized below:
<TABLE>
<CAPTION>
Quarters ended, Six Months ended,
June 30, June 30,
-------------------- --------------------
1999 1998 1999 1998
-------------------- --------------------
<S> <C> <C> <C> <C>
Balance at beginning of period............................. $42,974 $45,623 $43,290 $46,965
Provision for loan losses.................................. 1,205 867 2,492 2,135
Loans charged-off........................................ (2,260) (2,472) (4,482) (6,005)
Recoveries of loans previously charged-off............... 696 1,036 1,315 1,959
---------- -------- -------- ----------
Net loan (charge-offs)/recoveries................. (1,564) (1,436) (3,167) (4,046)
---------- -------- -------- ----------
Balance at end of period................................... $42,615 $45,054 $42,615 $45,054
========== ======== ======== ==========
</TABLE>
Information with respect to impaired loans at June 30, 1999 and 1998 is provided
below:
<TABLE>
<CAPTION>
June 30,
-------------------
1999 1998
-------- -------
<S> <C> <C>
Recorded Investment in Impaired Loans:
Recorded investment requiring specific loan loss reserves /(1)/..................... $ 1,666 $ 6,872
Recorded investment not requiring specific loan loss reserves....................... 12,856 13,161
-------- -------
Total recorded investment in impaired loans..................................... $14,522 $20,033
======== =======
Specific loan loss reserve related to impaired loans.................................. $ 1,121 $ 2,566
======== =======
</TABLE>
/(1)/ These impaired loans require a specific reserve allocation because the
value of the loans are less than the recorded investments in the loans.
For the six months ended June 30, 1999 and 1998, the average recorded investment
in impaired loans was approximately $14,414 and $15,975, respectively.
A discussion of the impaired loans criteria, including a definition of impaired
loans is included in Note 1 to the 1998 Annual Report on Form 10-K beginning on
page 44.
6. COMPREHENSIVE INCOME
Effective January 1, 1998, First Midwest adopted FASB Statement No. 130,
"Reporting Comprehensive Income" ("FASB No. 130"), which establishes standards
for the 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.
8
<PAGE>
The components of comprehensive income, net of related taxes, for the quarters
and six months ended June 30, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
Quarters ended Six Months ended
June 30, June 30,
------------------ ------------------
1999 1998 1999 1998
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Net income.............................................. $ 17,884 $16,535 $ 34,775 $32,727
Unrealized losses on securities, net
of reclassification adjustment........................ (29,769) (579) (35,057) (5,820)
-------- ------- -------- -------
Comprehensive income...................... $(11,885) $15,956 $ (282) $26,907
======== ======= ======== =======
Disclosure of Reclassification Amount:
- ---------------------------------------
Unrealized holding losses on securities
arising during the period.............................. $(30,153) $(1,853) $(35,812) $(1,964)
Less: Reclassification adjustment for
(gains) losses included in net income................. (384) (1,274) (755) 3,856
-------- ------- -------- -------
Net unrealized losses on securities....... $(29,769) $ (579) $(35,057) $(5,820)
======== ======= ======== ========
</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.
The following table sets forth the computation of basic and diluted earnings per
share for the quarters ended June 30, 1999 and 1998.
<TABLE>
<CAPTION>
Quarters ended Six months ended
June 30, June 30,
------------------ ---------------------
1999 1998 1999 1998
-------- -------- -------- ---------
<S> <C> <C> <C> <C>
Net Income................................................. $17,884 $16,535 $34,775 $32,727
======== ======== ======== =========
Average common shares outstanding.......................... 28,251 29,709 28,571 29,560
Dilutive effect of employee stock options.................. 223 403 219 488
-------- -------- -------- ---------
Average diluted common shares outstanding.................. 28,474 30,112 28,790 30,078
======== ======== ======== =========
Earnings per share:
Basic.................................................. $ 0.63 $ 0.56 $ 1.22 $ 1.11
Diluted................................................ $ 0.63 $ 0.55 $ 1.21 $ 1.09
</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 June 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.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The discussion presented below provides an analysis of First Midwest's results
of operations and financial condition for the quarters and six months ended June
30, 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
9
<PAGE>
and six months ended June 30, 1999 are not necessarily indicative of results to
be expected for the full year of 1999. The consolidated financial statements
and financial information for all previously reported periods presented herein
have been restated to include First Midwest's July 1, 1998 merger with Heritage
which was accounted for as a pooling-of-interests. All financial information is
presented in thousands, except per share data.
Summary of Performance
Net income for the second quarter increased to $17,884 or $.63 per share from
last year's second quarter of $16,535 or $.55 per share representing an increase
of 15% on a per share basis. Net income for the six months ended June 30, 1999
totaled $34,775, or $1.21 per share as compared to $32,727 and $1.09 for the
same period in 1998, for an increase of 11% on a per share basis.
Return on average assets was 1.40% for the second quarter of 1999 as compared to
1.31% for the same quarter in 1998. Return on average assets was 1.37% for the
six months ended June 30, 1999 as compared to 1.32% for the same period in 1998.
Return on average stockholders' equity was 16.85% for the second quarter of
1999, as compared to 14.17% for the same 1998 quarter. Return on average
stockholders' equity was 16.06% for the six months ended June 30, 1999 as
compared to 14.21% for the same period of 1998.
Net Interest Income
Net interest income on a tax equivalent basis totaled $52,110 for the second
quarter of 1999, representing an increase of $3,298 or 6.7% over the year-ago
quarter totaling $48,812. As shown in the Volume/Rate Analysis on page 11, the
increase in net interest income is attributable to lower interest income of
$2,595 net of lower interest expense of $5,893. Net interest margin for the
second quarter of 1999 increased to 4.42% 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 lower level of high yielding loans offset in part by higher
volumes in the securities available for sale portfolio, and these factors are
discussed below.
As shown on the Volume/Rate Analysis, $8,894 of the reduction in net interest
income is due to both lower volumes and, to a lesser extent, lower rates earned
on the loan portfolio as compared to the second 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 latter half 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 as a result of the integration of both acquisitions. 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 $285 million in average loans in the second
quarter of 1999 as compared to the like period in 1998. 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 31
basis points to 8.5% in the second quarter of 1999 as compared to 8.81% in the
1998 period. Offsetting the interest income reduction on loans resulting from
both lower volume and rate was a corresponding increase in interest income on
securities available for sale due to the asset transfer described above.
In an effort to offset the decline in interest income resulting from the
conditions outlined above, 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 63 basis points in
overall interest paid on interest bearing liabilities during the second quarter
of 1999 as compared to the 1998 quarter and offset the drop in total interest
income in the second quarter of 1999 as compared to 1998.
For the six month period ended June 30, 1999, net interest margin increased to
4.34% from 4.33% for 1998. The Volume/Rate Analysis for the six months ended
June 30, 1999 as compared to the like 1998 period is presented on page 12.
10
<PAGE>
Volume/Rate Analysis
The table below summarizes the changes in average interest-bearing assets and
interest-bearing liabilities as well as the average rates earned and paid on
these assets and liabilities, respectively, for the quarters ended June 30, 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 June 30, 1999 and 1998
----------------------------------------------------------------------------
Average Interest
Average Balances Rates Earned/Paid
---------------------------------------- ---------------------------------
Basis
Increase/ Points
1999 1998 (Decrease) 1999 1998 Inc/(Dec)
----------- ----------- ----------- -------- -------- ---------
<S> <C>
Federal funds sold and other
short-term investments...................... $ 21,058 $ 83,239 $ (62,181) 4.67% 5.61% (0.94)%
Mortgages held for sale..................... 39,713 42,217 (2,504) 7.34% 8.21% (0.87)%
Securities available for sale/(1)/.......... 1,914,402 1,455,513 458,889 6.59% 6.13% 0.46%
Securities held to maturity/(1)/............ 48,906 134,701 (85,795) 6.94% 7.43% (0.49)%
Loans, net of unearned discount/(1)/........ 2,696,507 2,981,853 (285,346) 8.50% 8.81% (0.31)%
----------- ----------- ----------- ------- -------- ---------
Total interest-earning assets/(1)/ 4,720,586 4,697,523 23,063 7.68% 7.88% (0.20)%
=========== =========== =========== ======= ======== =========
Savings deposits............................ $ 528,809 $ 540,624 $ (11,815) 1.85% 2.60% (0.75)%
NOW accounts................................ 457,750 436,202 21,548 1.72% 2.29% (0.57)%
Money market deposits....................... 477,347 479,693 (2,346) 3.21% 3.95% (0.74)%
Time deposits............................... 1,879,165 1,855,457 23,708 4.87% 5.48% (0.61)%
Short-term borrowings....................... 634,048 601,779 32,269 4.67% 5.25% (0.58)%
----------- ----------- ----------- ------- -------- ---------
Total interest-bearing
liabilities................................. $ 3,977,119 $ 3,913,755 $ 63,364 3.88% 4.51% (0.63)%
=========== =========== =========== ======= ======== =========
Net interest margin/income/(1)/ 4.42% 4.17% 0.25 %
======= ======== =========
<CAPTION>
--------------------------------------------------------------------------
Interest Increase/(Decrease) in
Income/Expense Interest Income/Expense Due to:
-------------------------------------- ----------------------------------
Increase
1999 1998 (Decrease) Volume Rate Total
---------- ---------- ----------- ---------- ---------- ----------
<S>
Federal funds sold and other
short-term investments...................... $ 246 $ 1,178 $ (932) $ (756) $ (176) $ (932)
Mortgages held for sale..................... 729 874 (145) (50) (95) (145)
Securities available for sale/(1)/.......... 31,539 22,491 9,048 7,480 1,568 9,048
Securities held to maturity/(1)/............ 849 2,521 (1,672) (1,502) (170) (1,672)
Loans, net of unearned discount/(1)/........ 57,297 66,191 (8,894) (6,146) (2,748) (8,894)
---------- ---------- ----------- --------- --------- ---------
Total interest-earning assets/(1)/ $ 90,660 $ 93,255 $ (2,595) $ (974) $ (1,621) $ (2,595)
========== ========== =========== ========= ========= =========
Savings deposits............................ $ 2,440 $ 3,542 $ (1,102) $ (74) $ (1,028) $ (1,102)
NOW accounts................................ 1,971 2,517 (546) 134 (680) (546)
Money market deposits....................... 3,836 4,778 (942) (24) (918) (942)
Time deposits............................... 22,901 25,646 (2,745) 333 (3,078) (2,745)
Short-term borrowings....................... 7,402 7,960 (558) 469 (1,027) (558)
---------- ---------- ----------- --------- --------- ---------
Total interest-bearing
liabilities................................. $ 38,550 $ 44,443 $ (5,893) $ 838 $ (6,731) $ (5,893)
========== ========== =========== ========= ========= =========
Net interest margin/income (1) $ 52,110 $ 48,812 $ 3,298 $ (1,812) $ 5,110 $ 3,298
========== ========== =========== ========= ========= =========
/(1)/ Interest income and yields are presented on a tax-equivalent basis.
__________________________________________________________________________________________________________________________
</TABLE>
<TABLE>
<CAPTION>
1999 1998
-------------------------- --------------------------------------------------
2nd 1st 4th 3rd 2nd 1st
------------- ----------- ------------ ------------ ------------ --------
<S> <C> <C> <C> <C> <C> <C>
Net Interest Margin Trend
by Quarter 1999 and 1998.................. 4.42% 4.23% 4.02% 4.09% 4.17% 4.48%
</TABLE>
11
<PAGE>
Volume/Rate Analysis
The table below summarizes the changes in average interest-earning assets and
interest-bearing liabilities as well as the average rates earned and paid on
these assets and liabilities, respectively, for the six months ended June 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>
Six Months Ended June 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.............. $ 11,899 $ 63,856 $ (51,957) 4.99% 5.63% (0.64)%
Mortgages held for sale............. 49,117 34,976 14,141 7.02% 8.24% (1.22)%
Securities available for sale /(1)/. 1,932,976 1,410,564 522,412 6.64% 6.53% 0.11%
Securities held to maturity /(1)/... 48,688 133,983 (85,295) 6.93% 7.63% (0.70)%
Loans, net of unearned
discount /(1)/...................... 2,675,456 2,997,323 (321,867) 8.47% 8.97% (0.50)%
----------- ----------- ----------- -------- --------- -----------
Total interest-earning assets /(1)/. $ 4,718,136 $ 4,640,702 $ 77,434 7.68% 8.15% (0.47)%
=========== =========== =========== ======== ========= ===========
Savings deposits.................... $ 530,373 $ 541,640 $ (11,267) 1.98% 2.63% (0.65)%
NOW accounts........................ 443,917 416,446 27,471 1.77% 2.32% (0.55)%
Money market deposits............... 490,945 468,747 22,198 3.32% 3.97% (0.65)%
Time deposits....................... 1,861,926 1,858,248 3,678 4.93% 5.58% (0.65)%
Short-term borrowings............... 638,614 563,944 74,670 4.69% 5.29% (0.60)%
----------- ----------- ----------- -------- --------- -----------
Total interest-bearing liabilities.. $ 3,965,775 $ 3,849,025 $ 116,750 3.94% 4.57% (0.63)%
=========== =========== =========== ======== ========= ===========
Net interest margin/income /(1)/.... 4.34% 4.33% 0.01%
======== ========= ===========
<CAPTION>
-------------------------------------- ----------------------------------
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.............. $ 297 $ 1,782 $ (1,485) $ (1,316) $ (169) $ (1,485)
Mortgages held for sale............. 1,723 1,430 293 452 (159) 293
Securities available for sale /(1)/. 64,204 45,999 18,205 17,338 867 18,205
Securities held to maturity /(1)/... 1,687 5,070 (3,383) (2,988) (395) (3,383)
Loans, net of unearned
discount /(1)/...................... 113,366 133,264 (19,898) (13,843) (6,055) (19,898)
---------- ---------- ---------- ------- ---------- ----------
Total interest-earning assets /(1)/. $ 181,277 $ 187,545 $ (6,268) $ (357) $ (5,911) $ (6,268)
========== ========== ========== ======= ======== ==========
Savings deposits.................... $ 5,259 $ 7,057 $ (1,798) $ (142) $ (1,656) $ (1,798)
NOW accounts........................ 3,920 4,784 (864) 348 (1,212) (864)
Money market deposits............... 8,147 9,224 (1,077) 465 (1,542) (1,077)
Time deposits....................... 45,917 51,433 (5,516) 102 (5,618) (5,516)
Short-term borrowings............... 14,974 14,792 182 914 (732) 182
---------- ---------- ---------- --------- ---------- ----------
Total interest-bearing liabilities.. $ 78,217 $ 87,290 $ (9,073) $ 1,687 $ (10,760) $ (9,073)
========== ========== ========== ========= ========== ==========
Net interest margin/income /(1)/.... $ 103,060 $ 100,255 $ 2,805 $ (2,044) $ 4,849 $ 2,805
========== ========== ========== ========= ========== ==========
</TABLE>
/(1)/ Interest income and yields are presented on a tax-equivalent basis.
<PAGE>
Noninterest Income
Noninterest income totaled $14,503 for the quarter ended June 30,1999, as
compared to $13,697 for the same period in 1998. Exclusive of net security gains
which totaled $68 for the second quarter 1999 as compared to net security gains
of $161 for the like period in 1998, noninterest income increased by $899 or
6.6% with most components of noninterest income contributing to the increase.
Service charges on deposit accounts increased 7.9% to $4,536 for the second
quarter in 1999 as compared to $4,202 in the same 1998 period. The $334
increase is primarily attributable to service charges on business accounts.
Growth in trust business produced $99 in higher trust and investment management
fees. Other service charges, commissions and fees increased $149 to $2,841 over
the year ago like quarter of $2,692 primarily due to higher other earnings and
commissions on official check outsourcing commissions.
Reductions in mortgage banking revenues for the second quarter in 1999 is
directly correlated to general mortgage loans rate increases resulting in lower
gains on sales of mortgage loans into the secondary market. First Midwest's
investment in corporate owned life insurance averaged $101,886 for the second
quarter of 1999 compared to $64,926 for the 1998 period generating $1,293 in
income for the 1999 quarter, an increase of $475, or 58% as compared to the same
1998 period. A gain of $152 on the sale of a bank owned property was a
contributing factor to the 12% increase of other income for the second quarter
in 1999.
Noninterest income totaled $28,754 for the six months ended June 30, 1999 as
compared to $26,240 for the same period in 1998. Factoring out net security
gains totaling $67 for the 1999 six month period as compared to $474 for the
1998 period, noninterest income increased by $2,921, or 11%. The reasons for
the increase in noninterest income for the six month period generally followed
those described above for the second quarter.
Noninterest Expense
Noninterest expense in the 1999 second quarter increased $2,253 or 6.3% compared
to the same period in 1998. For the six months ended June 30, 1999, noninterest
expense increased $3,120 or 4.3% compared to the same period a year ago. The
current quarter increase in noninterest expense is primarily attributable to
other operating expenses offset in part by computer processing costs and
advertising expense.
Salaries and other employee benefits increased by less than 1/2 of 1% to a
combined $19,729 for the second quarter of 1999 from the same period in 1998 for
an increase of $70. The majority of the increase is attributable to general
merit raises effective January 1999 and incentive payments offset by decreases
in pension and profit sharing expenses. 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.
Occupancy expense increased by $134, or 4.3% to $3,208 for the second quarter in
1999 as compared to the like year ago period of $3,074 due to increased
janitorial services related to the outsourcing of facilities management.
Combined equipment expense and computer processing expense for the 1999 second
quarter and six months declined 4.5% and 4.8%, respectively as compared to the
same periods a year ago due to reduced depreciation expense resulting from the
elimination of duplicate equipment and redundant systems during the integration
of the Heritage and McHenry State Bank ("MSB") acquisitions.
Advertising and promotions expense decreased by $145, or 11.9% for the 1999
second quarter and by $355 or 14.3% for the first six months of 1999 as compared
to the year ago like periods. Certain 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 February 1998 MSB consolidation into First Midwest Bank, N.A.
and the attendant costs related to customer retention and communication.
For the 1999 second quarter and six months, professional services increased 5.1%
and 2.1%, respectively as compared to the year ago like periods due to two
consultancy fees incurred in the second quarter of 1999 primarily applicable to
development of earnings enhancement strategies. Other expenses increased by
$2,304 and $2,584 for the 1999 second quarter and six months as compared to the
1998 like periods due to higher freight and express expense, merchant credit
card expense and costs applicable to a review of certain branch operations.
Additionally, the 1998 second quarter expense was benefitted by a reduction in
foreclosed property expense and repossession expense.
13
<PAGE>
The efficiency ratio for the quarter ended June 30, 1999 was 56.04% as compared
to the 1998 second quarter ratio of 56.52%, while the efficiency ratio for the
six months ended June 30, 1999 was 56.29%, as compared to 56.95% in the same
period in 1998. The 1999 six month ratio reflects well-controlled noninterest
expenses and the realization of cost benefits from the fourth quarter 1998
Heritage integration.
Income Tax Expense
Income tax expense totaled $6,284 for the quarter ended June 30,1999, decreasing
from $6,965 for the same period in 1998 and reflects effective income tax rates
of 26.0% and 29.6% respectively. Income tax expense totaled $12,643 for the six
months ended June 30, 1999 decreasing from $14,448 for the 1998 six month period
and reflects effective tax rates of 26.7% and 30.6%, respectively. The decrease
in effective tax rate is primarily attributable to increases in federal and
state tax exempt income in 1999.
Nonperforming Assets and 90 Day Past Due Loans
At June 30, 1999, nonperforming assets totaled $20,787 and loans past due 90
days or more and still accruing interest totaled $5,195. 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 June 30 March 31 Dec. 31 Sept. 30 June 30
- -------------------------------------------------- ------------ ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Nonaccrual loans................................. $ 18,995 $ 18,055 $ 20,638 $ 22,326 $ 23,755
Renegotiated loans............................... -- -- -- -- ---
------------ ------------ ----------- ----------- -----------
Total nonperforming loans........................ $ 18,995 $ 18,055 $ 20,638 $ 22,326 $ 23,755
Foreclosed real estate........................... 1,792 1,960 1,015 3,357 3,160
------------ ------------ ----------- ----------- -----------
Total nonperforming assets...................... $ 20,787 $ 20,015 $ 21,653 $ 25,683 $ 26,915
============ ============ =========== =========== ===========
% of total loans plus foreclosed real estate 0.75% 0.75% 0.81% 0.88% 0.91%
============ ============ =========== =========== ===========
90 days past due loans accruing interest......... $ 5,195 $ 5,005 $ 5,342 $ 11,044 $ 7,408
============ ============ =========== =========== ===========
</TABLE>
Nonaccrual loans, totaling $18,995 at June 30, 1999 are comprised of commercial
and agricultural loans (49%), real estate loans (46%) and consumer loans (5%).
Foreclosed real estate, totaling $1,792 at June 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 consolidated financial statements, located on page 8.
Provision and Reserve for Loan Losses
Transactions in the reserve for loan losses during the three and six months
ended June 30, 1999 and 1998 are summarized in the following table:
<TABLE>
<CAPTION>
Quarters ended Six Months ended
June 30, June 30.
------------------- ------------------
1999 1998 1999 1998
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Balance at beginning period $42,974 $45,623 $43,290 $46,965
Provision for loan losses.......................... 1,205 867 2,492 2,135
Loans charged off.................................. (2,260) (2,472) (4,482) (6,005)
Recoveries of loans previously charged-off......... 696 1,036 1,315 1,959
-------- -------- ------- -------
Net loan (charge-offs) recoveries............. (1,564) (1,436) (3,167) (4,046)
-------- -------- ------- -------
Balance at end of period................................ $42,615 $45,054 $42,615 $45,054
======== ======== ======= =======
</TABLE>
14
<PAGE>
The provision for loan losses charged to operating expense for the second
quarter of 1999 totaled $1,205 as compared to $867 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 $1,594, or .23% of
average loans in 1999 as compared to 1998 loan charge-offs of $1,436 or .19% 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 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. At June 30, 1999 the balance of the general unallocated reserve
was $19,647.
The distribution of the loan portfolio is presented in Note 4 to the
consolidated financial statement located on page 8. The loan portfolio,
consists predominantly of loans originated by First Midwest from its primary
markets and generally represents credit extension to multi-relationship
customers.
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 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 net of related taxes as accumulated other
comprehensive income in the stockholders equity section of the consolidated
statement of condition. Note 6 to the consolidated financial statements shows
the changes in the accumulated other comprehensive income for the quarters and
six months ended June 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 June 30, 1999 market interest rates rose by
approximately 125 basis points, resulting in a significant negative impact on
the market value of the mortgage backed securities and state and municipal
securities components of the portfolio. As a result, as of June 30, 1999 the
portfolio has a net unrealized loss of $41,283.
The decrease in the market value of the mortgage backed securities results
primarily from the general increase in mortgage rates over the first six months
of 1999, partially offset by a reduction in mortgage loan prepayments. The
duration of the mortgage backed securities component of the portfolio at June 30
was approximately 3.5 years with a tax exempt 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 June 30, the duration of the state and
municipal securities portfolio was approximately 6.6 years with a tax exempt
yield to maturity of 7.1%.
15
<PAGE>
Capital
The table below compares First Midwest's capital structure to the minimum
capital ratios required by its primary regulator, the Federal Reserve Board
("FRB"). Also provided is a comparison of capital ratios for First Midwest's
national banking subsidiary, First Midwest Bank, N.A. ("FMB, N.A."), to its
primary regulator, the Office of the Comptroller of the Currency ("OCC)". Both
First Midwest and FMB, N.A. are subject to the minimum capital ratios defined by
banking regulators pursuant to the FDIC Improvement Act ("FDICIA") and have
capital measurements in excess of the levels required by their respective bank
regulatory authorities to be considered "well-capitalized" which is the highest
capital category established under the FDICIA.
<TABLE>
<CAPTION>
As of June 30, 1999
-----------------------------------------------------------------
Bank Holding Company Subsidiary Bank
------------------------ ------------------------------------
Minimum
Minimum Minimum Well-
First Required FMB, Required Capitalized
Midwest FRB N.A. OCC FDICIA
----------- ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Tier I capital to risk-based assets............ 11.20% 4.00% 8.91% 4.00% 6.00%
Total capital to risk-based assets............. 12.38% 8.00% 10.09% 8.00% 10.00%
Leverage ratio................................. 7.93% 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 FMB, Required Capitalized
Midwest FRB 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>
First Midwest's strong earnings and capital position has allowed the Board of
Directors to increase the quarterly dividend every year since 1993. The
following table summarizes the dividend increases declared during the years 1994
through 1998:
Quarterly Rate
Date Per Share % Increase
------------- -------------- -----------
November 1998 $.24 7%
November 1997 $.23 13%
November 1996 $.20 18%
February 1996 $.17 13%
February 1995 $.15 15%
February 1994 $.13 13%
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. First Midwest repurchased 881 shares during the first six
months of 1999.
16
<PAGE>
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.
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 has been retained to review the testing of Year 2000 mission critical
applications; the review commenced in December 1998 and has been substantially
completed. A final report of testing results will be rendered in early third
quarter 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 has been
completed on all 565 internal mission critical applications. First Midwest is
now fully Year 2000 compliant with all known mission critical applications.
17
<PAGE>
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" 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 10% at the end of the
second 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.
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
in process, validated by First Midwest's internal compliance department.
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 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. Action will be taken to
implement this plan beginning in 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
18
<PAGE>
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 benefits 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
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 20.
(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: August 12, 1999 Donald J. Swistowicz
Executive Vice President *
* Duly authorized to sign on behalf of the Registrant.
19
<PAGE>
EXHIBIT INDEX
Exhibit Sequential
Number Description of Documents Page Number
- ------ ------------------------ -----------
21
27 Financial Data Schedule
20
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