10-Q 1 mar2001.htm FORM 10-Q
 




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  March 31, 2001 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
(State or other jurisdiction of
incorporation or organization)

36-3161078
(IRS Employer Identification No.)

300 Park Blvd., Suite 405, P.O. Box 459
Itasca, Illinois 60143-9768
(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 May 11, 2001, 40,586,750 shares of the Registrant's $.01 par value common stock were outstanding, excluding treasury shares.

Exhibit Index is located on page 20.




FIRST MIDWEST BANCORP, INC.

FORM 10-Q

TABLE OF CONTENTS

Page

Part I. FINANCIAL INFORMATION

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 4. Submission of Matters to a Vote of Security Holders

19

Item 6. Exhibits and Reports on Form 8-K

19




PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

FIRST MIDWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF CONDITION
(Amounts in thousands)

March 31,
2001

December 31,
2000

(Unaudited)

Assets

Cash and due from banks

$

186,525

$

166,423

Federal funds sold and other short-term investments

2,900

18,070

Mortgages held for sale

9,647

5,438

Securities available for sale, at market value

1,937,236

2,130,148

Securities held to maturity, at amortized cost

95,940

84,797

Loans, net of unearned discount

3,279,473

3,233,196

Reserve for loan loss

(45,421)

(45,093)
             
   

Net loans

3,234,052

  

3,188,103

Premises, furniture and equipment

81,178

81,840

Accrued interest receivable

38,500

41,589

Investment in corporate owned life insurance

129,858

126,860

Other assets

55,052

63,216

Total assets

$

5,770,888

$

5,906,484

Liabilities

Demand deposits

$

698,271

$

705,404

Savings deposits

458,760

447,455

NOW accounts

432,573

450,503

Money market deposits

542,433

535,391

Time deposits

2,013,576

2,113,452

Total deposits

4,145,613

4,252,205

Borrowed funds

1,099,028

1,145,872

Accrued interest payable

17,258

20,568

Other liabilities

43,498

41,116

Total liabilities

5,305,397

5,459,761

Stockholders' equity

Preferred stock, no par value; 1,000 shares authorized, none issued

-

-

Common stock, $.01 par value; authorized 60,000 shares; issued
   45,548 shares; Outstanding: March 31, 2001 - 40,726 shares;
   December 31, 2000 - 40,866 shares



455



455

Additional paid-in capital

77,908

78,269

Retained earnings

499,048

487,878

Accumulated other comprehensive income (loss), net of tax

4,821

(7,039)

Treasury stock, at cost: March 31, 2001 - 4,822 shares
   December 31, 2000 - 4,682 share

(116,741)


(112,840)

Total stockholders' equity

465,491

446,723

Total liabilities and stockholders' equity

$

5,770,888

$

5,906,484

See notes to consolidated financial statements.

 

 

 

 

 

FIRST MIDWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands, except per share data)
(Unaudited)
 

Quarters Ended
March 31,
 

2001

2000

Interest Income

Loans

$

69,212

$

64,535

Securities available for sale

31,829

34,025

Securities held to maturity

1,407

680

Federal funds sold and other short-term investments

193

233

Total interest income

102,641

99,473

Interest Expense

Deposits

40,117

34,569

Borrowed funds

15,636

16,712

Total interest expense

55,753

51,281

Net interest income

46,888

48,192

Provision for loan losses

3,458

1,962

Net interest income after provision for loan losses

43,430

46,230

Noninterest Income

Service charges on deposit accounts

5,492

4,989

Trust and investment management fees

2,673

2,478

Other service charges, commissions, and fees

4,267

3,538

Mortgage banking revenues

-

405

Corporate owned life insurance income

2,268

1,423

Security gains (losses), net

704

(8)

Other income

1,522

1,883

Total noninterest income

16,926

14,708

Noninterest Expense

Salaries and wages

14,361

15,702

Retirement and other employee benefits

4,077

3,837

Occupancy expense of premises

4,114

3,467

Equipment expense

1,954

2,056

Technology and related costs

2,541

2,998

Professional services

1,400

1,704

Advertising and promotions

891

985

Other expenses

5,755

6,384

Total noninterest expense

35,093

37,133

Income before income tax expense

25,263

23,805

Income tax expense

5,939

5,665

Net income

$

19,324

$

18,140

Per Share Data

Basic earnings per share

$

0.47

$

0.44

Diluted earnings per share

$

0.47

$

0.44

Cash dividends per share

$

0.20

$

0.18

Weighted average shares outstanding

40,864

41,130

Weighted average diluted shares outstanding

41,085

41,353

See notes to consolidated financial statements.



FIRST MIDWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)

(Unaudited)

Quarters Ended
March 31,

2001

2000

Operating Activities

Net income

$

19,324

$

18,140

Adjustments to reconcile net income to net cash provided by operating activities:

Provision for loan losses

3,458

1,962

Depreciation of premises, furniture, and equipment

2,168

2,228

Net (accretion) of (discount) on securities

(28)

(619)

Net (gains) losses on sales of securities

(704)

8

Net (gains) on sales of other real estate owned

(54)

(130)

Net losses (gains) on sales of premises, furniture, and equipment

29

(150)

Net loss on sale of mortgage servicing rights

-

207

Tax benefits from employee exercises of nonqualified stock options

252

176

Net (increase) in deferred income taxes

(321)

(3,871)

Net amortization of goodwill and other intangibles

748

914

Originations and purchases of mortgage loans held for sale

(35,934)

(27,193)

Proceeds from sales of mortgage loans held for sale

31,725

34,052

Net (increase) in corporate owned life insurance

(2,998)

(6,423)

Net decrease (increase) in accrued interest receivable

3,089

(4,475)

Net (decrease) increase in accrued interest payable

(3,310)

2,409

Net (increase) in other assets

(1,062)

(843)

Net increase in other liabilities

2,439

124

Net cash provided by operating activities

18,821

16,516

Investing Activities

Securities available for sale:

Proceeds from maturities, repayments, and calls

236,241

102,778

Proceeds from sales

354,581

56,607

Purchases

(376,934)

(294,722)

Securities held to maturity:

Proceeds from maturities, repayments, and calls

5,825

461

Purchases

(16,921)

(4)

Net (increase) in loans

(49,676)

(122,287)

Proceeds from sales of other real estate owned

414

1,240

Proceeds from sales of premises, furniture, and equipment

1

213

Purchases of premises, furniture, and equipment

(1,506)

(2,918)

Proceeds from sale of mortgage servicing rights

-

22,564

Net cash provided (used) by investing activities

152,025

(236,068)

Financing Activities

Net (decrease) increase in deposit accounts

(106,592)

23,115

Net (decrease) increase in borrowed funds

(46,844)

216,703

Purchase of treasury stock

(5,118)

-

Proceeds from issuance of treasury stock

4

5

Cash dividends paid

(8,185)

(7,414)

Exercise of stock options

821

309

Net cash (used) provided by financing activities

(165,914)

232,718

Net increase in cash and cash equivalents

4,932

13,166

Cash and cash equivalents at beginning of period

184,493

156,973

Cash and cash equivalents at end of period

$

189,425

$

170,139

See notes to consolidated financial statements.

 




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" or the "Company") 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 2000 data to conform to the 2001 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, 2000.


Disclosures about Segments of an Enterprise and Related Information


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 assess performance. Public companies are required to report certain financial information about operating segments in interim and annual financial statements. 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 financial condition and results of operations taken as a whole, and, as a result, separate segment disclosures are not required. First Midwest offers the following products and services to external customers: deposits, loans, and trust services. Revenues for each of these products and services are disclosed separately in the Consolidated Statements of Income.


Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities


In September 2000, FASB issued Statement No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities" ("FASB No. 140") that replaces, in its entirety, FASB Statement No. 125. Although FASB No. 140 has changed many of the rules regarding securitizations, it continues to require an entity to recognize the financial and servicing assets it controls and the liabilities it has incurred and to derecognize financial assets when control has been surrendered in accordance with the criteria provided in the Statement. As required, the Company will apply the new rules prospectively to transactions beginning in the second quarter of 2001. Based on current circumstances, the Company believes the application of the new rules will not have a material impact on the financial position or results of operations of the Company.


2. SECURITIES

The aggregate amortized cost, gross unrealized gains and losses, and market value of securities were as follows:

March 31, 2001

December 31, 2000

Amortized

Gross Unrealized

Market

Amortized

Gross Unrealized

Market

Cost

Gains

Losses

Value

Cost

Gains

Losses

Value

Securities Available

for Sale

U.S. Treasury

$

401

$

6

$

-

$

407

$

602

$

2

$

-

$

604

U.S. Agency

167,640

383

(171)

167,852

423,211

546

(1,068)

422,689

Mortgage-backed

1,214,307

8,609

(3,601)

1,219,315

1,172,187

5,648

(11,311)

1,166,524

State and municipal

480,432

9,553

(4,002)

485,983

480,730

6,202

(8,413)

478,519

Other

65,706

111

(2,138)

63,679

64,958

102

(3,248)

61,812

Total

$

1,928,486

$

18,662

$

(9,912)

$

1,937,236

$

2,141,688

$

12,500

$

(24,040)

$

2,130,148

Securities Held

to Maturity

U.S. Treasury

$

1,824

$

-

$

-

$

1,824

$

1,821

$

17

$

-

$

1,838

U.S. Agency

75

-

-

75

75

-

(1)

74

State and municipal

71,209

742

(4)

71,947

60,392

709

(5)

61,096

Other

22,832

-

-

22,832

25,509

-

-

22,509

Total

$

95,940

$

742

$

(4)

$

96,678

$

84,797

$

726

$

(6)

$

85,517



For additional details of the securities available for sale portfolio and the related impact of unrealized gains/(losses) thereon, see Note 6 to the interim consolidated financial statements on page 9.


3. LOANS

The major classifications of loans are as follows:

March 31,

December 31,

2001

2000

Commercial, industrial and agricultural

$

895,255

$

884,944

Consumer

929,659

924,189

Real estate - 1 - 4 family

241,250

250,635

Real estate - commercial

951,072

900,781

Real estate - construction

262,237

272,647

Total loans, net of unearned discount

$

3,279,473

$

3,233,196

 


4. RESERVE FOR LOAN LOSSES/IMPAIRED LOANS


A summary of the transactions in the reserve for loan losses and details regarding impaired loans for the quarters ended March 31, 2001 and 2000 are summarized below:

Quarters Ended March 31,

2001

2000

Balance at beginning of period

$

45,093

$

42,645

Provision for loan losses

3,458

1,962

Loans charged-off

(3,704)

(2,354)

Recoveries of loans previously charged-off

574

731

Net loans (charged-off)

(3,130)

(1,623)

Balance at end of period

$

45,421

$

42,984

Impaired Loans:

Requiring valuation reserve (1)

$

7,934

$

89

Not requiring valuation reserve

8,071

15,063

Total impaired loans

$

16,005

$

15,152

Valuation reserve related to impaired loans

$

1,417

$

74

Average impaired loans

$

14,493

$

16,162

(1)

These impaired loans require a valuation reserve allocation because the value of the loans is less than the recorded investments in the loans.


Specific reserves are established for any impaired commercial, real estate commercial and real estate construction loans for which the recorded investment in the loan exceeds the measured value of the loan. A loan is considered impaired when it is probable that a creditor will be unable to collect all contractual principal and interest due according to the terms of the loan agreement. Loans subject to impairment valuation are defined as nonaccrual and restructured loans exclusive of smaller balance homogeneous loans such as home equity, installment and 1-4 family residential loans. The value of the loan is determined based on the present value of expected future cash flows discounted at the loan's effective interest rate, the market price of the loan or the fair value of the underlying collateral less costs to sell, if the loan is collateral dependent.


5. EARNINGS PER COMMON SHARE


The following table sets forth the computation of basic and diluted earnings per share for the quarters ended March 31, 2001 and 2000:

Quarters Ended March 31,

2001

2000

Basic Earnings Per Share:

Net income

$

19,324

$

18,140

Average common shares outstanding

40,864

41,130

Basic earnings per share

$

0.47

$

0.44

Diluted Earnings Per Share:

Net income

$

19,324

$

18,140

Average common shares outstanding

40,864

41,130

Dilutive effect of stock options

221

223

Diluted average common shares outstanding

41,085

41,353

Diluted earnings per share

$

0.47

$

0.44



6. COMPREHENSIVE INCOME


The components of comprehensive income, net of related taxes, for the quarters ended March 31, 2001 and 2000 are as follows:

Quarters Ended March 31,

2001

2000

Net Income

$

19,324

$

18,140

Unrealized holding gains on securities available

for sale, net of reclassification adjustment

12,377

3,703

Unrealized holding (loss) on hedging activity

(517)

-

Comprehensive income

$

31,184

$

21,843

Disclosure of Reclassification Amount:

Unrealized holding gains on securities

available for sale arising during the period

$

12,806

$

3,698

Less: Reclassification adjustment for net

gains (losses) realized during the period

429

(5)

Net unrealized holding gains on securities available for sale

$

12,377

$

3,703

Provided below is the change in accumulated other comprehensive income (loss) for the quarters ended March 31, 2001 and 2000:

Quarters Ended March 31,

2001

2000

Beginning balance

$

(7,039)

$

(49,072)

Current year change

11,860

3,703

Ending balance

$

4,821

$

(45,369)


For additional details of the securities available for sale portfolio and the related impact of unrealized gains/(losses) thereon, see Note 2 to the interim consolidated financial statements on page 7.


7. SUPPLEMENTARY CASH FLOW INFORMATION


Supplemental disclosures to the consolidated statements of cash flows for the three months ended March 31, 2001 and 2000 are as follows:

Quarters Ended March 31,

2001

2000

Income taxes paid

$

38

$

1,222

Interest paid to depositors and creditors

59,063

48,872

Noncash transfers of loans to foreclosed real estate

269

860

Dividends declared but unpaid

8,153

7,412


8. ADOPTION OF NEW ACCOUNTING STANDARD - ACCOUNTING FOR DERIVATIVE
   INSTRUMENTS AND HEDGING ACTIVITIES


Effective January 1, 2001, First Midwest adopted Financial Accounting Standards Board ("FASB") Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities", as amended by FASB Nos. 137 and 138. 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. If the derivative is designated as a hedge, depending on the nature of the hedge, changes in the fair value of derivatives that are considered to be effective, as defined, will either offset the change in fair value of the hedged assets, liabilities, or firm commitments through earnings or will be recorded in other comprehensive income until the hedged item is recorded in earnings. Any portion of a change in a derivative's fair value that is consider to be ineffective, as defined, may have to be immediately recorded in earnings. The adoption of these standards may cause volatility in both the income statement and the shareholders' equity section of the balance sheet.


First Midwest enters into derivative contracts to manage its sensitivity to interest rate risk. This is accomplished by using derivative instruments to offset the inherent price or interest rate risk of specific balance sheet assets or liabilities. All such derivative instruments are designated as hedges on the trade date and are recognized on the balance sheet at their fair value as other assets or other liabilities. The fair value of derivative instruments in a gain position is reported on the balance sheet in other assets, and the fair value of derivative contracts in a loss position is reported in other liabilities. Derivatives designated as hedges of changes in the fair value of an asset or liability are considered to be fair value hedges. Derivatives designated as hedges of a forecasted transaction or of the variability of cash flows to be received or paid related to an asset or liability are considered to be cash flow hedges. First Midwest formally documents all relationships between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking various hedge transactions. A formal assessment, both at the inception of the hedge and on an ongoing quarterly basis is performed to determine whether the derivative instruments that are used in hedging transactions have been effective and whether they are expected to continue to be effective in future periods.


As of March 31, the only derivative contracts employed by First Midwest were interest rate swaps used to lengthen the duration of certain indexed deposit accounts. These interest rate swaps are designated as cash flow hedges under FASB No. 133. No ineffectiveness was recorded for such cash flow hedges for the quarter ended March 31, 2001. Changes in the fair value of these cash flow hedges are reported in the accumulated other comprehensive income component of stockholders' equity.


For additional details of the unrealized gains/(losses) on hedging activity, see Note 6 to the interim financial statements on page 9.


9. CONTINGENT LIABILITIES AND OTHER MATTERS


There are certain legal proceedings pending against First Midwest and its Subsidiaries in the ordinary course of business at March 31, 2001. 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 ended March 31, 2001 and 2000. 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 2000 Annual Report on Form 10-K. Results of operations for the quarter ended March 31, 2001 are not necessarily indicative of results to be expected for the full year of 2001. 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 quarter ended March 31, 2001 increased to $19,324, or $.47 per share, as compared $18,140, or $.44 per share for the same period in 2000, representing an increase of 6.8% on a per share basis. Performance for the first quarter of 2001 resulted in annualized returns on average stockholders' equity and assets of 17.06% and 1.36%, respectively, as compared to returns of 19.85% and 1.30% for the same quarter in 2000.


Book value per share as of March 31, 2001 was $11.43 as compared to $9.34 a year-ago for an increase of $2.09, or 22.4%. The increase in book value was related in significant part to the improvement in the market value of the available for sale securities portfolio resulting in an increase in that component of stockholders' equity of approximately $50 million as of March 31, 2001 as compared to the year earlier level. Further, the approximate $82 million increase in total stockholders equity at March 31, 2001 over the year earlier level explains the reduction in return on average equity for the quarter just ended.


Net interest income for the first quarter of 2001 declined by 3.0% on a tax equivalent basis from last year's like quarter. However, although net interest margin declined on a year-to-year basis, it improved by 16 basis points to 3.77% from the 3.61% reported for the fourth quarter of 2000.

The provision for loan losses of $3,458 recorded during first quarter 2001 exceeded both the quarters' net charge-offs by $328 and the provision recorded for the like quarter of 2000 by $1,496, resulting in a ratio of reserve for loan losses to total loans at March 31, 2001 of 1.39%, which was consistent with levels maintained at year-end 2000.

Total noninterest income for the quarter grew 15.1% over last year's first quarter with the three major categories of service charges and fees growing 13.0%. Corporate owned life insurance income also increased $845 resulting from higher outstanding balances and the renegotiation of certain terms of the underlying insurance policies to achieve improved earnings rates.

Noninterest expenses for the first quarter 2001 continued to be vigorously controlled and declined by $2,040, or 5.5%, as compared to 2000's like quarter. Across-the-board cost containment measures resulted in the year-over-year improvement with the major reductions being realized in the categories of salaries and benefits, technology and other expenses. Partially offsetting such declines was a seasonal increase in occupancy expense resulting from $481 in increased snow removal and related costs as well as to higher utility costs. As a result, the efficiency ratio stood at 51.4% for the 2001 quarter as compared to 54.6 % for last year's like quarter and 53.1% for full year 2000.

Credit quality ratios weakened slightly at March 31, 2001 from the historically low levels achieved in 2000's fourth quarter. The ratio of nonperforming loans to total loans increased by 7 basis points to .68% from .61% at year end 2000 and net loan charge-offs to average loans increased to .39% for the first quarter 2001 as compared to .23% for the fourth quarter 2000. Net charge-offs for the current quarter included partial charge-offs of $750 on two loans that had been carried as nonperforming since last year and are in the process of rehabilitation. These two charge-offs represent 9 basis points of the quarter's total 39 basis point charge-off ratio.


Net Interest Income, Loan Growth and Funding Sources


Net interest income on a tax equivalent basis totaled $50,515 for the first quarter 2001, representing a decrease of $1,579, or 3.0%, over the year-ago quarter which totaled $52,094. As shown in the Volume/Rate Analysis on page 13, the decrease in net interest income is attributable to higher interest expense of $4,472 net of higher interest income of $2,893. Net interest margin for the first quarter 2001 decreased to 3.77% as compared to 3.96% for the same period in 2000. The decrease in net interest margin is primarily due to higher rates paid on interest bearing liabilities, generally, during the 2001 period.


Again, as shown in the Analysis on page 13, the $2,893 increase in interest income is largely attributable to higher volumes of earning assets in both the securities held to maturity and loan portfolios which increased $42,433 and $254,061, respectfully, from year-ago levels. The increase of $4,472 in interest expense on paying liabilities is due to higher volumes of time deposits coupled with higher rates paid thereon. The effect of these factors on net interest income is discussed below.


First Midwest continued to experience growth in both average loans and deposits during the first quarter of 2000 versus last year's like quarter. Total average loans increased by 8.5% in the first quarter of 2000 as compared to last year's like quarter. However, on a linked quarter basis, average loans decreased by 1.4% due primarily to the sale of $30 million home equity loans and the transfer of $40 million of other loans to the securities available for sale portfolio, both occurring at the end of the fourth quarter 2000. Furthermore, the first quarter is generally affected to a greater degree by seasonality relating to the winter months than are the remaining three quarters of the year.


Consistent with the growth in average loans, total average deposits increased by 3.4% in the first quarter of 2001 as compared to the prior year's. The increase in average deposits permitted First Midwest to reduce its reliance on higher cost wholesale funding with the latter decreasing by 6.7% on average in the first quarter of 2001 as compared to the prior year's like quarter. Wholesale funding continued to drop during the first quarter of 2001 by 3.2% on a linked quarter basis as compared with the fourth quarter of 2000.


The combination of continued loan growth and reduced wholesale funding positively impacted the net interest margin in the first quarter of 2001. The net interest margin for the quarter was 3.77%, reflecting a 16 basis point improvement from the 3.61% reported for the fourth quarter of 2000 and representing the first linked-quarter improvement in net interest margin since the second quarter of 1999 Further improvement in net interest margin is projected, assuming no material change in the anticipated economic climate and monetary policy.


Loan Growth


The following table summarizes growth in loans based upon both average and period end balances:

Average Balances


2001

2000

March 31
% Change From

March 31

December 31

March 31

12/31/00

3/31/00

Commercial, industrial and agricultural

$

886,406

$

892,525

$

827,341

(0.7%)

7.1%

Consumer

926,694

955,537

863,106

(3.0%)

7.4%

Real estate - 1 - 4 family

247,407

253,672

257,091

(2.5%)

(3.8%)

Real estate - commercial

910,012

909,187

839,961

0.1%

8.3%

Real estate - construction

287,483

291,991

216,442

(1.5%)

32.8%

Loans, net of unearned discount

$

3,258,002

$

3,302,912

$

3,003,941

(1.4%)

8.5%


As of Period End


2001

2000

March 31
% Change From

March 31

December 31

March 31

12/31/00

3/31/00

Commercial, industrial and agricultural

$

895,255

$

884,944

$

839,432

1.2%

6.7%

Consumer

929,659

924,189

888,907

0.6%

4.6%

Real estate - 1 - 4 family

241,250

250,635

257,760

(3.7%)

(6.4%)

Real estate - commercial

951,072

900,781

851,456

5.6%

11.7%

Real estate - construction

262,237

272,647

244,736

(3.8%)

7.2%

Loans, net of unearned discount

$

3,279,473

$

3,233,196

$

3,082,291

1.4%

6.4%

 




Core Funding Sources

Average Balances


2001

2000

March 31
% Change From

March 31

December 31

March 31

12/31/00

3/31/00

Demand Deposits

$

656,312

$

669,806

$

665,341

(2.0%)

(1.4%)

Savings deposits

450,701

445,546

479,616

1.2%

(6.0%)

NOW accounts

438,707

468,913

446,034

(6.4%)

(1.6%)

Money market deposits

531,628

528,921

457,523

0.5%

16.2%

Time deposits

2,054,015

2,140,411

1,946,481

(4.0%)

5.5%

Total deposits

4,131,363

4,253,597

3,994,995

(2.9%)

3.4%

Borrowed funds

1,110,898

1,147,500

1,191,047

(3.2%)

(6.7%)

Total funding sources

$

5,242,261

$

5,401,097

$

5,186,042

(2.9%)

1.1%

 

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 March 31, 2001 and 2000. 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. Interest income and yields are presented on a tax-equivalent basis.

Quarters Ended March 31, 2001 and 2000

Average
Balances

Average Interest
Rates Earned/Paid

Interest
Income/Expense

Increase/(Decrease) in
Interest Income/Expense Due to:

Basis

Increase

Points

Increase

2001

2000

(Decrease)

2001

2000

Inc/(Dec)

2001

2000

(Decrease)

Volume

Rate

Total

Fed funds sold and other investments

short-term investments

$

5,966

$

5,025

$

941

6.44%

5.65%

0.79%

$

96

$

71

$

25

$

14

$

11

$

25

Mortgages held for sale

5,583

8,014

(2,431)

6.95%

8.09%

(1.14)%

97

162

(65)

(44)

(21)

(65)

Securities available for sale

2,000,944

2,204,058

(203,114)

6.98%

6.79%

0.19%

34,907

37,425

(2,518)

(3,583)

1,065

(2,518)

Securities held to maturity

84,897

42,464

42,433

8.46%

7.73%

0.73%

1,796

821

975

891

84

975

Loans, net of unearned discount

3,258,002

3,003,941

254,061

8.52%

8.64%

(0.12)%

69,372

64,896

4,476

5,394

(918)

4,476

Total interest-earning assets

$

5,355,392

$

5,263,502

$

91,890

7.94%

7.86%

0.08%

$

106,268

$

103,375

$

2,893

$

2,672

$

221

$

2,893

Savings deposits

$

450,701

$

479,616

$

(28,915)

1.94%

1.93%

0.01%

$

2,185

$

2,318

$

(133)

$

(140)

$

7

$

(133)

NOW accounts

438,707

446,034

(7,327)

1.92%

1.87%

0.05%

2,109

2,090

19

(32)

51

19

Money market deposits

531,628

457,523

74,105

4.07%

3.93%

0.14%

5,409

4,492

917

749

168

917

Time deposits

2,054,015

1,946,481

107,534

5.92%

5.27%

0.65%

30,414

25,669

4,745

1,472

3,273

4,745

Borrowed funds

1,110,898

1,191,047

(80,149)

5.63%

5.61%

0.02%

15,636

16,712

(1,076)

(1,128)

52

(1,076)

Total interest-bearing liabilities

$

4,585,949

$

4,520,701

$

65,248

4.86%

4.54%

0.32%

$

55,753

$

51,281

$

4,472

$

921

$

3,551

$

4,472

Net interest margin / income

3.77%

3.96%

-0.19%

%

$

50,515

$

52,094

$

(1,579)

$

1,751

$

(3,330)

$

(1,579)

2001

2000

1st

4th

3rd

2nd

1st

Net Interest Margin Trend By Quarter

 

Yield on interest earning assets

7.94%

8.12%

8.13%

7.97%

7.86%

Rates paid on interest bearing liabilities

4.86%

5.26%

5.16%

4.79%

4.54%

Net Interest Margin

3.77%

3.61%

3.66%

3.84%

3.96%



Noninterest Income


Noninterest income increased by $2,218, or 15.1%, to $16,296 for the quarter ended March 31, 2001, as compared to $14,708 for the same period in 2000. Exclusive of net security gains which totaled $704 for the first quarter 2001 as compared to net security (losses) of ($8) for the same 2000 period, non interest income increased by $1,514, or 10.3%, with all major component of noninterest income excluding mortgage banking revenues and other income contributing to the increase. The factors resulting in the year-to-year changes are discussed below.


Service charges on deposit accounts increased 10.1% to $5,492 in the first quarter of 2001 as compared to $4,989 for the same 2000 period. The $503 increase is primarily attributable to higher returned check (NSF) revenue as a result of a tightening in fee waiver practices in addition to increases in service charges on business checking and NOW accounts. Other service charges, commissions and fees increased by $729, or 20.6%, to $4,267 for the quarter ended March 31, 2001 over the year-ago like quarter of $3,538 due primarily to increases of $214 in commissions on mortgage sales, $246 in debit card fee income as a result of greater usage volumes, $177 in nonyield loan fees and $172 in higher commissions on sales of annuity, insurance and investment products.


Trust and investment management fees for the first quarter 2001 increased $195, or 7.9%, to $2,673 as compared to the year-ago period of $2,478 due to growth in new business and expansion of existing relationships.


First Midwest's investment in corporate owned life insurance generated $2,268 in income for the first quarter 2001 for an increase of $845, or 59.4%, as compared to the year-ago like period as a result of higher outstanding balances and the renegotiation of certain terms of the underlying insurance policies to achieve improved earnings rates. Other income decreased by $361 or 19.2%, to $1,522 for the first quarter 2001 as compared to the 2000 period of which $325 of the total decrease is due to one-time asset sales that occurred in the prior year period.


Noninterest Expense


Noninterest expense totaled $35,093 for the quarter ended March 31,2001 as compared to the year-ago period of $37,133 for a decrease of $2,040, or 5.5%. A comparison of the major categories of noninterest expense is discussed below.


Salaries and wages decreased by $1,341, or 8.5%, for the quarter March 21, 2001 as compared to prior year levels. The decrease was a result of the elimination of approximately 100 full time equivalent employees of First Midwest Mortgage Corporation ("FMMC") in 2000. Additionally, modest other staffing reductions were experienced as a result of the reorganization of certain support operations of First Midwest Bank.


Retirement and other employee benefits increased by $240, or 6.3%, in the first quarter of 2001 compared to the same year-ago period. Higher pension and healthcare costs principally accounted for the increase in the current period.


For the quarter ended March 31, 2001, occupancy expenses increased $647, or 18.7%, as compared to the same year-ago period of $3,467. The increase in occupancy expense is primarily attributable to $500 in snow removal costs and higher utility costs. Equipment expense decreased $102, or 5.0%, as compared to the same year-ago period of $2,056, due primarily to reduced depreciation expense relating to the discontinuation of FMMC operations.


Technology and related costs decreased $457 to $2,541 in the first quarter 2001 as compared to $2,998 for the same year-ago period. $314 of the total decrease is incident to the discontinuation of FMMC operations in 2000.

Professional services declined by $304, or 17.8%, to $1,400 for the quarter ended March 31, 2001 as compared to the prior year period of $1,704 with 60% of the reduction attributable to the elimination of costs associated with FMMC's lending and recordkeeping operations. Other expenses decreased $629, or 9.9%, for the first quarter 2001 as compared to the year-ago like period due to approximately $297 in certain costs recorded in the prior year relating to the winding down of FMMC operations in addition to $100 in cost savings from the elimination of operations thereof and lower costs experienced amongst various categories including supplies and printing, telephone, other real estate owned expense and miscellaneous losses due to generally tighter cost controls.


As a result of the forgoing cost reductions, the efficiency ratio for the quarter ended March 31, 2001 was 51.35% as compared to the 2000 first quarter ratio of 54.61%.

Income Tax Expense


Income tax expense totaled $5,939 for the quarter ended March 31, 2001, increasing from $5,665 for the same period in 2000 and reflects effective income tax rates of 23.5% and 23.8%, respectively. The decrease in effective tax rate is primarily attributable to an increase in corporate owned life insurance income and state tax exempt income in 2001.


Nonperforming Assets and Past Due Loans


The following table summarizes nonperforming assets and past due loans as of the close of the last five calendar quarters:

2001

2000

March 31

December 31

September 30

June 30

March 31

Nonaccrual loans

$

22,453

$

19,849

$

$

20,313

$

19,838

$

19,137

Foreclosed real estate

1,246

1,337

2,467

1,295

907

Total nonperforming assets

$

23,699

$

21,186

$

22,780

$

21,133

$

20,044

% of total loans plus

foreclosed real estate

0.72%

0.65%

0.69%

0.66%

0.65%

90 days past due and still accruing interest

$

5,339

$

7,045

$

6,217

$

6,099

$

6,226

Total nonperforming assets increased $2,513, or 11.9% on a linked quarter basis with $1,500 of the increase attributable to a single real estate construction credit that was placed on nonaccrual during the first quarter 2001.


Nonaccrual loans, totaling $22,453 at March 31, 2001 are comprised of commercial and agricultural loans (28%), real estate loans (60%) and consumer loans (12%). Foreclosed real estate, totaling $1,246 at March 31, 2001, primarily represents real estate loans on 1-4 family properties.


First Midwest's disclosure with respect to impaired loans is contained in Note 4 to the interim consolidated financial statements, located on page 8.

Provision and Reserve for Loan Losses


Transactions in the reserve for loan losses during the quarters ended March 31, 2001 and 2000 are summarized in the following table:


Quarters Ended
March 31

2001

2000

Balance at beginning of period

$

45,093

$

42,645

Provision for loan losses

3,458

1,962

Loans charged-off

(3,704)

(2,354)

Recoveries of loan previously charged-off

574

731

Net loans (charged-off)

(3,130)

(1,623)

Balance at end of period

$

45,421

$

42,984



Loan charge-offs, net of recoveries, for the quarter totaled $3,130, or 0.39% of average loans, as compared to $1,623, or 0.22% for the first quarter of 2000. Approximately one half of the $1,507 increase in charge-offs includes write downs on two loans carried as nonperforming since 2000 that are currently in the process of rehabilitation.


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-offs, delinquencies, collateral values and Management's assessment of current and prospective economic conditions. The provision for loan losses charged to operating expense for the first quarter of 2001 totaled $3,458 as compared to $1,962 for the same quarter in 2000. The provision for loan losses for the current quarter exceeded net charge-offs by $328.


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 policy. The reserve for loan losses consists of three elements; (i) specific reserves established for any impaired commercial, real estate commercial and real estate construction loan for which the recorded investment in the loan exceeds the measured value of the loan; (ii) reserves based on historical loan loss experience; and, (iii) reserves based on general economic conditions as well as specific economic factors in the markets in which First Midwest operates.


Loans within the portfolio that are selected for review to determine whether specific reserves are required include both loans over a specified dollar limit as well as loans where the internal credit rating is below a predetermined classification. Loans subject to this review process generally include commercial and agricultural loans, real estate commercial and real estate construction loans. Specific reserves for these loans are determined in accordance with the provisions of Financial Accounting Standards Board Statements 114 and 118, "Accounting by Creditors for Impairment of a Loan." Consumer and other retail loan reserve allocations are based upon the evaluation of pools or groups of such loans. The portion of the reserve based on historical loan loss experience 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 portion of the reserve based on general economic conditions and other factors is considered the unallocated portion of the reserve. This portion is determined based upon 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 which is used to determine the allocated component of the reserve.


The distribution of the loan portfolio is presented in Note 3 to the interim consolidated financial statement located on page 7. The loan portfolio consists predominantly of loans originated by First Midwest from its primary markets and generally represents credit extension to multi-relationship customers.



Capital


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.


Bank Holding Company

Subsidiary Bank

Minimum

Minimum

Minimum

Well-

First

Required

FMB,

Required

Capitalized

Midwest

FRB

N.A.

OCC

FDICIA

As of March 31, 2001:

Tier I capital to risk-based assets

10.72%

4.00%

9.37%

4.00%

6.00%

Total capital to risk-based assets

11.82%

8.00%

10.48%

8.00%

10.00%

Leverage ratio

7.70%

3.00%

6.72%

3.00%

5.00%

As of December 31, 2000:

                    

Tier I capital to risk-based assets

10.51%

4.00%

9.57%

4.00%

6.00%

Total capital to risk-based assets

11.61%

8.00%

10.67%

8.00%

10.00%

Leverage ratio

7.36%

3.00%

6.67%

3.00%

5.00%

Dividends

As a result of improved performance from operations as well as First Midwest's perceived future prospects, the Board of Directors has increased the quarterly dividend every year since 1993. The following table summarizes the dividend increases declared during the years 1994 through 2000:

Quarterly Rate

Date

Per Share

% Increase

November 2000

$

0.200

11%

November 1999

0.180

13%

November 1998

0.160

7%

November 1997

0.150

13%

November 1996

0.133

18%

February 1996

0.113

13%

February 1995

0.100

15%

February 1994

0.087

13%


FORWARD LOOKING STATEMENTS

Statements made in the preceding "Management's Discussion and Analysis of Financial Condition and Results of Operations" section which are not purely historical are forward-looking statements with respect to the goals, plan objectives, intentions, expectations, financial condition, results of operations, future performance and business of First Midwest, including, without limitation, (i) loan and deposit growth, market interest rates on net interest income and net interest margin, wholesale funding sources, provision and reserve for loan losses, nonperforming loan levels and net charge-offs, collateral value and economic conditions, noninterest income and expenses, diluted earnings per share growth rates for 2001, and dividends to shareholders, and (ii) statements preceded by, followed by or that include the words "may", "would", "could", "should", "expects", "projects", "anticipates", "believes", "estimates", "plans", "intends", "targets" or similar expressions.

Forward-looking statements involve inherent risks and uncertainties, and important factors (many of which are beyond First Midwest's control) that could cause actual results to differ materially from those set forth in the forward-looking statements, including the following, in addition to those contained in First Midwest's reports on file with the Securities and Exchange Commission: general economic or industry conditions, nationally and/or in the communities in which First Midwest conducts business, changes in the interest rate environment, legislation or regulatory requirements, conditions of the securities markets, deposit flows, cost of funds, demand for loan products, demand for financial services, competition, changes in quality or composition of First Midwest's loan and investment portfolios, assumptions used to evaluate the appropriate level of the reserve for loan losses, the impact of future earnings performance and capital levels on dividends declared by the Board of Directors, changes in accounting principals, policies or guidelines, other economic, competitive, governmental, regulatory and technical factors affecting First Midwest's operations, products, services and prices.

Accordingly, results actually achieved may differ materially from expected results in these statements. Forward-looking statements speak only as of the date they are made. 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 statement.



ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Submission of matters to a vote of security holders is incorporated herein by reference to Item 5 to the Current Report on Form 8-K and Form 8-K/A, both dated April 30, 2001.

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 -

On January 18, 2001, First Midwest filed a report on Form 8-K announcing its earnings results for the three and twelve-month periods ended December 31, 2000.


On February 21, 2001, First Midwest filed a report on Form 8-K announcing the declaration of a quarterly cash dividend on its common stock of $0.20 per share.


On February 22, 2001, First Midwest filed a report on Form 8-K to announce its participation in the Midwest 2001 Super-Community Bank Conference.

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.
 

/s/ DONALD J. SWISTOWICZ

Donald J. Swistowicz
Executive Vice President*

Date: May 14, 2001

* Duly authorized to sign on behalf of the Registrant.


EXHIBIT INDEX

Exhibit Number

Description of Documents

Sequential Page Number

10

Amendment to the Restated 1989 Omnibus Stock and Incentive Plan

21

15

Acknowledgment of Ernst & Young LLP

23

99

Independent Accountant's Review Report

24