10-Q 1 sep3010q.htm 10Q

 




SECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
Washington, D.C. 20549


(Mark One)

[X]

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarter ended  September 30, 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 November 13, 2001, 39,020,216 shares of the Registrant's $.01 par value common stock were outstanding, excluding treasury shares.

Exhibit Index is located on page 23*.


FIRST MIDWEST BANCORP, INC.

FORM 10-Q

TABLE OF CONTENTS

 

 

 

Page

 

 

Part I. FINANCIAL INFORMATON

 

 

 

Item 1. Financial Statements

 

 

 

Consolidated Statements of Condition

3*

Consolidated Statements of Income

4*

Consolidated Statements of Cash Flows

5*

Notes to Consolidated Financial Statements

6*

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

11*

 

 

 

 

Part II. OTHER INFORMATION

 

Item 6. Exhibits and Reports on Form 8-K

22*

 

 

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

FIRST MIDWEST BANCORP, INC.

CONSOLIDATED STATEMENTS OF CONDITION

(Amounts in thousands)

September 30,
2001

December 31,
2000

(Unaudited)

Assets

Cash and due from banks

$

184,120

$

166,423

Federal funds sold and other short-term investments

3,762

18,070

Mortgages held for sale

10,966

5,438

Securities available for sale, at market value

1,830,378

2,130,148

Securities held to maturity, at amortized cost

87,014

84,797

Loans, net of unearned discount

3,448,248

3,233,196

Reserve for loan losses

(47,745)

(45,093)

Net loans

3,400,503

3,188,103

Premises, furniture and equipment

77,698

81,840

Accrued interest receivable

37,321

41,589

Investment in corporate owned life insurance

133,412

126,860

Other assets

54,397

63,216

Total assets

$

5,819,571

$

5,906,484

Liabilities

Demand deposits

$

727,486

$

705,404

Savings deposits

415,923

447,455

NOW accounts

493,763

450,503

Money market deposits

611,986

535,391

Time deposits

1,930,336

2,113,452

Total deposits

4,179,494

4,252,205

Borrowed funds

1,117,013

1,145,872

Accrued interest payable

11,852

20,568

Other liabilities

53,915

41,116

Total liabilities

5,362,274

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 45,543 shares; outstanding: September 30, 2001 - 39,287 shares;    December 31, 2000 - 40,861 shares

____

455

455

Additional paid-in capital

76,415

78,269

Retained earnings

524,662

487,878

Accumulated other comprehensive income (loss), net of tax

16,695

(7,039)

Treasury stock, at cost: September 30, 2001 - 6,256 shares
    December 31, 2000 - 4,682 shares

(160,930)

(112,840)

Total stockholders' equity

457,297

446,723

Total liabilities and stockholders' equity

$

5,819,571

$

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
September 30,

Nine Months Ended
September 30,

2001

2000

2001

2000

Interest Income

Loans

$

66,722

$

72,143

$

203,784

$

205,571

Securities available for sale

26,971

35,351

88,404

104,244

Securities held to maturity

1,381

725

4,217

2,134

Federal funds sold and other short-term investments

277

853

749

1,313

Total interest income

95,351

109,072

297,154

313,262

Interest Expense

Deposits

31,762

41,158

108,113

112,198

Borrowed funds

10,310

20,886

38,509

57,444

Total interest expense

42,072

62,044

146,622

169,642

Net interest income

53,279

47,028

150,532

143,620

Provision for loan losses

5,248

2,625

12,771

7,099

Net interest income after provision for loan losses

48,031

44,403

137,761

136,521

Noninterest Income

Service charges on deposit accounts

6,062

5,495

17,643

15,980

Trust and investment management fees

2,589

2,677

7,910

7,835

Other service charges, commissions, and fees

4,924

3,979

13,819

11,761

Corporate owned life insurance income

1,935

1,494

6,222

4,371

Security gains, net

55

1,111

757

1,054

Other income

1,673

1,507

5,082

5,529

Total noninterest income

17,238

16,263

51,433

46,530

Noninterest Expense

Salaries and wages

15,408

14,422

44,709

45,525

Retirement and other employee benefits

4,111

3,897

12,345

11,926

Occupancy expense of premises

3,459

3,411

11,392

10,177

Equipment expense

1,872

2,084

5,715

6,041

Technology and related costs

2,594

2,581

7,693

8,297

Professional services

1,637

1,694

4,474

5,512

Advertising and promotions

628

1,043

2,597

3,143

Other expenses

7,175

5,904

19,771

18,748

Total noninterest expense

36,884

35,036

108,696

109,369

Income before income tax expense

28,385

25,630

80,498

73,682

Income tax expense

7,136

6,228

19,634

17,577

Net income

$

21,2499

$

19,402

$

60,864

$

56,105

Per Share Data

Basic earnings per share

$

0.53

$

0.47

$

1.51

$

1.36

Diluted earnings per share

$

0.53

$

0.47

$

1.50

$

1.36

Cash dividends per share

$

0.20

$

0.18

$

0.60

$

0.54

Weighted average shares outstanding

39,782

41,057

40,380

41,103

Weighted average diluted shares outstanding

40,095

41,313

40,636

41,338

See notes to consolidated financial statements.

FIRST MIDWEST BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands)
(Unaudited)

Nine Months Ended
September 30,

2001

2000

Operating Activities

Net income

$

60,864

$

56,105

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

Provision for loan losses

12,771

7,099

Depreciation of premises, furniture, and equipment

6,620

6,630

Net amortization (accretion) of premium (discount) on securities

712

(2,399)

Net (gains) on sales of securities

(757)

(1,054)

Net (gains) on sales of other real estate owned

(98)

(371)

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

(220)

(43)

Net loss on sale of mortgage servicing rights

-

222

Tax benefits from employee exercises of nonqualified stock options

620

1,527

Net (increase) in deferred income taxes

(1,045)

(3,611)

Net amortization of goodwill and other intangibles

2,245

2,412

Originations and purchases of mortgage loans held for sale

(191,912)

(75,278)

Proceeds from sales of mortgage loans held for sale

186,384

83,327

Net (increase) in corporate owned life insurance

(6,552)

(9,371)

Net decrease (increase) in accrued interest receivable

4,268

(9,862)

Net (decrease) increase in accrued interest payable

(8,716)

7,177

Net (increase) in other assets

(9,012)

(31,710)

Net increase (decrease) in other liabilities

13,079

(3,938)

Net cash provided by operating activities

69,251

26,862

Investing Activities

Securities available for sale:

Proceeds from maturities, repayments, and calls

512,724

166,563

Proceeds from sales

505,001

183,391

Purchases

(675,939)

(407,846)

Securities held to maturity:

Proceeds from maturities, repayments, and calls

25,651

8,877

Purchases

(27,820)

(8,393)

Net (increase) in loans

(229,409)

(344,322)

Proceeds from sales of other real estate owned

2,225

2,529

Purchases of other real estate owned

(203)

-

Proceeds from sales of premises, furniture, and equipment

2,415

737

Purchases of premises, furniture, and equipment

(4,633)

(7,975)

Proceeds from sale of mortgage servicing rights

-

22,564

Net cash provided (used) by investing activities

110,012

(383,875)

Financing Activities

Net (decrease) increase in deposit accounts

(72,711)

219,052

Net (decrease) increase in borrowed funds

(28,859)

181,473

Purchase of treasury stock

(52,072)

(6,494)

Proceeds from issuance of treasury stock

9

6

Cash dividends paid

(24,385)

(22,217)

Exercise of stock options

2,144

1,689

Net cash (used) provided by financing activities

(175,874)

373,509

Net increase in cash and cash equivalents

3,389

16,496

Cash and cash equivalents at beginning of period

184,493

156,973

Cash and cash equivalents at end of period

$

187,882

$

173,469

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 that 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 applicable to 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


Effective April 1, 2001, First Midwest adopted Financial Accounting Standards Board ("FASB") Statement No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities" 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. The adoption of FASB No. 140 had no material impact on the consolidated position or results of operations of First Midwest.

Recent Accounting Pronouncements

In June 2001, the FASB issued Statements No. 141, "Business Combinations" ("FASB No. 141"), and No. 142, "Goodwill and Other Intangible Assets" ("FASB No. 142"). These Statements significantly change the accounting for business combinations, goodwill, and intangible assets. FASB No. 141 eliminates the pooling-of-interests method of accounting for business combinations except for qualifying business combinations that were initiated prior to July 1, 2001. Additionally, FASB No. 141 further clarifies the criteria to recognize intangible assets separately from goodwill. This Statement is effective for business combinations initiated after June 30, 2001.

Under FASB No. 142, goodwill and intangible assets deemed to have indefinite lives will no longer be amortized but will be subject to annual impairment tests in accordance with the Statement. Other intangible assets will continue to be amortized over their useful lives. The amortization provisions of FASB No. 142 apply to goodwill and intangible assets acquired after June 30, 2001. With respect to existing goodwill and intangible assets, companies are required to adopt FASB No. 142 in their fiscal year beginning after December 15, 2001.

 The following is a summary of First Midwest's intangible assets as of September 30, 2001 and December 31, 2000, which are included in other assets in the Consolidated Statements of Condition at September 30, 2001 and December 31, 2000:

September 30, 2001

December 31

2000

Intangibles from acquisitions:

Goodwill

$

16,937

$

18,557

Core deposit premiums

1,285

1,839

Other identified intangibles

205

276

Total intangible assets

$

18,427

$

20,672


First Midwest will adopt FASB No. 142 on January 1, 2002. As of September 30, 2001 the average remaining life of unamortized goodwill was 7 years. Application of the non-amortization provisions of the Statement applicable to goodwill is expected to result in additional net income of approximately $2.2 million, or $.05 per share, per year. During 2002, First Midwest will perform the first of the required impairment tests of goodwill and indefinite lived intangible assets as of January 1, 2002 and has not yet determined what the effect of these tests will be on the financial position or results of operations of First Midwest.

2. SECURITIES

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

September 30, 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

$

7

$

-

$

408

$

602

$

2

$

-

$

604

U.S. Agency

77,868

230

-

78,098

423,211

546

(1,068)

422,689

Mortgage-backed

1,181,809

22,490

(1,268)

1,203,031

1,172,187

5,648

(11,311)

1,166,524

State and municipal

477,826

14,256

(1,788)

490,294

480,730

6,202

(8,413)

478,519

Other

61,995

45

(3,493)

58,547

64,958

102

(3,248)

61,812

Total

$

1,799,899

$

37,028

$

(6,549)

$

1,830,378

$

2,141,688

$

12,500

$

(24,040)

$

2,130,148

Securities Held
   to Maturity

U.S. Treasury

$

1,833

$

-

$

-

$

1,833

$

1,821

$

17

$

-

$

1,838

U.S. Agency

75

-

-

75

75

-

(1)

74

State and municipal

61,724

778

-

62,502

60,392

709

(5)

61,096

Other

23,382

-

-

23,382

22,509

-

-

22,509

Total

$

87,014

$

778

$

-

$

87,792

$

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:

September 30,

December 31,

2001

2000

Commercial, industrial, and agricultural

$

938,488

$

884,944

Consumer

979,826

924,189

Real estate - 1 - 4 family

217,275

250,635

Real estate - commercial

998,802

900,781

Real estate - construction

313,857

272,647

Total loans, net of unearned discount

$

3,448,248

$

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 and nine months ended September 30, 2001 and 2000 are summarized below:

Quarters Ended
September 30,

Nine Months Ended September 30,

2001

2000

2001

2000

Balance at beginning of period

$

46,705

$

44,112

$

45,093

$

42,645

Provision for loan losses

5,248

2,625

12,771

7,099

Loans charged-off

(5,032)

(2,224)

(12,308)

(6,630)

Recoveries of loans previously charged-off

824

536

2,189

1,935

Net loans (charged-off)

(4,208)

(1,688)

(10,119)

(4,695)

Balance at end of period

$

47,745

$

45,049

$

47,745

$

45,049

Impaired Loans:

Requiring valuation reserve (1)

$

8,552

$

74

Not requiring valuation reserve

8,666

15,691

Total impaired loans

$

17,218

$

15,765

Valuation reserve related to impaired loans

$

3,010

$

74

Average impaired loans

$

15,771

$

15,199

(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 First Midwest 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 and nine months ended September 30, 2001 and 2000:

Quarters Ended

September 30,

Nine Months Ended September 30,

2001

2000

2001

2000

Basic Earnings Per Share:

Net income

$

21,249

$

19,402

$

60,864

$

56,105

Average common shares outstanding

39,782

41,057

40,380

41,103

Basic earnings per share

$

0.53

$

0.47

$

1.51

$

1.36

Diluted Earnings Per Share:

Net income

$

21,249

$

19,402

$

60,864

$

56,105

Average common shares outstanding

39,782

41,057

40,380

41,103

Dilutive effect of stock options

313

256

256

235

Diluted average common shares outstanding

40,095

41,313

40,636

41,338

Diluted earnings per share

$

0.53

$

0.47

$

1.50

$

1.36

6. COMPREHENSIVE INCOME


The components of comprehensive income, net of related taxes, for the quarters and nine months ended September 30, 2001 and 2000 are as follows:

Quarters Ended
September 30,

Nine Months Ended September 30,

2001

2000

2001

2000

Net Income

$

21,249

$

19,402

$

60,864

$

56,105

Unrealized holding gains on securities available
    for sale, net of reclassification adjustment

19,327

14,334

25,631

20,031

Unrealized holding (losses) on hedging activity

(1,227)

-

(1,897)

-

Comprehensive income

$

39,349

$

33,736

$

84,598

$

76,136

Disclosure of Reclassification Amount:

Unrealized holding gains on securities
    available for sale arising during the period

$

19,361

$

15,012

$

26,094

$

20,702

Less: Reclassification adjustment for net
    gains realized during the period

34

678

463

671

Net unrealized holding gains on
     securities available for sale

$

19,327

$

14,334

$

25,631

$

20,031

 

Provided below is the change in accumulated other comprehensive income (loss) for the nine months ended September 30, 2001 and 2000:

Nine Months Ended September 30,

2001

2000

Beginning balance

$

(7,039)

$

(49,072)

Current year change

23,734

20,031

Ending Balance

$

16,695

$

(29,041)

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 nine months ended September 30, 2001 and 2000 are as follows:

Nine Months Ended September 30,

2001

2000

Income taxes paid

$

17,621

$

24,059

Interest paid to depositors and creditors

155,338

162,465

Noncash transfers of loans to foreclosed real estate

4,238

3,468

Dividends declared but unpaid

7,879

7,382


8. 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 considered 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 statement of condition.


First Midwest maintains an overall interest rate risk management strategy that incorporates the use of derivative instruments to minimize significant unplanned fluctuations in earnings and cash flows caused by interest rate volatility. This is accomplished by modifying the repricing characteristics of certain assets and liabilities so that changes in interest rates do not adversely affect the net interest margin and cash flows. On the date First Midwest enters into a derivative contract, it designates the derivative instrument as either a fair value hedge or cash flow hedge. 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. Fair value hedges are accounted for by recording the changes in the fair value of the derivative instrument and changes in the fair value of the hedged asset or liability or of an unrecognized firm commitment attributable to the hedged risk on the balance sheet with a corresponding offset record in current period net income. The adjustment to the hedged asset or liability is included in the basis of the hedged item, while the fair value of the derivative is recorded as a freestanding asset or liability. Cash flow hedges are accounted for by recording the fair value of the derivative instrument on the balance sheet as either a freestanding asset or liability with changes in the fair value of the derivative instrument to the extent that it is effective are recorded in other comprehensive income within shareholders' equity and subsequently reclassified to net income in the same period(s) that the hedged transaction

impacts net income. Prior to entering a hedge transaction, 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. This process includes linking all derivative instruments that are designated as fair value or cash flow hedges to specific assets and liabilities on the balance sheet or to specific forecasted transactions along with a formal assessment at both inception of the hedge and on an ongoing quarterly basis as to the effectiveness of the derivative instrument in offsetting changes in fair values or cash flows of the hedged item. If it is determined that the derivative instrument is not highly effective as a hedge, hedge accounting is discontinued and the fair value of the derivative instrument is recorded in net income.


As of September 30, the only derivative contracts employed by First Midwest were interest rate swaps used to hedge the variability of forecasted cashflows on 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 or nine month periods ended September 30, 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 September 30, 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 and nine months ended September 30, 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 and nine months ended September 30, 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 September 30, 2001 increased to $21,249, or $0.53 per share, as compared $19,402, or $.47 per share, for the same period in 2000, representing an increase of 12.8% on a per share basis. Performance for the quarter resulted in an annualized return on average assets of 1.47% as compared to 1.30% for the same quarter in 2000 and an annualized return on average equity of 18.6% as compared to 19.1% for the 2000 quarter. For the nine months ended September 30, 2001, net income increased to $60,864, or $1.50 per share, as compared to $56,105, or $1.36 per share, for the same period in 2000, for an increase of 10.3% on a per share basis. Performance for the nine months ended September 30, 2001 resulted in a return on average assets of 1.42% as compared to 1.30% for the same period of 2000 and an annualized return on average stockholders' equity of 17.76% for the nine months ended September 30, 2001 as compared to 19.51% for the same period in 2000.

The reduction in return on average equity for the third quarter and nine months of 2001 as compared to 2000 is attributable to a $39 million increase in total stockholders' equity at September 30, 2001 over the year-earlier level resulting primarily from the increase in the market value of the available-for-sale securities portfolio. As a result of such increase, book value per share as of September 30, 2001 improved to $11.64 from $10.21 a year-ago, for an increase of 14.0%.

Cash basis diluted earnings per share (which excludes amortization of goodwill, core deposit premiums, and other intangibles, net of tax) increased to $0.55 per share for the third quarter of 2001 as compared to 2000's $0.49 per share representing an increase of 12.2% on a per share basis. For the nine months ended September 30, 2001, cash diluted earnings per share increased to $1.55 per share as compared to $1.41 per share for the 2000 period,representing an increase of 9.9%. On a cash basis, the return on average assets (which excludes goodwill, core deposit premiums and other intangibles, net of tax, from total average assets) was 1.52% for the third quarter of 2001 as compared to 2000's 1.35%, while cash basis return on average equity for the third quarter of 2001 was 19.14% as compared to 2000's 19.76%. Performance for the nine months ended September 30, 2001 resulted in cash basis return on average assets of 1.47% as compared to 1.35% for the 2000 period and cash basis return on average equity of 18.35% as compared to 20.21% for the 2000 period.


As the result of continued loan growth and the series of interest rate reductions initialed by the Federal Reserve in 2001, net interest margin for third quarter 2001 improved to 4.27% as compared to 4.04% and 3.77% in second and first quarter 2001, respectively. Since troughing at 3.61% in fourth quarter 2000, margin has improved by 66 basis points year to date.


Factoring out the effect of net security gains, total noninterest income for third quarter 2001 grew by 13.4% over 2000's like quarter while the nine months of 2001 grew by 11.4% over the prior year period. The year-over-year improvement for both the third quarter and nine month periods was realized across all categories of noninterest income except for market sensitive trust and investment management fees. Total noninterest expenses for third quarter 2001 increased by 5.3% from 2000's like quarter while on a linked-quarter basis they were virtually unchanged. The efficiency ratios for the third quarter 2001 and nine month period continued to drop to a record 48.9% and 50.2%, respectively as compared to the third quarter 2000 and nine month period of 52.0% and 53.5%, respectively.


The provision for loan losses for third quarter 2001 totaled $5,248, exceeding net charge-offs by $1,040, while the provision for the nine month period of $12,771 exceeded net charge-offs by $2,652. Net loan charge-offs for the third quarter 2001 were .49% of average loans, up from .21% for the like 2000 period and .34% for the second quarter 2001.

Net Interest Income, Loan Growth and Funding Sources

Net Interest Income/Margin

Net interest income on a tax equivalent basis totaled $56,823 for third quarter 2001, representing an increase of $5,982, or 11.8%, over the year-ago quarter of $50,841, with net interest margin for the 2001 quarter improving by 61 basis points to 4.27% as compared to 3.66% for the 2000 quarter. As shown in the Volume/Rate Analysis on page 15*, the increase in net interest income is attributable to the reduction of interest expense paid on interest bearing liabilities totaling $19,972 for third quarter 2001 exceeding the reduction of interest income earned on interest-earning assets totaling $13,990 for such quarter.

The on-going reduction of interest rates initiated by the Federal Reserve continues to positively impact First Midwest's net interest income and margin as the Company's liability sensitive balance sheet repriced liabilities downward at a faster pace than rates reduced on interest earning assets. Further contributing to the current quarter increase in net interest margin was the continued loan growth of $164,039, or 5.1%, over the year-ago like quarter. Such loan growth was funded by the liquidity of the securities available for sale portfolio allowing continued reduction in higher cost wholesale funds, with average borrowings decreasing by 19.2% as compared to the 2000 period, as further described below.


Loan Growth


The following tables summarize growth in loans based upon both average and period end balances:

Year to Date Average Balances

September 30, 2001

September 30, 2000

% Change

Commercial, industrial and agricultural

$

912,394

$

849,819

7.4

Consumer

945,246

907,252

4.2

Real estate - 1 - 4 family

234,168

258,783

(9.5)

Real estate - commercial

946,823

869,522

8.9

Real estate - construction

290,924

245,183

18.7

Loans, net of unearned discount

$

3,329,555

$

3,130,559

6.4

 

 

As of Period End


2001

2000

September 30
% Change From

 

 

September 30

 

December 31

 

September 30

 

 

12/31/00

 

9/30/00

Commercial, industrial and agricultural

$

938,488

$

884,944

$

891,856

6.1

5.2

Consumer

979,826

924,189

953,980

6.0

2.7

Real estate - 1 - 4 family

217,275

250,635

258,800

(13.3)

(16.0)

Real estate - commercial

998,802

900,781

913,814

10.9

9.3

Real estate - construction

313,857

272,647

280,196

15.1

12.0

Loans, net of unearned discount

$

3,448,248

$

3,233,196

$

3,298,646

6.7

4.5

Total average loans for the nine months of 2001 increased by 6.4% as compared to the 2000 period, while on a linked-quarter basis total average loans for the third quarter 2001 grew by 2.4%. Loan growth continues across all three major categories of commercial, consumer, and real estate with the largest increases on both a year-to-date and linked-quarter basis being experienced in the real estate category. The increase in total loans was experienced despite the sale of $30 million in consumer home equity loans occurring at year-end 2000.

Core Funding Sources

The following tables provide a comparison of average core funding sources for the quarters and nine months ended September 30, 2001 and 2000 based upon average balances. Average, rather than period-end balances are more meaningful in analyzing funding sources because of the inherent fluctuations that occur on a monthly basis within most deposit categories.

Quarter-to-Date Average Balances

September 30, 2001

September 30, 2000

% Change

Demand deposits

$

698,963

$

657,678

6.3

Savings deposits

414,357

461,937

(10.3)

NOW accounts

504,699

496,867

1.6

Money market deposits

605,053

499,582

21.1

Time deposits

1,960,950

2,050,829

(4.4)

Total deposits

4,184,022

4,166,893

0.4

Borrowed funds

1,050,214

1,300,272

(19.2)

Total funding sources

$

5,234,236

$

5,467,165

(4.3)

 

 

Year-to-Date Average Balances

September 30, 2001

September 30, 2000

% Change

Demand deposits

$

679,375

$

662,964

2.5

Savings deposits

441,472

475,200

(7.1)

NOW accounts

474,193

475,853

(0.3)

Money market deposits

562,557

476,384

18.1

Time deposits

2,006,767

1,979,455

1.4

Total deposits

4,164,364

4,069,856

2.3

Borrowed funds

1,078,278

1,271,778

(15.2)

Total funding sources

$

5,242,642

$

5,341,634

(1.9)

Although total average deposits increased a modest 0.4% in the third quarter of 2001 as compared to the prior year, total average deposits for the nine months of 2001 increased by 2.3% over the 2000 period and were essentially unchanged on a linked-quarter basis. This modest core deposit growth coupled with the liquidity provided by the securities portfolio funded the quarter's loan growth while, at the same time, allowing continued reduction in higher cost wholesale funds, with the latter decreasing by 2.3% on a linked-quarter basis and by 15.2% for the nine months of 2001 as compared to the 2000 period.

Volume/Rate Analysis

The table below summarizes the changes in average interest-bearing assets and interest-bearing liabilities as well as the average rates earned and paid on these assets and liabilities, respectively, for the quarters ended September 30, 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 September 30, 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

$

13,531

$

46,498

$

(32,967)

3.16%

6.62%

(3.46)%

$

107

$

769

$

(662)

$

(381)

$

(281)

$

(662)

Mortgages held for sale

10,305

3,876

6,429

6.60%

8.67%

(2.07)%

170

84

86

100

(14)

86

Securities available for sale

1,797,787

2,222,516

(424,729)

6.67%

6.97%

(0.30)%

29,981

38,755

(8,774)

(7,143)

(1,631)

(8,774)

Securities held to maturity

93,545

43,886

49,659

7.73%

7.91%

(0.18)%

1,808

868

940

960

(20)

940

Loans net of unearned

discount

3,403,769

3,239,730

164,039

7.85%

8.94%

(1.09)%

66,829

72,409

(5,580)

3,984

(9,564)

(5,580)

Total interest-earning assets

$

5,318,937

$

5,556,506

$

(237,569)

7.44%

8.13%

(0.69)%

$

98,895

$

112,885

$

(13,990)

$

(2,480)

$

(11,510)

$

(13,990)

Savings deposits

$

414,357

$

461,937

$

(47,580)

1.52%

1.98%

(0.46)%

$

1,572

$

2,286

$

(714)

$

(218)

$

(496)

$

(714)

NOW accounts

504,699

496,867

7,832

1.59%

2.09%

(0.50)%

2,012

2,590

(578)

42

(620)

(578)

Money market deposits

605,053

499,582

105,471

2.95%

4.68%

(1.73)%

4,458

5,843

(1,385)

1,842

(3,227)

(1,385)

Time deposits

1,960,950

2,050,829

(89,879)

4.84%

5.94%

(1.10)%

23,720

30,439

(6,719)

(1,287)

(5,432)

(6,719)

Borrowed funds

1,050,214

1,300,272

(250,058)

3.93%

6.43%

(2.50)%

10,310

20,886

(10,576)

(3,500)

(7,076)

(10,576)

Total interest-bearing

liabilities

$

4,535,273

$

4,809,487

$

(274,214)

3.71%

5.16%

(1.45)%

$

42,072

$

62,044

$

(19,972)

$

(3,121)

$

(16,851)

$

(19,972)

Net interest margin / income

4.27%

3.66%

0.61%

%

$

56,823

$

50,841

$

5,982

$

641

$

5,341

$

5,982

2001

2000

Net Interest Margin Trend By Quarter

3rd

2nd

1st

4th

3rd

2nd

1st

 

Yield on interest earning assets

7.69%

7.44%

7.69%

7.94%

8.12%

8.13%

7.97%

7.86%

Rates paid on interest bearing liabilities

4.27%

3.71%

4.27%

4.86%

5.26%

5.16%

4.79%

4.54%

Net interest margin

4.04%

4.27%

4.04%

3.77%

3.61%

3.66%

3.84%

3.96%

Volume/Rate Analysis

The table below summarizes the changes in average interest-bearing assets and interest-bearing liabilities as well as the average rates earned and paid on these assets and liabilities, respectively, for the nine months ended September 30, 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.

Nine Months Ended September 30, 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

$

9,811

$

20,394

$

(10,583)

4.24%

6.48%

(2.24)%

$

312

$

991

$

(679)

$

(408)

$

(271)

$

(679)

Mortgages held for sale

8,727

5,261

3,466

6.68%

8.16%

(1.48)%

437

322

115

159

(44)

115

Securities available for sale

1,899,552

2,222,969

(323,417)

6.85%

6.87%

(0.02)%

97,520

114,501

(16,981)

(16,605)

(376)

(16,981)

Securities held to maturity

91,688

43,942

47,746

7.95%

7.82%

0.13%

5,469

2,576

2,893

2,847

46

2,893

Loans net of unearned

discount

3,329,555

3,130,559

198,996

8.18%

8.79%

(0.61)%

204,167

206,484

(2,317)

21,815

(24,132)

(2,317)

Total interest-earning assets

$

5,339,333

$

5,423,125

$

(83,792)

7.69%

7.99%

(0.30)%

$

307,905

$

324,874

$

(16,969)

$

7,808

$

(24,777)

$

(16,969)

Savings deposits

$

441,472

$

475,200

$

(33,728)

1.77%

1.95%

(0.18)%

$

5,869

$

6,941

$

(1,072)

$

(473)

$

(599)

$

(1,072)

NOW accounts

474,193

475,853

(1,660)

1.72%

1.94%

(0.22)%

6,104

6,937

(833)

(24)

(809)

(833)

Money market deposits

562,557

476,384

86,173

3.42%

4.29%

(0.87)%

14,426

15,340

(914)

7,267

(8,181)

(914)

Time deposits

2,006,767

1,979,455

27,312

5.43%

5.59%

(0.16)%

81,714

82,980

(1,266)

1,176

(2,442)

(1,266)

Borrowed funds

1,078,278

1,271,778

(193,500)

4.76%

6.02%

(1.26)%

38,509

57,444

(18,935)

(7,970)

(10,965)

(18,935)

Total interest-bearing

liabilities

$

4,563,267

$

4,678,670

$

(115,403)

4.28%

4.83%

(0.55)%

$

146,622

$

169,642

$

(23,020)

$

(24)

$

(22,996)

$

(23,020)

Net interest margin / income

4.03%

3.82%

0.21%

%

$

161,283

$

155,232

$

6,051

$

7,832

$

(1,781)

$

6,051

Noninterest Income


Noninterest income increased by $975, or 6.0%, to $17,238 for the quarter ended September 30, 2001, as compared to $16,263 for the same period in 2000. For the nine months ended September 30, 2001 noninterest income increased by $4,903, or 10.5%, to $51,433 as compared to $46,530 for the same period in 2000. Exclusive of net security gains, which totaled $55 for the third quarter 2001 as compared to net security gains of $1,111 for the like 2000 period, noninterest income increased by $2,031, or 13.4%. The factors resulting in the year-to-year changes are discussed below.


Service charges on deposit accounts increased 10.3% to $6,062 in the third quarter of 2001 as compared to $5,495 for the same 2000 period. The $567 increase is primarily attributable to an increase in NSF fee revenues relating to higher pricing and increased collection rates as a result of the tightening in fee waiver practices. Also contributing to the increase were higher service charges on business checking and savings accounts as a result of greater transaction volumes and new fee initiatives put in place in 2001. Other service charges, commissions and fees increased by $945, or 23.7%, to $4,924 for the quarter ended September 30, 2001 as compared to the third quarter 2000 of $3,979 with commissions on mortgage loan originations and sales of annuity, insurance and investment products principally accounting for the increase. Debit card and merchant card fees also positively impacted the year-to-year increase.

Trust and investment management fees for third quarter 2001 decreased $88, or 3.3%, to $2,589 as compared to the year-ago period of $2,677. Trust assets under management fell by approximately $97 million from $1.972 billion at September 30, 2000 to $1.875 billion at September 30, 2001, with the net decrease being primarily due to the general decline in equities since the beginning of 2001. Trust and investment management fees generally follow the amount of total assets under management, as well as conditions in the equity and credit markets, as such fees on certain accounts are based on market value. The decrease in fees experienced in the third quarter of 2001 was due in part to the overall condition of equity and credit markets since the beginning of the year, as well as to a slight decline in sales related to certain customers' reluctance to commit new funds and shift existing assets.


First Midwest's investment in corporate-owned life insurance increased to $133.4 million as compared to the year-ago levels of $114.7 million generating an increase in attendant revenue of $441, or 29.5%, for third quarter 2001 as compared to the year-ago like period. Additional purchases of insurance coupled with improved earnings rates resulting from the renegotiation of certain terms of the underlying insurance policies contributed to the increase. Other income increased by $166, or 11.0%, to $1,673 for third quarter 2001 as compared to the 2000 like period and is primarily due to greater ATM revenues.


Noninterest Expense


Noninterest expense totaled $36,884 for the quarter ended September 30, 2001 as compared to the year-ago period of $35,036 for an increase of $1,848, or 5.3%. For the nine months ended September 30, 2001, noninterest expense decreased $673, or 0.6%, as compared to the same period in 2000. A comparison of the major categories of noninterest expense is discussed below.


Salaries and wages increased by $986, or 6.8%, for the quarter ended September 30, 2001 as compared to prior year levels largely due to merit increases to hourly employees based upon annual evaluations conducted in August coupled with the expansion in commissioned-based sales staff in the mortgage origination and alternative investment departments. For the nine month period, salaries and wages decreased by $816, or 1.8%, as compared to the same period in 2000. The decrease was due to the elimination of approximately 100 full time equivalent employees of First Midwest Mortgage Corporation ("FMMC") in the first quarter of 2000, as well as modest staffing reductions experienced as a result of the reorganization of certain support operations of First Midwest Bank. The related retirement and other employee benefits increased by $214, or 5.5%, in the third quarter of 2001 as compared to the year-ago period.


Occupancy expenses increased $48, or 1.4%, for the 2001 quarter as compared to $3,411 for the like year-ago period. Equipment expense for the 2001 third quarter and nine months declined 10.2% and 5.4%, respectively, as compared to the same periods a year-ago due to reduced repair costs, depreciation expense, and lower maintenance contract costs as the result of renegotiated terms thereon.

Technology and related costs increased $13, or 0.5%, to $2,594 in third quarter 2001 as compared to $2,581 for the year-ago like period. For the nine months ended September 30, 2001, technology costs declined $604, or 7.3%, as compared to the year-ago period with approximately 60% of the decrease incident to the discontinuation of FMMC operations in 2000 and the balance due to lower data network costs as a result of renegotiated contract terms.

Professional services declined 3.4% and 18.8% for the quarter and nine months ended September 30, 2001, respectively, as compared to the year-ago like periods. Contributing to the decrease was an approximate $125 reduction in supervisory costs associated with the June 2001 charter conversion of First Midwest's banking subsidiary from a national banking association to an Illinois banking corporation. The elimination of certain professional costs associated with the discontinuation of FMMC operations and subsequent liquidation were also attributable to the year over year change, in addition to the reduction of certain professional consulting services.

Advertising and promotions decreased by $415, or 39.8%, for third quarter 2001 as compared to the year earlier period and decreased by $546, or 17.4% for the 2001 nine month period as compared to the year-ago like period due to a shift in marketing strategy and the scaling back of certain advertising programs.

Although other expenses increased 21.5% for the 2001 third quarter as compared to the prior year's quarter, on a year-to-date basis, other expenses increased 5.5%, and is reflective of across-the-board cost control efforts. The increase experienced in the current quarter is attributable to a loss on sale of assets, higher repossession expense, and merchant credit card expense with the remaining variance spread over various other expense categories.

As a result of continued effective cost controls and increased revenue from net interest income and noninterest income, the efficiency ratio for the quarter ended September 30, 2001 dropped to a record 48.9% as compared to the 2000 third quarter ratio of 52.0%, while the ratio for the nine months ended September 30, 2001 was 50.2%, as compared to 53.5% for the year-ago like period.

Income Tax Expense


Income tax expense totaled $7,136 for the quarter ended September 30, 2001, increasing from $6,228 for the same period in 2000 and reflects effective income tax rates of 25.1% and 24.3%, respectively. Income tax expense totaled $19,634 for the nine months ended September 30, 2001, increasing from $17,577 for the same period in 2000 and reflects effective tax rates of 24.4% and 23.9%, respectively.


Credit Quality and the Reserve for Loan Losses


The following table summarizes certain credit quality data for the last five calendar quarters:

2001

2000

September 30

June 30

March 31

December 31

September 30

Nonaccrual loans

$

21,425

$

20,518

$

22,453

$

19,849

$

20,313

Foreclosed real estate

3,651

2,425

1,246

1,337

2,467

Total nonperforming assets

$

25,076

$

22,943

$

23,699

$

21,186

$

22,780

90 days past due and still accruing interest

$

6,117

$

5,187

$

5,339

$

7,045

$

6,217

Nonperforming loans to total loans

0.62%

0.61%

0.68%

0.61%

0.62%

Nonperforming assets to total loans plus

foreclosed real estate

0.73%

0.68%

0.72%

0.65%

0.69%

Reserve for loan losses to loans

1.38%

1.38%

1.39%

1.39%

1.37%

Reserve for loan losses to

nonperforming loans

223%

228%

202%

227%

222%

Provision for loan losses

$

5,248

$

4,065

$

3,458

$

1,995

$

2,625

Net loan charge-offs

$

4,208

$

2,781

$

3,130

$

1,951

$

1,688

Net loan charge-offs to average loans

0.49%

0.34%

0.39%

0.23%

0.21%

 

 

Nonaccrual loans, totaling $21,425 at September 30, 2001 are comprised of commercial, industrial and agricultural loans (52%), real estate loans (40%) and consumer loans (8%). Foreclosed real estate, totaling $3,651 at September 30, 2001 primarily represents real estate loans on 1-4 family properties. The composition of total nonaccrual loans shifted in third quarter 2001 as compared to quarter-earlier levels with a 25% increase in commercial loans due to the addition of a single approximate $5 million commercial credit and a 20% reduction in real estate loans as a result of the removal of $2.4 million in real estate commercial loans inclusive of the $1,100 charge-offs discussed below. First Midwest's disclosure with respect to impaired loans is contained in Note 4 to the interim consolidated financial statements, located on page 8*.

Transactions in the reserve for loan losses during the quarters and nine months ended September 30, 2001 and 2000 are summarized in the following table:


Quarters Ended
September 30,

Nine Months Ended
September 30,

2001

2000

2001

2000

Balance at beginning of period

$

46,705

$

44,112

$

45,093

$

42,645

Provision for loan losses

5,248

2,625

12,771

7,099

Loans charged-off

(5,032)

(2,224)

(12,308)

(6,630)

Recoveries of loan previously charged-off

824

536

2,189

1,935

Net loans (charged-off)

(4,208)

(1,688)

(10,119)

(4,695)

Balance at end of period

$

47,745

$

45,049

$

47,745

$

45,049

Reflective of the overall weakening in the economy, loan charge-offs, net of recoveries, for the 2001 third quarter totaled $4,208, or .49% of average loans, up from the year-ago like period of $1,688, or .21% of average loans with increases being concentrated in the consumer and real estate commercial portfolios. Approximately $1,100 (or 44%) of the increase in charge-offs related to two real estate commercial loans that had been carried as nonperforming loans since 2000 and carried specific valuation reserves. Of such loans, $2.2 million remains in nonaccrual status on one while the other was completely charged off.

The provision for loan losses for the third quarter and nine months of 2001 totaled $5,248 and $12,771, respectively exceeding net charge-offs by $1,040 and $2,652, respectively. As a result of such provisioning, the ratio of reserve for loan losses to total loans at September 30, 2001 was maintained at 1.38%, consistent with levels of the past six quarters. 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, Management's assessment of current and prospective economic conditions, and the level of the reserve for loan losses. 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 8*. The loan portfolio consists predominantly of loans originated by First Midwest from its primary markets and generally represents credit extension to multi-relationship customers.

 

Capital

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"). Both First Midwest and its bank subsidiary First Midwest Bank ("FMB") 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 bank regulatory authority to be considered "well-capitalized," which is the highest capital category established under the FDICIA.

Actual

Capital Required

Minimum

Minimum

Well-

First

Required

Capitalized

Midwest

FMB

FRB

FDICIA

As of September 30, 2001:

Tier I capital to risk-based assets

9.66%

9.08%

4.00%

6.00%

Total capital to risk-based assets

10.75%

10.17%

8.00%

10.00%

Leverage ratio

7.38%

6.94%

3.00%

5.00%

As of December 31, 2000:

 

 

 

 

 

 

 

 

Tier I capital to risk-based assets

10.51%

9.57%

4.00%

6.00%

Total capital to risk-based assets

11.61%

10.67%

8.00%

10.00%

Leverage ratio

7.36%

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%

 

 

Capital Management

First Midwest has continued to follow a policy of retaining sufficient capital to support growth in total assets and returning excess capital to shareholders in the form of dividends and through common stock repurchases, with the latter resulting in an increase in the percentage ownership of the Company by existing shareholders.

On August 15, 2001, First Midwest's Board of Directors approved a new stock repurchase plan authorizing the repurchase of up to 2.5 million common shares or 6.25% of shares outstanding and incident thereto, the Board rescinded the former repurchase plan under which some 550,000 shares authority remained. The new plan is the eighth approved in the last ten years and authorizes repurchases in both open market and privately negotiated transactions and has no execution time limit.

The following table summarizes the shares repurchased by First Midwest for the prior three calendar years and for the current year-to-date period:

Nine Months

Years Ended December 31,

Ended
Sept. 30, 2001

2000

1999

1998

Shares repurchased

1,709

485

2,669

1,275

Cost

$

52,072

$

12,195

$

70,043

$

35,434

As of September 30, 2001, First Midwest had 1,939 shares remaining to be repurchased under its current share repurchase authorization.


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, financial or political instability, acts of war or terrorism, 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.

 

 

 

PART II. OTHER INFORMATION

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits - See Exhibit Index appearing on page 23*.

(b) Forms 8-K and 8-K/A -

On September 21, 2001, First Midwest filed a report on Form 8-K to announce updated earnings guidance for its 3rd quarter ending September 30, 2001.

On September 17, 2001, First Midwest filed a report on Form 8-K to announcing that in repurchasing its common shares pursuant to its earlier announced repurchase plan, it intends to utilize the additional flexibility afforded by the Securities and Exchange Commission Emergency Order of September 14, 2001.

On August 16, 2001, First Midwest filed a report on Form 8-K to announce the Company's intention to repurchase up to 2,500,000 shares of its common stock outstanding and declaration of its 3rd quarter 2001 quarterly dividend.

On July 19, 2001, First Midwest filed a report on Form 8-K announcing its earnings results for the quarter and six months ended June 30, 2001.


On July 9, 2001, First Midwest filed a report on Form 8-K to announce that its banking subsidiary, First Midwest Bank, was converted from a national banking association to an Illinois banking corporation and to announce that its trust subsidiary, First Midwest Trust Company, was merged into First Midwest Bank.

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: November 14, 2001

* Duly authorized to sign on behalf of the Registrant.

EXHIBIT INDEX

Exhibit Number

Description of Documents

Sequential Page Number

15

Acknowledgment of Ernst & Young LLP

24*

99

Independent Accountant's Review Report

25*